(MCT)—As director of the Joint Center for Housing Studies at Harvard, Nicolas Retsinas has had a front-row seat for the real estate market’s dramatic boom and bust. After 12 years at the center, Retsinas left the director’s job to teach housing finance at Harvard Business School. He spoke recently with New Jersey’s The Record about why buyers got mortgages they couldn’t afford, and why real estate matters so much.

Were you surprised by the magnitude of the housing bust and how long it has lasted?
Nicolas Retsinas: Yes, by the severity of the housing bust but even more so, how credit just seized up.

When do you see any kind of loosening-up of the credit markets?
NR: I would suspect we’re likely to see the same dominance of the government at least through the balance of this year. One of the big issues facing public policymakers is what to do with Fannie Mae and Freddie Mac. If we want to attract private capital, not only from this country but also global capital, some part of that credit risk has to be borne by the government.

One of the biggest factors in the bust was that credit standards got too easy. Buyers who weren’t qualified got mortgages. Do you have any ideas about why this happened?
NR: In part, people were granted mortgages not on their ability to repay the mortgage, because it was clear that wasn’t going to happen. But there was an expectation that even if they couldn’t pay, the future increase in the value of the property would end up being the collateral for that loan. For a long time, that was a formula that worked. But we reached a point where even with these exotic—what turned out to be toxic—mortgage terms, they just weren’t affordable.

What has been the biggest human cost of the housing bust?
NR: The biggest human cost is the millions of people who have lost their homes. One can look back coldly and say, “Well, maybe a lot of them shouldn’t have bought a home in the first place.” But a lot of people lost their homes the old-fashioned way: they lost their jobs.

Who has benefited from the bust?
NR: Beside the investors who played with different sorts of financial products, I think the key winners probably have been first-time home buyers, who have maybe longed to buy a house but could not afford to. Now we’ve essentially transferred wealth from existing homeowners to new homeowners.

Some observers have been disappointed by the number of homeowners helped by the federal loan modification program.
NR: In defense of the government, when they designed this program 18 months ago, they based it on a premise that the principal problem in the housing market was egregious mortgage terms. And if those mortgage terms could be reset and recalibrated to more typical mortgage terms and could be afforded, through subsidy or whatever means, by the borrower, that would stem the hemorrhage of the defaulted loans and foreclosures.

As we moved into 2009, the problem was less about the subprime loans and more the traditional reason why people have problems making ends meet—which is that they lost their jobs. If you modify the loan so that your monthly payments are only 31% of your income, and your income is zero, that’s probably not going to work. The problem outran the solution.

Will home-price appreciation return anytime soon?
NR: The next couple of months will be an interesting test because we’ve had the withdrawal of the home buyer tax credit. I think we’re likely to have a sort of trawl-along-the-bottom type of recovery, a little bit lumpy for a year or so.

Congress is looking at new financial regulations. What effect are these likely to have on mortgages?
NR: I think it’ll make it more difficult to go back to the Wild, Wild West. There will be a new consumer financial agency, and I think that will be more likely to look at some of these (mortgage) products. I think that’s going to be critical. RE

The real estate trend in firming home prices solidified in the second quarter with more metropolitan areas showing increases from a year ago, aided by a surge in home sales driven by the home buyer tax credit, according to the latest survey by the National Association of Realtors. In the second quarter, 100 out of 155 metropolitan statistical areas (MSAs) had higher median existing single-family home prices in comparison with the second quarter of 2009, including 14 with double-digit increases; two were unchanged and 53 metros showed price declines. In the first quarter of this year, 91 areas had higher prices, while only 26 MSAs experienced annual price gains in the second quarter of 2009.

The national median existing single-family price was $176,900 in the second quarter, up 1.5% from $174,200 in the same period of 2009. The median is where half sold for more and half sold for less. Distressed homes accounted for 32% of second quarter sales, down from 36% a year ago.

Lawrence Yun, NAR chief economist, said the correction in home prices appears to have ended in 2009. “All year we’ve been seeing relatively flat national home prices, which appear to be supported by market fundamentals,” he said. “Prices in some areas remain below replacement construction costs, so even with an elevated supply of existing homes on the market, we don’t expect any consequential movement in home prices for the foreseeable future. Very low inventory of newly built homes will also help to support home values.”

Yun urged caution on interpreting price data. “The median price is influenced by the mix of homes that were sold and do not reflect pure appreciation or depreciation,” he said. “The recorded home prices in many markets were significantly depressed last year because of a large percentage of distressed homes sold at discount. Now as more normal, non-distressed home sales are occurring, the median price in many areas is showing higher values.”

Total state existing-home sales, including single-family and condo, rose 9.1% to a seasonally adjusted annual rate of 5.61 million in the second quarter from 5.14 million in the first quarter, and were 17.3% above the 4.78 million-unit pace in the second quarter of 2009.

Sales increased from the first quarter in 44 states and the District of Columbia; 47 states and D.C. had increases over year-ago sales levels.

NAR President Vicki Cox Golder, owner of a Tucson, Ariz.-based firm, said record low mortgage interest rates will help cushion a summer slowdown. “As expected, sales are slowing down now that the home buyer tax credit has expired, but record-low mortgage interest rates, along with stable and affordable home prices in most areas, provide opportunities for buyers who weren’t able to take advantage of the credit,” she said.

According to Freddie Mac, the national average commitment rate on a 30-year conventional fixed-rate mortgage was a record low 4.91% in the second quarter, down from 5.00% in the first quarter; it was 5.03% in the second quarter of 2009.

“Job creation will give home buyers more confidence, but the market over the next few months is likely to be below what we would expect for the size of our growing population,” Golder said. “With improving bank balance sheets, credit restrictions should gradually improve—Realtors are a great resource for consumer information on loan availability as well as neighborhood market conditions, which vary widely.”

In the condo sector, metro area condominium and cooperative prices—covering changes in 55 metro areas—showed the national median existing-condo price was relatively flat at $175,700 in the second quarter, down 0.5% from the second quarter of 2009. Twenty-six metros showed increases in the median condo price from a year ago; the first quarter of 2010 showed 24 metros up, while only four metros saw annual price gains in the second quarter of 2009.

Regionally, the median existing single-family home price in the Northeast declined 3.2% to $238,000 in the second quarter from a year earlier. Existing-home sales in the Northeast jumped 14.9% in the second quarter to a level of 980,000 and are 23.6% above the second quarter of 2009.

In the Midwest, the median existing single-family home price increased 1.4% to $148,500 in the second quarter from the second quarter of last year. Existing-home sales in the Midwest rose 14.5% in the second quarter to a pace of 1.30 million and are 20.9% above the same period in 2009.

In the South, the median existing single-family home price slipped 2.0% to $155,500 in the second quarter from the second quarter of 2009. Existing-home sales in the South increased 10.9% in the second quarter to an annual rate of 2.10 million and are 18.8% above a year ago.

The median existing single-family home price in the West rose 2.6% to $219,700 in the second quarter from a year ago. Existing-home sales in the West fell 2.6% in the second quarter to an annual rate of 1.23 million but are 7.6% higher than the second quarter of 2009.

The 4.5% fixed-rate mortgage is here, although more than 14 months late. That magic number, or a close approximation, was reached recently, when Freddie Mac reported a 30-year rate of 4.54%. The possibility first arose in early 2009, when the government began mass-purchasing mortgages from Fannie Mae and Freddie Mac to prop up housing. Just about everyone predicted the rates would hit what builders and real estate agents call a “sweet spot” in a few months, and the housing recovery would begin, especially if consumer confidence had recovered to prerecession levels as well.

“What gets people buying again?” asked mortgage broker Peter Buchsbaum of Arlington Capital Mortgage in Horsham, Pa. “The answer is confidence—confidence in the value not falling and confidence they’ll still have a job.”

Even if behind schedule, the 4.5% rate has arrived, but in an environment that buyers perceive as anything but inviting.

Consumer confidence fell again in July, and why? Jobs and sagging real estate values.

“People will start buying houses again when they feel securely employed, house prices are rising, and they can make low down payments,” Bankrate.com columnist Holden Lewis said. “I don’t see any of those conditions coming anytime soon, at least in most parts of the country,” Lewis said. “Job security is the most important factor.”

Suburban homebuilder Marshal Granor said that “when we went under 6 percent, I was amazed and excited, but 4.5 percent artificially increases affordability. If rates start to climb, it will severely dampen already-spotty sales.”

Moody’s Economy.com chief economist Mark Zandi concurs. “The key to more homebuying is more jobs,” he said. “Once job growth kicks in earnestly, household growth will ramp up, and so will demand.”

Zandi added that despite these “extraordinarily low rates,” many prospective buyers have little savings for a down payment and tattered credit scores.” The securely employed appear to be nibbling at the bait, however.

“There’s a new group of buyers just entering the market because of the low rates,” said Art Herling, regional vice president of Long & Foster Real Estate, although the weather is keeping them “from totally getting into the buying mood.”

Buchsbaum also reports “a greater influx of buyers than past summers.”

Philadelphia Realtor Fred Glick compared the economy to a driver with his “feet on both the accelerator and the brake at the same time.”

“Until the jobs are produced, the banks start lending, and the underwriting guidelines start to make sense, we’ll be caught in this conundrum,” Glick said.

What about home prices?

Although the Case-Shiller Home Price Index rose again in May, economists believe that prices nationally will drop 6-8% more through the end of the year.

May’s increase, economists say, is attributable to the federal tax credit that expired April 30, and to seasonal buying patterns that typically boost prices.

The indexes are three-month moving averages, “so May’s readings reflect transactions in 20 markets that closed in March, April and May,” IHS Global Insight economist Patrick Newport said. With the credit gone, “we expect them to rise for two months, then start to decline,” with recovery in 2011.

That means a lot of buyers will remain on the sidelines until prices level off completely. The lowest fixed interest rates in 50 years won’t be enough to draw them in.

“Many people are bottom-fishing,” Herling said.

On the other hand, “People are starting to view houses as places to live and build equity over time, not financial assets where they can make a killing,” said economist Joel L. Naroff of Holland, Pa. If that is the case, demand for housing would rise much more moderately. “Add to that the lack of equity and the difficulty in qualifying for a mortgage, and the outlook for sales is not great,” Naroff said.

Interest rates are rock-bottom because the economy is rock-bottom. As more investors shift their money out of a volatile stock market and to the safety of Treasurys, rates will drop further, at least in theory.

Assuming “the debt crisis abates and the economy doesn’t double-dip, both of which seem more than likely,” Zandi expects rates to close in on 5% by year’s end and over 6% next year.

“I wouldn’t bet my mortgage payment on rates remaining this low for a long time,” Lewis said. “If I were refinancing, I would lock now instead of floating in hopes of rates falling further. I think there’s a greater possibility of rates rising than falling.”

Here are three great reasons why it’s still a great time to buy real estate and make smart investments in a down market.

Low Home Prices
Although there is widespread agreement in the industry that the housing market has reached the bottom, home prices aren’t expected to spike upward. Instead, they’re likely to skip along the bottom into 2011. They will continue to decline in some markets and creep up in others. As long as buyers remain diligent in the home search over the coming months, possible pricing fluctuations won’t have a dramatic effect on their property options.

Low Interest Rates
Interest rates on 30-year, fixed-rate mortgages hit a five-month low of 4.93% in May, and as of early June the rates were holding steady below 5%. Financial concerns over the growing debt crisis in Europe have stemmed discussions in the U.S. of raising rates. The historically low rates will save home buyers thousands and thousands of dollars over the life of a loan, which arguably is reason enough to enter the market.

Other Tax Benefits
The U.S. Home Buyer Tax Credit was temporary, but there are other tax benefits that buyers can continue to count on for the foreseeable future. Property taxes, mortgage interest payments and mortgage insurance premiums are qualified deductions that can help reduce many homeowners’ tax liability. For eco-conscious homeowners, purchasing energy-efficient appliances and making other green upgrades can mean a tax credit up to $1,500. For more information, be sure to visit www.irs.gov or consult a tax professional.

Don’t miss your opportunity to take advantage of the best buying conditions the market has seen in decades. There are plenty of deals to be had in our local Reno/Sparks market. We are the experts that can help you find the right deal for you!

-DMG

Click here for the Reno March 2010 Monthly Market Report

In short, things are looking up! The median home price is $175,500, which is an increase over both January and February of this year. The number of homes sold also had a big spike in March of this year which is a great indicator to help determine the absorption rate of properties and if the available inventory is headed back to a healthy level, which it is.

Possibly one of the most interesting statistics is the Sold-to-Asking Price-Ratio. This ratio shows how much of the original list price was achieved in the final sale. Even as far back as March of 2009, this ratio has not been lower than 96%. As of March 2010 this ratio jumped up to 97.9%, meaning sellers are getting near, at or over their asking price at closing.

This is critical for buyers to understand that the days of “wiggle room” are over. It’s time for buyers to write serious offers and be prepared to pay asking price for a home they really love. From my perspective, this can be attributed to the large number of short sales being purchased. Short sale banks are not accepting low offers and more often than not are countering at a higher price based on the value they receive through an appraisal.

I am an optimist. If these numbers continue on this path, we could see some great progress this year in our local market place. We still have a ways to go before we are really out of the woods, but the light at the end of the will get brighter every month.

“Q: I am looking to buy my first home, and it seems like short-sales are priced much lower than regular sales. Are these prices negotiable, or are they the bottom line that lenders will accept?

A:Many lenders negotiate prices for short-sales [The lien holder is NOT the owner and cannot negotiate the price of the home],  in which the seller is offering the home for less than is owed on the mortgage. But traditionally the only way you could find out was to submit a below-list offer and wait—often for many months—for a response. If the bank made a counter-offer, you knew you were in the ballpark; if they didn’t respond at all, you were too low [The author missed the point.  The bank is NOT the seller and does not "counter the buyers offer". The short sale process is first and foremost to confirm that the lien holders will approve of a short sale for the seller.  That in fact the seller is approved to do a short sale.  Then the lien holders negotiate with the seller on terms acceptable to the lien holders/investors on what they will accept.  The lien holders are looking only at the costs of the sale or the HUD-1 settlement sheet]. By then, you may have lost all interest in buying the property.  [Lien holders are looking at what is best for them.  Is a foreclosure more profitable?  Is the offer within acceptable range to approve of a short sale for the investors without the expense and risk of a foreclosure?  It is all about the net.  Lien holders do not respond to offers per se, they respond to the owner of the home and a low offer only creates a barrier whereby the foreclosure route is the best way for the lien holders to go, thus a decline of the short sale.]

The good news is, on April 5, this frustrating system will change at least for some buyers and sellers. That’s when the federal government will begin to provide financial incentives to lenders to do more short sales. The rules also help standardize the process, so your chances of negotiating a distressed property bargain will increase.  [No, in fact we really do not know what to expect but the author is still thinking that a short sale and a foreclosed home are one and the same.  It is my opinion that in fact the author is right in the fact that more "bargain" sales are on the way but not for what is being said.  In reading the new directive it appears that the banks may well use the short sale process to circumvent the expenses of a foreclosure.  Only time will tell on this.  Until a home is foreclosed on the banks do not own the home and the owner is the seller.  Sellers today are finding that to approve of a short sale they must agree to financial terms on some form of loan payment.  That does not happen when a home is foreclosed, though the banks have the legal right to pursue the owner for lost monies, but that is another subject.]

Under the old practices, when a financially-distressed seller brought a potential buyer who was offering less than the amount owed on the loan, the bank would order an appraisal or broker’s price opinion (BPO) and then decide whether the offer was acceptable [Correct, the banks are looking at fair market value, as a buyer looking for a "bargain" this is where they go wrong.  Fair market value is what the home is worth].  Under the new federal rules, banks will order a BPO before the property is listed for sale, and will share information on the minimum net proceeds they’re willing to accept with the sellers. If they then bring in a buyer whose offer is equal to or greater than this pre-approved amount, the lender must accept it within 10 days.  [This is correct, but actually seeing the lenders adhere to such a time line will be interesting to see.  The new process if done correctly (something I have been asking for for two years) would be huge.  By placing a home on the market that can close in a near normal fashion, we can slow down and even stop the falling prices, therefore the question on bargains we hope will also be coming to an end as well.]

Not all sellers are eligible for this program, called Home Affordable Foreclosure Alternatives (HAFA) (for the requirements see Help for America’s Homeowner’s Supplemental Directive 09-09). But since the process is likely to go so much smoother for those who buy and sell under HAFA, I suggest you wait a bit until the program goes into effect and concentrate on finding these “pre-approved” deals.  [Agreed.  In fact, based on what I know now many homes will fall outside of this program.]

Of course, when you do find a property you like, you may not be the only person bidding on it. [The days are long gone where only one buyer bids on a home.  Today any buyer writing a low offer is pretty certain to fail, unless they are trying to buy a home that NO ONE else wants and that is also another story for another time.] To improve your chances of winning, make sure your offer is “clean,” with as few contingencies as possible (though I would never fore go a home inspection). Include tax and credit records, and a mortgage pre-approval letter. If you can afford to pay cash, that will put you in an even stronger bargaining position [This is not different than any offer, at any time, these are in fact standard items that any offer should include].  Still, in your eagerness to win the property, don’t forget that distressed properties often come with added financial burdens. Although under HAFA, the seller is supposed to provide clear title, to protect yourself your, your contract must make it clear that you will not be responsible for any of the seller’s unpaid property taxes, liens or second trusts.  [Here we go again, the author is confusing short sales and foreclosed homes, what she says is true on foreclosed homes but on short sales the home is still owned by the owner and in most states the law says that the owner is still responsible for full disclosures] . Also, cash-strapped homeowners often stop paying taxes and homeowners’ association fees during the time between when the house is listed and the deal is closed. To make sure that you’re not on the hook for these expenses, Leonard P. Baron, professor of finance at San Diego State University, recommends that you ask that the bank escrow at least six months worth of taxes and HOA fees, to cover any potential shortfall.  [We call this clear title and in areas that useescrow and title companies all recorded liens must be paid or the escrow cannot close.  Again the difference here is short sales versus foreclosures.]

 June Fletcher at fletcher.june@gmail.com”

  It went on to explain how to get a good deal and how the new government guidelines will address how short sales need to be handled from April on.  The general ignorance of the article was amazing and the lack of knowledge underscores the gap in understanding.  Later today we are going to post 60 graphs giving a update on what is happening in the Reno & Sparks Markets with the three dominate types of sales, short, foreclosed, traditional.

“As we work our way through the Great Recession, the discussion often sways between whether to expect inflation or deflation.  Deflationists mention the huge credit bubble that we are digesting, and often like to point out Japan’s experience over the last 20 years.  Inflationists point out all of the government spending and quantitative easing (essentially money printing) that may lead us to hyperinflation, mentioning episodes like the 1970’s Great Inflation, or even worse, Germany’s Weimar Republic. Who is right, and is the answer actionable for an investor?  In order to keep the brief discussion more interesting, I’ve decided to add a few quotes from John Maynard Keynes, the economist our leaders claim to emulate.

“It is better to be roughly right than precisely wrong” – John Maynard Keynes

Getting the inflation/deflation call seems very important. Inflation typically crushes fixed income, as higher rates can choke business, and pushes down the value of investor’s bonds.  Further, high interest rates make stock investments less appealing relative to bonds, and therefore stocks tend to fall in price until their dividend yields become more interesting to investors.  Hard assets can often make large gains during these periods, as falling currency values lose purchasing power, pushing up the nominal value of real assets.

On the other hand, deflation can cause investors to flock to bonds, which makes their values rise, and yields fall.  Business suffers as prices drop.  Wages also drop, as business slows.  People often save more and spend less, further deepening the deflationary spiral.  As business suffers, stocks typically drop.  A poor business climate usually leads to less use of commodities (hard assets), and their prices often fall.

It is easy to conclude that making a bold bet on inflation will be disastrous if deflation continues, and vice versa.

“Markets can remain irrational far longer than you or I can remain solvent.” – John Maynard Keynes

Even if an investor ultimately makes the right call on inflation/deflation, when does her/his thesis play out?  Remember, one of the best investors  of our generation called the debt bubble well before it happened.  George Soros (among others) mentioned the dangers of our enormous leverage in the mid 80’s, through the 90’s, and into the 2000’s.  He was spot on in his analysis, but acting on his forecast would have made one miss the greatest bull market in American history.  Imagine being short stocks as they rose 16+ percent a year from 1982-2000?

“Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally” - John Maynard Keynes

In order to avoid being out of sync, or even worse, loosing their investors, many “professional” money managers choose to follow the crowd.  They “manage” risk by hugging investment indexes, and feel it is ok to lose 49% of an investors portfolio, as long as the markets went down 50%.  Clearly, this may work for the stockbroker/financial advisor profession, but it doesn’t work for people who want to grow their assets and retire in comfort and safety.  We believe this mentality is destructive to most people’s savings.  The need to follow the herd is deep seeded in the human psyche.  To overcome this bias, one must first understand it.  Then, one must study history to see what people did well, and where they failed.  Most importantly, a rational investor must be willing to do things differently than the herd.  It is difficult to watch the neighbors make millions on tech stocks, or reap huge profits flipping houses and condos.  However, fundamentals eventually apply.  A rational investor will be called stupid, old fashioned, and jealous while bubbles expand.  She/he will be resented when the bubble pops.  In order to survive and thrive in an investment career, it would be wise to avoid “worldy wisdom”.

“A study of the history of opinion is a necessary preliminary to the emancipation of the mind.” - John Maynard Keynes

In the inflation/deflation debate, most people with an opinion attach their ideas to a specific guru or school of economics.  One theory is memorized, and doggedly followed, even when experiences dictate that things aren’t working as forecasted.  There is very little thinking and learning involved, only determined rooting for whichever “team” one has chosen to follow.  History is ignored, and few people open their minds to the idea that they might be wrong.  Instead of learning all sides of an issue, most observers start with a premise and assume that everyone else is wrong.  In our opinion, these debates are interesting, but only semi-relevant.   Often times, each school of economic thought offers a few nuggets of wisdom attached to much hubris.

“The difficulty lies, not in the new ideas, but in escaping the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.” John Maynard Keynes

While we understand the different schools of economic thought, and pay attention to their lessons, we choose to be open minded as to what may happen in the future.  History leaves a thick paper trail, and what actually happened to markets and asset valuations over time is more valuable to us than defending individual theories.  We want our clients to survive and thrive over their investing careers regardless of the direction that inflation goes.

Those of you that visit our office frequently know that while we religiously track current events, we also spend an enormous amount of time studying the history of the markets.  Often times, the parallels are chilling.

What we find is that most often, the bulk of the mainstream economists are wrong.  Most of our leaders appeared to be caught off guard by the collapse of the debt bubble, despite nearly twenty years of warnings by high profile investors, competent journalists, and the lessons of history.  Politicians typically follow Keynesian policies (stimulus spending to create jobs until the economy gets back on its feet), as this is often the school of economic thought most readily pushed on students at American Universities.  Further, Keynes’ prescription for recessions requires massive amounts of deficit spending and appeal to the populist mentality of “doing something to help”.  Our leaders forget that Keynes recommended government surpluses in good times, and government spending in tough times.  It seems that we either suffer from selective memory, or that we have chosen our theory because it allows our leaders to avoid fiscal responsibility, while feigning to follow a well known economist.  Historically, stimulus hasn’t worked well in solving recessions or credit bubbles.  Tough love (bankruptcies, assets price collapses, high unemployment) has worked faster, but has understandably wrought political unrest.  Our politicians don’t have the will to say “no” to their voting base, therefore stimulus will most likely continue until it creates massive inflation, high interest rates, and potential social unrest.  (Hey, no one said running a democracy is easy!)

We also find is that quality businesses purchased at low prices tend to thrive over all time and space.  The price of their stocks may swing with the ebb and flow of boom and bust cycles, but this really has little to do with the cash that these businesses earn and distribute to their shareholders.  Large, multinational corporations have the added advantage of doing business in different countries.  Some countries boom while others bust, creating some protection in the event of regional issues.  Regardless of the economic outlook, people still eat, drink, and wear clothes, and the companies that supply these products really don’t care if we are of the Keynesian or Austrian persuasion!

Further, when we buy a bond, we actually become a creditor.  Our thought process, when loaning money, is no different when buying a corporate bond than if we were loaning money to a distant cousin.  When do we get paid back?  Is there adequate cash flow to pay us timely interest and principle?  Is the interest rate we are charging enough in context of both the risk of the loan, as well as in regard to competing investments?  Only if these questions can be adequately answered will we invest.

By the way, these things also work for real estate investments, with an additional look at regional supply/demand characteristics as well as incomes and cap rates.

History shows that rational analysis of business and loans, as well as the proper pricing of these investments is more important to financial success than just looking at the economic backdrop prevailing at the time of investment.  To reiterate, the safety of an investment (whether it be a loan or an ownership position) is of paramount concern for an investor, but the price paid is nearly as important.  Money managers and individuals that got these two concepts right made money during the 30’s and 70’s, two difficult periods for investors.

“The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”  John Maynard Keynes

As pointed out above, it is not only difficult to pinpoint the direction of inflation/deflation, but also the timing.  Credit bubbles tend to cause significant damage to an economy (see Reinhart and Rogoff’s This Time is Different) that takes years to play out.  Contrast this with the United States high debt, inflationary policies, and a fed Chairman that has stated he will “drop money from helicopters” before he allows deflation to take hold.

Instead of making a bold wager on one or the other directions, we think it is prudent to remain open minded and hedge our bets.  Housing and other big-ticket items that require financing to purchase are likely to continue falling in price.  Until incomes begin to stabilize, and even rise, expect other discretionary purchases to remain weak.

Keep in mind (thanks Dave Rosenberg of Gluskin Scheff) that some Americans are walking from their homes and freeing up their cash, which leaves more room for consumption, while further hurting banks, investors, and the fed which hold the mortgages on these properties.  If enough people strategically default, without retribution, consumption can recover quicker, although the losses will most likely be born by investors and by taxpayers in the form of more bailouts, with  higher government debt and rising taxes.

As the government continues to add debt, and the Federal Reserve continues to monetize assets (print money), we put our currency at risk.  A floating currency means that the value of said currency is left up to the financial markets in theory at least. In practice, many countries manage the value of their currencies through market intervention.  If investors believe in the stability of the U.S. dollar, it’s value can remain high despite skyrocketing debt and quantitative easing.  If, on the other hand, investors panic, the results could be severe, and could happen almost instantly. The British Pound’s recent sharp drop should be a warning to developed countries.  We are a nation that imports more than we export.  If the value of our currency plummets, the cost of much of what we import will rise.

Tying it together, we think it is entirely possible to see, for example, houses continue to fall, while the cost of food and oil rise.

We could spend hours discussing other potential sources of inflation/deflation, but I think our readers get the big picture.  There are legitimate threats for both inflation and deflation.  Over time, our spiraling deficits will most likely lead to a weaker dollar.  Whether these trends play out over 2 years or 10 years, nobody knows. In the meantime, the collapse of a credit bubble tends to push prices down for years, slowly unfolding despite our impatient desire for “things to get better”.  In conclusion, we think it is entirely possible to see, for example, house prices continue to fall, while the cost of food and oil rise. There is no reason to believe that all prices must rise or fall at the same time.  If history is any guide, quality assets bought at cheap prices will provide protection from inflation and deflation.  By owning assets of this type, we believe an investor can both protect capital, and grow purchasing power.”  Courtesy of Ancorawest, Robert Barone

Bob says a lot in his writing but I feel that this is worth reading, and thought provoking as well.

David Morris

CRS, CRB,CLHMS, CDPE, SFR, ABR

You’ll see the following categories:
f/s = Homes that are for sale today.
Pend = Pending sales today but not closed.
% of pending sales today that are short sales.
Sold = Sold homes in the last 180 days.

All sales values are averages.

$000,000-$250,000

f/s 821 units $165,943 avg. 94 days on market
Pend 1,315 units $155,614 avg. 140 days on market
% short sales 72%
Sold 2,072 units $155,346 avg. 116 days on market

$250,000-$500,000

f/s 386 units $348,099 avg. 132 days on market
Pend 291 units $330,279 avg. 170 days on market
% short sales 62%
Sold 544 units $326,288 avg. 147 days on market

$500,000-$750,000

f/s 164 units $612,121 avg. 188 days on market
Pend 45 units $609,890 avg. 250 days on market
% short sales 64%
Sold 89 units $599,365 avg. 183 days on market

$750,000-$1mill

f/s 74 units $894,265 avg. 202 days on market
Pend 15 units $843,377 avg. 333 days on market
% short sales 80%
Sold 20 units $879,743 avg. 164 days on market

$1mill-$2mill

f/s 103 units $1,518,516 avg. 315 days on market
Pend 9 units $1,350,000 avg. 601 days on market
% short sales 67%
Sold 17 units $1,246,000 avg. 200 days on market

$2mill +

f/s 26 units $2,872,688 avg. 289 days on market
Pend 0 $0 0
Sold 1 unit $2,250,000 575 days on market