Scott Warner on Frailties of the Markets

CLICK HERE to hear the show.
MP3 File
This week, Scott discusses what the next cliff is that the economy and the stock market could fall of of in 2010.

Apparently, it sounds like President Obama was sitting in on this show making additional comments to Scott. See what he also has to say.

NOTE: The sound clip enters into the middle of a conversation Scott and I were having about the books of Harry S. Dent Jr. Sorry for the lack of intro there.

CLICK HERE NOW to listen to the show.
MP3 File

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.

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.