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Johan

9/9/10, US Falls Again in Competitiveness Rankings - DailyFinance »»

9/9/10, Chinese Advocate's Confinement Continues After Release From Prison - New York Times »»

9/9/10, Jobless Claims in US Decreased 27000 to 451000 Last Week - Bloomberg »»

9/9/10, 3M acquires heating blanket maker for $810 million - The Associated Press »»

9/9/10, UK Regulators Ding Goldman With $27 Million Fine - Forbes »»

9/9/10, Brazil Central Bank Signals End of Interest Rate Increases; Yields Decline - Bloomberg »»

9/9/10, McDonald's Sales Boosted by Smoothies - Wall Street Journal »»

9/9/10, OECD: Economy May Need More Stimulus - Wall Street Journal »»

9/9/10, US Stock Futures Rise After Jobless Claims, Trade Deficit Data - Wall Street Journal »»

9/9/10, Canada July Trade Deficit Unexpectedly Widens to Most Since at Least 1971 - Bloomberg »»

Matt

9/29/08, Supply & Demand »»

There's not a whole lot of magic about supply and demand. If demand is high, a low supply will result in a high costs whereas a high supply will result in low costs. Because of the abundance of products in the marketplace, our economy is demand driven. Meaning, if demand is low, it really doesn't matter what supply is because the price will be low.

Well, in our real estate market, demand is high. People are always inheriting properties, getting sick, getting divorced, gettind addicted to drugs, losing their job or getting transfered. All of these result in people wanting to either buy or sell a property. Given a good economy, the average homeowner moves once every seven years.

This article at Bloomberg caught my attention because it clearly states that, on a national level, there is an over abundance of supply. "The top 14 homebuilders have seen their market value plunge 69 percent...since 2005." Ouch! Why so low? Supply and demand. After building and building, it resulted in over supply. The market is telling the homebuilders, "We don't need anymore new homes."

While this is certainly true on a national scale, here in Austin, the effect is more minimal. If you were to drive around the periphery of Austin, you'd probably run into new subdivisions all the way around. There have been lots of new homes built in the last 2 - 3 years.

Fortunately for us, though, we've had a very good job market that has attracted homebuyers and investors. But that doesn't mean all is dandy.

As lenders restrict lending and as homebuilders build less, what we are facing is a simple supply and demand function at work. Demand will dip (though not much), and supply will go up. Add these together and you're looking at decreased home prices. How much and what areas will be affected the most is a bit too much to get into here. But it will happen.

And that just further illustrates why now is the best time to start your education in how to invest in real estate. Opportunity is knocking.

-Beasley

9/26/08, Wait-and-Hope Strategy? »»

9/22/08, Be Afraid...? »»

Americans are responding to the market basically in two ways; fear and confusion. This article from Bloomberg touches on how the everyday Joe is reacting to all of the chaotic news.

The sounds of Lawrence Olivier's panic stricken voice from the Marathon Man seems to resonate appropriately; "Is it safe?" Americans are calling their banks, their financial advisors and their friends worried whether or not their money will be gone tomorrow. It is a geniune concern.

Many of today's baby-boomers apply the financial advice from their elders who suffered through Great Depression. They heard the horror stories of banks running dry and saving accounts being annihilated. We remind ourselves almost ceremoniously every Christmas when we watch It's A Wonderful Life.

The federal government is trying to get as much screen time on the televisions to tell people, "Yes, it is safe."

But we don't necessarily believe them. They were the ones who said Fannie Mae and Freddie Mac were fine and only Bear Stearns needed to be saved. The federal government's treasury division is designed to sell one thing; confidence. Americans are doubting Thomas'.

Reading the Bloomberg article puts into perspective how dubious the typical financial education is of an average American. In response to the crises, people are choosing to go to the dollar store. Other's are liquidating their cash and burying it in their yards. Others are starting to buy generic goods instead of name-brand. The confusion around the subject is daunting.

Which illustrates that opportunities, big opportunities, are on the horizon.

Today's mortgage meltdown is almost a play-by-play re-enactment of what happened in the 1980's. Back then, mortgages became easy to attain, people who shouldn't have gotten loans did, and the impending results decimated the Savings and Loans enterprises. Americans paid the bills and property prices plummeted.

But they came back.

And herein lies the lesson. While greed drives the market, fear slams on the brakes. Fear is on the rise, but greed will come back. The question is, while property prices decrease, are you going to be brave enough to start investing when everyone else is getting out?

-Beasley

9/18/08, Okay, Take A Deep Breath... »»

Okay, everybody needs to calm down. We all know there's a bit of an economic crisis going on. However, that doesn't mean we need to start making irrational decisions.

Let me explain how we got here.

This problem starts back in 1938 when FDR created Fannie Mae. This was a government-created and government-backed institution that could purchase mortgages. This put a surge in the mortgage market then because privately owned banks could originate loans and then, to make quick money and to protect their risk, they could immediately sells the loan to Fannie Mae. This is called the secondary mortgage market. Most likely, the loan you have on your house is no longer owned by the same company that originated it.

In 1968, Fannie Mae became a new institution called Ginnie Mae and a NEW Fannie Mae was created. This new Fannie Mae would be privately owned yet was IMPLICITLY backed by the government. Let me reiterate, even though it was a privately-held company, the public assumed it was backed by the federal government and the federal government never EXPLICITLY denied it. To make sure they didn't violate at monopoly rules, another institution was created identical to Fannie Mae called Freddie Mac.

Throughout the 1970's and 1980's, the lending guidelines between Fannie Mae and Freddie Mac began to loosen. They began buying loans on multifamily properties, which were riskier than an owner-occupied residence. They were then allowed to buy adjustable rate mortgages, which are riskier than fixed-rate mortgages. They were also allowed to purchase secondary mortgages, which are riskier than the first lien position mortgages.

While all of this is going on, Fannie Mae and Freddie Mac became publically traded companies that would package bundles of loans and sell them as mortgage-backed security bonds. These were very popular in the investment world because they were perceived to be safe as the bonds were backed by real estate and the company was backed by the government.

Well, as the loans themselves became riskier, Fannie Mae and Freddie Mac also increased the amount in which they would allow a loan to be. In 1980, they could only take loans nearing $100,000. By 2008, it had increased to $730,000. You've heard about the bubble in the marketplace, right? This bubble was caused by Fannie Mae and Freddie Mac increasing their loan amounts, then making loans easier to acquire, which raised prices, in which they responded to by increasing their loan amounts again.

If it wasn't obvious, a huge multi-billion dollar company in which its profits were privatized, yet its debt were paid for by the public started to become a magnet for corporate corruption. In the early 2000's, there was a huge accounting scandal. A BILLION dollar audit was performed that still never resulted in a true financial status of the companies. While it was obvious that the executives were involved in nefarious activities, there were no reprimands.

As Fannie Mae and Freddie Mac still had ties to the government, they were able to access much lower interest rates than their privately-owned competition. With this, Fannie Mae and Freddie Mac effectively seized the secondary mortgage market. They owned nearly 90% of all of the housing mortgages in the United States.

All of these factors began to reach a critical mass as people who never should have qualified for the loans they received started to default. Over the last 6 months, Fannie Mae and Freddie Mac lost so much money that they became insolvent. The federal government acted on their implicit promise, and bailed them out.

The big investment banks that filled their books with the mortgage-backed securities Fannie Mae and Freddie Mac offered started to fall. This includes Bear Stearns, Merrill Lynch and Lehman Brothers. Also, you should realize that all of these risk-infested, mortgage-backed securities were marketed to the world as safe, AAA investments. Our dollar has decreased in value because confidence has been lost in the international marketplace due to this false misrepresentation.

You have probably read that AIG just got bailed out too. AIG is an insurance company that insured the owners of these mortgages in case the borrower defaulted. The biggest insurance company in the country is now bankrupt.

This is what has happened.

As the federal government is bailing out Fannie Mae, Freddie Mac, Bear Stearns and now AIG, we are going to have to foot the bill in the form of higher taxes and inflation. Keep in mind that we are being taxed by the government to keep private companies afloat.

You should note that, aside from this, the market is doing fine. Unemployment is fine. Our import/export operations are fine. While the dollar has taken a hit, it is still relatively okay. The information-age based companies are still growing. Everything else is pretty much fine.

The root cause to all of the turmoil in the market place is a result of the federal government nationalizing the housing market through Fannie Mae and Freddie Mac. This is not a failure of capitalism, it is the failure of a socialistic program trying to integrate in a capitalistic marketplace. Anybody you announces that the solution to this crisis is for the federal government to seize control of the housing industry has NO CLUE what they are talking about.

I know emotions are running high, but to act flippantly and start making decisions without closely analyzing how we got here is likely to cause more problems than they are going to solve. I write this to try to bring some rationale into the discussion and I hope you do the same.

-Beasley

9/15/08, Oh M3, Where Art Thou? »»

Okay, I know this is going to sound rather technical and perhaps even boring, but understanding what M3 is what it means to you can have a significant impact on your life.

The Federal Reserve is responsible for determining how much money is circulating in the market place. However, it's a little more complicated than just keeping a tally of all the bills that are printed and subtracting all of the bills that are destroyed or withheld from the marketplace.

There is a statistic known as M0 that measures the actual physical currency that is in circulation. There is another statistic known as M1 that includes all of M0 plus checking account balances. Then there is M2. M2 is the M1 statistic plus small time deposits and mutual funds. M3 includes all of M2 plus large time deposits, institutional money-market funds and other large liquid assets.

As you can see, since our economy borrows and re-borrows money over and over again, the M0 statistic doesn't accurately reflect how much money is in the marketplace compared to the M3 statistic.

Here's what's interesting; in 2006, the Federal Reserve STOPPED calculating the M3 statistic! Why is this interesting? Well, to many economists, the M3 statistic best reflected our market's actual inflation. By not calculating it, the Federal Reserve effective hid what the country's inflation was!

Now, the Fed's response to why they cancelled the M3 statistic is that it took up too many resources to calculate and that they made very few decisions based off of it. I don't doubt that this is true.

Consider this. If this overall inflation rose, then costs of good would go up and, ultimately, salaries would go up cancelling each other out. The Fed's primary responsibility is to make sure this relationship isn't widely distorted. This relationship is called the CPI or, the consumer price index. Since the Fed's job is to moniter and maintain a healthy CPI, then overall inflation IS unnecessary and the M3 statistic isn't very valuable.

But, overall inflation IS valuable!

Now, you've heard that inflation is somewhere in the ballpark of 4% to 5%, right? Well, that number, called core inflation, includes all items NOT INCLUDING FOOD AND ENERGY COSTS! I don't know about you, but I can't live without food and energy, so, not factoring in those costs seems rather useless to me.

And it should to you too!

Since 2006, when the Federal Reserve stopped calculating the M3 statistic, overall inflation has risen from about 8% to almost 18% (of course, remember that this number is now calculated by private institutions and not the Fed).

And it's on the rise!

With the Federal Reserve promising to bail out Fannie Mae and Freddie Mac, the Fed is going to effectively print huge amounts of money. This will unquestionably effect inflation.

Now, who is this going to affect the most?

Retirees.

Yup, retirees, or anybody, who lives off of a fixed income is going get hit hardest by the rising costs of goods due to the hidden tax called inflation. All retirees should immediately look to finding ways to secure their finances other than just putting into a savings account. If your bank promises to pay you 4% of your money, but the overall inflation of the economy nears 18%, you're losing 14% of your cash every year!

PLEASE NOTE! Those not financially learned enough to understand all of this are going to get hammered in the near future. The rules have changed. What used to be risky is now safe, and vice versa. Saving is a loser's game!

-Beasley

9/11/08, Go Round Rock »»

9/9/08, Big Damn Hurry »»

9/8/08, Advice: Fire Yourself »»

9/8/08, The $200 Billion Bandaid »»

Although I'd like to think of myself as psychically endowed, my prediction that the government would step in to save Fannie Mae and Freddie Max was hardly a lucky guess. They've been seized and we're all going to be affected.

Personally, I'm a bit conflicted on the issue. I know that, had the government not stepped in, there would be a brutal recession around the corner that would affect not only our us domestically, but the rest of the world as well. It would be a quick and deep economic downturn that would seriously undermine the economic integrity of the United States compared to the other nations and it would be a long time before the economy, and our reputation, had been restored.

On the other hand, this act of governmental intervention is diametrically opposed to the sound principals of a free market. This intervention doesn't prevent a downturn, it merely stalls it. It undermines our economic principals which will permeate to more and more similar decisions. We're creating (arguably have already created) an unspoken rule in America that says if your company gets big enough, don't worry, the government will never let you fail. Since when it is the government's responsibility to tax the private sectors in order to bail out other private citizens who make poor financial decisions? I've read the Constitution many times, and I'm pretty sure this isn't authorized.

Yet, here we are.

The last element of this issue that I think deserves mentioning is that, for years, these questionable loans were falsely advertised as AAA loans to the foriegn markets. They will be seriously damaged if this bailout didn't occur. In a sense, I can rationalize the bailout in order to honor our agreements with them. However, I would only endorse this with the caveat that the private sector be given control of the mortgage market and the federal government be banned from stepping in again. Of course, in today's climate, such a request borders on lunacy.

This bailout is not a solution, it's a bandaid. It's probably the most expensive bandaid ever at $200 billion (and possibly more). And while the wound matestasizes, another, bigger bandaid may be looming over the heads of our grand-kids.

Then again, what do I know?

-Beasley

9/5/08, Pensions > Mutual Funds? »»

7/28/08, I've got gas... »»

7/28/08, Anti-preneures »»

7/23/08, Another "Expert" »»

7/17/08, Retirement risks... »»

7/16/08, Monetary Conspiracies »»

9/24/07, California "Investors" in Austin »»

9/21/07, Austin; Market Snap-shot »»

Alrighty then, this is the first blog of what I expect to be a long list of blogs detailing the Austin market and how we investors can make the best of it. So, I think it's wise to start off briefly describing what I affectionately dub, "The Capital A."

A few years ago, as we all remember, the stock market took a nice hit and caused a wave of panic throughout the U.S. Those who felt this sting more than most were "investors" who had put thier money into the market at retail prices and were hoping for continued growth. Personally, I don't consider them investors as much as I consider them people with money in the stock market. Anybody can put money in the market, but one's strategy for doing so really determines if they are, indeed, investors.

Nonetheless...

As a knee-jerk reaction, money was pulled from the market and then placed in more "secure" investments; real estate. While I do consider real estate to be a more sound investment, the strategy of buying retail and hoping for continued growth is, again, not the move of an investor. The same problem they had in the market followed them into real estate...but not before prices started to skyrocket.

And, on the coasts, especially in California, where appreciation went soaring, a lot of people made a nice chunk of cash. This was helped by low interest rates that made selling homes much easier. Of course, when one starts to sell and bank, it's usually followed by others and the California market peaked and then began to decline.

After they made thier tiny fortune, they started looking elsewhere to invest, and, for some reason, Austin was thier number 1 choice.

But California and Austin are not the same market...

But who cares! Californian's started dumping millions here looking at Austin real estate saying to themselves, "It's so cheap!!!" Yeah, of course it is...compared to California. So, they started using real estate as a giant safty deposit box, putting thousands, if not hundreds of thousands, down on a property in order to get it to cashflow.

Statisitical data like cash on cash return or return on investments were never even considered. We Austinites went with the flow and like clockwork, the multi-family market started to get waaaaay overpriced. And it still is. The multi-family market in Austin is about 20-40% too high. Those crazy Californians...

Adding to situation is the mortgage market...

The mortgage industry played fast and loose with cash a few years ago, especially with ARMs and now, foreclosers are starting to become headlining news. But, not so much in Austin. The coasts are down around 30% due to these foreclosers, but, because of all of the money coming into Austin, our foreclosers are being purchased and are not significantly effecting our retail market.

In fact, too a large degree, Austin is still a seller's market. Most of the FSBOs I run into get plenty of foot-traffic with just a sign and, in many cases, have no problem selling thier house.

But, things are on the cusp of changing.

The tightening of money in the mortgage industry is turning what would normally be qualified buyers into non-qualifying buyers. This is starting to create a demand for creative financing measures whether through owner-financing or private lending.

This is even made more prevalent due to the increase of jobs as more companies start to settle here.

So, that's it; a snap-shot of the Austin market. More will come as I fill the details in. Feel free to add your impression of the market if you like.

-Beasley

Real Estate Center at Texas A&M University

9/7/10, Want to Win a Camcorder? »»

9/7/10, Tell Your Story on the Red Zone »»

9/7/10, Baywood Redeveloping Historic Building »»

9/7/10, City Council Helps Dairy Expand »»

9/7/10, Oak Cliff: Land of Learning Opportunity »»

9/7/10, TxDOT Offering Land-for-Services Exchange »»

9/7/10, Less is More for Houston Homebuyers »»

9/7/10, Satterfield & Pontikes Goes Back to School »»

9/7/10, Alamo City Retail Vacancy Rates 'Stable' »»

9/7/10, Gaines Looks Ahead at Housing Market »»

Inman News

9/9/10, Real estate agent: Will work for food »»

9/9/10, A roadworthy real estate website »»

9/9/10, Title company offers smart phone apps »»

9/9/10, Buying into college-town real estate »»

9/8/10, Smokin' fireplace makeovers »»

9/8/10, Near-record affordability in real estate »»

9/8/10, Purchase-loan demand picking up »»

9/8/10, Feds award $1B to buy up REOs »»

9/8/10, Judge denies Section 8 evictions »»

9/8/10, Dive into the link stream »»

9/8/10, California, FHA offer 4% loans »»

9/8/10, 5 tips for assessing a lowball offer »»

9/8/10, Save $25K a year the frugal way »»

9/7/10, 47% of home sellers slash list prices »»

9/7/10, Most bankers don't see credit easing »»

9/7/10, 3 ripe real estate opportunities »»

9/7/10, Homebuyers, sellers still stuck in denial »»

9/7/10, Inherit real estate without hiccups »»

9/3/10, Economic genie is out of wishes »»

9/3/10, Homebuyer tax credit off the radar »»

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