Sunday, November 28, 2010

The Difference Between Real Mortgage Rates and Our Current Phony Rates Could Wipe Out Your 20% Down Payment

Speculators in the housing market have been the beneficiary of a once in 100 year event.

Over the last 25 years interest rates have collapsed from 18% to 4.5%. This has allowed home buyers to borrow 200% more than they could in 1985.

This is how the numbers work:

In 1985 a $1,800 mortgage payment would purchase a $150,000 home at a mortgage rate of 18% and 20% down.

Today a $1,800 mortgage payment will purchase a $450,000 home at a mortgage rate of 4.5% and 20% down.

The collapse in rates has directly caused a tripling of home values over the last 25 years.

It’s simple math.

This math works in reverse also:

Today a $1,800 mortgage payment would purchase a $465,000 home at a rate of 4.15% and a 20% down.

Tomorrow a $1,800 mortgage payment would purchase a $381,300 at a rate of 6% and a 20% down.

This $83,700 loss is due to mortgage rates changing from 4.15% to 6%.

What is the possibility that rates will go from 4.15% to 6%?

I would like to suggest that "real" mortgage rates are 6% now.

Over the last 2 years the government has used Fannie Mae and Freddie Mac to take over the mortgage market. 95% of the loans are government guaranteed. Also the Federal Reserve has committed to at least 2 trillion dollars of asset purchases to manipulate interest rates.

I think it is safe to say that today we don’t have real interest rates. They are being manipulated by the government.

What would they be if the government was not spending trillions of taxpayer dollars to manipulate the market?

One could argue that without the trillions of dollars of government intervention mortgage rates could be at 6%. This is far below the average over the last 25 years.

A change from a manipulated 4.15% mortgage rate to a “real” 6% mortgage rate would mean the immediate loss of 18% in purchasing power or $83,700 on a $465,000 home.

Add the 2% purchase costs to this 18% interest rate loss and you have basically wiped out your 20% down payment.

If you are purchasing a home now in a phony interest rate environment and plan to sell in 5 years at a real interest rate you have already lost your down payment.

There is one last variable to consider. It takes over 6 years of mortgage payments on a 30 year mortgage to gain enough principle to prepay the closing costs when you sell your home.

So if you buy today and sell in 5 years not only could you lose your down payment but you will also need to bring a $5,400 check to pay the balance on the $26,600 in closing costs to sell your home in 5 years for $381,300.

That’s the math, not including our nation's current deflation problem and the fact that housing is a depreciating asset.

Tuesday, November 23, 2010

The Destruction of our Last Free Market

I work as an accountant. I am not supposed to be innovative. Accountants are trained to follow the rules. Andrew Fastow of Enron or Mark Schwarz of Tyco tried to be innovative. They now reside in jail.

The opposite of accounting is economics. Economists must be innovative. Their job depends on inventing new theories. These new rules give their employers or their clients an advantage in the marketplace.

Over the past 15 years our nation’s top economists have been very innovative in coming up with new theories for our government and Wall Street to improve our nation’s markets. It is not surprising that most of these suggestions have enriched the pockets that employ these economists. It is also not surprising that these forays of crony capitalism have destroyed every free market that the government has attempted to control.

I only bring all this up because of the latest nonsensical plan that is being presented to save our country.

John Burns is one of our nation’s leading housing economists. He sees a new profit center for his clients. So he has come up with a new theory.

Mr. Burn’s scheme involves the government hiring private sector companies to create a huge real estate investment trust. This Wall Street trust will take all of the underwater homes from the banks, Fannie Mae and Freddy Mac and rent them out.

He says that renting out these homes will prevent our nation's house prices from falling any further.

This is economic theory at its finest. There will be huge profits for Wall Street and the banks. There will be monstrous subsidies to be paid by the taxpayer. There will be limitless unintended consequences in the future. But best of all there are fat commissions for the innovative economist that can explain how this nonsensical plan can benefit the country.

So let me recap.

Presently investors that are entering our real estate rental market are not receiving subsidies, implied bailouts or tax breaks. They are not benefiting from the easy money from the Federal Reserve. So rental real estate is the only market that is not subsidized by the taxpayer.

Investors that are entering the rental real estate market are the only investors in this country that are receiving a fair return on their money. Today investors are getting a positive cash flow on their investment. This is in line with the historical return on investment. They are receiving a fair return because the government is not distorting the market.

This is possibly the only market that the government is not distorting.

Investors that are entering the rental real estate market are not using large amounts of debt. Most are purchasing with at least 30% down and some are purchasing with all cash. So these investors will not be a risk to be bailed out by the government.

Looking at the facts one could argue that the rental real estate market is the only free investment market in our country today.

John Burn’s intends to destroy our last free market, for a profit. He is a very smart man has a good chance of achieving his goal.

It is funny how economists preach the religion of free markets as they devise ever more self-serving ways to corrupt the system.

Tuesday, November 2, 2010

Warning Label on Economic Advice

I believe many people are confused by the role of economists in our society. They are very similar to the fortune teller at the circus. These charlatans sell their measurement of the future to the unsuspecting public. They are unconcerned with how their guess affects the outcome of their victim but laser focused on getting their paycheck from the owner of the circus.

Our government is the circus.

Our nation under the direction of our political economists has spent the last 25 years using debt to increase our nations total standard of living above the sustainable trendline. Soon our total debt to GDP will be triple what it was in 1985.

Most of this debt has been used to increase the size of the unproductive financial sector and the government. These areas are the major employers of economists. This public sector growth has occurred while our job producing private sector has stagnated. The private sector hires very few economists.

Our nation’s unsustainable growth trend of borrowing is a big worry for anyone with an ounce of common sense. But is of little concern for political economists. Their focus is on growing the source of their paycheck. Upton Sinclair said it correctly 80 years ago about our crony capitalistic system: “it is impossible to get a man to understand something when his job depends on him not understanding it”.

Our unsustainable borrowing is so unimportant to political economists that they have created very flawed models so that taxpayer debt can be overstated. These models have eliminated “total debt” as a variable. The models only include the “debt payment”. This flaw allows an unlimited amount of money to be borrowed if interest rates can be manipulated down to zero. To make matters worse the models don’t use any form of amortization, so in economic theory our nation’s debt never needs to be paid back. Borrowing $1 trillion or $20 trillion is the same to an economist because neither amount will ever be repaid.

As an accountant I feel that it is important for the taxpayer to understand the understated accounting and the conflict of interest inherent in the field of economics. There should be a disclosure notice similar to the warning on a pack of cigarettes attached to anything that is published by an economist.

Warning label to taxpayers:

Economists can only be relied upon to predict small insignificant changes in the economy. On average they have a moderate degree of success in predicting year over year economic growth of 3.5%. But as a group they have never, ever correctly predicted a major shift in our economy. Therefore the predictions of an economist of the future should never be relied upon in business. In a free market society the successful business owner is the only entity that has the ability to predict the future.

Economists are not accountants. They are not regulated by any authority and are never held accountable for anything that they say. If a private sector accountant overstates the numbers they will go to jail. If a political economist overstates the numbers they are hired by Wall Street, the goverment or by a universtiy to train other economists. So if you require accurate numbers always seek the advice of an accountant.

Taxpayers should understand that as more tax dollars flow into government, then the government will give large amounts of this money to Wall Street. Wall Street in turn uses this largess to train more economists which they send back to the government. Be aware that every time your taxes are increased, it indirectly allows the government to hire an economist that has a vested interest in increasing your taxes even more.

It is important that you understand as a taxpayer that any money the government borrows must be paid back by you. If you are a middle class family of four and the government borrows $1 trillion then that is an immediate debt to you of $26,667 plus interest.

It is important that you understand that the debasement of a nation’s currency has a cost. If you are of the middle class you are very likely to be negatively effected by the indirect effect of currency debasement. This is called “inflation”. Historically inflation has been used by tyrants to reward political favorites. Presently, our government has chosen to funnel most of the gains from inflation to the financial sector, speculators and the upper classes.

So, as a taxpayer, if the attached economic report deviates from common sense and suggests “unsustainable debt”, “a larger government”, “a larger financial sector”, “manipulating markets” or “debasing our money supply” then it is in your best interest to disregard the information.