Response: To Michael Medved's USA Today Opinion Piece dated 7/25/2011
Mr Medved's take on the current political and economic situation is fanciful at best. The major factors contributing to our current economic quagmire were 9/11, which precipitated 2 unfunded wars; 2 economic bubbles, TARP funds meant to shore up banks and increase lending that never materialized, special interest groups, tax cuts for the wealthy and a deep recession. As is all too typical, the Right is loath to acknowledge these trifles. Instead, the fallback position is to blame all our woes on the poor. It is acknowledged that there is waste, corruption, inefficiencies and duplication in all our social agencies. These are serious threats to our fiscal well being that must be addressed. But their collective cost pale in comparison to the crisis' of the last decade. Within that same timeframe, massive wealth has been created. Wealth that even the Robber Barons of the previous century could never have imagined. One reads of 40,000 or 50,000 households controlling 30% or more of the nations wealth. Hedge Fund managers making hundreds of millions or even billions, yet paying taxes at rates lower than their most menial employees. Mr. Medved states that the "...underclass needs to learn middle-class habits, and leave behind the dysfunctional values that characterize persistent pockets of poverty."
From his position, it is easy and facile to look with disdain upon the struggles of those not so blessed. In the minds of the Right, the poor are often viewed as shiftless and lazy. The reality is more like waiting for the bus at 5:30 AM and multiple jobs to keep their families above water. Welfare Queens are a fantasy from another era and have little basis in reality. There will always be those who try to game the system. But they are the exception rather than the rule. Given the choice between welfare and a job, most working folk would gladly chose the dignity and pride of providing for their family and contributing to society, rather than the humiliation of welfare and the dole. Within this context, Democrats that state that those who benefited the most financially in the last 10 years should pay a modest tax increase, are accused of inciting class warfare. The average hard working middle class family could hardly imagine what their lives would be like if they were burdened with the trauma of having to pay taxes on a $250,000 income. If they were magically vaulted into this rarified income bracket and the Bush tax cuts were allowed to expire, how would they view the addition $100 a week they would have to pay on their $5,000 a week incomes? Most surveys indicate that the more affluent members of our society would willingly give some back to the country that gave them so much. But the Republican Congress is held captive to the Tea Party that swept so many of them into office and to mean spirited and worthless pledges made to agents of the rich and powerful. The wealthy do not need more help.
Ron Freeland
Senators Baucus and Grassley
Finance Committee, United States Senate.
Senators,
Sirs,
The current turmoil in the in the financial markets is frightening and to a degree, somewhat misplaced. The large lending institutions are writing off billions of dollars of loans in the aftermath of the collapse of the housing market. The irony is that these assets have not disappeared. Their value has diminished; but they are not worthless. A loan has a number. When these large financial institutions sold these CDOs and SIVs , did they erase the loan numbers? Can the ultimate destinations of these mortgages not be found? This is not like the IT Bubble at the turn of the current century, when start ups with PEs of 300 or 500 or nothing came public on a wing and a prayer. Homes have value.
The lenders are writing off assets as though they are forever lost. After the write downs, will not these assets be found? The banking and financial institutions, through write downs, are going to charge all of us by taking immense tax write offs and then, surprisingly, someday find these loans and recoup a major portion of their losses. These assets have not disappeared. Their value is certainly diminished; but it is not gone. That is why property is called Real Estate. It is real and is not ethereal like a failed Dot Com.
This is not a not a call for investigation as much as a plea for sanity in a world of financial madness. My desire is more a request for calm analysis and introspection upon the somewhat overblown panic that is currently gripping our wonderful country.
Please ponder this reality and use your wisdom to bring perspective to this situation.
Respectfully,
Ronald Freeland
Into the Tranches
Praise the Lord, the Fed is not asleep and the kidney stone, at least temporarily, has passed. Directly or indirectly, Jim Cramer’s meltdown on CNBC two weeks ago has born fruit. Early last Friday morning, nearly two weeks after his rant, Jim observed the 800 point drop in the Japanese stock market Thursday, possibly brought about by the collapse of the Japanese carry trade and was stunned. He realized that this event could have had a profound impact upon the U.S. economy and have easily brought about a 1,000 point decline in the Dow. Confidence in the American financial system was shaken. He felt that had the Fed not responded to this threat it might have brought about a serious decline in the American financial system, and I think he would have been right.
Japan’s interest rates the last few years have been so low, that it was common practice to borrow money in Japan, at approximately 1% and then buy secure short term U.S. bonds at approximately 4.00% and profit from the difference. However, with the collapse of the stock market and the drop in treasury yields because of the exit from equities to bonds, this ready access to huge profits has dried up and the carry trade had all but died. The pumping of money into the United States financial system was drying up. The Fed’s action Friday morning has forestalled this event. Prior to the Feds action the situation was:
A. Real estate values in the U.S. had declined precipitously.
B. The sub prime madness had all but eliminated folks with less than desirable credit scores getting loans.
C. Financing had become virtually unobtainable even for people with excellent credit scores; the jumbo loan rate (home loans over $417,000) climbed from 6.88% to 8.00% for people with excellent credit scores. .
D. Corporations, businesses, auto dealerships etc. were having difficulty obtaining
short and long term financing.
E. The stock market was in a tailspin and yields on U.S. backed bonds were declining precipitously.
F. Money, the fuel that drives business, was becoming unobtainable.
With the easing of the discount rate, from 6.25% to 5.75%, and the active encouragement by the Fed to take advantage of these funds, the risk has been diminished and liquidity has been restored. This essentially saved Countrywide Financial, the largest mortgage company in America, from bankruptcy. It will be interesting to see what happens this week and see how effective this change has been. It seems all but certain that the Fed is prepared to step in with a Fed Funds rate cut as well.
As the old saying goes,” May you be blessed by living in interesting times.”
Mortgage Meltdown.
Any one that saw Jim Cramer’s heartfelt rant Friday afternoon on CNBC had to know something was wrong. Mr. Cramer who is normally upbeat and humorous was anything but. He is genuinely concerned and fearful that millions of people are going to lose their homes and likened the Fed’s seeming lack of concern to that of President Hoover’s attitude as the Great Depression loomed.
The market had endured another whipsaw week, with the averages doing quick turnarounds after 3:30 Wednesday and Thursday. The interesting thing was that virtually no one took solace in these upturns. In fact both rallies were viewed with skepticism bordering on disbelief. The news was so bad, no one really had faith that the rallies were real and Friday proved they weren’t.
A top officer from Bear Stearns, after stating that their firm was well positioned to ride out the storm relating to the collapse of their two mortgage based Hedge Funds, followed with the bombshell that the “… market was the worst I’ve seen in 22 years.” This was part of the impudence of Jim’s tirade, but only part.
The bigger concern was that our situation could spin out of control. Rates on 30 year Jumbo loans (fixed rate, 30 year loans over $400,000) had jumped from 6.88% to 8.00% Friday afternoon. This is simply unheard of. This also occurred on a day when the 10 year note fell from 4.77% to 4.69%, a movement that would normally cause rates to fall.
The normally upbeat and confident Rick Santelli, CNBC’s Bond Pit analyst made a comment to the effect that the average homeowner whose home is on the market is not going to get what his neighbor got a year ago and this is contributing to the sluggishness of the housing market.
Something has to be done and the Fed has the power to do it. Their incredible laser like focus on inflation is ridiculous in the context of what is going on. Except for the truly wealthy, most average folks are infinitely more fearful of losing their homes and livelihoods than a minor up tick in inflation. This obsession with inflation is pandering to the rich who can afford to take a lower assured rate of return on safe government bonds. Most of us are just trying to survive.
Of Gin and House Plants
Last week my wife Betty and I took a trip to upstate New York. Since we were traveling in my Miata, we had to pack light, I mean really light; it has a tiny trunk. We decided to take a little Scotch and Gin along and due to our limited space, the previous night we poured said intoxicants into compact plastic water bottles.
The next morning Betty suggested we water our planters on the deck before we left. She opened our little portable cooler and said, “…this bottle is nearly empty, why don’t you get rid of it and pour it on the plants.” I dutifully obeyed her, as I am wont to do after 36 years, and the moment I completed my assigned task, I realized my, our, mistake. “Oops,” I said. ( Perhaps with the arrival of the new Simpsons movie I should have said “D’oh.”) I had watered the plants with the Gin. We both looked at each other and said, more or less simultaneously, “…what do you think will happen?” We didn’t know, but we did not think it would encourage their growth. I put a lot of extra non-alcohol enhanced water on the plants and hoped for the best.
Sure enough, a week later we arrived home to find our initially inebriated planter had now succumbed to sclerosis of the protoplasm. The Gin had destroyed our once lovely plants. It was a classic before and after moment. Our non- intoxicated planter was lovely and thriving. Our soused planter was full of dead and dying plants.
What does this have to with Real Estate you might ask? In spite of our loss, it was actually pretty funny. I mean it didn’t make us feel one bit smarter, but it was funny in a ridiculous, twisted sort of a way. And I guess this is my inane, lame tie-in. In life, all of our histories are filled with mistakes, large and small. Some we can laugh at and others that haunt us forever.
In the last several years, far too many folks did not know what was contained in their Real Estate loan contracts and woke up with far worst than a hangover. Many families and individual’s lives have been severely damaged, if not ruined, by mistakes and outright lies.
I guess the lesson of my little antidote is to always know the contents of the containers and contracts of your life to avoid pain and heartbreak later.
Went to the A La Mode Appraisal Software convention in Las Vegas this past weekend. It was a great experience as I got to meet appraisers from all over the country and hear about conditions in their areas.
I spoke to an appraiser from Denver who stated that 3 out of every 8 recent sales are in foreclosure. I know this sounds extreme, but I heard similar tales about other previously hot locales. Several folks from Las Vegas said that they heard of situations where some California home owners had sold their dwellings and bought 2 in Las Vegas hoping to cash in by taking what is now seen as a dangerous gamble. Homes in formally red hot Las Vegas are staying on the market way too long and prices are plummeting.
Much of this apparent bubble was caused by speculation, with these buyers essentially creating a false shortage by removing available housing product from the market. By taking this economic gamble and tightening the supply of available housing, some prices rose to unprecedented heights. Although this has been devastating to many average folks caught up in it, much of the pain being felt now is by those who helped create the problem.
Some feel that this is similar to the Internet/Technology bubble, but this analogy is somewhat flawed. Back then we saw I/T companies with price/earnings ratios in the hundreds and many ostensibly great new companies with no inherent value at all. But real estate is different, it has REAL value. Though in many places that value has gotten out of step with reality.
We in Baltimore are somewhat better off than in many other parts of the country. Our most severe drops in value have occurred in areas that experienced the greatest appreciation. These properties are primarily situated in the communities surrounding the Inner Harbor. Many other more reasonably priced dwellings in decent neighborhoods are still seeing modest appreciation. Since most of these other parts of the city have seen decent but not spectacular increases in value, they have also been spared the extreme gyrations of the market. Consequently, our foreclosures are running at “only” about 5%.
A few weeks ago, new housing sales figures came out indicating that nationally sales were up 16%, but prices were down 11%. This shows that the large builders understand the law of supply and demand. They know that to clear out unsold inventory, prices must moderate.
When owners of previously owned housing realize that they too must give up some of their gains, in many instances 60%-100% , the log jam in existing housing sales will break and the market gradually recover. When these owners accept the reality that they must accept less then their neighbors got a year ago, perhaps they will eventually find comfort in their net gains. The incredible appreciation they have realized is really not that hard to live with.