Their Dream, Your Nightmare
For One Sovereign Individual,
Economic Crisis Hits Home This Week
Dear A-letter Reader,
Damn it feels good to be a renter.
Itâs been a pretty good investment decision the past few years â sure, thereâs a monthly cash outlay, but there are no property taxes, homeownersâ fees, repair bills, readjusting mortgages or declining home values to worry about.
The Deutsche Bank statement that nearly half (48%) of all U.S. mortgages will be underwater â wherein more is owed on the house than itâs worth â by 2011 probably didnât come as a surprise to A-letter readers.
If anything, those estimates might even seem a little conservative â but the report goes on to state that in Las Vegas and parts of California and Florida, up to 90% of mortgages may end up underwater.
What makes this statistic especially poignant is that homeownership was literally sold to people as the American dream â a piece of property of oneâs own â and, in many cases, sold on the notion that it would always go up in value... the true asset for the middle class to build and store wealthâ¦
â¦but that dreamâs become a nightmare.
And when one out of two homeowners is going to be underwater, odds are youâll know some of the people involved.
After all, for all the statistics, graphs, and data points being thrown out continually, the economy just doesnât seem that bad until you know people who have been burnedâbadly.
This week, a couple I know joined my renterâs lifestyle. They sold their home for the exact value of their mortgageâthe first time they didnât enjoy a gain in equity, but they were lucky enough to sidestep a loss.
As of the end of July, 9.2% of all mortgages are delinquent. Theirs wasnât one of them.
The previous time this couple sold a home, in 2006, they downsized in value and took money off the table. It was a smart move, but renting would have been better still.
The couple is my parents, two members of the 74-million strong Baby Boomer generation. You know, the generation thatâs starting to hit retirement age. The generation that, despite an embrace of counter-culture, got suckered by lenders and the government into the notion that a home was a good investmentâand a dream come true.
To be sure, thereâs already been some bottom-fishing in the real estate markets by solvent and shrewd investors looking for the deal of a lifetime.
Buying at or below replacement value with strict cash-flow and occupancy requirements may not sound like fun, but itâs real, honest money for real estate investors. And theyâre also doing us all a favor by wiping out bad loans in the process.
Imagine that. The marketâs got a better solution than any program or policy yet decreed by government.
And as painful as it looks in the housing market, there is a silver lining. If you need a place to live, buying a house on the cheap now â think foreclosures and short sales â might still seem like a risky investment⦠but look at it in terms of cash flowsâ¦
Future inflation is inevitable, and will be large. And as the value of the dollar is decimated further, acquiring now and paying off in penny-dollars later (via a fixed-rate mortgage) seems like a winning proposition.
Just donât get high expectations about rising equityâand donât let bankers and politicians define your dreams. In many cases, renting may still be the way to go. And thereâs a lot less stigma attached to it these days.
Speaking of Shattered Dreams
A lot of other grim realities faced investors this week:
On Tuesday, A-letter editor Matt Collins exposed the simple math behind the insolvency of the FDIC. If you have a dime in a savings account in any FDIC-insured bank, this affects you. Itâs your must-read for the week.
Thursday offered a double whammy as Investment Director Eric Roseman looked under the lid on why the correction in Chinese equity markets is just the tip of the iceberg, and Currency Director Ashish Advani exposed how the Middle East is subsidizing Americaâs War on Terror (amongst other things).
The dream of privacy in Europe faced some setbacks this week as well. On Monday, Bob Bauman weighed in on UBS and the weakening of Swiss banking laws. And on Friday, Bob offered the final word on UBSâs resolution with the IRS.
On Wednesday, Mark Nestmann talked about encryptionâand how trying to protect a sliver of electronic privacy can land blokes in the U.K. in jail.
I hear Matt always reminds you to relax on the weekend, so Iâll do the same. May I suggest a drive around the neighborhoodâ¦maybe looking for foreclosures and short sales?
Stay Sovereign,
Andrew T. Packer
Managing Editor, TSI
For One Sovereign Individual,
Economic Crisis Hits Home This Week
Dear A-letter Reader,
Damn it feels good to be a renter.
Itâs been a pretty good investment decision the past few years â sure, thereâs a monthly cash outlay, but there are no property taxes, homeownersâ fees, repair bills, readjusting mortgages or declining home values to worry about.
The Deutsche Bank statement that nearly half (48%) of all U.S. mortgages will be underwater â wherein more is owed on the house than itâs worth â by 2011 probably didnât come as a surprise to A-letter readers.
If anything, those estimates might even seem a little conservative â but the report goes on to state that in Las Vegas and parts of California and Florida, up to 90% of mortgages may end up underwater.
What makes this statistic especially poignant is that homeownership was literally sold to people as the American dream â a piece of property of oneâs own â and, in many cases, sold on the notion that it would always go up in value... the true asset for the middle class to build and store wealthâ¦
â¦but that dreamâs become a nightmare.
And when one out of two homeowners is going to be underwater, odds are youâll know some of the people involved.
After all, for all the statistics, graphs, and data points being thrown out continually, the economy just doesnât seem that bad until you know people who have been burnedâbadly.
This week, a couple I know joined my renterâs lifestyle. They sold their home for the exact value of their mortgageâthe first time they didnât enjoy a gain in equity, but they were lucky enough to sidestep a loss.
As of the end of July, 9.2% of all mortgages are delinquent. Theirs wasnât one of them.
The previous time this couple sold a home, in 2006, they downsized in value and took money off the table. It was a smart move, but renting would have been better still.
The couple is my parents, two members of the 74-million strong Baby Boomer generation. You know, the generation thatâs starting to hit retirement age. The generation that, despite an embrace of counter-culture, got suckered by lenders and the government into the notion that a home was a good investmentâand a dream come true.
To be sure, thereâs already been some bottom-fishing in the real estate markets by solvent and shrewd investors looking for the deal of a lifetime.
Buying at or below replacement value with strict cash-flow and occupancy requirements may not sound like fun, but itâs real, honest money for real estate investors. And theyâre also doing us all a favor by wiping out bad loans in the process.
Imagine that. The marketâs got a better solution than any program or policy yet decreed by government.
And as painful as it looks in the housing market, there is a silver lining. If you need a place to live, buying a house on the cheap now â think foreclosures and short sales â might still seem like a risky investment⦠but look at it in terms of cash flowsâ¦
Future inflation is inevitable, and will be large. And as the value of the dollar is decimated further, acquiring now and paying off in penny-dollars later (via a fixed-rate mortgage) seems like a winning proposition.
Just donât get high expectations about rising equityâand donât let bankers and politicians define your dreams. In many cases, renting may still be the way to go. And thereâs a lot less stigma attached to it these days.
Speaking of Shattered Dreams
A lot of other grim realities faced investors this week:
On Tuesday, A-letter editor Matt Collins exposed the simple math behind the insolvency of the FDIC. If you have a dime in a savings account in any FDIC-insured bank, this affects you. Itâs your must-read for the week.
Thursday offered a double whammy as Investment Director Eric Roseman looked under the lid on why the correction in Chinese equity markets is just the tip of the iceberg, and Currency Director Ashish Advani exposed how the Middle East is subsidizing Americaâs War on Terror (amongst other things).
The dream of privacy in Europe faced some setbacks this week as well. On Monday, Bob Bauman weighed in on UBS and the weakening of Swiss banking laws. And on Friday, Bob offered the final word on UBSâs resolution with the IRS.
On Wednesday, Mark Nestmann talked about encryptionâand how trying to protect a sliver of electronic privacy can land blokes in the U.K. in jail.
I hear Matt always reminds you to relax on the weekend, so Iâll do the same. May I suggest a drive around the neighborhoodâ¦maybe looking for foreclosures and short sales?
Stay Sovereign,
Andrew T. Packer
Managing Editor, TSI
