Archive for September, 2012
If your life revolves around real estate you’re probably wondering when will the real estate market bounce back. And even if you’re not directly involved in real estate you’re most likely wondering when will you be able to sell your property for a price above your loan balance.
So, if you’re like most people and listen to the news you would have heard this. The Federal Reserve has lowered the interest rate to revive the depressed real estate sector. Low rates would get people to buy and others to refinance. Buying would lead to more housing demand thus helping builders and realtors. Refinancing would help consumers increase their net disposable income. Therefore, these folks would start spending which in turn triggers demand in other consumer areas and blah, blah, and blah.
It may not be obvious to the untrained eye that our Keynesian anti-free market government and its media disciple have it backwards. What they don’t seem to understand is that in order for people to buy houses they must be financially able. Not only that but they also must have the security that their job will be there and their employer will still need them for a while. When nine out of a hundred people (or more realistically seventeen out of a hundred) are jobless, the majority of folks don’t think about the “American Dream”. They think about how they’ll be able to keep food on the table and keep a roof, any kind of roof, above their heads.
Then we have the Joe Smiths who may want to move and buy a new home but they can’t just seem to be able to sell their current ones. Their homes are either under water or there is no demand to buy at the price they think is fair. So the Joe Smiths will have not much of a choice but to stay where they are.
Reality is that few people today have a sense of prosperity. As a landlord myself I see how my tenants are suffering through this economy. As a commercial mortgage broker I can’t help noticing the challenges some of my clients experience. Heck, my work and my investments are affected by the people I work with, my tenants and my clients. As you can see there is a Domino Effect that impacts all of us. So, what is the solution then?
Get rid of Regulations
In order for the real estate market to get better there are some underlying fundamentals that must occur. First, we must see a business friendly environment encouraged by the government. In this case the government’s job is to slash most of the burdening regulations so that entrepreneurs can put their creative minds into action and bring new enterprises to life. We definitely need the small business and the wonderful benefits of competition. This will create employment and will fill commercial real estate vacancies.
Secondly, we need lower taxes not only for businesses but for all taxpayers. The businessman must profit in order for him to stay in business. Otherwise there is no incentive for him to take such challenge and risk. As far as the individual, he knows best how to spend his money, he doesn’t need the government to do it for him. When the individual has more disposable income he can then direct the spending in the areas he finds it most beneficial.
Get rid of Moral Hazard
Then we have the all so predominant Moral Hazard. The Wikipedia defines moral hazard as “a situation where a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk. Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions.” What I am referring to is the corporate welfare which entails the “generosity” of the government when bailing out insolvent corporations.
This matters because when Fannie and Freddie get bailed out it doesn’t allow the market to work in its natural course of events. It matters because when the Fed buys the banks’ bad assets it takes away the banks’ incentive to efficiently discard those properties to investors for the prices established by the market. Thus we have banks sitting nonchalantly on portfolios of foreclosed and non-foreclosed (but non-performing) assets. Why such behavior? Because they already sold their bad loans for a higher (than what the market dictates) price to the Fed. They have the money in reserves so why hurry? Ask a realtor who sells foreclosures or short sales what it’s like to work with the banks and you’ll get the real picture.
That’s it, folks, this is what must happen before we dare to even think of a real estate market recovery. Without getting rid of regulations, without lowering taxes, and without eliminating the corporate/bank welfare I don’t care what the laymen journalists say or predict. It’s all wishful thinking.
A final note. Implementing one or two of those requirements would somewhat improve the real estate market but in no way will bring it to a full recovery.
The US Republican Party recently announced its intention to set up a “gold commission”, to examine the feasibility or not of returning to a gold standard. This raises important questions, cutting across the neoclassical economic consensus, so is bound to be controversial. If the commission is appointed, its members will have to re-learn how gold works as money, take on board the consequences of its reintroduction, and understand the reasons why mixing un-backed paper and gold is a flawed compromise.
Gold as money is fundamentally different from the paper-money environment we operate in today. Gold cannot be manipulated by government, while fiat money gives governments the flexibility in monetary policy they are accustomed to. To ditch flexibility for inflexibility is hard to justify, whatever the economic case. To do away with the option of easy money will also make many businesses judged to be not over-geared in a flexible monetary environment potentially insolvent.
For this reason, it is likely that any proposal for a gold standard is unlikely to go the whole hog. There is also the question of how much gold the central banks actually own, given decades of denying its monetary role, and of intervention by releasing bullion to discourage any thoughts that it is money.The road to hell is paved with good intentions. The reality is that any attempt to go back to a gold standard is an uncomfortable rewinding of the clock. This is not to decry the benefits of sound money: if we had stuck to sound money in the first place we would not be facing the economic crisis we have today.
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As Austrian economist Ludwig von Mises pointed out decades ago, the deeper the central bank gets into the inflationary cycle, the more the law of diminishing returns applies. We have reached this point as even the unprecedented accommodative conditions put in place by the Fed over the past few years are creating less and less artificial growth each time. This is why the Fed is likely thinking at this point that if they really want to stimulate the economy, it is going to take something stronger. The market has been following closely and is waiting for them to deliver.
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