So...How do Things Look for You?

Here's what my 'ole buddy Gary Fong had to say about the value of the average American home today:
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Here is an example from the "real homes of genius" website:

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In 1998 this house sold for $78,000. Sounds reasonable. 1 Bedroom, 1 bath, 551 square feet. In 2005, a year before the market peaked, it sold for $299,500. The current owner is trying to sell it for $349,999 (dropped from 370k). If they sold this house at 349k, the payments would be $2,465/month. Yet in the city of "Bell" california, the:

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Average/Household Income: $41,464
Median Rent Price: $900

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The price historically should be triple household income, or about $123,000. The fact that it hit $370,000 in a pre-crash economy shows the size of the speculative bubble. This house, with emerging India and China taking hold of the world's economic rein (they are still growing at double digits) will NEVER SEE $370,000 again.

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In fact, it won't see $123k in a long time because of two things. 1) property values 'stabilize' to triple household income. That's after the crash panic. 2) Household income goes down in a prolonged, severe recession or depression as unemployment skyrockets. So say that 10% of the people lose their jobs, and wages go down 10% because of oversupply. Take that average household income to say, 32k, and this house will stabilize at 96k. Now that makes sense. But when that happens, the bank won't be able to give it away for the simple reason that PEOPLE BUY REAL ESTATE ON THE ASSUMPTION IT'S GOING TO GO UP IN VALUE. Nobody in their right mind would buy knowing that in a year it's going to go down in value - or they'd wait a year, right?

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If you want to know what prices are going to be like in your neighborhood in about two years, take the U.S. census data for your city (google it) and multiply the average household income by 3x. Now take about 20% off that to reflect the glut in inventory. This is how you can find out what your house will be worth in 2010.

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So I DID google it....for Albany, GA the average household income is: $28,639 (as of 2003, the earliest data I could find). Multiply that by 3x=$85,917 minus 20% = $68, 735. So Fong is saying that your house (if you live in Albany) will be worth no more than $70,000 by the year 2010? Am I right on that? Does that sound right to you? I'm skeptical that things would get THAT bad...but then again, what do I know? What do YOU think?

Read This if You Own A Home, or Are Even Mildly Interested in Economics

I apologize in advance for this VERY lengthy blog, but I think it's worth reading if you have any investment in real estate or the market...and I'm really interested to hear your opinion (especially from the following people: Dad Nowack, my brother Rob, and Dan-0, although I'd like to hear from everyone). Wait till you have about 30 minutes, then sit down with some coffee and read this:

I read the blog of this guy Gary Fong. He's a photographer/entrepreneur/businessman...and a dang good one at that. He's a millionaire. Seriously.
Anyway, I started reading his blog about a year ago...and he frequently writes on the economy and at that time he was touting the virtues of buying gold. Saying it was a solid investment, that the US Dollar was going to decline, etc. etc.
Well....one year later and what do you know? The US Dollar has, incredibly, for the first time in like 40 years dropped in value below the Euro, below the Canadian dollar and the price of gold per ounce has more than tripled. So I've really been paying attention to what he's had to say lately.

He wrote this on Jan. 12:

I WANT TO TALK TO YOU ABOUT THE CRASH

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I have been struggling with ways to be inspiring, and encouraging. I constantly wrestle in my mind about why I have to write my financial forecasts when so many people are stuck. I don't want to be insensitive and go on and on about what is going to happen if you are stuck in a situation that you cannot get out of.

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But I can't not share what I've learned in all of my volumes of reading and experience. I am a person who has foreclosed on another individual (he was fine about it, it was totally friendly - there was nothing he could've done to save his home). Having foreclosed on someone, I know what happens in this mechanism and I totally understand the foreclosure process.

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It takes at least a year. The ranch had gone into receivership and the previous owner was forced to move out. By the time I came onto the scene, I tried to rescue it in preforeclosure, but the previous owner went bankrupt. Therefore, he no longer had the title and couldn't sell it. I had to buy the mortgage (the right to foreclose) from the bank. It cost me nearly a million bucks and all I had was a piece of paper. Not even keys to the ranch. Only the right to foreclose. Then I had to start the foreclosure process (either I was going to do it or the bank was going to do it, so it was not an aggressive move on my part). I had to take the property to court, have the court foreclose the property and only then did I get the keys. To a ranch that was an absolute mess.

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In Canada, bankruptcy is a completely different animal than the U.S. To paraphrase, in Canada you still get a fresh start. In the U.S. - thanks to President Bush's recently signed legislation - let's just say that you don't get a fresh start. In fact, even under bankruptcy a debtor can attach your wages far into the future, even for the rest of your life. So walking away from a property in the U.S. is not something one should do without really good legal advice.

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The fact that foreclosures hit a record (and it was so obvious that it was coming) is only the beginning because THESE foreclosed properties have not yet hit the market. When they do (and it may be up to a year from now because many would have to be fixed up, etc) then they get sold at "foreclosure" prices because the bank just wants to dump and liquidate and reduce the bad assets in their holdings. So if you have a house, and all over your neighborhood foreclosed properties are being put on the market - that means the "comparable" values that the appraisers use to grant financing will for sure go down. In other words - regardless of if your house has been foreclosed on - or not - the value of it in a year's time will be foreclosed value because of the number of deadbeat properties competing against you for buyers.

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How are you going to find a buyer for more than loan value - when you are competing with banks dumping their losses right in your own neighborhood?

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Is that scenario scary? Now remember that the banks are in the business of making money by lending people money to buy homes. Would they have money to lend you if they are up to their eyeballs in deadbeat homes that they cannot dump? The banks in theory would face a liquidity crisis with NO MONEY TO LEND. That would be a nightmare scenario in a future where real estate collapses.

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But in a historic situation where the tail wags the dog, the liquidity crisis occurred BEFORE THE CRASH - causing the crash. You see, Countrywide nearly went bankrupt because it had no source of funds to lend. Mortgage-backed securities have all disappeared, and there literally is no money to lend for house purchases. With no money to lend for mortgages - who is going to buy your house???

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I tried so hard SO HARD a couple of years ago talking about stagflation and the coming crash in real estate - and I was saying it before it hit the high. And some of you didn't believe me and I am so sorry I tried to warn you. Just do a search backwards on this site - you will see - or those of you who frequent this blog will know that I've been telling you to BE CAREFUL and not invest in U.S. real estate. I stopped buying real estate in the U.S. SEVEN years ago.

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Now the panic is just beginning, and the disaster is coming in the comparable values. Appraisers will be giving your house a valuation compared to foreclosed homes. Those appraisers will give the banks really low values - and then the banks will have no money to lend to any potential buyer for your house. If you think real estate has hit the skids I have to tell you - again - it hasn't even begun.

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I really want to give inspiration and motivation, but all I keep coming up with is a call to awareness. India and China are emerging so fast, and if we think, "well if the US goes down the world goes down" is egocentric. Other countries diversify into the U.S. with their investments, and while they wouldn't be happy if the world's largest economy collapses - they will pick up the slack and take over. Nobody ever took India or China seriously a few years ago. Look at them now, and they haven't even begun.

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I wrote this post in response to Nuyokaandco's comments in earlier posts about maybe purchasing a property in Florida with his brother. The fact that he was contemplating purchasing this property prompted me to take more action and explain more fully what is coming with the economy.

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If you try to take your US Dollar to europe, you'll find that it buys very little. Historically it is worth less than at any time in history. To think that "if the US crashes, so will the world" is that example of the pompous impestuous, bratty attitude that gives an attitude of impunity that we never have to pay our bills. Good heavens, did everybody think that they would never have to pay these debts????

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My goodness I am so sorry. Tell me what I can do to help, but do not ask me to calm your nerves by telling you that everything is going to be fine because I'm not going to do that. One can say, "well I will just wait out the cycle" because the U.S. real estate has usually 10 year cycles - but honestly, with what I know, once the market collapses (and it hasn't hardly begun), it will not come back. EVER.


Interesting, don't you think? Steve and I discussed it a lot. What would that mean for us? For our family? How could that play out? I drew Steve in, showed him Gary's predictions, etc. Steve thinks he's a little "doom and gloom" but we both kept up with his blog now.

Then, yesterday Fong says this:

Last night I was having dinner with Tiffany, Jenn and Melissa and I got really sad not only because we had seen a tear-jerker movie (p.s. I love you) - didn't affect me at all by the way... but because of the economic data reports that I had been seeing from around the world.

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The markets are going to crash, I said. I called Amy and asked her, what should we do? I'm trying to come up with an answer that makes the best of things. I said in an earlier post that the DOW is poised to fall 2,000 points by the looks of it, and what little stock I had left in the market was Apple computer, that I sold at $200.10

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People are dumping their stocks now because they realize that owning securities is not a good place to be in the event of the collapse of the largest economic superpower. I think the U.S. Stock market is going to crash - and only then will the collapsing economy be talked about at dinner tables across America. Then we hit the next stage - panic.

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I think it's a great time to sell every piece of junk you have on ebay, or craigslist. And turn it into gold.

And then later in the day, said this:

TOMORROW ON WALL STREET...

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The international markets were open today, as they do not celebrate MLK holiday. There was a very very heavy selloff in securities in response to the U.S. economic data. The world pretty much is in consensus that the U.S. is already in a deep recession.

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When the market opens tomorrow, brokers will be completely swamped with sell orders. This is one of those semi-rare opportunities in being pretty certain what the market will do tomorrow. I no longer have U.S. securities, but if I did, you betcha I would dump everything I had at the opening bell.

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I've been getting a lot of emails and comments about what is a photographer to do in a great depression, and I'm still tossing that one around. Regarding U.S. real estate I would at least list it right away and consider whatever offer comes in, but I doubt anybody would buy anything right now, and even if they did, they couldn't complete the loan because the banks have no money to lend.

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Tomorrow is going to be a wreck at the opening bell. Once the market crashes, oh good heavens there go jobs. And once jobs go here come entitlement programs to rescue those in need - for a U.S. economy that is so thick into a war that has no end. Sure is a good thing that the U.S. is spending all of that money to rescue the Iraqis in the name of democracy.

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Everybody in the U.S. had a real sense of wealth, but built on completely borrowed money. Now everybody realizes it and the investment dollars are going to go to other economies.
In just a few hours, by the time most of you wake up and read this, Wall Street is going to open to a crash. It is so odd to know what is going to happen in tomorrow's market hours in advance, but this is because of Global trading of U.S. Futures prices. While the U.S. markets were closed for the holiday, the world reacted to the U.S. subprime collapse and responded by massive drops in value.

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It is so weird knowing that in just a few hours, the U.S. Stock market is going to crash, and when it crashes this will start the collapse of the U.S. economy. I think that global investors are diving for safety right now, and liquidating their positions in a panic, but when they realize that the emerging economies have strong fundamentals (especially with them being net savers and investors, rather than borrowers on credit like the U.S.) the international markets will stabilize, even after Wall Street crashes.

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Well, we are all in this together. There are many international visitors to this site, and I'm sure we are all very concerned about the collapse of the U.S. economy. I am really sad right now because I see what's coming, and when my bond broker friend said that the bottom is "unimaginable" - I can imagine. I'll try to think of some suggestions for those of you who are unprepared. I'm not coming up with anything brilliant if you are late to the preservation game.

And what do you know? This morning when Steve gets to work he emails me the link to CNN and they report:


Wall Street Tries to Fight Back and articles like Don't Panic, Don't Sell and stuff about the Feds dropping rates, etc. etc.


So....doom and gloom? Or a realistic concern? What do you think?