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The American Dream Act

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So there is a voters initiative going around in Arizona, called the American Dream Act.  This act would remove property taxes off of any citizen over the age of 65.  On the face of it, you may be willing to support this effort, as I was, but after just a little thought about it, it is clear that this must be defeated.  Being a Realtor, I have a high degree of interest and knowledge in this subject.

First we must look at how property tax is calculated in Arizona.  First the county accessor figures out how much every property in that county is worth.  It can only go up at a small rate each year, so properties that have not changed hands in a long time are valued much less than they should be.  The amount the county says a property is worth is the Full Cash Value, then we have the Limited Property Value.  The property can go up any amount but the LPV can only go up 5% per year.  So in the last 8 years most property has gone up much more than 5% per year, but the LPV is a benefit for people who still own the same house.  The LPV gets reset to the FCV when the property is sold.  On an owner occupied single family residence the tax is based on 10% of the LPV Value this is called the assessed LPV.   Most commercial buildings are assessed at 18% of the LPV Value.  Empty land and investment property is 15%, Senior living centers are also 15%.  Schools and churches are even 15% though churches can apply to be exempt. 

So if you are a taxing body you send the amount you need to raise to the assessor’s office.  They then add up the Assessed LPV of all the properties in your jurisdiction and divide that by the amount you need to raise, and those properties are assessed that amount.  So lets say you are school district, you need $10 million to run your school.  Your district has $2 billion in Assessed LPV then that would mean for each $100 in Assessed property value a property has they will have a property tax obligation of 50 cents.  So if the home in that district is worth $200,000 and has an LPV of $120,000, then an assessed LPV of $12,000 that person will owe $60 to that school district.   Then we have layers and layers of different taxing bodies, each with different borders and different amounts.  This is a large task, mostly done by computers now, but after figuring out everything a bill is sent out for each property with a list of each taxing body they are paying tax to and how much.  All of this data is public record for every property.     For example a home in Sun City that is worth $173k has an assessed LPV of $10,376.  They have a tax obligation to three taxing districts, $102 to pay for Maricopa County Community Colleges, $342 to pay for Fire service in Sun City, and $70 to pay for Street Lighting improvements.  This is only $5 per $100 in Assessed LPV.

So lets say we make all senior citizen property owners tax exempt then they won’t pay these taxes any longer, BUT they still we be paid, the assessor will just have the remaining properties pay a higher amount.  So lets say this bill passed, and in sun city about 70% of the properties are owned by someone over the age of 65.  The rest are churches, businesses, property that is rented and such.  So in order for those 70% to pay nothing the rest must pay over 3 times as much as they are paying now because the tax base has shrunk. 

Imagine you are a business in Sun City, you already are assessed at 18% instead of 10% on the value of your property, but now that amount will go way up due to a smaller base.  If you own a building worth $500,000 which would be a small business, you already are paying on an assessed LPV of $90,000, about 9 times as much as the average home. If we use the same amount of $5 per 100 in LPV we would expect a tax of $4,500 for this small business per year.  If the base is shrunk by 70% this business will see a tax INCREASE of OVER $10,000 to over $15,000 per year.  This sort of thing can make the difference of that business staying in business or failing. 

Imagine you are renter in Sun City, you live in a nice home, or senior living and you rent from a landlord.  This property is also not exempt.  You may not directly pay property tax, but it is part of your rent, and if it goes up your landlord will surly pass it on to you eventually.  Lets say it is an average house with a $700 a year tax obligation, and lets say that 70% of the property value in sun city becomes non taxable, your new tax is over $2300 per year, about $135 more per month.   Let’s think about who rents, usually these are the most fragile, and poorest among us, the people who can least afford a tax increase. 

Because this new law is not means tested that means you will get the benefit no matter how much you make or are worth, but a renter, or someone who is just out of college struggling to pay their bills, or that small business will pay for your benefit.  You lived a good life, you are reaping the rewards of home ownership and now you want more benefits on the backs of those that can least afford it. 

If you are for this still for this, and your reasoning is that taxes are bad and that taxes are theft, I am with you.  But this will just shift the taxes to people who have a hard time already.  Furthermore, the senior population is with us on this cause to lower taxes, and once their taxes are gone they will no longer care about lowering property taxes, this will lead to even higher taxes.

If you are still for this because it will put money in your pocket, have a heart and care about the rest of the population, you had a good life, you own a home, you are ahead of most people, the generation that is coming up has it much harder than you had it.  

Luckily for me I live in Peoria, where the senior population is much lower than sun city, but if this was to pass it would still be a fairly large impact because I own a business also that pays a lot in property taxes but I have never minded them because I see where the money goes and those are things that I support.  But I don’t want to pay more than my fair share. 

When the Founders said “democracy is two wolves and a sheep deciding what’s for dinner” this is EXACTLY what they had in mind.

So I implore you to not sign petitions for this, and if it makes it on the ballot vote against it.   Unless of course you only care about yourself and are greedy then do what you want.  

How to get office or retail space on the cheap

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In the last decade I have chosen office or retail space for quite a lot of businesses. Much of this is about Arizona but it should mostly ring true for most of the nation.

Of course, if you have the credit the BEST space is one you can buy.  If you have enough cash and credit to buy a building 3-6 times larger than you need and then rent out the rest you are very lucky and this should be done whenever you can.   I know many businesses that decided to buy and they rent out the rest of the building for more than their entire mortgage.  Remember, the same is true in commercial as in residential, when you rent your cost will always go up but when you own you lock in your mortgage payment at the start, and you are paying it back later and at the same monthly rate for the term of the loan. (Usually)  I also know a few business that, after 10 years or so, hit a bump in the road and were able to take out some of the equity in their building to keep their business going.  Lack of access to credit is a quick way for a growing business to fail, or for an entire economy to falter.

Now if you must rent you still have many options.  You are the one picking the building so you get to pick your neighbors.  Spend a day talking to them before you lease, ask them how the foot traffic is, ask them about the amount and types of customers they have.  See if they sell products that will attract customers that may buy your products.  Back in 2001 I located a computer store next door to a cad software and training company, during the first few years we received many of our customers from them simply because they needed a computer to run their cad things.  In 2006 that company moved away.

You also get to pick your landlord.  I have found time and again that you really want a local landlord, the smaller the landlord the more they need you and also the more willing they will be to break the rules when and if you need it.  Also they are much more likely to be helpful if you get behind because they need you.  If you are dealing with a property management company with distant owners they don’t care if you live or die really, the property management gets paid both ways.

You also get to set the terms of the agreement.  Many landlords like to hide tons of little details in their contracts.  One even tried to tell me what hours I needed to have a store open.  Another told me where we could park.  Before you sign the contract you can negotiate on anything you like, and most of these clauses are easily removed.  But one thing that has saved me tons of money is agreeing to take units as is in exchange for many months of free rent.  Many landlords will pay people to fix up the space but if you are willing to take it as is you will get exactly what you want and you can save thousands of dollars.  In one example we got into a location in 2004 and received 4 months of free rent in exchange for taking the unit as is.  All we needed to do was paint, put in new carpet and run our networking cables, which would we have had to have done no matter what.  We got the carpet 24 months no interest, we had some of our employees paint the unit and our total immediate out of pocket cost was less than 1 month of rent.  We now had 3 months for free, leaving us money to get some nice furniture and such.  Another term we always have looked at is about competition.  We don’t want someone to open up who is going to take away our customers so we make a long list of things we do and put in the contract that no one else who does these things can move in. Another clause that we put in that is helpful is the first right of refusal.  Basically this states that if the units adjacent to yours are empty and someone is looking at renting it that the landlord must call you and tell you that someone new is getting ready to move in, you then have 48 hours to decide if you want it or not.  This is very important if you ever plan to expand without moving.  If you foot traffic mostly comes from an anchor store you should also put in a clause saying that if the anchor store goes out of business you will receive rent at half price, and after three months you have the option to dissolve your lease at any time in case you want to move out.  We used this clause once in 2006, and it saved us a ton of money when the albersons wanted to leave, we got out of the lease 2 years early.

Getting a buyers agent is a great idea, the landlord is going to pay for one no matter what so don’t just call his agent, get one of your own who will work for you and have them talk to the landlord.  They will fight harder and you will end up with a much better deal in the end.

Once you have the unit there are a ton more ways to save money, more on that in another blog.

The Mortgage Crisis in Plain English

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Hello, my name is Jason Dragon.  You may be a long time reader of my blog, or like many people you may have found this simply by doing a search, if that is the case then welcome.  I plan for this blog entry to be one of the largest in scope of any entry that I have every done.  We are going to talk about the current Mortgage Crisis.  I will talk about it in 4 areas.

  1. The Boom
  2. The Bust
  3. The Current Situation
  4. The Way Forward

If you are wondering, I do have a degree in Business and I spent a lot of time studying economics. For a short time I even sold mortgages.  I will try to keep the text as simple as I can, I want you to not get bored and to read the entire things. Some of this will be my educated opinion, but most is simply fact.

The Boom

At the start of 2000 there was a bust in the stock market, millions of people pulled out a total of billions of dollars.  When 9/11 came they did so even more.  All of these people needed a place to put the money and the new trend was to put it into Real Estate, housing prices started to rise.  By 2003 and 2004 many real estate gurus arrived on the scene, showing common people how to make money in real estate.  It was a great time.  Prices were going up each month.

To add to this information, for the first time, was easy to get and compile.  It was easy to find a good deal on a house online, you could even find out the estimated value of your house or any other by going to sites like Zillow.  It was also easy to get a loan.  Because home values were expected to keep going up you could get a house for $150,000 and get 100% funding because by the time you get close to closing it was already worth $175,000.

The housing market was a great investment, it is one of the only investments that you can get almost total leverage in. Figure this, you buy a house for $150,000.  You only put $10,000 as your down payment, you get a tenant in the house and they pay for all the expenses giving you a zero cash flow but no expenses.  Now you sit, wait a year in this market and the price of the house goes up by 10%, BUT your return was not 10%, because the price goes up on the whole value of the home, not just your down payment.  You now have $25,000 equity in the house, a return of 150%.  This is the reason that investors flocked to houses, huge returns.

For many people, the more passive kind who usually invest in bonds and such this was way too risky for them, so they decided they would simply buy mortgage backed securities.  100’s of billions of dollars flew into these.  What these were was baskets of mortgages, and you could buy shares in this basket just like a stock, they had sold and predictable returns.  If you were used to getting 2% on your money in a CD or government bond, now you could get 5% on your money by buying one of these.  It was great for pension funds and foreign banks to sock away money because it had a higher yield and was still considered very safe.

The reason it was considered so safe was because of the very low default rate in mortgages caused by a booming housing market. Most people would simply sell their house for a nice profit before they went into foreclosure.  The investment banks reduced the risk even more by bunching 1000’s of mortgages together.  They would then break them up into different levels.  If there were any defaults the investors at the lowest level would be wiped out first, and the investors at the highest levels would still receive their full returns even if 20% of the mortgages defaulted.  It was a great system.  The investment banks bought up over a 100’s of billions of dollars worth of mortgages using this process, and they charges a hefty fee for all of it, making them some of the most profitable companies in the world.

For almost 70 years there was been a set of two companies, founded by the US government to facilitate the flow and resell of mortgages, these are Freddie Mac and Fanny Mae.  Basically these were huge companies that would buy mortgages from banks.  If a bank could not resell the mortgages they would need to get deposits to cover all the mortgages that they wrote and that would be nearly imposable.  About 92% of all mortgages are resold.  Freddie and Fanny purchased over half of them.  They would buy them from the bank, the price was set by the value of the house, Credit of the home owner, zip code of the house and a few other factors.

This created a great system for the banks.  They would sit there and advertise that they can get you a great deal on a mortgage, they would help you with all the paperwork, they would send your information to underwriting, where they would basically see what was needed to make your loan sell for the highest price to Freddie/Fanny.  They had some rules such as the first mortgage could only be 80% of the value of the house, or else the homeowner would need to buy PMI (Private Mortgage Insurance).  The bank would then take your entire mortgage packet and find out how much they could get.  On a $200,000 loan at 6% there is someone making $12,000 in interest every year.   The buyer of the mortgage would pay a premium for the loan, but they wanted to make sure they would get their money back.  So what the banks did was to get the home owner to sign a pre-payment penalty clause.  Basically this was a clause saying that the bank would get 2 years worth of interest from the customer, that the customer would still have to pay 2 years of interest even if they sold or refinance the house before 2 years was up.  So on that $200,000 mortgage at 6% interest the holder of the mortgage was guaranteed $24,000 in interest payments.  Because this $200,000 mortgage was really worth $224,000 for the first 2 years they would offer to buy it for $215,000 from the bank.  The bank where you got your mortgage made $15,000, paying some of that out as a commission to your mortgage broker.  They also usually would agree to service the loan, meaning they would send out statements and collect the money on behalf of those who owned the mortgage.  If a loan had a longer pre-payment penalty the bank would get more money, if they sold it for a higher interest rate they would also get more money.  The more income they could show for the client the more they would sell the loan for.  The interest of the bank and mortgage broker was to get as much from the client as they could so that the resell value would be as high as possible.  A few banks even started to lie about some of the details to drive up the price.

Mortgages were sold almost instantly.  This allowed banks to generate mortgages as fast as they could.  It was a great deal, get someone to come in and fill out some paperwork, show that paperwork to the mortgage buyer, get the buyer to agree to fund the deal and then you close on the whole deal and walk away with huge profits.  Do this a few times a day and a little office with a handful of people can make millions per year.  And that is exactly what happened. The banks had every incentive to get you into a mortgage, and they would do whatever was needed to do so.  It was easy to get a loan, even if you had no money to put into the deal, they simply would do a 20% second mortgages, or even if you really had no income, you could just do a stated income loan.  People were buying houses who could not pay for them.  Their main plan to pay as little as they could each month, and refinance when that 2 years was up and they would have a ton of money due to the value of the house going up.  It was a great system that worked for millions of people.

All of this easy money was causing housing prices to sky rocket.   I live in Phoenix Arizona and between 2003 and 2006 prices for most of the city doubled, people were bidding against each other in attempts to get houses, simply because the house was a good investment.

Where was this money coming from?  Well as I said much of it came from people who got out of the stock market, and needed a new place to keep their money, a large chunk came from foreign companies.  Remember we are buying at least 700 billion dollars more of stuff each year than we export.  So many nations, China, India, Saudi Arabia have billions of dollars that they need to invest somewhere.  They want us to keep buying to they make it easy for Americans to buy things on credit, then we buy more and they sell more.  It is a great spiral that put America in huge debt while at the same time sending millions of jobs all over the world.  The is the greatest transfer of wealth in the history of the world, but more on this in another blog.

The Bust

In mid to late 2006 the prices started to get very high, and there were signs of problems.  Some of these no money down investors who bought on stated income loans started to not pay their mortgages and the prices were not going up fast enough to still leave the buyer of the loan with a profit.  The buyers of these loans started to change their guidelines on who they would give money to, they started to make it harder.  This was a sign to many investors to start to sell, and the number of houses for sale started to go up.

Some of the hottest housing markets were Southern Ca, Phoenix Az, Vegas Nv , Atlanta Ga, and Miami, Fl.  These markets saw some of the largest gains, they were all nice warm places to live and people have been moving here for decades.  But they also had something else in common, they were all major places where Illegal immigrants would flock.  In late 2006 and early 2007 there was a huge national debate about Illegal Immigration,  and many of those here illegally owned houses but decided to simply leave, they dumped their houses, many others just borrowed as much as they could and walked away.  And the prices in these markets started to fall.

Once prices started to fall it changed all the numbers for the banks and the buyers of the mortgages.  If you get that same loan for $200,000 the buyers have more risk now, they don’t have a security of the house itself because the value will likely be less than $200,000 if the customer defaults.  So they said that they would only take the best and most qualified borrowers.  No more stated income loans, no more loans to people with sub-prime credit.  Suddenly most Americans could not qualify to buy a house.   All of these people were pushed out of the market, demand for houses plummeted, and when demand goes down price is soon to follow.

To make matters worse some of the Sub-Prime loans started to default.  Many were from investors who were upside down on the loan, they borrowed in a corporate name so there was no ill effects to them to simply walk away and give the house to the bank.  So thousands of them did just that, it was smart for them to do so.  The people who used the system the most were mostly the smartest and best at it, and when things started to go down they were the first to get out.

Most of these banks only put a 1-3% budget in for losses and some are getting much higher losses than that.  These foreclosed houses had to be sold so the banks simply dumped them on the market.  But banks are not in the business of selling houses, and they do a very poor job of selling houses.  They are risk adverse so they only want buyers who they feel will actually close the deal.  For the most part they sell the house as-is.  They do nothing to make the house look good and nothing to try to sell it.  For most buyers, buying a REO (Real Estate Owned)(Bank Owned) house is not appealing.  People with good credit who can buy a nice house want that house to be ready, and come with a warranty.  So these houses sat on the market for a while and the only choice for the banks was to keep slashing prices.  This was the main cause for housing prices to plummet.  This caused even more people to realize that they are upside down on their house and more of them simply walked away.  From the middle of 2007 until now this process has been happening, and it keeps getting worse.

These banks then saw their stock start to melt down.  Imagine a company that has 250 billion in mortgages but they owe 200 billion in debt on those mortgages, lets call them Mega Bank.  It was great for them in the boom time, they borrow money at 3% and loan it out at 7%, making 4% on 200 billion dollars, or 8 billion per year.  They had every inventive to do this as much as they could.  This company would have a value of 50 billion dollars or so in book value, the stock market almost always prices your stock well above book value so the Market Cap (The total value of all stock of the company) may be 100 billion or so.  With earnings of 10 billion or so it would be at a Price to Earnings ratio of 10, something that wall street loves to buy.   This company would be a star.  Now what happens if there is a ton of risk in the mortgages that the company owns, the company figures out that 5% of their loans are defaulting, but for one loan that is a total loss it wipes out the profits from 10 other loans.  So their accountants do figure out on average how much are all of the loans that they company owns worth.  If that number is lower than what they currently value the loans at they restate the value of these loans and do a write down of these impaired assets.  If you have 250 billion of loans on the books your accountants may feel that they are only worth 200 billion.  50 billions dollars, on paper, just disappeared.  Some companies bought insurance for such a thing to happen, the largest company that sold such insurance was AIG, they have as much as 300 billion dollars of insurance losses out there that may be paid.   So if you are Mega Bank the value of your company just went down by 50 billion dollars, but in reality all the rest of your assets you owe so your stock crashes, your market cap is no longer 100 billion but maybe more like 10 billion, or even 1 billion.  Investors on the stock market don’t know what to do, all they know is that they can’t value your stock.

The Current Situation

At the start of 2008 there were 5 major investment banks in the US, and three banks acting as mortgage clearing houses.  These were the banks that were selling mortgages to investors.  The investment banks took most of their profits by keeping some of the most high risk and high profit mortgages for themselves.   4 of the 5 investment banks saw huge losses, and all three mortgage clearing houses saw major losses.  1 of them went out of business, Indy Mac, they simply took so many losses that they could not pay depositors any longer.  Freddie Mac and Fanny Mae lost almost all of their stock value and had to be propped up by the government to stay alive.

Of the 5 investment banks Bear Sterns was the first to fall, they went from a 100 billion dollar company one week to being bought out by JP Morgan Chase for only 1.1billion the next.  The next to fall was Lehman Brothers.  They lost billions in sub-prime mortgages.  Their book value was negative.  They has a lot of really good assets though and tried to sell to a bank in Korea, but it did not work and in September of 2008 their stock went almost to zero.  They declared bankruptcy On Sept 13th, and are being sold in pieces to different companies, stock holders will probably get nothing.  On the same day the third Investment, Merrill Lynch was purchased by Bank of America for $50 billion.  Bank of America stock fell 15% that day because investors thought that they had over paid.   That only left two Investment banks,  Goldman Sachs and Morgan Stanley.  On September 22nd 2008 these two bank, under new government requirements converted to traditional banks.

None of this was helped by the hedge funds, these are basically large pools of money that often bet that something will fail.  These hedge funds helped drive the price down of many of the companies I wrote about today.  But many hedge funds also lost money on the mess.

The government has decided that for the most part they are going to bail out many of these companies, they are also considering a new govenment agency that will, for a short while, buy up this bad debt for pennies of the dollar, allowing the banks to write off these losses and move on.

During this whole time it has gotten harder and harder to get a loan, basically unless you put 30% down, have perfect credit and tons of income you are not getting a loan.  The government put in a program to help some home buyers which helped out a bit.

Even with all of this going on our economy is still fairly sound.  Employment levels have only gone down a bit, and many other parts of our economy are still stable.

The Way Forward

I have always been a free market guy, I think that the system works best when there is freedom to be successful and freedom to fail.  The government is really taking the failure and greed of these companies and helping them out.  They are doing this to save the normal people and the economy as a whole and to fix our broken mortgage system.  The government, and our President have seen how large this problem is and that they only way to fix it is a huge government bail out, and I AGREE with them.  The bail out will put stability into the system, it will prop up all the banks, and it will resolve the credit crisis allowing money to start flowing again.  They are looking at up to 1.5 TRILLION dollars in loans, and buy outs.

I think that we need to do this, if we don’t our economy is sunk, but this is NOT a progam that I think will cost the taxpayer any money, in fact I think it will make our government the highest profits that we have ever made.  Think of it this way, they are not just giving money away, they are going to be buying mortgages at the low of the market, the current talk is to buy them for 50-60 cents on the dollar.  If they do that they will set a low in the market, these mortgages are still backed by the actual real estate and the economy will turn around.  So one of three things will happen to each of these mortgages.  They will either get forclosed on and the government will sell off the house, most houses are still valued at over 60% of the value of the mortgage so they will still make a bit of money.  Option two is that later on they may sell back the mortgage for a profit, maybe 70-80 cents on the dollar.  The last thing that will happen to some of these loans is that the home owner may sell or refinance the house, and the government will get 100% of the value of the house, basically doubling their money.  I think that if the government does this that they will make at least a 20% profit on the money.  They are talking about buying 700 billion in mortgages, making them about $150 billion.

For AIG they are giving them a 2 year loan for $75 billion.  In the termns of the loan the government gets a 11.25% return each year AND they get stock options where they can buy 80% of the company at a very low price.  The company was worth over $200 billion last year.  If it goes back up to even 100 billion the government will make almost 80 billion from their stock options, and still make about $17 billion from the interest on the loan.  This bail out could make the government almost 100 billion dollars.  The owners of AIG see how much they will loose if the Government loans them the money so they are still looking for other lenders to help them out.

Almost everything that they are doing is set up in such a way, this whole bail out system as a whole, will probably cost out government nothing and make us at least half a TRILLION dollars in the next 2-3 years.  This could wipe out our deficit and radically change our government balance sheet.   It is not enought to totally wipe out our deficit but it will reduce it a lot.  If the economy really picks up so will taxes and the government has a good chance of being in the positive.  Of course this positive change will not happen until 2009 and if a democrat wins as president will probably say that it was them that made this change and that they are the reason that the government is suddenly so profitable, but we know the truth.

On a side note the President does very little to effect the economy.  Most of what is done is done by congress or the treasury department.  Also anything that the president does do takes 2-3 years before it really goes into effect.  Such as the losses in 2000 were not caused by Bush, he just took office.  All I know is that I would never vote for someone who thinks that raising taxes in a time like this is a good idea.

Thanks for reading, if you liked this blog entry, please leave a comment, I read all of them, and also please subscribe, you will then get all the nice future entries that I make.  Thanks.

The future of Real Estate

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Many people are wondering if Real Estate will bounce back.   Well the answer must be “OF COURSE”.

It is all supply and demand.  The run up in 2002-2005 was simply due to huge demand.  This demand was caused mostly by very cheap lending rates and how easy it was to get loans.  During this time millions of people purchased their first house.  Another factor was the reduction of the value of the dollar.  Something can go up in price while keeping a steady value when the value of the currency it is measured in falls.  This is also what happened in the 2000-2006 years.

So what caused prices to go down in 2007?  Well supply and demand again.  In many places developers were very excited about the prices going up so they ramped up production to record levels. (Increase supply) Next came a credit crunch, and the cheap money and the easy money left the system.  This made most people not able to qualify to get the house they wanted.  (Lower Demand).   To make matters worse many people felt they were at the top and that it would be a good time to sell so they listed their house for sale.  (Increase Supply).  Then in many places like Phoenix, there was a huge crackdown on illegal aliens.  Tens of thousands left their houses, many did not sell they simply just left.  Most were renters and left their lease, making the landlord have issues. (Reduced demand, increased supply).   Some people were used to the easy credit and have been living well beyond their means for years now, and when that stopped they could not pay their bills, and that included their house and they could not sell or refinance so they were foreclosed on.  (Lower demand for ownership, higher demand for rentals.  Higher supply of homes)   So with all of these things working together there was no reason for prices to not go down.

So where do we go from here, Well prices must go back up.  Builders stopped most building in mid 2007, and most places have many more people moving there than houses being built.  (Decrease Supply)  Well the credit crunch seems to be letting up, more deals are getting approved, mostly with government support.  (Increase Demand)  The lower prices are making people think twice about selling now, and many houses are coming off the market and turned into rentals.  (Lower supply for ownership, higher supply for rentals)  The illegal alien mess will not be resolved any time soon but most the people who are going to move already have.  The number of loans that have payments that reset soon is going down, also the government is making new rules to help these people keep their houses, which will result in less foreclosures.

In 1974 the median home price was 32,000.
In 1984 the median home price was 72,400 (a 126% gain in 10 years)
In 1994) the median home price was 107,200 (a 48% gain in 10 years or 235% in 20 years)
In 2004) the median home price was 185,200 (a 72% gain in 10 years or 478% gain in 30 years)

During this same time the size of houses increased from less than 900 square feet to well over 1700 on average.

So it is now a great time to invest, everything is on sale due to these supply/demand factors.  But where do you invest?

There are a few underlying economic facts to consider when picking the location of your investment.  First you want to be in a place that is growing, meaning more people are moving there than moving out.  Then you want to see how many vacant houses are on the market.   If you look at a city with 50,000 vacant houses but 10,000 people move there each month (These are the numbers for Phoenix) you can see that soon the houses will be full.   A city like Detroit is not good because people are leaving, there is no growth.  You need growth for demand, and demand vs supply sets the price of real estate.

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The value of financial education is huge.

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It is said you never really know what you don’t know. It is not until you learn something that you really understand the value of the thing you just learned. Some things are very valuable and other have little value. For example if you get a little education on real estate investing and how it REALLY works, (Not always what you see on the TV) it will rock your world.

On the other hand I went to a 4 year university and at the end of it all I felt that I could have learned much more on my own. I am still glad I went for the social side of it all. Too many people spend their whole life in the rat race, it is like a giant treadmill, you only earn enough to get current on your bills, and if you ever make more you tend to spend more.

There are many bloggers, most much more popular than I am, that tell the masses how to save their meager earnings, and how to find deals so that they can spend less. But you really can only save so much. Even if you could save 50% of your earnings you still would take years to really get ahead. What they miss usually is that it is MUCH easier to increase your earnings than reduce spending. It takes a different kind of education, a type that most people do now learn. One nugget of info can change your life. It is much easier to live below your means if you increase you means. You do need to control costs, but spend more time increasing income than controlling costs and you will be ahead in the long run.

There is another blog, by a successful guy who gets this, I highly suggest you read his blog. It is called 7Million7Years. He recently wrote a blog about home equity, and that you should not put all your net worth into it. Read it here

Are you ready to learn how to take your investing, and your thoughts to the next level, well the next step is get educated. Read books by Robert Kiyosaki, Donald Trump, Douglas Andrew and Ric Edelman. I have found them to have the best books on real financial advise. Most of the others really give the WRONG advise. I don’t know what they are thinking sometimes.

If you are interested in real estate investing (Which you should be) my company, Capital Active, sponsors events where we teach people, for FREE, how to get started and how to be successful right from the start. If you are interested in an upcoming event sign up here.

Thanks and have a great day, leave a comment please.

The flow of investment capital and how to keep it active

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Well here is a quick mental exercise. I am going to think about, and share with you, my thoughts about investment money.

Well the main areas of investment I see are:

  • Real Estate (Commercial and Residential Property)(I am not counting owner occupied housing because that is not primarily an investment.)
  • Securities (Stocks, Bonds, Mutual Funds, Futures)
  • Private Equity (Direct investment in private companies)
  • Metals and Jewels (Large amounts of money are kept in Gold, Silver and other precious metals)
  • Cash (Yes many people keep money in cash, CD’s and deposit accounts.)
  • International Investing (All of these areas but outside of the US)

Now, because the total amount of money is VERY QUICKLY increasing, the actual value of a dollar must be going down. This is evident by looking at the price of the dollar verses most any investment. You could have invested in most any are for the last 5 years and had a positive outcome vs. the dollar. Over 90% of this money is owned by less than 3% of the population. The total size of all of this investment money is well in excess of 70 TRILLION dollars. That is more money than most people can even imagine.

One important concept that I have noticed is the fact that money shushes around, from one investment type to another. In the late 1990’s the stock market was all the rage, and most other areas of investment were growing slower than normal, most investment money went there so the values went sky high. Then the hype popped in 2000-2001, and people started taking their money out of stocks, the people who left early took most of the profits.

From 2002 until 2006 the hype was all about Real Estate, as a whole the US made over 6 TRILLION dollars investing in real estate. That is about $40,000 for EVERY adult in the United States, and this number does NOT count the house you live in, only investment properties. By the start of 2007 people made a ton of money and started to see an end to the run-up in prices of Real Estate, so they started cashing out. Again the people who did it first made the most money.

Now this money STILL is out there. Where is it going? The easiest way to find this out is to look at what is going up in value. Metals is one huge area that has seem price spikes from 2007 until now. Another area is Private Equity. Most people who made this huge money qualify to invest in Private Equity and they have done so. They have brought companies private, they have started new companies.

Another area that has seen a huge increase in investment is the INTERNATIONAL segment. New cities are being built all over the world. The rate of investment in much of the world is on record pace.

Because of the vast size of stocks, and the fond memories many investors have, much of the money has returned to stock market. But many people who made a ton of money in Real Estate are looking to return to that market also.

So where should you invest??? The key is to move into the segment first and leave first, but it is hard to predict what will happen. For example I think metals were HOT but they are now near the top, and as we have seen when this happens there often is a fall. A lot of money has gone back to the stock market and more will follow, so there will still be a few years to make money in that area. Real Estate has taken a huge hit but should come up later, the returns will not be huge but at least there will be returns. So the two areas I see, where I would invest my money is in Private Equity and in International. In much of the world the Real Estate boom is just starting.

The best thing would be to start a company in a fast growing nation, and take advantage of the growth. This is hard so the next best thing would be to invest, using Private Equity, in a US company that does a good deal of business internationally.

When we stated Capital Active, this is exactly what we thought about, the fact that there is a huge amount of Capital out there, and that it needs to be kept moving around, kept active doing different things at different times.

Tell me what you think, please leave a comment to this blog, tell me if you agree or disagree.