Monday, August 3, 2015

US- Leverage within Real Estate.

The Risk of Real Estate – Forget Derivative & Fiat

The asset class within tangible assets that is in the immovable category is none other than Real Estate. This greatly varies from one location to the next. There are two problems we face with real estate because we are facing a major Sovereign Debt Crisis.
First is the fact we have a problem with leverage reflected within interest rates. While many tout derivatives and fiat money are the reason for a crisis on the horizon, of greater concern is the leverage within Real Estate. The 30 year mortgage was part of Roosevelt’s New Deal. Real Estate prices collapsed and with massive bank failures, there was no credit available so Real Estate collapsed to about 10 cents on the dollar.
Real Estate was being auctioned off an land that had sold for $2-$3 during the mid 1800s was bringing 10 to 30 cents and acre. FDR created Fannie Mae to revitalize the Real Estate market by providing 30 year mortgages to allow people to buy property. What was happening, sales were taking place at auction and were purely on a cash and carry basis. That obviously limited the buyers.
What we have to be concerned about is shutting down these agencies will reduce the leverage within the system and then add to that a banking crisis and we will see a return to the atmosphere of the 1930s. The amount of leverage within the entire system based upon Real Estate is astronomical. This has been a major factor in creating the long-depression in Japan for at the top mortgages became 150 years with several generation being responsible. Everyone was doing it so it became the NORM. As property collapsed with banks, everything changed in Japan.
Derivatives and fiat scenarios pale in comparison to the de-leveraging of Real Estate for this is also a direct hit upon the people. Many have built their lives assuming the value in their home will be there for retirement. This is part of the massive DEFLATIONARY wave we are in. This is why we have to restructure. The entire future will be lost and there are no political candidates willing to tackle the subject they do not understand and will never accept the fact that government is responsible for this economic nightmare.
Secondly, the negative impact upon Real Estate will also come from taxation. Just as Chicago is looking to raise property taxes by 30%, this will also have a negative impact upon Real Estate. The 2007 peak in Real Estate was the low-end, leveraged-out by the banks in their speculative bubble. We warned there would then be a bounce back into 2015.75, but this would be the higher-end. This has been aided by the inflow a foreign capital from both Europe and China. As taxation rises, this Real Estate asset class will be hit dramatically. The high-end which is peaking here in 2015.75, has NOT been financed for much of this has been paid for with cash with people trying to get off the grid. This is not the same locations that peaked in 2007 or sectors – that was the low-end leveraged pools based upon unsound speculation. That hurt the majority of home-owners whereas this peak in 2015.75 has been completely different sectors of the market.
This is the Real Estate problems we face. With state and local governments going broke and property taxes rising sharply, put this in the cauldron and stir with the decline in capital lending for mortgages, closure of Fannie Mae and the collapse in long-term lending (transactional banking), and the potion created is very toxic witches brew.
What creates depression is never the stock market or monetary issues. You have to destroy the bond market for that is where capital resides typically at least 10:1. Once you take out the bond market, that de-leverages to Real Estate market and now you have undermined not just the investors, you wipe out the savings of the population as a whole. People just begin to walk away from property as taxes keep rising. This was the way Rome collapsed. The city of Rome fell from its peak of about 1 million inhabitants to just 15,000 and in the process, Real Estate became worthless.
It is absolutely critical that we understand how civilizations self-destruct. They are ALWAYS at the hand of government. Their self-interest is always at the expense of the people. There have been few exceptions in 6,000 years of recorded history. The Paradox of Solution is always the solution for today’s crisis sets the stage to be the next crisis. We live in a cycle so indeed what comes around goes around.
Nothing is ever constant and there is no solution that will create a permanent result. Whatever we “think” today may not be true tomorrow. This is why we need a computer to avoid that human error factor to which there is no exception. We are all wrong about something at some point. That is how we evolve and learn. No human being is perfect or never wrong because we cannot foresee the future. What I have seen in research is straight forward – if they have done it before, they will do it again. Why? Because similar situations produce the same series of human response. History is a map to the future. There is nothing new under the sun.

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