HOW-ZING Exuberance 2005

Sir Alan Greenspan had some reassuring words today for the homeowners that have fully extracted the equity from their homes & for bankers who have willingly allowed them to use that cash to live the 'good life'. Congressman from both sides of the aisle questioned the maestro about the level of housing prices and voiced their concerns about the housing price run-up. In his usual fashion, Fed Chairman Greenspan spoke from both sides of his mouth without much in the way of explanation or coherence. What he did say, that was understandable, unusually clear, and could be of importance was the following.

"Some U.S. communities may experience a plunge in home prices after years of gains, but there does not appear to be any national home value collapse ahead, Federal Reserve Chairman Alan Greenspan said on Thursday. "I think we are running into certain problems in certain localized areas. We do have certain characteristics of bubbles in certain areas, but not as best as I can judge, nationwide," Greenspan said in response to questions from members of the House Financial Services Committee. The Fed chair said some decline in house prices on the national level is possible, but should not cause major problems because many homeowners have substantial home equity after a period of rising values.

The use of the word 'plunge' and 'collapse' in the statement did not seem to bother most. I encourage you to re-read the statement, as he clearly states, unusual as that may be for him, that a plunge in home prices may be experienced in some communities. He also states that there does not appear to be any national home value collapse ahead, even though he does acknowledge that he believes that we do have certain characteristics of bubbles in certain areas, but not as best he can judge nationwide. That should be comforting to most, but pretty worrisome for the homeowners in the so called localized areas. Finally, the certain problems he vaguely refers to could have been specified by saying that values are too high and speculative activity is rampant setting the stage for a serious correction in home values...of course that would be locally, not nationally.

The problem may be localized, but it is localized in some very large and important areas like South/Central Florida, Las Vegas, Nevada, Southern California, New York/New Jersey and surrounding areas, Washington/Maryland/Virginia areas, many areas in Colorado, Suburbs of Chicago, North Carolina suburbs, some areas in Texas. If housing prices plunge in these areas, it won't bode well for surrounding communities that have grown around them due to the prosperity of housing in these areas...can you see where this is leading?!

What Sir Greenspan failed to point out is the fact that most, if not all, of the "substantial home equity" has been EXTRACTED from those homes and has been used (spent) by the lucky homeowners to upgrade kitchens & bathrooms, buy new cars, send children to college, go on vacations, buy plasma televisions, iPods, and whatever else the profligate American consumer has wanted to purchase. Or to buy 2nd, 3rd, & 4th homes as investments or vacation homes, thus "parlaying" the investment in their primary residence.

And while their monthly payments may have been reduced, especially if they got a teaser rate refi or an ARM, the equitythat they pulled is most likely gone.

Thus, in the unfortunate communities, a.k.a localized areas, that may experience a PLUNGE in home prices, those unlucky and over stretched homeowners will need to figure out what to do to keep up with the Jones and the rest of their unlucky neighbors. The banks that have lent those happy go lucky folks all that money may also have to deal with the fallout from the plunge in values, as they are the very source of the capital that helped to pump up the bubbles in those certain areas.

Hopefully you are in one of the more fortunate communities, or less fortunate depending on how you view it, that has only experienced slight increases in home equity. Then your drop in value will be small, and not a plunge. And since you didn't get the big move up and weren't able to refinance and take out big bucks to redo your home and buy lots of new toys, you won't have it so bad during the downturn in home prices.

How come I don't think that makes you feel any better?

When I heard the news about the previously unpublished report, I completely freaked out!

TELL ME AGAIN THAT YOU DIDN'T HAVE ANY WARNINGS ABOUT THE 9/11 ATTACKS

For the past 3 1/2 years the American public has been told over and over and over and over and over that the governmental agencies and officials responsible for protecting the public and possibly preventing the 9/11 attack on our country had "no idea that terrorists were planning an attack or would ever use airplanes as weapons against us". Well, according to a previously 'undisclosed' report by the 9/11 Commission that was released today, that is just not the truth...what a shocker!

The report by the Sept. 11 Commission that investigated the suicide airliner attacks on the World Trade Center and the Pentagon detailed 52 warnings given to FAA leaders from April to Sept. 10, 2001, about the radical Islamic terrorist group and its leader, Osama bin Laden. The commission report, written last August, said five security warnings mentioned al-Qaida's training for hijackings and two reports concerned suicide operations not connected to aviation. However, none of the warnings "pinpointed" what would happen Sept. 11. FAA spokeswoman Laura Brown said the agency received intelligence from other agencies, which it passed on to airlines and airports. Adding this information to the previously reported intelligence obtained from the FBI, CIA, and other internal government documents that have 'dripped' out over the past 3 years, and it has become even more clear to me that the 9/11 attack on the U.S. was very preventable and was only able to occur because of a terrible failure on our governments part to follow-up and synchronize the information that they did have.

According to the report:

-Aviation officials were "lulled into a false sense of security" and "intelligence that indicated a real and growing threat leading up to Sept. ll did not stimulate significant increases in security procedures."

-Of the FAA's 105 daily intelligence summaries between April 1, 2001 and Sept. 10, 2001, 52 mentioned Osama bin Laden, al Qaida, or both, "mostly in regard to overseas threats."

-It notes that the FAA didn't expand the use of in-flight air marshals or tighten airport screening for weapons. It said FAA officials were more concerned with reducing airline congestion, lessening delays and easing air carriers' financial problems than thwarting a terrorist attack.

-A proposed rule to improve passenger screening and other security measures ordered by Congress in 1996 had been held up by the Office of Management and Budget and was still not in effect when the attacks occurred, according to the FAA.

-Information in this report was available to members of the Sept. 11 commission when they issued their public report last summer. That report itself contained criticisms of FAA operations.

Seems clear to me that this previously undisclosed information was kept from the American public until after the elections for political purposes and not to protect government sources or investigations. The next time Condi Rice or one of the other Bush Administration mouthpieces says that we couldn't have prevented the 9/11 attacks and that we didn't know that Al Qaida was planning to strike in the U.S., know for certain that it is propaganda meant to deflect responsibility and perpetuate a lie.

When I Heard George W. Bush Won a 2nd Term

I'm not sure how you felt, but I know there was at least a few Americans and many more foreigners that were "shocked & awed" by the re-election of George W. Bush. Not necessarily because of him as much as because of the American electorate and how they renewed the reign of a President that behaved in such an unpresidential manner. Whether because he took the country to War under false pretense and was unapologetic about it or because he gave the largest tax break to the wealthiest of Americans and large corporations, there was ample reason to question his leadership and hold him accountable for his lack thereof. Add to that the fact that most believe that George Bush is a puppet of Carl Rove and that Vice President Cheney is really calling the shots, and you have a concoction of reasons to at least try something new. But NOOOOOOOOOOOOOOOOOOOOOOOO, the complacent and, in my eyes, ignorant American electorate re-elected President George W. Bush.

Maureen Dowd, Op-Ed Columnist for the NY Times, wrote in her book that most foreigners don't hold Americans responsible for the policies of the Bush Administration, but that if the American people re-elect him they will blame us for all his past and future deeds. Well, now everything he does is our fault, and frankly, we deserve whatever he does.

George Bush claims now that he has a "mandate". Yikes! First term he stole the election, went on vacation, and then got the attacks of 9/11 to give him purpose. Now he gets a victory by 3% of the popular vote and he has a mandate. Whether its Social Security, Tax Reform, The War on Terror (Iraq, Iran, North Korea, Syria, or wherever the most Oil and weakest army is) or retooling the Supreme Court, we Americans are in for a 2nd term unlike any other this country has experienced. At least half of America will be very unhappy along with most foreigners.

And in case you were wondering...if any of the policies that President Bush proposes, gets forced down the throats of the congress and the American people, and they turn out to be bad ideas or have unintended results or are discovered to have been founded upon bad information, don't expect George W. to take responsibility for the misdeed...he won't!

The Coast is Clear

With the US & Iraqi elections behind us and the most recent FED FOMC meeting over, the equity markets are back to the business of self promoting and rising on "nothingness". After a miserable January that was plagued with mediocre economic data and uncertainty regarding the aforementioned events, investors have seen fit to buy up the very stocks that just a few days ago were being sold down. Mutual fund flows are streaming in and equity managers are comfortable placing more chips on the table and hoping for the best. Economic data has continued to come in less than anticipated, yet our government officials and FED governors recite ever more optimistic slogans of prosperity and good times to come.

A recent comment from one of the FED Governors, a.k.a. financial bubble blowers, was the following...Fed's Gramlich: "Sees Upside, Downside Risks To Economy"...now boy isn't that helpful.

To try and put things in perspective seems futile, but I feel it is my civic and professional duty to remind people that all is not right in sin city. The US government is still running a record fiscal deficit. The US trade deficit with our very generous trading partners is huge and poses serious risks for the value of the US$ and interest rates. The War on Terror, taking place in Iraq, is costing $1billion per week and continues to result in death and casualties on a daily basis. The FED is raising rates at their prescribed "measured pace" which will undoubtedly slow some very important economic engines that have floated the US economy for the last 3 years, namely housing, refinancing, and auto sales. Unemployment rate aside, as that data point is a fraud perpetrated on the American public, good paying American jobs continue to be shipped over to India and China at a staggering pace as US businesses are forced to cut costs to stay competitive. Most, if not all, of the new hiring is at lower paying jobs at the lower end of the employment spectrum. Nothing to get excited about, especially since wage growth has been stagnant if not declining.

Now thats the reality. Bush Administration propaganda aside, 2005 will be a very difficult year for the economy and the political enviroment. The economic recovery has been floated by 0% interest rates and payback tax cuts for the rich and famous. Both of those life preservers are losing their air and will need to be replaced by "real" economic strength. The Dems are in no way ready to cave in to President Bush's so called "mandate" to lead the U.S. to wherever he and Carl Rove think it should go and that will set up a stagnated governing process. Iraq is sure to be a sore spot even after the widely renowned success of the election held under marshall law.

My sense is that most people are confused and weary from all thats has been going on. Might as well be involved/invested and hope for the best. If the President thinks private accounts are good for my Social Security money then I might as well have all my other savings there too. Scared to miss out on another banner year of equity market gains and if things go kaphlooie, at least I'll be in good company. Don't want to miss the train, and willing to be miserable if I am not the only one. I guess thats as good a strategy as any.

BOCA HOUSING IS FULLY INFLATED

I drive to work through a middle class neighborhood in eastern Boca Raton, Florida. The street I drive down is a 4 lane roadway with small ranch style homes on each side. There is a tree lined median dividing the 2-way traffic and the speed limit is 35 mph. I have been going to work along this road for 6 years, and during that time I have periodically seen "For Sale" signs on the front lawns of the homes along the road. I have from time to time called to find out how much the houses are listed for, hoping that one day I would find a desperate homeowner who would sell their house quickly at a bargain price. In the 6 years I have done this, I have never been able to find a "good" deal.

Today I called on a house that I thought would be in the $200,000 area. The home is a ranch style home built in 1963. It is 1,600 square feet under air, with 2 bedrooms, 2 baths, and a small pool on about 1/4 acre of land. The kitchen is new and the floors have been replaced with wood. The homeowner, who is an investor and does not occupy the home, told me that the asking price was $400,000 and he was not negotiable. That's about $250/sq. ft. not in a gated community and not in a cul de sac. The driveway is on a busy street!

Curious about the stellar price tag, I wanted to know from where this new valuation came from. The house was sold in 1999, for the first time in 12 years, at a price of $125,000. In October of 2004, the investor who currently owns the property paid $325,000. He told me he made improvements costing about $30,000. Now, a mere 6 months later, this gem of a home is worth $400,000 firm. I am clearly in the wrong business and I am investing my clients' money in the wrong asset class.

This home has appreciated, (inflated, blown up) in value by a whopping 220% in the last 5 years. I do not know who the potential buyer is, but I picture the next homeowner as either a young couple with 1 or 2 children, both working at mid-level jobs, earning in the $100,000 combined. Not sure they will be peers of their neighbors who are probably in a lower socio-economic level, but over time, I am sure that will change as the values remain high.

Another real life story and I will revisit the topic in a few months or years to laugh. I know a doctor that bought a house to use as her office. Its in a town just to the north of Boca Raton called Delray Beach. She bought a small ranch style home on a pretty busy street in 2001 for $175,000, at that time the real estate taxes were $1,300 a year. She fixed the place up with about $30,000 and has been handsomely rewarded for her efforts. Today that same house is worth somewhere near $600,000, at least according to recent sales on the block. She is pretty happy about that, and bragged a bit about how she knew the house was a 'good buy' when she bought it. She also complained about the R/E taxes going up to $6,000/year, but was OK with it due to the appreciation of the property.

She and her husband have used the equity in this first property to buy 3 other houses in the neighborhood, all in "special" locations, and they too have appreciated nicely in the past 2 years. She rents the houses to Section 8 (low income) folks and gets rent from the government regularly. The properties are 1,700 sq ft homes 2 bedrooms 2 baths in a pretty run down area. These properties have doubled in value over the past 2 years from the mid $100,000 area to near $300,000 area...R/E taxes have also gone up alot, but the good doctor, turned real estate maven, is happy as could be about her investments. In fact she now has plans to further expand her property holdings in the area. She has bids in on 2 more homes and is thinking about doing a multi-family project on one of the properties after she knocks down the existing building and puts up a 6-8 unit apartment building...yes for Section 8 housing.

I asked her if she planned to sell any of the houses or her office anytime soon, as values seemed terrific and probably can't continue to appreciate at the recent pace. She told me, with a straight face, that she knows the values won't continue to rise at the same pace, but she thinks that her office property will be worth $1,000,000 in the next 4-5 years.

As for the real estate bubble not being a national bubble, maybe not, but in Boca Raton and the surrounding towns it is fully inflated...and so are alot of the very lucky real estate owners/investors in the area. My only comment to the good doctor was "just don't be the last one to sell".