Real Estate Is Grossly Overpriced

The Real Estate Coroner gives her Toxicology Report: Real Estate died from too much governmental interference. At least that is what Peter Schiff says on page 2 of his book The Real Crash I purchased at the Cambridge House conference I attended. I even got it autographed! Be still my beating heart. Schiff is writ rather large on the hard money scene, so hearing him in person was interesting. It seems only correct to talk about him and what he had to say near the beginning of my series on the conference. I also plan to talk about his theories at the end of the series as well. 

Real Estate being overpriced is not something you will hear about in the "normal media." This would not fit the allowed talking points on Real Estate. Prosperity is just around the coroner corner. I actually disagree with him on this. My own theory is worse. I think that the market is so screwed that it is impossible to value anything. I am not saying that one cannot look at recent sales and get a rough idea of potential sale price. I am saying that the market is so destroyed with horrific market conditions that the government interference dominates the market and distorts all pricing signals. 

A. The strongest market destroying condition is the Federal Reserve in effect buying all residential mortgages in the US. It is charging less than the Market rate. Since most people do not buy a house, but a payment, this is propping up the real estate prices for homes. One estimate I read was that the amount of such purchases was 800 billion dollars for 2013. We know the already completed purchases for 2010, 1.25 trillion. What is the true price with such non-market pressures? I have no idea. 

Are things better now? B. Another way that prices are being held higher than they would be is that many lenders are not foreclosing. A supply of such houses is a large overhang on the market. Yet at the same time when they do sell it is at a distressed price of course. But the supply of such houses is not enough to clear the market so you end up with a market that is bifurcated. These two different groups of prices are in competition. An appraiser will look to the upper group for their appraisals because if they don't, no sales will take place at all at that price with a loan. Which is the correct price? I have no idea.

While these kind of loans are available at ridiculous rates, normal loans for normal people are hard to get. C. But there is also another factor that is driving down prices. It can be difficult now to get a loan at all. In the heady days of the housing bubble, if you breathed you could get a loan. If the fraud I have read about is any indication, you may not have even needed to breathe. Many home owners’ names and credit rating were used on loans they actually knew nothing about.  As a result of the too-easy credit the bubble was made worse. Now, with a look to that history, it is too difficult to get financing on a home. Many people who could have gotten credit under normal circumstances before the bubble are unable to get credit now. This is driving prices down. 

I am sure that Peter Schiff's opinion is that the forces of A and B are greater than C. He is probably right, but no one knows. 

The same kind of forces are taking place in all markets right now. In such a situation, debt reduction seems to be the best option. Then, with a debt-free balance sheet, one might think about investing. 

Where should one invest? That is one presentation I will discuss Monday. Until then here is a Peter Schiff interview by Doug Casey. 

Poster Phalsity and Energy Emergence

I used to just repost things on email, and now on Facebook, without thinking about them too much. Now I think about the poster before I resend it to others. If it is untrue, do I want my name associated with it? Here is another post where I talk about this from a Biblical perspective.   

I noticed recently another meme that is making the rounds—Obama as the cause of high gas prices. I was suspicious about this meme from the start. While there are many things that a government can do to skew prices, commodity prices are not in the government's control. “I do not like high prices, and I do not like Obama, therefore it is his fault” seems to be the philosophy. 

Personally, I like high prices! Don't get me wrong, I grumble about the price of gas as much as the next person. But high prices send us signals. They tell me that I need to try to use less of the product than I used to. Rather than just jumping in the car and going off the hill for various products, I plan and buy these products on one combined trip. (I live 30 minutes away from most major shopping.) These price signals also tell producers that there is money to be made. They produce more. This is good. 

I saw an interesting chart at the Cambridge House conference I attended. It showed a gradual increase in US energy production. It is a combination of rising prices and new technology. While any trend can stop unexpectedly, the speaker pointed out that if this continues the US will be self-sufficient in 10 to 15 years! Yeah. Personally when I look at the prices, I think of the American oil producers and a disappointed Saudi King and I feel much better. 

So are gas prices higher under Obama? Is the meme correct? The answer to that is yes and no. Let’s look at some posters, the first two from Facebook, and the last from Vox Day's blog. 

The first one is a motorcycle rider waving and complaining about Obama complaining about Bush, a nice combination of two memes. I think that the Obama as anti-Bush meme has a lot more validity than the Obama gas meme. But why is there a motorcycle rider saying this? 

The second poster is getting some sharing among my friends on Facebook. It shows the increase of gas prices from Obama's inaugural month to today. As near as I can tell it is accurate, but misleading. Look at the next chart—by extending the time frame slightly it shows something different. Gas was much higher at the end of the Bush administration than in previous years, in fact it was just as high as it is now. I blame Bush.

Both blaming Bush or Obama for high prices is valid, if you criticize them for interfering in the market, but otherwise neither jab is fair. 

The purpose of the third chart is an internal debate among the hard money types about whether we can expect inflation or deflation in the coming crisis. (I do not think there were any deflationists at the conference.) Vox's point is that prices are not going up in energy if you go back to 2008. He is right, but his chart suffers the same problem as the second chart. If you go back farther then it will show a definite upward trend. There is inflation in the system, but Vox is partially right, inflation is not a huge problem at this time. 

Remember that statistics are ripe for misinformation. If you are not confident in an internet story, or do not wish to take the time to track it down, then do not repost. 

I concluded my post on the Telephone game with a Weird Al song. Here it is again. Stop Forwarding that Crap to Me. 

Hard Money Conference

Onion Jam, At least this won't lose any money. I recently attended a hard money conference sponsored by Cambridge House in Palm Springs. Also in attendance were such hard money luminaries as Peter Schiff, John Mauldin, and Eric Rule. Attending was an easy decision as it was only a one hour drive, and it was free. Well, almost free, $15 for a cheeseburger was a little high, even with the onion jam. Have you ever had onion jam? Interesting. The reason it was free is that the conference was designed to encourage the purchase of junior mining stocks, you know stocks costing 25 cents and listed on obscure stock exchanges. I was not convinced to buy any. 

I will be blogging about the various speakers over the next week, maybe two.

The first speaker I wish to talk about is the one I disagreed with the most. The whole point of his presentation seemed to be how awful it was to cut any military spending. I will point out tomorrow how charts and statistics are used to mislead. This presentation had such a chart. My guess is that the person was not lying, just hopelessly deceived. I may be naïve about this.

A more realistic chartHis chart had military spending as a percentage of total spending and it showed that military spending was down slightly over the last few years. This is a function of the much larger increase in non-defense spending that is the cause of the “decline.” But the decline is not in absolute defense expenditures, in that area spending is up, way up. It is just that other spending went up even more. 

Here is some information extracted from the US Treasury by alternative Internet newspaper CNS:

In fiscal 2002, which started on Oct. 1, 2001--three weeks after the Sept. 11, 2001 terrorist attacks—Defense Department spending was $423,856,810,000 in constant 2012 dollars. Ten years later, in fiscal 2012, Defense Department spending was $650,869,000,000 in 2012 dollars.

Thus, from fiscal 2002 to fiscal 2012, Defense Department spending increased by $227,012,190,000 in constant 2012 dollars—or by 53.558 percent.

This same article points out that even Obama, in real terms adjusted for inflation, increased defense spending by over 2%. 

I do not think that defenders of the status quo always realize the dire situation we are in. We are spending a lot more than we are taking in. In fact we are borrowing, mostly from the Fed by money printing, 42% of every dollar spent. Defense is 20% of this. (Actually it is more as they hide defense spending in other departments.) If we exempt defense spending from cuts, then the rest of the budget has to be cut more. Instead of cutting by 42% to balance our national budget, everything else must be cut by over 50%. Oh no, we must also exempt Social Security as well as defense, one might say. In that case we must also cut everything else by about 70%. What, cut medicine for poor people! If we exempt medical, Social Security, and defense we must cut the rest of the budget by over 100%.

Every part of the budget must be cut, Defense, Medicine, and Social Security cannot be exempt. We have no choice. The other speakers understood this better and I will talk about them over the coming days. 

Krugman on Japan

I know some complain that I am too pessimistic. Not so! I am guardedly pessimistic. Now Krugman, he is a lot more pessimistic than me. Here he compares Japan to the US. 

A longer and more interesting interview with Stan Druckenmiller can be viewed here. His suggestion that another crisis worse than 2008 is one I agree with. I also like his suggestion that the government can contnue with the money printing far longer than we realize.

Mactini

Here is the latest and greatest computer from Apple.

The new iMacThe reason the parody works is that Apple does have a tendency to place style over function. The current computer is a fine example of this. In Apple's mania for thinness and proprietary accessories they have managed to produce a new computer with less functionality than the previous one.

Apple decided that in order to keep its desktops thin they would remove the DVD player. Why in the world does anyone need a thin desktop? I do not spend all day looking at the end of my computer marveling about how thin it is. Yes you can buy an accessory that plays DVD's, but that takes up valuable desktop place. In addition, I do not know about you but the last thing I need on my desktop is more cords. I was an early adopter of CDRoms, I feel like I am going backwards.

It is not that I am "old fashioned," as was said in the Apple Keynote announcing these computers, in my desire for a DVD player. I need one.

Another thing I wanted to do was put the computer on a swivel so I could move it around. I do not want to be aggressively fussy, but the decision of Apple to make that impossible by insisting on a non-industry standard arm mount attachment is annoying. The Apple wall attachment does not allow you to move the computer around like I want.

Will I go ahead and buy the new computer? Probably, as switching costs are high. But Apple is shooting itself in its foot by letting style overwhelm function.