deflation

Real Estate News & Commentary by Chris McLaughlin, February 10, 2009
http://www.shortsalesriches.com/welcome.html

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—-
So much for a honeymoon for President Barack Obama, at least when it comes to the economy.  Wall Street reacted to his bailout plan …and it wasn’t pretty.  Yesterday the market tanked … with the Dow Jones Industrial Average dropping 4.62% to 7,888.88.  Ouch.

Was it really that bad?  What happened was the typical “buy on the rumor, sell on the news” hype that’s common on Wall Street.  What folks need to realize, and what we’ve been saying in this e-mail for months, is that there will not be an easy fix.  There is no silver bullet that will take us out of this mess.  So the markets headed lower, as they were reminded that our economy is indeed in trouble.

Frankly, I’m rather disgusted with the junk that’s in the non-stimulus bill.  All of this spending by the government will lead to … you guessed it: massive inflation.  The government just can’t keep printing money.   Let’s hope enough pressure is added to Congress to make this happen.  They have to FIX HOUSING FIRST in order to have a true economic recovery.  Anything short of fixing housing just wastes billions of dollars without accomplishing the real objective: stabilizing housing prices, which therefore stabilizes banks.

And hey, guess what? We’re not in this alone, our friends in the UK are in the same boat. The head of the Bank of England said that Britain was in a “deep recession” and that economic growth would not likely happen until the end of 2009.  “The risks surrounding the central projection for growth are judged to be weighted heavily to the downside,” the Bank of England said.

And if you’d like to see some grandstanding today, make sure you don’t miss CNBC, as the CEOs from the nation’s leading banks appear before Congress.  And the typically brash and arrogant jet-setting CEOs were humble with all smiles today, with lots of love going to the government.  And one CEO stated the obvious.  Lloyd C. Blankfein, head of Goldman Sachs, noted:  “Many people believe — and, in many cases, justifiably so — that Wall Street lost sight of its larger public obligations and allowed certain trends and practices to undermine the financial system’s stability.”

Now, on to our real estate investing section…

Short Sales and Deflation

Is it going to be inflation or deflation? Maybe both. Whatever side of the fence you have been sitting on, short sales are likely to be the best solution for your financial survival. We have previously discussed the advantages of buying short sales and foreclosure real estate as an inflationary hedge but how does it hold up in the event deflation takes hold? Good question…and the facts might just surprise you.

First, it’s important to understand what deflation really is. Contrary to what some think, deflation is not merely a drop in prices – instead, it is actually a contraction if the volume of money relative to the goods and services available for purchase. Savvy short sale readers should immediately recognize two important considerations; the focus upon a contraction in volume and the inclusion of the word “relative”. This is why real estate tends to hold up very well in a deflationary cycle despite initial drops in price!

Remember, real estate is a lagging indicator of an economy. It takes time to access the raw materials, build a home and sell it. It takes even longer to do so when builders have stopped building, lenders have stopped lending and producers have discontinued orders for supplies.  Although the price of homes has dropped over the past 18 months, the current credit contraction is expected to be short lived especially considering the massive spending programs currently being implemented by the federal government.

Right now, the volume of real estate sales has dropped so there are more goods (ie, homes) on the market. As demand continues to decline, fewer and fewer suppliers will build new homes. Everything from drywall to bathtubs will experience a contraction of volume resulting in less production and fewer sales. Some will go out of business while others will merely stop producing all but the most common examples. Eventually it will cost more to keep the business open than is being produced resulting in shortages.

While the initial focus of a deflationary cycle is on the short term drop in prices, fewer people take a long term outlook and realize the very real long term shortages that are likely to transpire. Unlike prior deflationary episodes, “Just in time” manufacturing and shoe-string inventories are likely to result in a much faster cycle of shortages. It is these same shortages that begin to create upward pressures on needed and necessary items such as housing.

In a nutshell, the short sale investor is wise to understand the deflationary lifecycle in order to recognize premium purchasing opportunities:

1.      Debtors are forced to cover losses by selling assets; in this case, banks are unloading “bad loans” to the federal government who is assuming these losses and printing cash to prop up banks.

2.      The total value of assets begins to decline as debtors sell for any price just to raise required capital.

3.      Dropping prices begin to impact other supporting businesses; credit tightens and production costs increase relative to profits further escalating the problem.

4.      Bankruptcy and lay-offs take place exacerbates the problem while resulting in further declines.

5.      Production costs outstrip profits. Companies begin to close and supplies, raw materials begin to grow scarce.

6.      People begin to focus on safe affordable housing, food, medicine and other necessities.

7.      Shortages take place in earnest as the excess inventory is insufficient for current demand.

8.      Demand once again exceeds supply – driving the cost of goods higher. Those holding available tangible assets can demand – and receive – top prices.

See you at the top!

Chris McLaughlin

http://www.shortsalesriches.com/welcome.html  

P.S.

This week’s webinar replay is right here…for the next 8 hours:

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Copyright Loss Mitigation Institute 2009.
All Rights Reserved.

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About the author:

Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.

    * As the top Florida foreclosure and pre-
      foreclosure expert, he oversees more than
      100 short sale & REO closings each month

   * Long-time authority on real estate investing
      and rapid flipping of distressed homes.  Owns
      portfolio of nearly 100 high-value, high-profit
     properties

    * Owner and Supervising Broker of one of Florida’s
     largest Real Estate firms, running 4 different
     offices, supporting nearly 450 agents, uniquely
     positioning him to help thousands of investors
     make money in the biggest market opportunity ever!

     * Highly sought-after speaker, consultant, and
      seminar leader for current trends and hot topics
      in Real Estate Investing, Entrepreneurship, and
      Wealth Building

 —

Mid-Day Market News & Commentary by Chris McLaughlin, December 12, 2008
http://www.shortsalesriches.com/welcome.html

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Tired of being sick and tired of this economy and all the negative news that goes along with it?  We have an amazing recession proof investing strategy that we’ll reveal to you on our webinar that we’re hosting tomorrow, yes SATURDAY at 2 PM ET LIVE.  This is your opportunity to learn about RECESSION PROOF INVESTING.  We’re going to share with you TRUE STORIES of investors who made over $80,000 and over $115,000 using the methods we’re teaching!  Go here now, there are just 18 spots left:

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——

The good news keeps coming for mortgage rates: they hit a 4 year low at 5.47% and then dropped further to 5.33% yesterday, with no points or origination fees. The new rates have encouraged fence sitters to jump off and begin making purchases, and loan officers have reported a bounce in mortgage applications as well.

Bank of America announced late yesterday that it would be giving pink slips to over 35,000 employees as it finalizes its merger with Merrill Lynch.  The reduction will account for approximately 10% of the combined companies’ total employee base.  The announcement comes on the heels of a similar one from Citigroup, which announced last month that it would eliminate 52,000 jobs, or about 15% of its total workforce.

And in a sign of the greedy times on Wall Street, get this: the former Chairman of the Nadaq Stock Market was arrested for what investigators have described as a “stunning fraud that appears to be of epic proportions.” The fraud is estimated to be a “50 billion Ponzi scheme,” where the assets that Mr. Madoff would tell his investors about actually didn’t even exist.   I wonder whether Madoff will ask the Treasury for a bailout?  Think about it … banks lied about the value of their mortgage bank securities and induced people into loans they weren’t suited for, so why given them money and not Madoff?  Ok, I’m just kidding but you get the point!

And in the latest on the Big 3 Bailout, it appears that Congress hit a snag and can’t come to agreement … so the Bush Administration is reversing course and now suggests that the money might be able to come from the $700 billion TARP.  “Under normal economic conditions we would prefer that markets determine the ultimate state of private firms,” White House press secretary Dana Perino stated. “However, given the current weakened state of the US economy, we will consider other options if necessary, including use of the TARP program to prevent a collapse of troubled auto makers.”

Now, on to our topic of the day: Recession, Depression, Inflation, Deflation…What’s it all About and How Does it Impact Real Estate?

Ronald Regan once stated “A recession is when a neighbor loses his job. A depression is when you lose yours. If we were to apply the same logic to the real estate market, then the nation has been in the midst of a recession for some time as people have been steadily losing (or walking away from) their homes. In fact, there is a great deal of recent debate on whether the nation is already in a recession and heading for a depression or whether the easy money economics of the Federal Reserve will prevent a depression at the risk of creating further inflation…or perhaps world-wide deleveraging will actually result in massive deflation instead. Let’s take a few moments to examine real estate in each of the above scenarios’…

Recession. Unlike employment figures (or stocks), real estate doesn’t act the same as jobs during a recession. When a worker loses a job the position may be completely eliminated (or the stock completely wiped out). When someone loses a house it reverts back to the prior owner, heirs, bank or local government. Short sale buyers realize the inherent value in the home or property and act like a middle man to obtain a percentage of that value for themselves in the form of resale, rentals or retained equity.

Depression. During a depression the entire economy may slow down so much that little to nothing is being produced. Job loss often runs rampant as prices drop below the cost of production. Unemployment drives labor costs down – creating a downward spiral as unemployed workers are unable to afford more than the basic necessities. Again, jobs and stocks alike may all but disappear during a depression but a house remains standing. Housing is a basic necessity and tends to take top priority even during the most critical economic crisis.

Inflation. Inflation tends to drive the price of all commodities and assets higher as the replacement cost rises; real estate is no exception. With the Federal Reserve practically printing money out of thin air, the ability to own or control physical assets with a fixed rate of interest is often the best way to preserve wealth during periods of escalating inflation. On the other hand, the increased cost of production and labor often leads to more work for less pay among employees.

Deflation. Falling assets prices and world-wide deleveraging tend to drive down the price of commodities and assets including real estate. However, short sale buyers are often purchasing property at or near the fully depreciated value. Even those who experience further price drops still have other options available to bridge the gap until the market recovers; rentals, owner financing and factoring may each help raise needed capital or reduce individual debt repayments until the property has regained full value. 

More on Monday!

See you at the top!

Chris McLaughlin
http://www.shortsalesriches.com/blog

P.S.:

Are you ready to crack the law of the lid?  Are you ready to get serious about your business and wealth heading into 2009?  If so, you have to go now and watch Nathan’s youtube video!  Leave some comments on it …this is AMAZING to watch, and all TRUE:

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—-

At midday investors continued to hold their breath, as the Dow Jones Industrial Average was down 317.24 to 8993.75.  A government report released this morning showed that retail sales had dropped by 1.2 percent, which was twice as much as most analysts had been expecting.   The report does not bode well for the upcoming holiday season, where many Americans are seen as tightening their belts. 

JP Morgan Chase’s profit dropped 84 percent to $527 million from the $3.4 billion in the year ago third quarter.  “It’s an unpleasant situation, and I don’t want to underplay it. It’s unpleasant for the country,” said CEO Jamie Dimon. “I hope that the financial crisis, with the powerful moves made by governments around the world, will start to ease.”

In other banking news, Wells Fargo fared much better than JP Morgan Chase.   Its third quarter profit fell 25% to 1.64 billion from $2.17 billion in the year ago period.  The company was successful in breaking up the proposed Citigroup-Wachovia merger and now Wells plans on merging with Wachovia.  Citigroup has indicated that it will not stop the deal but does plan on extracting its pound of flesh in court for damages.

Now on to our real estate investing news arena…

Recession, Depression, Inflation, Deflation…What’s it all About and How Does it Impact Real Estate?

Ronald Regan once stated “A recession is when a neighbor loses his job. A depression is when you lose yours.”  If we were to apply the same logic to the real estate market, then the nation has been in the midst of a recession for some time as people have been steadily losing (or walking away from) their homes.  In fact, there is a great deal of recent debate on whether the nation is already in a recession and heading for a depression or whether the easy money economics of the Federal Reserve will prevent a depression at the risk of creating further inflation…or perhaps world-wide deleveraging will actually result in massive deflation instead.  Let’s take a few moments to examine real estate in each of the above scenarios’…

Recession. Unlike employment figures (or stocks), real estate doesn’t act the same as jobs during a recession. When a worker loses a job the position may be completely eliminated (or the stock completely wiped out). When someone loses a house it reverts back to the prior owner, heirs, bank or local government. Short sale buyers realize the inherent value in the home or property and act like a middle man to obtain a percentage of that value for themselves in the form of resale, rentals or retained equity.

Depression. During a depression the entire economy may slow down so much that little to nothing is being produced. Job loss often runs rampant as prices drop below the cost of production. Unemployment drives labor costs down – creating a downward spiral as unemployed workers are unable to afford more than the basic necessities. Again, jobs and stocks alike may all but disappear during a depression but a house remains standing. Housing is a basic necessity and tends to take top priority even during the most critical economic crisis.

Inflation. Inflation tends to drive the price of all commodities and assets higher as the replacement cost rises; real estate is no exception. With the Federal Reserve practically printing money out of thin air, the ability to own or control physical assets with a fixed rate of interest is often the best way to preserve wealth during periods of escalating inflation. On the other hand, the increased cost of production and labor often leads to more work for less pay among employees.

Deflation. Falling assets prices and world-wide deleveraging tend to drive down the price of commodities and assets including real estate. However, short sale buyers are often purchasing property at or near the fully depreciated value. Even those who experience further price drops still have other options available to bridge the gap until the market recovers; rentals, owner financing and factoring may each help raise needed capital or reduce individual debt repayments until the property has regained full value. 

More on Thursday…

See you at the top!

Chris McLaughlin, J.D., M.B.A.
web: http://www.shortsalesriches.com/welcome.html
e-mail: info@shortsalesriches.com

Phone: (800) 452-7627P.S.: 

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P.P.S.: If you really want to get started building your wealth, now that recognize that your 401(k) isn’t going to do it, what are you waiting for?  Take action today! A journey of a thousand miles begins with a single step. Take that step right now by clicking here:

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