This is a special edition of EconomyGuy sent to you as a present.  It contains a real estate lesson being played out RIGHT NOW, and could provide you some more money in your pocket if you invest in real estate – or are a home owner.

Real Estate Insight……

I have a cousin who lives in Arizona and has related what is going on in his real estate market.  I have drawn an insight from his experience and want to share it with you.  If you are in real estate investment, or plan to buy/sell in the near future, this could be a valuable lesson for you too.

Here are the details.

He lives in a small town just about 10 miles outside the city limits and south west  of Phoenix called Maricopa.  This used to be farmland and ranches before the big real estate boom of the past 15 years, and then real estate developers came in an started to build, and to build in a big way.  There are many, many communities that have been built and partially built – as they stopped when the market collapsed.  This means the majority of homes are fairly new here.  It also means that all the people who bought them and still hold them are severely underwater in their mortgages.

The town of Maricopa is basically a single, main street running through the city with the commercial properties on each side – and it stretches about 3 miles in length.  The commercial piece of Maricopa did not keep up with the home building – and it got stifled when the home market hit the skids.

Here is what happened to the home values.  Just before the melt dow in home prices, people were paying about $200,000 to $250,000 for a nice, new home of about 1500 sq ft.  Arizona is one of the states (along with Nevada, Florida and California) that severely overbuilt during the boom times.  Speculation was rampant.  In Maricopa the home buyers were speculators, but were also people who worked in Phoenix and could get a better house for less money than in the city limits.

When the market collapsed, prices started to fall, and to fall fast – as you can remember, there were times that Phoenix prices were falling faster than any other place in the US.  Foreclosures were common place and they become the “comps” for house valuations – so the downward spiral took hold with each new wave of foreclosures driving the home values lower and lower.  This has now stopped in Maricopa.  Here are the details.

At the bottom of the prices, a buyer could purchase a fairly new (4 years old or so) home of 1300 sq ft for $45,000 to $60,000.  These houses were coming on the market from foreclosures, or short sales, or HUD sales, or FHA sales.  They were flooding the market, and were keeping the prices low.

But, a month ago, the city of Maricopa broke ground on a new 4 year college (they didn’t have one before) and a couple of medical centers.  WalMart had moved in about 3 years ago, and new grocery stores sprouted up at the time of the new WalMart.  For the past month, every previously owned home that has come on the market has had multiple offers submitted to the owners (usually the banks) within the first week.  This sounded to me just like the boom times when prices were going up, up, up…..  Homes one month after this phenomenon started are now selling for $70,000.  That is a nice increase in value for the neighborhood.

My insight…….

It has been clear to me over the past 3 years that as home prices have melted down, they have been driven by foreclosures.  The banks sold off their foreclosures cleaply (or agreed to short sales – cleaply), and by cheaply, I mean they sold them below the prevailing “market value” or value that the existing homeowners would sell their homes.  An appraiser must take into consideration all homes sold in an area, including the foreclosure sales – so the average home price – or the “market value” established by an appraiser kept falling as more foreclosures hit the market over the years.

My insight is that there are actually two values in any community.

1. A value established by people willing to sell and to purchase when the supply/demand is more “normal.”
2. A value established by foreclosure driven prices – and this value is many 10’s of thousands less than the prior value.
3. A “snapback” in home values is possible when the market conditions are just right.
   

In Maricopa, we have a good example of a point where the dynamics of the real estate market are changing.  It is changing from a foreclosure driven value to the more “normal” value.  This means than the “market value” of homes in Maricopa are now rising about $20,000 as compared to a couple of months ago.  This is a dramatic increase in a very short time.

What other dynamics could be going on to create this condition?  Well, I also think the banks are “gaming” the market and holding back foreclosures to help create a more “normal” supply/demand curve – or even encourage a feeding frenzy.  This is the first time the banks have been able play this game as there has always been more sellers than buyers.  Another dynamic is that the rental market is picking up, and it is relatively easy to rent a home in Maricopa – and that home will cash flow from an investor’s point of view.  This rental cash flow situation could be quickly reversed if the increase in home values continues its massive increase – and that should stop the feeding frenzy.

Another way to look at Maricopa is that the home values fell so far that they became oversold.  Then, the natural market reaction sets in, and buyers step in to snap up the bargains.  The city itself helped the situation by creating more infrastructure (like the 4 year college).

The purpose of my writing this insight is to allow each economyguy reader to assess their own real estate markets and to know that this can happen when the conditions are right.  Hope this helps someone make a fast million.  What was a surprise to me was the SPEED that the transition actually can happen.

DJ30 – 12,639   up 55
US Treasury 10 Year Bond – 3.16%    down 0.01% – a very low interest rate right now.
USDEUR  -  1.4313
Gold – $1495     up $10
Oil – $97.18    down $1.74

The standouts in the above measures are US Treasury interest rates at a very low level, and oil which has been pounded in the general commodity price meltdown currently going on.  Oil (mistakenly in my opinion) was said to be going down because of the poor US economy and the unemployment rate.  Gasoline continues to defy gravity and is now about $4.00/gallon on average across the US.l

Unemployment…..

Unemployment came in at 9.0%, up 0.2%.  Also, the economy created 244,000 new jobs last month.  First of all, I want to make clear that the unemployment percentage in itself is not very important – it is only a symptom of the illness that our economy is suffering.  The unemployment percentage is an easy measure to understand and gives you an easily accessible measure of what is going on in the creation of jobs in our economy.  The creation of jobs is what is VERY important.  Another measure of a lesser value is the number of unemployment insurance claims reported each weak.  Another fact to keep in mind is that both the unemployment rate and the number of new jobs created is established by a survey – in other words, they call people up and see what they say – just a poll.  So, the measure is somewhat suspect also.

The headline figure for unemployment of 9% is a disaster all by itself, but it is even more important to understand that this number only counts people who are receiving unemployment benefits.  When they no longer receive those benefits, they are no longer counted, as the government (in its infinite wisdom) thinks they are no longer looking for work.  I disagree.  There are tons of people who would love to get a job, but who are no longer counted in the unemployment figure.  If you count all those people, you find that one in five people in the USA is not working – that’s 20% of the working population.

The elephant in the room is a fairly well researched, and under reported, study showing that when people are receiving unemployment benefits, they are not highly motivated to find a job.  In other words, the “good” that government is doing for the unemployment by extending their benefits into multiple years is actually hurting those individuals over the long run – and it is hurting the US economy at the same time.  Now what I am saying may sound very harsh, but tough love is sometimes the right course of action.

Now let’s look at the facts.  The economy has lost 8,000,000 jobs since the economic meltdown in 2008.  The same economy has created less than 2,000,000 new jobs to replace those that were lose.  This is not a very strong economy, and the numbers help explain the pain that is being felt by families across America.  In addition, there are new job applicants coming into the jobs market for the first time from new adults (college and high school graduates) and immigrants – and this new pool of workers looking for jobs accounts for an additional 125,000 people per month – or another of looking at it, these new workers account for MORE than the number of new jobs created so far.

A common sense look at the employment market was given to us by McDonald’s restaurant.  They had a national hiring campaign where they wanted to hire 50,000 new workers.  There were 1,000,000 applicants for those 50,000 jobs.  That should give you a very good feeling for the desperation of workers in the US today.

Greece to Leave the EU??????

There is a rumor going around that Greece is considering leaving the EU in order to get out from under their debt problems – and the associated management by the EU and IMF.  This is just a rumor right now, but it has such great ramifications that I wanted to talk about it today.

First of all, this is a reasonable thing for Greece to consider.  Leaving the EU would entail leaving the Euro and going back to the Greek Dracma.  The Greeks could then go into a devaluation of the Dracma through inflation and pay off their debt with freshly printed money.  Lenders to Greece would be hurt – but caveat emptor.

Stay close to this story as it would have a dramatic downward pressure on the Euro – as the unknowns would create risk in the markets.  The Euro has already fallen from 1.48 to 1.43 in the past few days.  This is more than a stronger Dollar – so I suspect there are hedges going on just in case this story has legs.

US Housing Market…..

It’s now official.  The US Housing market is officially in a double dip.  The housing market fell like a stone right until the US Government came out with their Tax Credit Plan which expired last year.  During that period, housing prices started to creep upwards and stopped the first dip in prices.  Since the tax credit plan has expired, housing prices has continued to fall, and now have fallen BELOW the median price established at the low before the tax credit plan.

Welcome to the double dip housing market.  Does this mean we are heading for a double dip US economy (recession?)  Only time will tell.

What’s happening with Gold????

I think some the economyguy readers must be wondering what is happening with the gold price.  It hit an all time inter day high of $1580 about one week ago, and has since fallen back to a low of $1480, closing at $1495 on Friday.  Let me start by saying I am confident that gold will continue its climb in the future as the markets work out the excesses in them today.  Those markets with excesses include silver and the Dollar – both of which have had long sustained changes in price which must correct as all markets correct.

Silver is watched together with gold by world markets.  Many people think that silver moves with the gold price.  In reality, the silver market is different and separate from the gold market, but silver generally does move in the same direction as gold.  Silver has moved up about 150% over the past year – which is an enormous gain from $20/ounce to $50/ounce – and it had to correct.  The trigger to cause the correction was an increase in the amount of margin that was required to buy a futures contract in silver.  The added money caused many silver long contracts to be sold which started the meltdown in the price of silver.  The price came down as far as $34/ounce – a fairly hefty decline.

The Dollar has been on a downward rampage and threatened to break through the all time low it has ever established.  That long term trend needed to be corrected and has now started the correction.  It is not clear to me what caused the correction (other than its huge decline) but the decline in silver and other commodities certainly added to it.  The Euro (one of may currencies that the Dollar is measured against) has fallen significantly.

Gold may fall further, but the things I will personally be watching for the sure gold turnaround is the direction of the Dollar and a change in the silver direction to positive.  I believe that gold is now a good buy for anyone who is thinking of putting some money into gold.

Now let’s look at the US Housing Market valuation.  Did you know that we lost $7.9 TRILLION in equity in all the houses in the US since they dropped from their peak value?  Well, that number is just way too close to our fiscal debt to not note that we have been “taxed” by this housing equity reduction.  In 1Q 2006 (the peak of the market) the equity in US houses was $13.5 TRILLION.  In 1Q 2009 (just three short years later), the equity in our homes had fallen to $5.6 TRILLION – and that is a fall of $7.9 TRILLION over three years.

Now, here is the really bad news.  That last measure of equity was in 2009.  We are just starting 2011, and we are about 2 years later.  That equity is now much lower.  How much?  I guess we’ll have to wait to see, but it just isn’t good.  Or maybe I’ve missed something???  I doubt it.

Why do I call this a tax?  Anything that negatively affects our net worth, and is caused by the government is a tax.  It probably isn’t a tax in the real definitive sense of the word, but I think we must hold our government representatives accountable for the loss.  After all, if the banks, realtors, appraisers, mortgage lenders, and big banks were setting up the housing bubble, where were our government representatives who are supposed to protect us from that type of action?  With the previous numbers, isn’t is just common sense and understandable why the average citizen (especially those who own homes) just don’t like the way this coming down on them?

And holding Congress accountable is just what we did last November.  Remember that there will be another election (a local one) this coming November, and then in 2012, we will have the next big one – the Presidential election.  It will be time to take names, and count our net worth once more.  Vote out anyone who works against YOUR interests.

Update on US Home Foreclosure rate…..

Banks repossessed more than 1 million homes in 2010, according to a RealtyTrac report, the highest annual figure since 2005. A total of 2.9 million homes received foreclosure filings last year, the equivalent of one in every 45 U.S. households. However, the ugliest figures are likely to belong to 2011, when foreclosures and repossessions are expected to peak.

This just catches up with what I put in my 2011 Predictions – that 2010 was a “record year.”  Did you catch that throwaway line that 2.9 million homes received foreclosure filings???  But just 1 million were foreclosed on???  That leaves 1.9 million more homes in the pipeline, not to mention additional homes receiving foreclosure notices in 2011.  Also, that one in 45 number is very scary given that the 45 will be lowered to a smaller number in 2011.  I guess you just have to look around your own neighborhood and ask yourself “who?”  However, it would remiss of me to not remind you that all housing markets are local – so if you live in Nevada, or Arizona, or Florida the numbers just much worse.

The Housing Market is in a DEPRESSION……

Home prices fell for the 53rd consecutive month in November, taking the decline past that of the Great Depression for the first time in the prolonged housing slump, according to Zillow.  Home prices have fallen 26 percent since their peak in 2006, exceeding the 25.9 percent drop registered in the five years between 1928 and 1933, the housing data company said in a report on Monday.

House prices fell 0.8 percent over the month.

Okay, I know that Zillow isn’t perfect, but this statistic should be considered very carefully.  I agree with their conclusion.  The US Housing Market is now WORSE than during the Great Depression.  That is something that I predicted over 2 years ago, and remember that we aren’t out of the woods yet.  Housing prices could easily fall 10% or more over the next 2 years.

What does this mean to those of you who are actively in the US Housing Market?  Well, if you are buying and selling those houses – you are making money, so just continue.  I applaud you.  If you are buying houses and renting them, I assume you are making a positive cash flow – so that’s good too.  If you are buying a house to live in – in other words, it will become your home – then that is a different type of decision, an emotional decision, and do what works for you.  However, I would also recommend that you look at renting for a few years before buying – and that way you can increase your net worth over the long run.

Update on the European Crisis….

The day to day view of Europe’s crisis is best watched as what each nation in Europe must pay in interest rates for their debt.  The big news was that yesterday, Portugal had a fairly large bond sale, and if it had not gone well, Europe would have crashed.

It did go well, and that is just about all that the press reported.  Well, do you want to know why it went well?  The Chinese and the Japanese governments both bought Portuguese debt.  The Chinese bought about $1B worth of it.  Those purchases were certainly enough to guarantee that the bond sales looked successful.

Why did the Chinese do that?  Well, they are just spreading the risk of their massive Dollar holdings.  They believe it is better to hold Dollars and Euros, rather than just Dollars – so they are on the open market looking for investments.  Besides the Portuguese bonds were paying in the range of 7% per year interest.  Now that’s a lot better than we get at any bank here in the US – isn’t it?

I think the Chinese have another motivation in bailing out the European nations which are struggling right now.  They want to look “friendly” to the Europeans, and their money is certainly welcome there from that perspective.  They also want to look good politically as they make more strategic investments throughout Europe, and they don’t want those investments to be rejected by the EU, or any national leader.  Take as a past example, the fact that they are investing in Greece, and will be running the major port in Greece, Pireaus.  The Chinese must secure their oceanic transportation links to maintain the export engine driving their economy.  You can see, looking way back, that their takeover of the Panama Canal management was motivated by the same interests.  Remember that the Chinese are very long term planners and take actions accordingly.

GM (Government Motors) investment a bomb……

Taxpayers should expect a loss on GM. The U.S. is unlikely to recover its full $50B investment in GM, according to a report by the Congressional Oversight Panel, at least partly because the government chose to unload a large block of shares at $33 apiece during the company’s IPO rather than waiting for a higher price. The government’s stake is currently down to 26.5% on a fully-diluted basis from a one-time high of 61%, and has thus far recovered around $23B of the bailout funds extended to GM. Shares of GM, which closed at $38.62 yesterday, would have to reach around $53 for the government to break even.

What this is telling me is that the Treasury (which holds our GM ownership, and makes decisions to sell shares) didn’t really make a wise timing decision regarding the previous sales of GM shares.  You would think that the Treasury as the ultimate “insider” would know better, and would be able to manage OUR money a little better.  I know that timing the market is difficult at best, but we ARE talking about OUR money – aren’t we????  Remember that every BILLION recovered from GM, is one less BILLION that YOU will have to repay as part of our fiscal debt…..

Update on Gold since my 2011 Prediction……

Gold started the New Year on a downward path, and dropped about $60/ounce from $1420 to $1460.  Since then, it has been recovering.  The first three days of this week, gold has been up $5 or $6 each day.  Today, it looks like gold will be about level in price after falling off in the morning.

I have not changed my mind one iota on where I think gold will be going this year.  I am surprised that gold did not fall farther at the start of this year, but that might be a sign on the real world demand for the metal.  There are a lot of people predicting gold will take a large fall this year – going down to $1000 or so.  I disagree with them. These pundits are looking at the gold market as a US market – similar to a US stock market – as they make their predictions.  They are missing the fundamental point that gold is true world market, and the world buyers are the ones moving the market over the past 6 months.  Yes, the US buyers were in it too, but the US buyers didn’t move the market by themselves.

The Dollar FELL dramatically against most currencies.

Oil and gasoline went up – and this was driven by the weak Dollar

Gold went up slightly – and this was driven by the weak Dollar.

In the news today…..

Existing Home Sales – rose 2.4%, the 3rd month in a row increase.  Good news, but not good enough.  One in three home sales were a distressed sale, and the median price fell to $173,000, 16.8% drop from one year ago.  The good news was that the inventory dropped to 9.6 months worth of homes – still too much, but coming down.  Let’s hope it continues coming down.  A major problem with the housing market today is the appraisal rules being created by Fannie/Freddie and enforced by underwriters – these have slowed down sales.

3 Small Banks with TARP – suspending paying dividends to the US Government.  Their financial situation is so bad, they can’t pay the dividends on the TARP money.  Consider your tax money lost on these losers.  I guess I just don’t understand why FDIC didn’t step in a lot earlier and take them over if they are this bad off.

FED Chair Bernanke – was not highly praised by President Obama today when a press officer asked a question about the FED. Obama said all agencies had made mistakes, and the FED had done better than most.  In my opinion, this was not high praise.

Here are the last numbers for today:
Dow Jones 30 Industrial – 8323 (down 16 points)
10 Year Treasury Bond – 3.64% (down 0.05%)
Euro – $1.4078
Gold – $924 (up $3)
Oil – $69.74 (up $1.74)
Gasoline $1.89 (up $0.03)