Sorry to Say "I Told You So"

San Fernando Valley Business Journal – December 24, 2007

GUEST COLUMN
By Bruce Weide

I saw Jason Schaff at the 50 Fastest Growing event last month, and he just about turned white when he looked my way, like he’d just seen a dead man walking! I haven’t written for the Journal in over a year and Jason thought he might need to start checking the obituary pages for my name.

Well, it’s certainly not for any lack of financial and economic news I haven’t written, that’s for sure. Come on – the tanking real estate market, the credit crunch, volatile stock markets, weak dollar, taxes getting even surer to climb despite all the smoke and mirrors adjusting the AMT downward. What a turbulent year for me to be sitting on the sidelines keeping my mouth shut!

Believe me, it wasn’t easy for me to sit silent. But I have had two excuses. One - good year for business. I’m an advisor to my clients first and a big mouth editorialist second.

The second excuse relates to the first indirectly. And that is, I already told you so! Why should I say it all again and again?

Back in early 2006 I kept screaming “It’s over! End of real estate boom.” Seems like no genius now, but back then I suggested some rather serious medicine be taken to preserve home equity values, even if that was still early enough for the majority to wait and see. And all that’s been going on newsworthy since that time is exactly what I said would happen. That big sucking sound!

So what’s your home equity look like today? Had enough? Well, sorry to remind you that the worst may be yet to come. Consider that in 2008 about half a trillion dollars' worth of Option ARMs are due to reset to a higher mortgage rate as their two-year teaser rate period comes to an end. (Good thing that my opinions don’t necessarily reflect those of the SFVBJ. Please keep buying the Journal, real estate brokers.)

Last year, I quoted John R. Talbott, visiting scholar at UCLA’s Anderson School of Management, in his book Sell Now, The End of the Housing Bubble, (2006 St. Martin’s Griffins) when he wrote:

…you need to know that today’s high housing prices are an abnormal bubble about to burst…”

Talbott nailed it when he demonstrated in his book that outrageously low interest rates combined with obscenely easy credit had falsely inflated the housing markets, and it was coming to an end in a big way.

What I didn’t tell you about then is when he also said:

It is not fair to say that the current boom [2000-2005]will fully reverse itself, but is accurate to say that if it does not, it will be the first time in a century tat a boom in real prices actually stuck. (Note: Talbott has removed relative inflationary increases from the equation.)

But personally I don’t really even care about investment losses and gains and strategies in the short run. What I DO care about is this, and it is no small concern: There are 78 million Baby Boomers heading into retirement soon enough, and the average 401K balance is about $50,000! Sure, you guys have done better, but that means that a lot of Boomers have done worse! And the ONLY wealth they have fortuitously accumulated over recent years is (was) the equity in their home! Bye-bye.

My point is that the worst part of the real estate crash is that what little shot at a comfortable retirement a lot of the working class may have accumulated despite themselves, it’s now on the final run to vaporize right in front of their eyes, and they don’t even know it.

But the good news, (I know you’re ready to strangle me by now. I bet I had you going) yes, the GOOD news, is that in the coming years CASH WILL BE KING. And will there ever be a Buyer’s Market in real estate! Yes, you want to buy, but you also need to be prepared to hold for at least a decade for some real appreciation.

If homeowners were only to cash out now, (you don’t need to sell your house to do that. See The Last Chance Millionaire by Douglas Andrew, 2007 Warner Books) and preserve what equity they have left, they’ll need to keep that equity in a conservative “purse” that grows slightly better than the cost of the mortgage.

But that’s the trick. Now you’re talking inflation, weak dollar, unstable markets, and Uncle Sam’s increasing cut. I guess I need to write more next issue. I’ll tell you how to duck those problems, too.

I'm Back From the Dead!

CRIME: Don't you ever start a blog and then let it slumber! It makes you look very un-blogger like, undedicated, and dilettante. How can you possibly be taken seriously?

HOW DO I PLEAD?: Guilty as charged. I throw myself on the mercy of the Courts of Bloggerdom. In fact, may I add for Holy Blogger Father to forgive me...for it has also been over a year since my last communion with the San Fernando Valley Business Journal, writing any editorials.

WHAT DO YOU HAVE TO SAY FOR YOURSELF BEFORE SENTENCING? Well, gee...uh, glad you asked.

Excuuuusse meee, but I do run a legitimate business, you know! And unfortunately, or fortunately, the last bit of PR, writing, and promoting I had done, along with launching my radio show with Chuck Gebert, Straight Talk Real Estate, (KRLA 870AM, Sundays 6:00pm) has just kept me swamped with simply caring for my own clients. You know, the unglamorous stuff like crunching numbers and designing strategic financial plans. (Not really, it's actually fun working in the mad laboratory of financial planning, as nerdy as that may sound.)

And I'm not writing again now because business is slow, either. But - manna from Heaven- I have a new Marketing Director, Eric, who is taking half of my duties away from me and handling all of our promotion and public relations. Eric just points me in a direction now and says "Write", "Speak to the audience", ""Go to the studio", "Roll over", "Play dead", "Write me a paycheck".

But I have to tell you - Man, have I been SO YEARNING to have written you. SO MUCH has been going on since I was last keeping this blog.

• Stock market booms and crashes
  
• Tanking credit market
  
• Tanking real estate
  
• Weak dollar
  
• High oil
  
• Inflation or no inflation on the loom?
• Taxes almost sure to climb with the next political administration and over the coming decades
  

Don't think I haven't brought a stack of news articles into the office to post to our website
news section. (That's also way behind on being kept up to date.) But believe me, I read the same things you read, and the same things keep me up at night as do you. I believe, though, that I do have the advantage of being in a profession where I can spend the time to study these developments, study what financial strategies are being promoted, and tear them apart a bit.

So that's what I want to do for you in the coming weeks and months with this blog. With my plate a little less loaded, and with Eric's prodding, I want to see if I can't break down many of these events for you and the fear they generate, and perhaps point you in a direction of some shelter from the storm in the coming years.

Essentially, my business focuses on risk management.

On December 8th in Glendale, we're holding a seminar in my office entitled

The NEW RULES OF HOME EQUITY and INVESTING IN UNCERTAIN TIMES

In it we'll cover:

· How to Lock-In Your Home Equity Values NOW in a declining Real Estate Market

· How to enjoy the portfolio growth of the stock market when it rises, and guarantee against loss in down years.

· How to exploit the ebb and flow of capital between real estate and the stock market, without ever having to time the markets.

· How to ensure you get the best potential gains out of Asia, Europe or America, without having to “bet on the horse” until the race is over!

· How to guarantee 140% of the S&P 500 growth annually in your portfolio.

· How to make it all tax-free, and ignore the tax hatchet sure to come in the next 10-20 years.

In my blog, I'll start to actually break down these bullet points one at a time, and give you some preview and hopefully generate some discussion, of what we cover in the seminar. Your readership and your contribution will be great appreciated.

Foreclosures, ARM's, and the BIG Mistake

See the L.A. Daily News article on Report Hits Close to Home, posted in the Real Estate News Section of my website.

The San Fernando Valley had the highest number of foreclosures in L.A. area during April 2007. Twenty-three homes were lost to foreclosure and 289 properties were in some stage of the process.

And if you read the book Sell Now, by John R. Talbott, you get the feeling "you ain't seen nothin' yet". Talbott's expecting a huge wave of more foreclosures to come and he blames in part the rampant use (abuse) of Option ARMs. He's right in the context he's referring to, i.e., that people have been buying homes they could never have otherwise afforded, and never will. Now they're paying the piper. And by making the unaffordable artificially affordable, we've managed to inflate the entire housing market...artificially.

But don't throw the baby out with the bathwater! There's a right way and a wrong way to use an Option ARM.

You need to understand that you can't build a castle by eating away at it simultaneously. However, Option ARMs are very appropriate when your goal is to accumulate the principal outside of just handing it over to the mortgage company. In other words, if you use the savings of an Option ARM to still make your principal payments, but make them into something (i.e. a cash or other investment account) where you can control getting it back for emergency or investment opportunities, then you haven't really failed to make your principal payments at all, have you?

In fact, if you take a look at Doug Andrew's new book, The Last Chance Millionaire, and you read Chapter 7, Learn How to Become Your Own Banker, you'll see that this is actually a faster way of paying off a mortgage!

Believe it or not, we actually recommend to many of our clients to get an Option ARM -- IF they will take the otherwise payable principal, and save or invest it. Now you're off to the races!

That principal could buy other real estate, or be invested into insured investments which have a history of clearly outperforming the cost of the mortgage. That's how you use an Option ARM.

Last Chance Millionaire

See this AP Newswire Boomers Likely to Delay Retirement on the News Section of my website.

It says that Boomers have less kids, less retirement cash, and will retire substantially older than previous generations, or not at all.

In fact, apparently since Social Security was created 50 years ago, retirement age had been trending toward younger ages until about the 1980s.

Sure, we are living longer. Sure, I certainly don't plan on quitting work and being idle, a sure formula for an early grave. But to me retirement means financial independence. It means freedom to choose. So in that sense, it's important and I want it now.

What's overlooked with Boomer retirement is the enormous riches they've accumulated from about 2000-2006 by simply owning their homes. This could be the key to salvaging themselves from the brink of retirement failure if they just get a clue how to preserve and grow their most fortunate, if only inadvertent new wealth.

And if you look at the real estate news on my website, you'll see that they'd better act fast before that wealth disappears. It'll take precious years to not only recover the loss of their home equity values, but the additional growth they could have yielded if they had acted to grow and diversify that equity before the real estate market deflated.

Good new book came out this week that really summarizes the situation and solutions. Last Chance Millionaire by Douglas Andrew. Let me know what you think of it.

Doug will be in town next week giving seminars. Contact me if you want to go.

Housing Prices Down, Stocks Up...No, they're down... No, they're up...

I'm not even going to read the whole articles. I can get the drift. And I only care about the big picture, anyway. Two articles posted under News Section on my website today:

• Bernanke Says Rebound in Economy Seen
• Economy Seems to Be Shaking Slumps Off

What's interesting is how the good news gets accompanied by the bad news, and the meaning gets lost in between. The bad news in the Bernanke article is that stocks fell as a result of Bernanke's talk! Why would stocks fall when the Fed says the economy is so strong??

They fell because when the economy is strong, the Fed keeps interest rates high. Why? Because if money was super-cheap, people would build business and commerce on easy borrowed money so fast, that the economy would then over-heat. The danger in an overheated economy is that prices begin to rise. (Inflation. I'll explain that connection in another blog.) Inflation out of control sends the whole house of cards tumbling.

So, while some sectors like real estate have been waiting for interest rates to come down, it ain't gonna happen for a while now. Good news, bad news. The message? Stocks are tumbling momentarily because some people want interest rates down and they're not happy. But interest rates are staying high because the economy is hot right now - and overall that's good for stocks, if a little rough for real estate.

Don't worry, it'll shift sometime later up the road. The two markets tend to see-saw each other. Right now it's stocks' day in the sun.

Fire Sale in Real Estate

Well, it might be good new for Toll Brothers, but it ain't good for the rest of us. Reuters reports today that luxury home builder Toll Brothers have increased volume by slashing their prices.

The Commerce Dept. saw better than expected home sales, but it's being accomplished by slashing prices across the county.

Do you think this is good news or bad news? I've read a couple of different articles about this today, and the media can't figure out the twist on it.

For me, I've got my home equity out and in cash. So I don't care if my home prices falls, because my value from the peak of the market is in an account earning more than the cost of mortgaging it out.

I just feel sorry for those that have waited. It's not just the equity they've lost since the market declined. It's also the growth from the interest they could have made for as many years as it take for the market to come back.

Pity. Home sales "up". Good news or bad?

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