The Fed FINALLY admits it…

Could the Fed’s decision NOT to raise rates be basically an admission this “recovery” is a farce?

Janet Yellen swears to tell the whole truth and nothing but the truthIf the economy can’t absorb even a token rate increase, it must be FAR from robust.

As we’ve discussed, there’s simply not enough income (productivity) to service all the debt.

It’s like a sub-prime borrower using a teaser rate to squeeze into a home they can’t afford.  When rates re-set, their income’s not enough to cover the new payment.

In other words, we have a sub-prime economy hooked on teaser rates.  An interest rate increase could push it over the edge.

Of course, the flip side of every problem is opportunity.

Right now, Janet Yellen has a BIG problem.  And she thinks housing can help her get out of it.

Check out this headline from Bloomberg…

Janet Yellen Sees a ‘Very Depressed’ Housing MarketJanet Yellen has a big problem

 “The Fed chief noted… housing ‘plays a supporting role’ to bigger drivers such as consumer and business spending.”

“The central bankers ‘recognize that the housing market is sensitive to mortgage rates’ and that an increase…will eventually impact consumer borrowing costs.”

In other words, Yellen didn’t raise rates so she could prop up housing.


But…proceed carefully.

First, we’re not sure Janet Yellen will succeed at goosing housing.  And that’s okay.

Encouraging consumers to go into debt based on home equity isn’t a smart path to long term economic “recovery”.Encouraging homeowners to go into consumer debt based on home equity is a bad idea

Isn’t that how we got here in the first place?

And with interest rates already so low, there’s no room to push up debt based solely on lowering interest rates.

So incomes need to rise.

But competition from low overseas wages and technology put a drag on American wages.

So Yellen might be tempted to revert back to money printing…or more “quantitative easing”.

Long term that’s bad for the dollar.

So mortgages and real estate could be very good things to have in the years to come.

Because, as we discuss in our Real Asset Investing report, mortgages are a way to short the dollar.  And in spite of it’s recent “strength”, the dollar has a one hundred year history of loosing value over time.  This makes sense because the Fed has a stated goal to create long term inflation.Real Asset Investing explains how to protect yourself from a falling dollar

Real estate is a great way to hedge against long term inflation.

Just be mindful of the fundamentals of value.

REAL value comes from income.  The more income, the more value.  The less income, the less real value.

But after nearly seven years of artificially low interest rates, trillions of dollars in “stimulus”, and zero meaningful reform of highly leveraged derivative speculation…asset values for stocks and bonds have risen without corresponding increases in income.

So this CNBC article says Wall Streeters turned to Main Street for more real returns…

Investors Snapping Up New Homes for Rentals

Hedge funds and foreign investors are buying U.S. houses…large-scale investors buying thousands of discounted foreclosed properties…turning them into single-family rentals….The housing market is recovering…but these investors are not selling. They are buying more, and now they are buying new.”

This perplexes mainstream pundits who only understand “buy low, sell high”.  But the article explains…

 “‘…institutional capital is still looking at … a long-term hold…there’s yield and…appreciation to be had.’” 

Exactly.  Welcome to real estate investing.

Of course, Bloomberg reports that all that big-money bids up prices and takes inventory off the market…

Previously Owned U.S. Home Sales Retreat on Limited Availability

No wonder Wall Streeters are buying new…which of course, makes home builders happy.

As John Burns reported, home builders are beginning to cater to investors instead of only home owners.

But if real value is based on income, how are incomes doing?

Not so good…according to a Bloomberg article:

Americans paychecks are shrinking “Wages and salaries in the U.S. rose… at the slowest pace on record, dashing projections that an improving labor market would boost pay.”

“Private wages were little changed…, the worst performance since those records began in 1980.”

Is this headline from Market Realist provides a little glimmer of hope?

Wage Growth Could Possibly Be Ticking Up

Could…possibly…maybe…kinda sorta…

But then we dig deeper and find:

“Despite falling unemployment, one of the conundrums of the current labor market is flat real, or inflation-adjusted, wages.

And right in the same article we find out why it matters…

“Historically, real estate prices have correlated closely with wage growth…Recently, home prices have been increasing again, but that’s due to low inventory….the ratio of median home price to median income is again approaching bubble-type highs. As the Fed removes accommodation, further home price appreciation will be dependent on wage growth.

Of course, rents also come from wages, and this Associated Press article says…

US rental prices up 3.8 pct. in past 12 months; pace slows but still faster than wage growthRents are becoming unaffordable for many Americans

“…rental housing costs have been rising nationwide at roughly double wage growth…The result is an affordability crunch for renters.”

This means long term resistance to rental increases…and even pressure to lower rents as people look to move to more affordable housing.

Here’s the bottom line…

The Fed’s decision tells us the economy is weaker than advertised.

Wages are soft.  People can’t afford higher debt paymentsor higher rents.

But they NEED housing.

So housing and rents are rising.  But without wage growth it may not be sustainable.

You shouldn’t count on rising rents or lower interest rates to improve your cash flow.

So it’s REALLY important to BUY RIGHT.
  • Choose affordable markets with a good local economy, low taxes and living expenses, and an attractive quality of life for people leaving expensive areas in search of affordable housing.
  • Avoid paying too much. Be disciplined. Don’t chase the market.
  • Lock in low fixed rate long term financing. The difference in adjustable and fixed rates probably isn’t worth the risk right now.
  • If you want an equity pop, force it by adding value.  Ditto for rents.  Maybe the market will push prices higher, but don’t count on it.  The equity tide can rise…and it can recede.
  • If you can get available equity out at today’s cheap interest rates, it’s probably a good idea…as long as you have someplace to conservatively invest the proceeds for more than it costs to borrow.  Right now, that’s pretty easy.

When we look at the investment landscape, we agree with the contingent of defectors from Wall Street…stocks, bonds and bank accounts look very scary right now.

But investors have to store their wealth somewhere.

Real estate provides income, long term equity growth, tax breaks and the most affordable form of conservative leverage.

In today’s climate, it’s hard not to like properly structured real estate in the right markets.

So if you have wealth you want to protect and grow…consider real estate.

If you know how to invest in real estate, but are already fully invested…think about starting a business to help other people get into real estate while the getting is still good.

Until next time, good investing!

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6/22/14: Stop, Go or Proceed with Caution – A Conversation with Peter Schiff

Love him or hate him, Peter Schiff always speaks his mind.

Peter Schiff was rightWe happen to love him.  Not only do we admire his courage in trusting his own judgment… even when all the “experts” say he’s wrong, but we appreciate his willingness to explain his reasoning to anyone interested enough to listen.

For those that don’t know, Peter is the founder, CEO and Chief Global Strategist of Euro-Pacific Capital.  He ran for U.S. Senate in 2010, has a daily radio show, and is a best-selling author.  Slacker.

In 2005, he was sounding the alarm about the housing market, but few would listen.  We didn’t know him back then, but we wish we would have!

After everything blew up, we looked him up and have since become good friends.  Peter has been a faculty member on our last two Summits and we just found out he’s coming back for 2015!

We ran into Peter at The Money Show in Las Vegas, so we sat down to chat.  We thought you might like to listen in…

Behind the microphones in our mobile studio for this edition of The Real Estate Guys™ Radio Show:

  • Your Go-Go-Go host, Robert Helms
  • His stopped-up co-host, Russell Gray
  • Our never yellow guest, the indomitable Peter Schiff

One of the big lessons from the Great Recession is that financial markets both affect and reflect each other.  So even though we’re primarily real estate guys, we’ve learned to pay attention to stocks, bonds, currency, commodities and precious metals.

Peter Schiff isn’t really a real estate guy.  He’s big picture economy guy…that’s probably why he’s called a Global Strategist.  He has his eyes on the horizon…watching for waves of opportunity and signs of stormy skies.

When you hear Peter talk, he explains the cause and effect behind the movement of money, and filters everything through an Austrian economics school of thought.George Bush told America after 9/ your country.  Go out and spend!

If you’re not familiar with the two major economic schools of thought, think of it this way:  The dominant philosophy in modern economic is the Keynesian view which says that borrowing and spending fuels prosperity and economic growth.

When you understand this, it’s easier to make sense of what the government and the Fed are doing.  Everything is designed to entice people to borrow and spend.

The Austrian school believes that savings and production create prosperity and economic growth.  That is, when a society makes a lot of stuff (production) and doesn’t consume it all (savings), there’s abundance…more to go around.  Prices drop, stuff is more affordable to poorer people, and everyone is better off.

Peter Schiff says the Real Crash is yet to comeIf you keep this in mind when you listen to Peter, it helps you understand why he describes rising prices, low interest rates, increased debt and borrowing, and excess consumption all as warning signs.

It’s like using your credit card to buy a new car, new  furniture, a new wardrobe and then going out to eat every night at nice restaurants…even though you don’t earn enough money to pay for all those things without a big credit line.  Borrowing is the only thing fueling your “prosperity”.

But if you believe that borrowing is good, deficits don’t matter, then you’ll think that all the items purchased on credit are valid signs of prosperity.  After all, you got all kinds of stuff!  And more stuff is a sign of prosperity, right?Keynesian economist believe that borrowing and spending is the key to economic growth

Of course, anyone who’s ever run a household or a business knows that eventually the credit card has to be paid.  And the longer you wait, the bigger the balance will get, and the more painful the day of reckoning will be.

Peter thinks that higher interest rates would discourage borrowing and encourage savings.  He likens the cheap money to a spiked bowl of punch at a raging party.  It’s all good as long as the punch bowl is full.  But when the credit line gets cut, the punch bowl goes away, then the party is over…and all that is left is the hangover.

Evenutally the bill for all that spending comes dueSound gloomy?

Maybe a little.  But people go to parties all the time and enjoy themselves in moderation. Of course, if the guy next to you has had a little too much, it might be a good idea to keep a safe distance.  You don’t want his over-indulgence to get on you.  That’s the problem with investing alongside “hot money”.

In other words, asset prices are moving up because of cheap money.  Peter calls these “bubbles” because there isn’t legitimate productivity (fundamentals) underneath the increases.

Getting back to real estate (we haven’t forgotten that we’re The Real Estate Guys™)…

In housing, values are driven by the demand of home buyers (which is the desire to buy a home combined with the capacity to pay for one…which means an income that can be pledged to a mortgage), versus the supply of homes available to buy.

For investment housing, it’s similar…except the income comes from the tenants.  So even people with weaker credit and no savings help drive housing.

But in a weak economy (remember, “weak” means low productivity, low wages and low job growth…not a raging stock market), the incomes needed to drive housing aren’t strong.

Is that a red light?

Not necessarily.  After all, housing isn’t optional.  It’s essential.  So there will ALWAYS be a demand, even though it might be focused on the less expensive markets and product types.  And people will cut back on almost everything in order to keep a roof over their head, so even when incomes are soft, rental income is less affected than more discretionary spending.

Does that mean real estate is a step-on-the-gas green light?   If you view “green light” as throw-a-dart-at-a-map-and-buy-wherever-it-hits (like you could do in 2004), then no.  Some markets and property types are probably a long way from recovery.

Keep investing towards your financial goals...but proceed with cautionWe think it’s a “proceed with caution” yellow light.  Even though Peter disagrees with low interest rates, we have them.  And Peter says that current monetary policy favors the borrower.

Based on that, it seems like a good idea to borrow some cheap money, lock it in long term, and buy real incomes producing assets like rental real estate.  Especially because right now, in some markets, you can still buy properties at or below replacement costs.  For example, we just came back from Atlanta, and there are still very attractive deals there.

The key is picking the right market, price point and property type.  When markets get heated up, it’s SO tempting to speculate on rising prices.  If you get it right, it’s some of the easiest money you’ll ever make.  Who doesn’t want to buy a house for $500,000 and sell it a year later for $650,000?

But if you can’t sell it, are you structured in a way that you can afford to hold on for the long term?  If you could rent that home for enough to cover the rent and all the expenses for the next 3 to 5 years…or longer…then great!  If not, then you might lose everything you put into it…and your credit score.

And if you’ve been riding the tide of the rising stock market for the last year, you might think about moving some chips off the table and placing them into real assets No one likes it when the party’s over, but better to get out before the crowd…otherwise you risk getting stampeded or locked in.

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6/16/13: Rising Housing and a Weak Economy

Unless you’ve been under a rock for the last several months, you’ve probably noticed that lots of folks are excited about the housing recovery.  After all, prices and sales volume are up in a lot of markets.  Even home builder confidence has moved into positive territory for the first time in a very long time.

It’s all good, right?  Maybe.  That’s what we discuss in this uplifting episode of The Real Estate Guys™ radio show!

In the house and behind the microphones:

  • Your rising host, Robert Helms
  • The weak co-host, Russell Gray
  • The Godfather of Real Estate, Bob Helms

An old business mentor of ours once said, “It’s never as bad as it seems and it’s never as good as it seems.  Just keep going.”

His point is that it’s very tempting to analyze something right into paralysis.  That’s why we’re not huge fans of trying to time the market.  When fear and greed are blended with market volatility and data overload, it’s really hard to make good decisions where success is based primarily on being on the right end of a market move.

With that said, we also believe that macro-awareness is essential to long term prosperity.  Sometimes forces bigger than your deal or local market can tumble all but the most carefully constructed portfolios.

Right now the U.S. housing market is saying “all systems go!”.  But the economic data doesn’t seem to support it.  So is this housing recovery the real deal?  Or are we looking at a housing head fake?

And why is this all so confusing?

Now THAT is a great question.  So let’s visit it quickly…or maybe not so quickly. 😉

We (not The Real Estate Guys™, but the “powers that be”) measure the U.S. economy in dollars.  Duh.  But it’s an important point because the value of the dollar keeps changing – and primarily to the down side.  This means it takes more dollars to purchase the same value.  A gallon of gas today is $4, but 5 years ago it was $2… for the same gallon of gas.

So, if you measure your economy in dollars and five years ago you cranked out 1,000 gallons of gas a month (yes, we know that’s a dinky economy, but this is just an illustration) at $2 per gallon, your economy is a $2,000 a month economy.

Now if the value of the dollar falls so it now takes $4 to buy that same gallon of gas (does that happen?), and you’re still producing the same 1,000 gallons a month, your economy is now $4,000 a month.  You’ve DOUBLED your economic output!  WOW!  Prosperity!

BUT (and it’s so big, it could be a bubble)…how productive are you in terms of gallons of gas?  You haven’t grown at all.  You’re still producing the same 1,000 gallons a month you were in the $2,000 a month economy.

Now let’s say you reduce gasoline output by 200 gallons, so you’re only producing 800 gallons at $4 a gallon.  That would be $3,200 a month, right?  So your economy “grew” from $2,000 a month to $3,200 a month.  But your gasoline production FELL by 20%.

So…did your economy grow or not?

If you think a bunch of pieces of green paper with dead presidents’ pictures on them make you rich, then maybe you could say your economy grew.  But in terms of producing utility (the benefit of the stuff that money can buy), your economy shrunk by a lot.

Think about it.  Forget about the price.  Would you rather have 1,000 gallons of gas or 800 gallons?  Which is more?  I bet if we sat a bunch of elementary school kids down at a table and asked them, “Which is better: less or more?”, they would choose more.  (Wait…didn’t somebody do that?)

It’s not complicated.  More is better.  Except when your uncertain about how to measure “more”.  More dollars or more product?

This is the problem when the unit of measurement becomes unstable.  In the case of the U.S. economy (and housing prices) the unit of measure is dollars.  And because the unit of measure is easily manipulated (just watch how the markets respond to whatever Ben Bernanke says or doesn’t say), so then are the statistics that measure the “success” of the recovery.

Whew.  Does all this make sense?

Stick with us.  After all, you’ve made it this far. And “good job” by the way.

So when it comes to the U.S. housing market, is home ownership rising or declining?  And if home owners aren’t buying these houses, who is?

When measuring the U.S. economy, are we creating more jobs or less?  Are incomes rising or declining?  And if incomes are “rising”, are they rising faster than living expenses?  That is, are people becoming richer so they can afford to save and buy a home?  Or are they earning “more”, but spending more than that, thereby making savings harder to accumulate (down payments) and mortgage payments less affordable?

What about interest rates?  Are they rising or declining?  Obviously, rising rates (even though the current rates are awesome, it’s all compared to where they’ve been) make housing LESS affordable.

Wow.  That’s a lot to think about.

But don’t get paralyzed.  Just be aware.  Then discuss these things with other informed and active real estate investors.  It helps keep you sharp. That’s why we like talking to you each week.  And we REALLY like it when the producer let’s us out of our cage, so we can visit you in person at a field trip, seminar or our annual Summit at Sea™.

Here’s our take:

This isn’t a home buyer or economy driven housing recovery.  The U.S. economy is not creating enough jobs to offset the number of new workers entering the market, much less enough to back fill all the jobs lost in the Great Recession.  And the jobs that are being created are not high paying, but mostly lower paying service jobs.

Interest rates have nowhere to go but up from here.  So while they may stay low for a long time, they aren’t falling dramatically so as to make housing way more affordable to home buyers.

Meanwhile, in its attempts to keep interest rates down and “stimulate” the economy, the Fed’s QE program causes life to become more expensive where it matters most to working people: at the gas pump and in the grocery store.  No wonder they don’t include food and energy in the CPI (Consumer Price Index – used to measure the official rate of inflation)!

So is this all doom and gloom?

No!  It’s actually good for investors, which is why hedge funds and individual investors are pouring into real estate and creating demand that’s driving up prices.

But as home builders see demand and prices increase, they will go back into construction mode and add to the supply.  In markets where supply can be increased, this extra inventory could put downward pressure on prices.  If it gets real bad (like last time), the Fed will probably crank up the QE to prop it up…again.

So what to do?

Be careful when investing purely for capital gains.  We love equity and it still happens (yes, we feel a little vindicated).  But it’s all about staying power.

As we said in Equity Happens, “cash flow controls mortgages and mortgages control property” while you’re waiting for the inevitable inflation drives up the price (as measured in dollars whose value is falling).  That is, long term real estate is a great hedge against inflation.

It’s like gold with benefits.  You get cash flow (assuming your wise enough to buy a property that pays for itself, and you lock in these amazingly low interest rates for the long term).  You get tax benefits that actually enhance your cash flow.  You get amortization (the pay down of your loan using the tenant’s rent), which is profit to you. And you get long term appreciation.

Pick markets where prices are low and cash flows are strong.  While high priced markets might lose renters and homeowners if the economy stays weak and net purchasing power declines, lower priced markets might actually see an increase demand as people migrate their to improve their financial position.

If you can do that in a market where it’s hard for home builders to increase supply, then you can be somewhat insulated from speculative building.

Do we think real estate will be worth more (in dollars) 10 or 20 years from now?  Probably.

Will we ever see interest rates this low again?  Maybe, but probably not. And they really can only go up from here, so even is about the best you could hope for.  In other words, OPM (Other People’s Money) is on SALE right now.  And it’s a great tool to short the dollar (but that would be the topic of another lengthy blog).

And speaking of lengthy blogs…thanks for sticking with us this far.  Even tough there’s more to say, we’ll wrap it up now so you can listen to the show.  And stay tuned to The Real Estate Guys™ as we watch this market evolve.

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Squish Happens

Most people believe bubbles “burst”.  When people talk about the decline of tech stock values at the turn of the century, they say “the tech bubble burst”.  Of course, lately it’s all about the “real estate bubble” bursting.  Over the last two years, The Real Estate Guys™ have taken some criticism over one of our TV shows where we said, “Real estate bubbles don’t burst”.

But we’ll stand by that.  Bubbles don’t burst – at least not as long as whatever is underneath them is real.  And there isn’t much that’s more real than real estate.

So we say bubbles are squishy.  In fact, the term “bubble” (in the context of referring to a rapid run up of prices) is really a misnomer.  Better to say “balloon”.

When you squeeze a balloon, it squishes.  It comes out the sides or goes between your fingers; it just finds someplace else to go.

So you’ve heard that real estate prices have dropped.  There’s deflation.  Equity is gone.  Everyone’s underwater.  Life as we know it is over.  It’s real estate Armageddon.

Then you see (like we did) today’s Wall Street Journal article, “Hong Kong Land Sale Raises Worry of a Bubble”.

A bubble?  Didn’t it burst?

Well, no.  Actually, it squished.

According to the Wall Street Journal:

“Government officials here (Hong Kong) grapple with how to cool off overheating property prices”.

When’s the last time you heard “overheating” and “property prices” in the same sentence?  It almost seems like an oxymoron, like “reliable copier”.

Here’s another excerpt:

“The big (land purchase) came after (the real estate developer) sold 900 apartment units in a major new residential complex over the weekend for a total of  US$541 million.”

If you do the math, that’s over $600K per unit!  In ONE weekend.  We haven’t seen THAT in the US for awhile.


“In China…home prices have risen as much as 25% in the past year and land values have doubled.”

That’s this past year, as in 2009.  You know, when US prices were in their third year of decline.

Now, consider where much of the money that fueled the US real estate bubble came from.  Get it?

The bubble squished.  But if your perspective is too narrow, you might think it burst.  Especially because that’s what everyone says.  And if you think bubbles burst, then you will quit the game and hide in your FDIC insured bank account.  Meanwhile, as the dollar crashes, you’re savings become worth less and less.

We have two main points:

First, real estate is an asset class unlike any other.  It’s real (permanent).  Gold and other commodities can also make this claim so, in and of itself, being real doesn’t make real estate utterly unique as an investment.

But, unlike virtually every other investment, real estate’s value is not universal.  Real estate values vary by markets and sub-markets, and those markets are global as we can clearly see.

Compare that to gold, which is also real.  If an ounce of gold is selling for $1200, it’s the same price all over the world.  There’s no squish, except to another asset class.

To really look at it right, you can’t think of real estate as an asset class.  You almost have to think of each property, or at least each market or sub-market, as an asset class.  So when one is down, another is up.  Squish.  Like stocks and bonds, gold and the dollar, etc.

But the big thing (our FAVORITE) that makes real estate unique, is that it can be financed with bank or private funding and debt serviced by tenants.  This makes it VERY conservative when structured properly.  Why?  Because even if the property declines in value, as long as it produces enough net operating income to amortize the loan (meaning the tenants are paying down your loan) some day it will be paid off.  Then it just generates cash flow forever.  That’s a beautiful thing.  Form that perspective, squish doesn’t matter that much.

Our second main point is that right now many people are forming new financial paradigms as a result of what they’re seeing and experiencing.  The people who lived through the Great Depression came out of it with very powerful convictions about how they viewed and handled money.  There were many great attitudes such as frugality, saving; and loyalty and appreciation for the opportunity to work.  We would all be better off by adopting these attitudes.

However, many of those same people missed out on some of the greatest opportunities in modern history because they brought a lot of fear and rigidity out of the trauma of the Depression.  Many people were hyper-conservative.

To be clear, we aren’t suggesting anyone should take risks they aren’t comfortable with.  And we aren’t criticizing anyone’s personal investment philosophy – no matter how conservative it might be.  We’re certainly more cautious about the risks we take these days.

We are merely suggesting to be mindful of the temptation to be hyper-conservative in terms of your willingness to be an investor.  If you won’t invest in your education or take time to investigate opportunity, you’ve probably decided “investing is too risky” and have effectively quit.  You think the bubble burst, the game is over, and there is no opportunity.  Or it’s so far off or you’re so out of position that you’re on investing sabbatical.   This is probably not you, or you wouldn’t be reading a blog like this.  But, there are lots of people who have quit – or are in various stages of quitting.  Make sure you know who you are and that you’re honest about it.

Now is a great time to be getting started (or re-started).  Talk to the people you know about real estate investing and see what they say – and watch what they do.  How are their attitudes changing as a result of the last three years?  What’s their game plan going forward?  Ask yourself those same questions.

Remember, squish happens.  As an investor, you want to pay attention to the flow of capital and try to be on the right side of squish.  And since you know squish happens, be sure to structure your deals to survive if you’re on the wrong end of it.   We’ll be talking more about this in the future.

Most of all, make sure you take the right lessons out of this Great Recession.  The right lessons are those that make you a better investor, not those that push you back to being merely a saver or a non-participating observer.  Invest in your education.  Investigate and evaluate opportunities.  Keep your head in the game, even if you’re on the sideline temporarily.

We’d love to hear from you!  Use our feedback page to tell us how this recession has affected your investing philosophy and strategy.  What are the people around you saying and doing?  Where do you see opportunity and why?  What are you doing to broaden your horizon, increase your education and increase your network?