Where Are Housing Prices Headed?

If you are like most of us, you have seen your home value drop in recent years, but do not get overly gloomy because things are about to change.

This is not a result of some wise political winds, but more of a basic economic issue. The total National Debt has just jumped above twelve trillion dollars. Most people have never really considered how much that really is, but whenever you hear that they are spending another trillion, remember that each and every American, including children, owes an additional $3,100 of that debt.

The government has to pay the debt back at some point. Otherwise the interest rate on that debt eats away our nation’s resources. Furthermore, the politicians would rather spend the money on their own pet projects (which buys them votes), than flush it down the interest toilet.

There are only a few ways the Government can get that money.

1) They can borrow the money. They do that by selling financial instruments like bonds and treasury notes to private parties, institutions and other governments.

2) They can raise taxes

3) They can just print it

The Feds definitely employ the first two techniques, but each concept has serious flaws. In a nut-shell, our biggest lenders, the Chinese, are apprehensive about lending us much more money; and, there are not enough wealthy people to tax our way out of the debt. That leaves print more money and that is where this ties in to your home’s value.

There is a basic economic principle that says, “more money chasing fewer goods causes inflation.” So we can conclude that the Government’s Xtreme Spending campaign puts so much money in the system that inflation is inevitable; perhaps hyper-inflation.

Inflation is not necessarily bad, depending on the circumstances. For example the Government actually implements policies to maintain a 1-2% inflation rate. Their primary objective is to pay back their enormous debt with cheaper dollars.

So under normal conditions the Government likes a modest inflation rate, but when there is excessive spending, as we have witnessed lately, inflation is virtually guaranteed.

All of this spills into the housing market and affects new home prices. If goods like 2x4's and carpeting go up in value then builders have to raise their prices to recoup their costs.

When new homes get expensive, used homes become more appealing by comparison. All of that attention to the used homes causes them to rise in value too and that is why any recent drop in your home’s value should be temporary.

As the congress releases more and more money into circulation we should see the price of everything moving up. The losers will be people on fixed income (seniors) and purchasers of hard goods (like homes); winners will be people who hold hard assets as they rise in value.

Furthermore, if owning one home is good, then owning two homes is twice as good. That is why smart people are buying rental properties right now. As a seasoned landlord, I can tell you that most markets are friendly for this concept. To determine whether your market is well suited to this idea, you should investigate two issues: 1) Have home prices dropped but seem to be leveling off? If you are unsure about your market, you can search your local newspaper for articles or call a couple Realtors to find out the trends. 2) What is your rental market like? This is mostly a function of unemployment rates. If your local jobless rate is doing better than the national average, you are probably in good shape. To verify the dynamics, call a couple of local property managers or commercial real estate agents and find out if the vacancy rates have leveled off. If so, you are in a promising market. If not, you might consider forming partnerships with people whom you know in friendlier markets for this purpose. Some of the better ones are Denver, San Fransisco, Seattle, Austin, Raleigh.

There are a couple of primary ways to embark on this journey. If your home is a modest entry-level type property, then the best play may be to go buy a new home for yourself and make the current home into a rental property. It should be fairly easy to determine if the rent will cover the mortgage payment. If the rents are not going to be good enough, you can keep you current home and buy a low-end rental. In my book I refer to these properties as, “crummy dogs” because they are priced so low, but they usually make good rentals because the rent will cover the payments and other expenses.

As inflation kicks in you will have two properties rising in value and the rents should also be increasing and providing you with additional income. Over time the tenants will pay off the property for you and you will also pick up some tax benefits along the way.

One more thing, when there is high inflation, the Feds tend to raise interest rates to slow every thing down. Therefore I suggest you get long-term fixed rate loans on all of your properties. If your rents and property values are going up, but your expenses are holding fairly flat, you win on all fronts.

Finally, I do not know everything, but I do know quite a bit about this topic. I have spent 30 years in the real estate industry with a strong focus on the investment angle. I have hosted a radio call-in program on these topics and written a book for Realtors. I own many rental properties and I teach Realtors how to work with investors. I was able to retire while still in my 40’s (barely) by understanding the winds of real estate and acting accordingly. If you have any specific questions drop me a line and I will be happy to chat with you.

As I write this, prices are low, selection is good, interest rates are low, rents are stable and there are some extra tax benefits. Things don’t get much more promising.

Comments invited.

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Strawberry Fields, Forever

Long before the lottery became popular, Americans were looking for ways to “get rich quick”. In the 1840’s people rounded up everything they owned and headed west because gold was discovered in California. After that gold was found in several other places. Eventually, the U.S. needed silver for dollars and that set up an explosion of silver-mining in Leadville, Colorado and characters like Horace Tabor were suddenly enriched. As is usually the case, a few individuals stumbled upon incredible wealth, but most of the money-seekers were lucky to earn a living.

But in spite of the general failure of the masses to strike it rich, this country offers incredible prosperity to its people. We have hundreds of self-made billionaires, millions of self-made millionaires and countless hoards of middle-class citizens earning enough money to live in their own homes, drive their own cars and enjoy certain luxuries like home-delivered pizza, TV, and exciting vacations. But who gets what, and why?

Why do some people do so much better than others? I am currently writing a book about family finances and these are the types of questions we explore in the book. Among the primary points contained therein is that people need to create value for themselves. They can do that through education, training, experience, entrepreneurism, skill, enthusiasm, people skills, natural talent or even just plain luck. We even offer a public education system to get everybody headed in the same direction. But in spite of the fact that we all get pretty much the same basic training, there is an incredible range of outcome: some thrive while many languish or even sleep under bridges. Why?

A lot of it has to do with the artificial limits we place on our selves, just like the grasshopper in the jar. So some people try harder than others, who essentially give up, without ever fulfilling their potential.

Let me illustrate my point by telling you a story.

There were twin boys whose father was a very rich and honorable strawberry farmer. One year the boys reached the age where the father expected them to earn their keep so he made them work on his farm. By the end of the season, they had planted and grown acres and acres of strawberries. Then it came time for the harvest.

At the end of the first day they had picked mounds of strawberries to take to the market and they were so very hungry from their day’s work. The father handed them both a very large bowl and told them that from that day on they could have all of the strawberries they could pour into their bowls. So the boys each poured as many strawberries into their bows as they could and they feasted like kings.

The next morning one of the boys got up to work in the field and he noticed that his twin brother was missing. A couple of hours later the missing boy showed up, dressed in a tuxedo and accompanied by the town's attorney. The attorney knew the farmer was an honorable man and he proceeded to tell the father how generous he was for giving the boy all of his strawberries from that day on.

The other twin was shocked to hear the attorney’s words and he was especially confused when he saw a big smile on his father’s face. Then the farmer explained it all to the confused twin. “I have been ready to retire and today I found out who to put in charge.”

The farmer continued, “Last night I gave you each a bowl and said that from now on you could each have all of the strawberries you could pour into your bowl. You got a giant scoop and ate your fill and then you went to bed.” The confused lad said, “I did the same thing as my brother, so why are you turning the farm over to him?” And the farmer said because he is so much wiser.”

Then the farmer took out a bowl like he had given his sons the night before and he scooped up a large bowl of strawberries and paused; then he poured the berries into a box and got another scoop and did the same thing and then he did it once more.

It was at that moment that the confused boy understood what his dad was telling him and what his twin brother had already figured out: Namely, you can pour all of the strawberries in the farm into the bowl if you keep refilling it again and again.

When the wise boy realized he was entitled to "all" of the strawberries on the farm, he sought out the attorney to help him make it final. Then the farmer, the wise boy and the attorney signed all of the papers, making him the owner and manager of the strawberry farm.

The difference between the two boys is that the successful boy saw abundance where the confused twin saw scarcity. The same is true for people in America and all over the world. We think we only have one bowl of money so we can only eat so many strawberries. But the truth is there is a lot more money out there than it first seems like. We just have to learn how to refill our bowl more often and stop living in a world of scarcity.

Up next: How you can fill your bowl again and again.

By the way, I wrote the strawberry story. What did you think of it?

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You Owe $40,000 - Part 2

Who do you owe it to?

In my last post, (scroll down to read post) we established that each of us owes $40,000 as a result of government spending. We established that the very rich can only pay a small percentage of the debt and that nearly one-third of income tax filers pay nothing, which leaves the bulk of the responsibility resting on your shoulders and mine.

One of the questions people ask when this topic comes up is, “Who do we owe it to?” One fellow even said we just owe it to ourselves so we can simply forgive the debt. No, no, no! This debt is real. The government gets the money by selling bonds, treasuries and notes to anybody who will buy them. It is possible that your mutual fund buys bonds because many of them do. Bright Hub has a nice article discussing how individuals can buy government bonds and treasuries. When the government sells these certificates, they have to pay back the debt, plus interest.

The biggest buyer of US instruments is the Chinese government, but they are growing nervous about our long-term debt situation. If we get to the point where nobody wants to finance our debt, our Treasury Department can print money anyway but that can lead to very high inflation rates.

What we can conclude from all of this is we have a lot of real debt and we are getting to the point that other investors do not want to finance our spending. If we run out of investors we can employ a smoke and mirrors game like the congress has been doing with the social security system (borrow from ourselves) but if we keep creating money with no assets to back it up, we invite inflation, high interest rates and even the possibility of a depression.

In my opinion, we will be lucky if we only have to pay $40,000 per person, because the congress continues to spend more money than they take in. Every time they take on a new trillion dollars in debt your share is $3,100…plus interest and do not assume that is insignificant. To get a good illustration of just how much a trillion is watch another Glen Beck video.

If interest rates are 4%, then each of us also owes (and pays) another $1,600 per year to service our share of our debt. You don’t notice that you pay it because you don’t actually write a check or take it out of your pocket. But it is a lot like the withholding of your income for tax purposes. The government has figured out that if you never actually get the money you won’t be so opposed to giving it to them.

But every dollar that you are forced to spend on interest is a lost opportunity to use that money for other more important causes like some of these.

Every one of us could get a free tank of gas every week

We could each lease a new entry-level car

You could cut years off of your mortgage or use that same money to upgrade your home BY $30,000-40,000

We could strengthen and improve the social security system

Insert your own pet project here ______________________.

The bottom line is you owe a lot of money and you cannot get rich people or poor people to pay it off for you. If we don’t put a stop to the government’s crazy spending habits our entire way of life is in jeopardy.

The solution is to lower taxes so businesses will invest and grow. Then they will hire new people who will in-turn pay more income taxes and thereby reduce the debt. Furthermore, those people can afford to buy goods and services and new demand creates even more jobs and more tax payers.

Your comments are welcomed

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Your Amazing Hidden Debt

The National Debt has just surpassed twelve-trillion dollars.

That means every man, woman and child in America owes approximately $40,000.

If you are under the impression that we can just make the lucky rich people pay all of this debt, then think again. The richest man in America is Bill Gates. His net worth is estimated to be around forty-five-billion dollars. We would have to steal all of his money from him plus 20 others just like him to pay off one of those trillions, but we don’t have that many rich people. In fact, you have to throw in all of the money from Warren Buffet, and the Walmart Klan and the rest of the top-ten billionaires (see this list) just to round up one-quarter of a trillion.

After that group, we would have to seize all of Oprah’s money and Ted Turner’s and Martha Stuart’s resources, and the majority of the richest 400 people in America before you finally pay off the first trillion.

Now consider this point: According to The Tax Foundation, in a recent year, there were approximately 134 million tax filers and of those over forty-million were exempt from paying income taxes, (many of them actually get refunds) so somebody else has got to pick up their share.

So, if the richest people can barely make a splash in the bucket of debt, and tens of millions of citizens pay no taxes, who do you suppose is going to be expected to pay it?

Do you have a mirror?

In my next entry I will tell you who you owe the money to and how all of this is affecting you and your family.

Your input is invited!

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Home Values Headed Up

This information should be helpful to you whenever you want to discuss the long-term financial benefits of owning property.

When it comes to real estate values, they are essentially guaranteed to steadily rise with time. Oh sure, there are certain areas in the country that have held their same value for decades and will probably stay about the same for years to come. And then there have been communities in which real estate values seem to be on a perpetual roller coaster ride, but those situations are the exception. So, what about the rest of us who live in more traditional communiites? What can we expect?

For starters, let me suggest that a home should not ordinarily be considered an “investment” per se because the primary objective of investments is to make a profit; but the primary purpose of the family home is to provide an acceptable place to live. Still, some people simply cannot resist refinancing their homes every time they rise in value. This is not usually a good idea if the borrower is taking out money to buy a car, pay off credit cards, remodel the home, go on a vacation etc. This equity is simply to precious to CONSUME like that.

However, if the borrower is using the proceeds of the refinance to buy a rental property, then that is a different matter, because rental properties should pay for themselves over time and that is only one of four ways to make profit off of the investment. The other three ways include cash flow, tax savings and appreciation, which is related to inflation.

Regarding Appreciation: There are quite a few ways a person can force the value of a home to go up. A few of them include remodeling, adding on to the property and rezoning. But the steady appreciation of real estate that can be gained over time by simple inflation can be every bit as dynamic as some of those more industrious undertakings.

Now, to prove that inflation is here to stay I offer you these points:
1) The United States government has more debt than anybody else. They currently owe over 11 Trillion dollars. Each person in your family owes a staggering $37,000 and it is growing like a weed.
2) By manipulating the inflation rate, they can pay back their (our) debt with cheaper money. For example, if they borrow a dollar from the Chinese Government today and then maintain a 1.5% inflation rate for 10 years, the future dollar that they use to pay back the debt only has 85% as much buying power and therefore inflation has helped them (us).
3) Other government agencies also like property inflation because rising values mean increased property taxes. Furthermore, when values go up, citizens tend to refinance their homes and spend the money on the type of things mentioned earlier and that stimulates the society and creates jobs and that results in even more people paying taxes.

Once we accept the fact that the various governments have a built-in incentive to maintain and manipulate inflation, there are two follow-up questions we should ask ourselves: 1) How would they actually do that? 2) and, How do their policies all tie into the housing market in particular?

To explain how the Federal Government manipulates inflation, imagine a machine-shop operator who acquires a pound of brass for one dollar and then makes it into a hinge that is worth two dollars. Our operator-friend has just created a brand-new dollar in goods. The same thing happens when somebody else turns a tree into 2X4's and then again when somebody elses turns the 2X4's into a home, or when somebody makes a new TV or anything else. New products make up the Gross Domestic Product; The government studies these figures and then releases new money into society based on all of that added value. If they did not do that, the money that is in circulation would have to be stretched farther and farther over all of the new goods. Eventually, very few people would have money and those wishing to sell goods or services would have to lower their prices dramatically to attract some of the money. When prices go down, that is deflation, and as we just discussed that is contrary to the governments’ basic objective.

So, all the government has to do in order to create the desired inflation rate is determine the total value of all the new goods that were created and then release a modest amount more money than that amount into society and basic supply and demand principles kick in.

Generally, the Feds do not like an inflation rate higher than 1-2% because many of our citizens are on fixed incomes (especially seniors) so limits and stability are in order.

All of this spills into the housing market and affects new home prices. If goods like 2x4's and carpeting go up in value then builders have to raise their prices to recoup their costs. In addition, premium land values go up and so do wages.

When new homes get expensive or they are found to be too far from employment centers then used homes become more appealing to many consumers. All of that attention to the used homes causes them to rise in value too.

The bottom line is that most areas are not immune from these forces so most of us can expect our property values to rise steadily over time, generally between 1-2% per year.

So, if you can graciously take advantage of inflation and structure your finances so that your assets grow faster than your expenses, you are on a path to wealth. An important part of that equation is to avoid refinancing your home and using the proceeds to support an unnecessarily frivolous lifestyle.


Comments invited

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Creative Way to sell homes

Creative Way to sell homes

If you know anybody who is having trouble selling their home you might recommend one of these creative solutions.

1. Trade White Elephants.

This writer has completed many real estate trades both as a real estate agent (see uncledaves site example and as an investor. Sometimes trading will complete transactions that cannot otherwise be accomplished. For example if you won a small home and want to an area of higher priced homes the sellers of those homes might take property just to make a sale.

You don’t always have to trade up either. According to Goswap.org a lot of people are exchanging high-end properties as a means to get their equity out of properties that have watched the values in their neighborhood fall through the floor

2. Offer owner-carry financing

Car dealers and home builders have realized that people are more concerned about down payments and monthly payments than the purchase price. By offering creative front-end benefits, buyers will usually just pay full price.

If you are having trouble selling a home, you might get top-dollar by becoming the buyer’s lender. That way you can lower the down payment or the monthly payment enough to make the difference whether your home sells or not. Simon Volkov also likes this idea.

3. Auctions

human psychology can be strange. This writer has purchased several properties at auction. One of them off of eBay. The odd thing is I have seen many examples of people paying more for a property at auction than they would have to pay on the open market. This usually happens at government auctions such as FHA. As far as the private sector is concerned one of the bigger auction houses is REDC A good site to get information is www.willliamsauction.com

4 Bury a statue

If all else fails the owner can adopt a creative idea that involves religion. There are those who think that burying a statue of St. Joseph on the property assures the seller will have good luck. This idea was very popular a couple of years ago and there were several success stories. You might enjoy this article about the concept.

Selling a home can be difficult even in more prosperous times, but with all of the economic problems we have been experiencing lately some creativity might be in order. Don’t forget to tell your friends about trading, owner-carry financing, auctions and burying statues of Saints.

comments welcomed

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