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Trembling Treasuries

October 30, 2014 by Realty411 Team Leave a Comment

What is the bond market? Why have interest rates increased so much between 2012 and 2013 on a percentage basis? How does it affect real estate? Why should I care about it?

What is the Bond Market?

As defined by recent Wikipedia updates, the Bond Market is described as follows:

“The bond market (also known as the credit, or fixed income market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and private expenditures.

As of 2009, the size of the worldwide bond market (total debt outstanding) is an estimated $82.2 trillion, of which the size of the outstanding U.S. bond market debt was $31.2 trillion, according to Bank for International Settlements (BIS – The World’s “Superbank”).

References to the “bond market” usually refer to the government bond market, because of its size, liquidity, relative lack of credit risk and, therefore, sensitivity to interest rates. Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates, or the shape of the yield curve. The yield curve is the measure of “cost of funding.”

The Historical Trends for both Treasuries and Fixed Mortgages

Let me go back further in time to better explain this section about the more recent changes in 10 Year Treasuries which impact the directions for thirty (30) year fixed rate residential mortgages. Interest rates reached their peak highs back in the very early 1980s (1981, especially). In the very early 1980s, the 10 Year Treasury Yield peaked near an insanely high 16.0%, and corresponding 30 Year fixed mortgage rates fluctuated in the 15% to 18% rate ranges.

Bonds are glorified “IOUs” from governments or companies to investors

As a result of the high double digit fixed mortgage rates at the time in the early 1980s, the popularity of seller financing options such as AITDs (All Inclusive Deeds of Trust), Land Contracts or Contracts for Deed, Lease-Options, and “Subject To” deals increased significantly. On a comparative basis, a 12% “Wraparound” or seller financed deal seemed awfully “cheap” as compared with a 16% fixed rate mortgage loan.

The Credit Crisis Trends for both Treasuries and Fixed Rates

Since the official start of the Credit Crisis back in the Summer of 2007 (www.thecreditcrisis.net), we have seen a downward pricing trend for both Treasury Yields and fixed mortgage rates due to some fancy financial games or shenanigans played by the Federal Reserve, such as “Quantitative Easing” (“create money out of thin air in order to buy stocks, bonds, and mortgages”) and “Operation Twist.” With “Operation Twist”, The Fed sells short term bonds while simultaneously purchasing long term bonds, in order to artificially drive Treasury yields and mortgage rates downward.

Near the official start of The Credit Crisis in August 2007, the average 30 year fixed mortgage rate hovered within the 6.5% to 6.6% rate ranges. During the same month of August 2007, the 10 Year Treasury Note Yield was near 4.86%. After asset prices began to implode such as stock and real estate values after the Summer of 2007, then the Fed reacted by trying to make rates much lower in order to try to offset so much asset deflation, which had also hurt Japan back in the 1990s.

Our Last Year’s Treasuries and Mortgage Pricing Trends

Over the past year, the 10 Year Treasuries hit a low of 1.55% (September 3, 2012), and 30 year fixed mortgage rates reached near the low 3% fixed rate ranges. In the week when I write this article (early October 2013), 10 Year Treasuries are somewhere closer to the 2.60 to 2.70% ranges. Additionally, 30 year fixed mortgage rates are closer to the 4.4% + rate ranges today.

When interest rates increase, then there are less qualified buyers who have sufficient income necessary to qualify for these proposed mortgage payments. As a result, more lenders are beginning to offer adjustable rate mortgages with shorter fixed rate durations so that more of their clients may qualify for loans today.

With the double digit annual home price appreciation numbers in many parts of our nation over the past year or two, it can be more challenging for some people to qualify for a mortgage loan with a higher interest rate and payment as well as for a home which may have increased $50,000 to $100,000+ in price in recent times.

I have read a few times in recent weeks that upwards of 50% to 60% of all U.S. home buyers have paid all cash in 2013. If these numbers are fairly accurate, then many sellers seem to prefer selling to all cash buyers as opposed to buyers who need to qualify for a mortgage loan if they are both willing to pay the same price for the property.

Will the Fed “Taper” QE Strategies?

Fed Chairman Ben Bernanke has now suggested several times that the Federal Reserve may soon “taper” off their “Quantitative Easing” (QE) strategies at some point in the “future.” Will it be tomorrow, or possibly years or decades from now depending upon the state of the U.S. economy?

Bonds are glorified “IOUs” from governments or companies to investors. Bondholders are only entitled to a repayment of their principal amount when the bond matures. This can put an upper limit or ceiling on the amount of price appreciation for bonds held by investors today.

Bond prices are falling today partly due to the Fed’s implied “tapering” threat that they may begin decreasing the amount of stocks, bonds, and mortgages that the Fed may purchase each month. Allegedly, the Fed purchases upwards of $85 billion per month of both Treasuries and Mortgage Bonds, so their investment percentages of the overall market are quite significant.

In a rising interest rate market world as today, even though rates are still near historical all-time lows, new bond investors can purchase bonds which offer higher rates and income. For bond holders who currently own bonds at much lower rates from last year, then these same bond investors will have less future buyers for their existing bonds (or “IOUs”).

In basic Economic theories, a decreased number of buyers tends to historically lead to falling prices for any type of product whether it be a bond, real estate, or lemonade from a child’s corner stand. For bonds, falling prices then, in turn, leads to rising Treasury Yields since prices and yields are inverse to one another, and are akin to being on a “see saw.”

Whether the Fed does, in fact, begin tapering off or reducing their investments by way of QE policies or maintains their perceived and potential “QE Infinity” strategies in order to try to continue boosting asset prices such as stocks and real estate values, please keep a close eye on the directions of both the Treasury Yields and mortgage rates so that you have a better idea of the future potential direction of the overall U.S. economy.

Author: Rick Tobin

Look for Rick’s ebook on Amazon Kindle: The Credit Crisis Deals: Finding America’s Best Real Estate Bargains.

Rick Tobin has a diversified background in both the Real Estate and Securities fields for the past 25+ years. He has held seven (7) different Real Estate and Securities brokerage licenses to date.

Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), Equity Funds, and foreign money sources.

You can visit Rick Tobin at RealLoans.com.

Leverage and the Financial System

October 30, 2014 by Realty411 Team Leave a Comment

An investor who primarily uses third (3^rd) party money from sources such as banks, investment banks, private money groups, margin loans, credit lines, or other sources can be both a positive or negative option, depending upon the current state of the economy. In “Boom” economic times, when assets are rapidly appreciating in value, leverage can be an exceptional financial and investment strategy. This is partly true since the owner gets to keep all of the profits as we have seen more over the past year as it relates to rapidly increasing stock and real estate prices, even though the 3^rd money source typically puts up the bulk of the capital in order to purchase the asset.

What is Leverage?

Per the financial website entitled “Investopedia”, some of the root definitions for the word “Leverage” translate as follows:

“1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.

2. The amount of debt used to finance a firm’s assets. A firm with significantly more debt than equity is considered to be highly leveraged.

3. Leverage is most commonly used in real estate transactions through the use of mortgages to purchase a home.”

Leverage Can be Good or Bad Depending upon the Financial Cycles

When assets are appreciating in value such as stocks or real estate, then using third party money sources (i.e., margin loans, mortgages, credit lines, etc.) to buy the assets can be a very wise and prosperous investment option. It is almost akin to being on a “hot streak” at the local casino in which a gambler is using the “house’s money” (or the winnings earned from the casino) in order to try to create even higher winnings with the gambler’s compounded parlays or bets.

For example, the $100,000 home that a homeowner purchased in 2012 using just $5,000 down (excluding closing costs or potential seller credits) may now be worth $125,000 in 2013. As a result, the property owner generated a potential $25,000 gain in appreciated value off of just a $5,000 cash down investment (excluding monthly mortgage payments, of course).

However, leverage can be a very bad thing if that same $100,000 property listed above now sells for $80,000. If true, then that same $5,000 cash down payment investment is now worth a whopping negative $20,000 (- $20,000), excluding closing costs and monthly payment obligations.

Leverage and Derivatives

The almost six (6) years of our ongoing Credit Crisis (www.thecreditcrisis.net), which began back in the summer of 2007, is primarily related to the collapsing derivatives markets worldwide linked to convoluted, complex, and nonsensical financial and insurance hybrid investments such as Credit Default Swaps and Interest Rate Options.

Many of these financial investments are akin to glorified “bets” in a figurative “casino” (or the world’s financial markets) in which one party bets on the future directions of things like the future direction of interest rates, or the values of underlying stock, bond, or real estate assets. In a “bet”, somebody typically wins, and somebody also usually loses. With most casino bets, the losing party may lose anywhere from a few dollars to a few hundred or thousand dollars for some of the more aggressive and wealthier gamblers. In derivatives investments, the losing party may literally lose hundreds of millions or billions of dollars to as much as trillions of dollars, tragically.

The global derivatives exposure in 2013, according to some analysts, is allegedly at least $1.5 Quadrillion (or $1,500 trillion) as valued in U.S. Dollars. The top twenty five (25) U.S. banks supposedly may have a total derivatives exposure, on and off balance sheet investments (publicly admitted or not), close to $250 trillion dollars, yet these same Top 25 U.S. banks’ combined total assets are only $8.3 trillion. If these numbers are fairly accurate, then these Top 25 U.S. banks are allegedly leveraged at thirty (30) times (x) their assets.

Sadly, U.S. banks may now have a derivatives exposure risk much higher than back near the start of the Credit Crisis in the summer of 2007, or back when the world’s financial system almost collapsed in late September 2008, as publicly admitted by Federal Reserve Chairman Ben Bernanke in the Spring of 2009 in front of a Congressional subcommittee hearing. The rapidly declining interest rate plunge between 2007 and 2013 is partly to blame for the increased derivatives risk exposure as T-Bill rates dropped from 5.12% to almost ZERO (or 0.03%) since these near zero yields motivated many banks to try to find higher yields in the derivatives markets.

Bailouts & Derivatives: Create Money “Out of Thin Air” for the Casino

Since the near financial implosion of the U.S. and world’s financial markets back in late September 2008, how many trillions of dollars of anonymous and not so anonymous bailouts have the Top 25 Banks, investment banks, insurance companies, and other businesses deemed “Too big to fail” have U.S taxpayers helped to subsidize and save from their own financial implosion?

If the fictional ABC Bank did perhaps receive $5 trillion in “bailout” money, then shouldn’t a fair amount of that same $5 trillion in funds be set aside to both boost the company’s stock values as well as to make more affordable loans to their banking customers? However, many financial analysts allege that the bulk of the “bailout” funds are being used to invest even more money in the riskier derivatives markets. In fact, some banking analysts suggest that the vast majority of the largest U.S. banks currently earn the bulk of their income from derivatives investments as opposed to fees and rates earned from making loans to their banking customers (i.e., mortgage, business, and credit card loans).

Leverage & The Bond Market

Over the past year, the 10 Year Treasury yields have reached as low as 1.55%. In recent times, the 10 Year Treasuries have fluctuated within the 2.8 to 2.9% ranges. Since 30 year fixed rate mortgages are tied to the direction of the 10 Year Treasuries, then increasing Treasury Yields and fixed rates are making it more challenging for borrowers to qualify for larger loan amounts with increased leverage.

With recent increased Treasuries Yields partly due to the Federal Reserve’s “tapering” comments by Fed Chairman Ben Bernanke, in which he alleged that the Fed may eventually taper or cut back on the amount of Quantitative Easing (QE) investments in the future. If the Fed may cut back on their QE investments in stocks, bonds, and mortgages, then the overall demand for these investments may lead to worsening prices. As bond prices fall due to less investors, then Treasury Yields increase since they are inverse to one another somewhat like a “see saw.”

Increasing mortgage rates then leads to decreasing mortgage loan amounts which borrowers may qualify for when trying to acquire real estate. As a result, home buyers or investors may need to invest larger down payments in their future real estate investments, since they will have less leverage options at their disposal, or reduced mortgage loan percentage options.

Leverage & Government Backed Mortgages

Over the past five (5) plus years, government backed or insured mortgages have rapidly increased in percentages nationwide, partly due to the weakening mortgage securities market. Once Fannie Mae and Freddie Mac were bailed out by the U.S. government and the FDIC almost imploded themselves back in the Fall of 2008 after the Washington Mutual collapse (* the largest bank collapse in U.S. history), then fewer private, non-governmental backed or insured lenders were as willing to make real estate loans (residential or commercial). This was true partly since they did not have very many secondary market investment sources which may buy these same funded mortgage loans from them at a later date.

FHA, VA, USDA, Fannie Mae, and Freddie Mac represented the bulk groups of government backed or insured entities which were directly or indirectly behind the funding of 97% of all U.S. residential mortgage loans in recent years. Additionally, SBA (Small Business Administration) and USDA (United States Department of Agriculture) have stepped up even more in recent years to help fund small to very large commercial properties (i.e., Retail shopping centers, hotels and motels, gas stations, industrial, office buildings, etc.).

We Need Better Capital Access

As I have said for many years now, the number # 1 factor behind the various “Boom” and “Bust” real estate cycles over the past several decades is related to the supply of capital. How readily available is the money today as compared with back in 2005? Even though 2005’s interest rates were higher than 2013’s interest rates, most people would answer that it was much easier to qualify for a mortgage loan back in 2005 than today, in spite of the higher interest rates back then.

I keep hearing rumors of more private money investors or investment groups interested in creating their own secondary markets for new and existing mortgage loans. If more secondary market investors begin purchasing funded residential and commercial mortgage loans, then private investors, small banks, and even larger banks will have more options to sell off their mortgage loans in bulk. Historically, private non-governmental loans typically have fewer fees associated with them such as FHA insurance premium fees, which recently increased even more partly allegedly related to the increasing mortgage default rates for the highly leveraged FHA loans in past years.

Back in the 1980s, I remember “Hard Money” loans, which were called “The Perfect Vision Loan” because the interest rates were 20%, and the cost to fund these loans was 20 points (or “The 20/20 (“Perfect Vision”) Loan”). Today’s private money loan options are incredibly cheap as compared with the old “Perfect Vision Loans.” In many cases, private money loans may be funded in a week or two as opposed to a month or two with various types of government backed or insured loans.

For the real estate markets and U.S. economy to continue improving in the near and long term, we need better access to capital for small investors and “Mom and Pop” business owners who truly represent the bulk of the U.S. consumer market. Even if interest rates continue to slowly increase as they have in recent months, due to the fears associated with potential reduced Quantitative Easing (QE) policies (or “create money out of thin air to bail out the Big Banks and Wall Street firms in order to continue increasing their bets in the world’s largest casino”), then the easing of underwriting guidelines and more private money or non-governmental funding options will help to better stimulate both the real estate sector as well as the rest of the U.S. economy.

Author: Rick Tobin

Look for Rick’s ebook on Amazon Kindle: The Credit Crisis Deals: Finding America’s Best Real Estate Bargains.

You can visit Rick Tobin at RealLoans.com.

The Credit Crisis: The Bubbling Bond Market

October 30, 2014 by Realty411 Team Leave a Comment

In recent years, both short and long term interest rates have plunged to near, or at, all-time record lows, partly due to the manipulation of the U.S. Bond Market. Since the Credit Crisis (www.thecreditcrisis.net) officially began back in the Summer of 2007, asset prices have both crashed and boomed over the past six (6) years because of, or in spite of, the sluggish U.S. economy.

For U.S. economists, financial analysts, investors, bankers and Central Bankers, one of the biggest fears since 2007 or 2008 was that the USA may end up somewhat like Japan back in the 1990s, when their stock, bond, and real estate “bubbles” all popped. Sadly for the Japanese, the past few decades have been very asset deflationary as asset values have plummeted to values at a fraction of the market peaks in the late ‘80s or early ‘90s, in spite of their incredibly low interest rate policies, which were somewhat akin to the USA’s ongoing “Quantitative Easing” policies.

Asset Values may either Rise, Fall, or be Stagnant

From various regional market peaks across the USA, many homes or commercial properties reached their all-time market value highs anywhere between 2006 and 2008, depending upon their region. After “Stated Income”, “100% Loans”, “EZ or No Doc Loans”, and very low adjustable rate mortgage loans (starting rates beginning in the 1% range) started to disappear following the start of the Credit Crisis, then home values began to drastically fall in value.

From my perspective, the number #1 reason why home values either rise or fall, is related to the ease and availability of capital or loans to either help one buy or sell their homes. When money is “easy” and more readily accessible, then there are typically more buyers for real estate. An increased demand for a home or any other type of asset or consumer goods product typically leads to an increase in prices. Conversely, a decreased demand for an asset class or a consumer goods product historically has led to a decreased value or sales price for this same asset or product.

When too little money chases too few goods, then asset prices may begin to fall across the board regionally, nationally, or world-wide. Additionally, when access to capital begins to get more challenging by way of higher interest rates, tougher underwriting guidelines, fewer liquid or solvent equity investors or lenders, and / or more difficult regional, state, or national regulations, then home prices tend to fall as we have seen during several different “Boom and Bust” housing cycles over the past few decades.

QE to the “Rescue”?

Over the past few years, our financial and governmental leaders have attempted a wide variety of alleged “bailouts” in order to better stimulate the financial and housing markets. QE (or “Quantitative Easing”), once again, may be effectively akin to “creating money out of thin air in order to buy up more stocks, bonds, mortgages, and other assets.” Prime examples of the impact of QE policies in recent years, for better or worse, include the 15,000+ Dow Jones index values as well as annual home price value increases of double digits over the past year or two in various regions nationally (i.e., Las Vegas, Phoenix, Los Angeles, etc.)

The downside of QE policies has been related to rampant inflation for consumer goods like food and gasoline. When our financial leaders flood the markets with trillions of dollars each year, then the overall value of the U.S. Dollar may rapidly decline. Many nations around the world have been so concerned about the USA’s inflationary QE policies that they have begun to use other forms of currency besides the U.S. Dollar. This decreased demand for the Dollar from abroad has led, in turn, to even further falling Dollar values.

QE and the Stock and Bond Markets

Shortly after Federal Reserve Chairman made public statements on May 22^nd that the Fed may begin “tapering” (or reducing) their QE methods in the near term, then U.S. stock prices plunged and bond prices increased quite a bit due to investor concerns. Since many investors know and understand how important QE policies have been to increased stock and real estate prices in recent years, then their same investor concerns adversely impacted stock and bond values in the short term.

Fed Chairman Bernanke also made similar “tapering” statements about potentially easing up QE policies, or buying fewer assets like stocks, bonds, and mortgages, on June 19^th and on July 10^th. Yet, the financial markets strengthened, strangely, after the July 10^th comments at an economic conference, and the Dow Jones sits near all-time record highs once again on the day that I am writing this article (mid-July 2013).

In the 2^nd quarter of this year, the $5 trillion dollar U.S. bond market dropped about 2% partly related to Chairman Bernanke’s “tapering” comments. This was the worst bond market drop since the “Bond Market Massacre” back in 1994 after the Fed shockingly raised short term rates a number of times back when interest rates were near thirty (30) year lows at the time.

The worsening bond prices then, in turn, led to higher 10 year Treasury Yields. Thirty (30) year mortgage rates are tied to the directions of the 10 Year Treasury Yields, so mortgage rates began to increase rapidly in recent months. In fact, mortgage rates spiked the most in a two (2) month time span than ever before.

Additionally, thirty (30) year fixed mortgage rates increased to their highest levels or rates since July 2011. While today’s interest rates are still near historically low levels, the 30 year fixed mortgage rate recently increased from a national average of 3.93% to 4.46% within the span of just one (1) week. According to a Freddie Mac report, this was the largest one (1) week increase since as far back as 1987.

Mortgage Rate Directions & the Housing Market

Not every home buyer or investor over the past few years has been an all cash buyer (individual or institutional). A very high percentage of home buyers have been owner occupied buyers in need of highly leveraged FHA loans (96%+ LTVs). The thirty (30) year fixed mortgage rate has increased as much as 40% from their near record low rates at 3.25% over the past twelve (12) months which, in turn, has led to higher FHA, and other loan types, costs.

The Fed may still be purchasing upwards of $85 billion of mortgage backed securities and Treasury Bonds each and every single month. Without their same consistent level of capital investments, then bond and rate yields may only worsen. Is a 5% thirty (30) year fixed mortgage rate more likely prior to the end of 2013 as suggested by some economists and financial analysts? Or, will we possibly reach 6% to 7% mortgage rates which have been more common in recent decades?

Regardless, increased mortgage rates make it more challenging for buyers to qualify. If a potential client may qualify for a $400,000 mortgage loan at a 3.25% interest rate, then that same borrower may only qualify for a new mortgage $100,000 less if the future interest rates hit closer to 5%. With fewer mortgage borrowers able to qualify for larger loan amounts due to higher mortgage rates, then home price appreciation levels may begin to “taper” off, ironically.

As compared with past financial time periods such as the early 1980s when the U.S. Prime Rate hit as high as 21.5%, today’s mortgage rates are still incredibly cheap. Banks need to ease up somewhat on their underwriting guidelines as well, so that more borrowers may qualify for more loans. When the capital markets ease up more and more hopefully, then we may see more stability in the financial and real estate markets.

A more solid U.S. Economy is needed more than another “bailout”

The American economy needs to strengthen more without magical and mythical “bailout” programs which seem to increase the U.S. debt numbers, weaken the U.S. Dollar, and cause rapidly increasing inflation numbers which hurts gasoline, food, and other consumer goods prices while helping certain asset classes like real estate in both the short and / or long term.

If the national job market numbers improve more in the near term, then the potential tapering of QE money may not adversely impact our economy as badly as some economists perceive. Yet, stock, bond, and real estate prices continue to improve fairly consistently in 2013 in spite of a sluggish job market and economy.

One of the main questions to ask ourselves related to this same “QE and Asset Prices” topic may be as follows: “How long will the boom in asset prices continue to last?” Only time will tell. Since my “Crystal Ball” continues to be in the shop, I will not even venture to guess the answer partly since there is no historical time precedent to compare with here in the USA, as we have never relied so heavily on these glorified forms of “bailouts” to better stimulate our financial markets.

Author: Rick Tobin

Look for Rick’s ebook on Amazon Kindle: The Credit Crisis Deals: Finding America’s Best Real Estate Bargains.

You can visit Rick Tobin at RealLoans.com.

The Credit Crisis: An Economic Rollercoaster Ride

October 30, 2014 by Realty411 Team Leave a Comment

Seemingly every financial implosion time period of the past one hundred (100) + years here in the USA was due to the combination of a “boom” economic time period, subsequently followed by an economic “bust” time period. During the “boom” or prosperous economic time periods such as “The Roaring 20s”, the availability of capital was much more flexible as related to easier real estate, stock margin, or business loan options at the time.

The availability of capital is typically the number one driving force behind a “boom” or “bust” time period as it relates to real estate cycles. “Easy Money” time periods such as “The Roaring 20s” and “The Sub-Prime / “EZ Doc” Mortgage Era” (2002 to 2007, approximately) were both prime examples of economic “boom” eras, which preceded economic “busts” such as The Great Depression (1929 – 1939), and the ongoing “Credit Crisis” (www.thecreditcrisis.net).

From Boom to Bust…….

What is typically the catalyst for the transition from an economic “boom” time period to a “bust” time period? One of the best answers may be tied to the figurative “slamming of the brakes” related to Americans’ access to capital or money. When a borrower has more flexible access to capital (i.e., loans, equity money, margin loans, etc.), then this same borrower may have more options for investments, business expansion, or earlier retirement options.

On the other hand, if money is tight or more challenging to qualify for like in recent years, then a prospective borrower or investor may not be able to expand their investment or business options, as much as they had hoped to at the time. Since money does not literally “grow on trees”, then one must find better access to capital in locations other than one’s backyard or under their mattresses.

“It takes money to make money” is one of the truer statements as it pertains to investment opportunities. Yet, hard work, persistence, and good luck also may figuratively “open doors” to various new opportunities as well. If more real estate buyers and sellers have better access to capital or cheaper and / or more flexible mortgage loans, then there may be more opportunities for home purchases or sales, partly since most buyers of real estate need third party loans to complete their purchases.

Virtual Money and Debt

According to some financial and economic sources, upwards of 97% of all forms of money created here in the USA may originate by way of a computer keyboard. If true, then only 3% of all forms of American money may be created as coins or dollar bills. The combination of the Federal Reserve and the U.S. Treasury may create our oxymoronic “Fiat Money” (or “assets backed by nothing of real value”) primarily by the power of the computer keyboard stroke. Prior to President Nixon taking the U.S.A. off of the “Gold Standard” back in the early 1970s, the value of the U.S. dollar was allegedly backed by gold more so than “thin air.”

Also, American money is backed by oil by way of the “Petrodollar” system since most forms of oil worldwide have been traded for U.S. Dollars over the past few decades. Sadly, more countries like the “BRICS” nations (Brazil, Russia, India, China, and South Africa) are opting to trade their oil for currencies other than the U.S. dollar.

With less demand for U.S. dollars worldwide in recent years and the combination of rising inflation partly due to the introduction of trillions of dollars by way of “Quantitative Easing” and other government and Central Bank “bailouts”, the price of gasoline has skyrocketed due to the weakening value of the U.S. dollar.

I may venture to guess that demand for gasoline here in the USA in recent years has dropped due to the sluggish economy and $4 to $5+ gasoline costs per gallon. If true, then the weaker U.S. dollar may be the primary reason for the much higher gasoline costs rather than a lack of supply of oil for American consumers.

As I once learned in past Economics courses back in college, when supply exceeds demand for a product, then prices tend to drop. However, when oil is traded for weaker U.S. dollars, then gasoline prices tend to skyrocket, sadly.

Bank Bailouts as opposed to People Bailouts

Since the financial implosion began back in the Summer of 2007 after the near collapse of the world’s derivatives markets (i.e., Credit Default Swaps, Interest Rate Options, etc.), then many of the financial bailouts offered by Central Banks and governments worldwide have focused more on saving many of the largest banks, investment banks, and insurance companies as opposed to directly helping individuals or small to mid-sized business owners. Why haven’t more of the U.S. citizens or “Mom and Pop” businesses been bailed out as well? Why can’t people also be “too big to fail” as alleged with some of the larger U.S. banks and Wall Street firms?

There have been upwards of millions of homes foreclosed in the USA since 2007, and countless personal and business bankruptcies. Couldn’t the USA take a few trillion dollars of allocated “bailout” money for the big banks, and redirect it towards helping U.S. consumers reduce their credit card debt, student loans, mortgage loans, business loans, and possibly to provide them with some “seed capital” for business and investment expansions?

Credit Crisis “Solutions”: Let’s create more Money and Debt out of “Thin Air”

In recent years, the Federal Reserve has become the primary buyer of stocks, bonds, and mortgages with their various “bailout” methods, partly by way of “Quantitative Easing”, “Operation Twist”, and numerous other anonymous or not so anonymous bank bailout loans or investments. The “Fed” allegedly invests upwards of $85 billion per month in U.S. Treasuries and mortgages trying to stimulate the various investment markets.

How nonsensical is it that the Dow Jones index levels now hover near 15,000, in spite of the ongoing sluggish national economy? Without the Federal Reserve’s infusion of potentially countless trillions in the stock and bond markets, then would the Dow Jones levels of today be closer to 6,000 or 7,000 just a few years ago?

How about the U.S. Treasury Bond market? If the Fed wasn’t the primary buyer of U.S. Treasuries as opposed to individual or foreign investors or governments, then how high would the interest rates be today due to a rapidly declining supply of non-Federal Reserve U.S. Treasury buyers?

Thirty (30) year fixed rates are tied to the directions of the 10 Year Treasury Yields. An increasing demand for U.S. Treasuries tends to bring down interest rates. On the other hand, a declining demand for U.S. Treasuries due to perceived risks may lead to rapidly increasing interest rates.

“Free Money” is not always so “Free”

Mortgage rates have been slightly increasing in recent months, partly related to Fed Chairman Ben Bernanke’s suggestions that the “free flow” of capital may not always be there to continue trying to allegedly bail out the banks, investment banks, Wall Street, and the stock, bond, and mortgage markets. If the Federal Reserve begins to slowly turn off the figurative “spigot” of their trillions of dollars of capital, then the financial markets may be adversely impacted significantly.

Whether or not the Central Banks and governments worldwide continue onward with their trillions of dollars of bailouts and investments, the perception of smaller future bailouts may cause investors to purchase more or less stocks, bonds, real estate, or other assets in the near or long term. Additionally, the creation of too much capital in recent years had led to massive inflation or hyperinflation for various types of products like gasoline, as noted above, food, clothing, and other basic commodities.

With Real Estate: Inflation is much better than Deflation

With real estate, inflation tends to be a positive for both current and future appreciation levels. Historically, homes in the USA have appreciated close to an average of 3% per year over the past fifty (50) + years. Between 2012 and 2013, the median priced home in various U.S. regions has increased between 5% and 25%+, due to the combination of near record low interest rates, artificially suppressed home listing inventory levels, and an increased demand from individual and institutional investors.

Homeowners, retail shopping center owners, and other property owners are more likely to “walk away” from an “upside down” property than owners who have equity in their properties. Thankfully, more properties nationally have gone from negative equity to positive equity in recent years due to rapidly increasing sales and prices. There are few things worse for an investor to have then mortgage debt currently exceeding their property values.

For many Americans, the bulk of their net worth comes from real estate more so than for any other type of investment option. Improving equity in real estate nationally also may lead to a more prosperous economy, and hopefully to more jobs created as well.

Tragically, the recent stock market boom has only benefitted a very small percentage of Americans who are fortunate enough to actually even own shares in Dow Jones, or other stock indices. Yet, the recent price improvements in the U.S. housing market have helped more Americans feel a bit more prosperous and happy here in 2013.

From Bust to a more steady Boom?

How many homes between 2007 and 2010 dropped in value between 20% and 50%+ plus due to the Credit Crisis implosion? Even with recent price appreciation over the past year or two in various regions, many properties are still well off their housing peak prices back in 2006 or 2007. However, a slow and steady economic recovery may last a lot longer than a rapidly escalating price “boom” which we have seen in past economic “Boom and Bust” time periods.

How long will median prices continue to improve regionally and nationally? How long will “Quantitative Easing”, and other bailouts, continue at the same mind boggling multi-trillion dollar pace? How long will interest rates continue to hover near historical lows? Are these financial gains short term or long term? The answer is “Only time will tell” because there are truly too many economic and financial variables out there today to really make an educated guess.

There is no historical precedence in U.S. history to compare with the near financial implosion of $1,500+ in derivatives worldwide as well as for the various trillion dollar financial bailouts tried in recent years. As such, let’s all hope and pray for a more steady economic recovery, as opposed to one with more volatile and extreme “boom and bust” cycles as in past years.

Author: Rick Tobin

Look for Rick’s ebook on Amazon Kindle: The Credit Crisis Deals: Finding America’s Best Real Estate Bargains.

You can visit Rick Tobin at RealLoans.com.

Why Investing in Greener Homes Now Will Fill Your Wallet Later

October 30, 2014 by Realty411 Team Leave a Comment

“Going Green” may be all the rage these days, but many people have found it difficult to keep up with the movement financially. For homeowners, maintaining a lifestyle is hard enough without the societal pressures to be more environmentally conscious. Greener solutions are costly up front, and with so many other expenditures to manage, many families are focusing their finances elsewhere.

However, what the same people fail to see are the potential savings made possible by green alternatives. A hybrid car may be more expensive than an average sedan; energy-efficient air conditioning equipment may cost more than other run-of-the-mill appliances; but such as recycling, the money you spend on “Going Green,” over time, lands right back in your bank account.

Immediate Savings

Consider your daily routine for a moment; how much water do you think you use on average? How many lights do you keep on at home? How do you usually go about regulating temperature in your house? Look over your utility bill while asking yourself these questions and you should begin seeing areas where you can cut back on usage.

Small adjustments to your lifestyle can mean huge savings every month. Although you may risk discomfort at times, these changes to your regimen are well worth it. Through the installation of low-flow showerheads, toilets, dishwashers and other energy-efficient products, you can decrease your monthly expenses by considerable amounts.

By installing a low-flow showerhead, families can reduce their monthly water consumption by 50%.
Low-flow toilets use 1.3 gallons of water per flush, as opposed to the 3.5 to 7 gallons used by older toilets.
Supplementing shorter dishwasher cycles with hand washing and drying saves both water and electricity.
Unplugging appliances while not in use can save consumers more than $3 billion a year.

Savings over Time

“Going Green” may be inspired by the desire to save money, but trimming monthly expenses is only the beginning. It is easy to calculate your recurring savings; it is great knowing how much money is going back into your pocket every year upon adopting a greener lifestyle. But is your piggy bank, now flush with pennies, capable of affecting life on a global scale?

Environmental consciousness is invaluable, especially as the wellbeing of the planet continues to decline. As pollution and deforestation continue to strip the Earth of its beauty and natural resources, it should come as no surprise that it’s time to do something more. It may have started as a budgetary decision, but it’s important to remember that with the power to better yourself comes the responsibility to better others.

Next time you gawk at that piggy bank and at the funds you have saved for that rainy day, think of all the other places that it’s raining and do something about it. You may be safe inside your home, but there are so many people out there suffering a crueler fate; don’t let this planet be one of them.

Griff Haeger is a writer and avid environmentalist who enjoys sharing his knowledge of financing through energy recovery and greener living.

The Credit Crisis: Investments On a Tightrope With Less Safety Nets

October 30, 2014 by Realty411 Team Leave a Comment

By Rick Tobin

In our perceived capitalistic country since the start of the Credit Crisis (www.thecreditcrisis.net) back in the Summer of 2007, we have all seen many industries effectively become “Socialized” and taken over by the government allegedly to “bail out” the sectors such as the mortgage industry, automobile industry, insurance industry, and Wall Street. As a prime example, at least 97% of all residential mortgage loans funded in recent years were government backed or insured (i.e., FHA, VA, Fannie Mae, Freddie Mac, USDA Rural, etc.).

The near implosion of the world’s financial system back during the week of September 29^th, 2008, as I had forecast about six (6) months in advance for a variety of reasons, significantly changed the way we live in our world today. The figurative financial “tightrope” that most Americans walk on each day became a bit more challenging partly due to less perceived “safety nets” to better protect and to save us.

Prior to the near collapse of the highly leveraged financial markets, partly due to the alleged $1,500 trillion of primarily unregulated derivatives (i.e., Credit Default Swaps, Interest Rate Options, etc.), individuals or investment groups supposedly determined the direction of the stock, bond, commodities, and real estate markets. After the near collapse of the financial markets, bailouts from governments and Central Banks around the world became more of the norm as opposed to “Mom and Pop” investors.

For example, the Federal Reserve became the primary buyer of stocks, bonds, and mortgages by way of Quantitative Easing (or create money out of “thin air” in order to buy assets and drive prices higher such as the Dow Jones index) and other bailouts. Each month, the Federal Reserve allegedly purchases up to $85 billion of Treasuries and mortgage bonds in order to keep interest rates as low as possible, and to allegedly try to better stabilize the financial markets.

The history of the FDIC “safety net”

The Federal Deposit Insurance Corporation (FDIC) was created back in 1933 after the collapse of almost 9,000 banks in the first few years of The Great Depression (Oct. 29^th, 1929 – 1939). The FDIC was originally created as part of the Glass – Steagall Act of 1933 (this act was partly repealed back in 1999 which allowed banks to operate in the insurance and securities industries too), and was based somewhat on a deposit insurance program in Massachusetts which insured a portion of banking customers’ checking and savings accounts.

The worst year of the ten (10) year Great Depression era was possibly back in 1932 when “Bank Runs” began to happen on a more steady basis. Sadly, many banks began to run low on cash on hand as customers stood in long lines somewhat reminiscent of a famous scene in the classic film entitled It’s a Wonderful Life with Jimmy Stewart and Donna Reed.

If bank customers did not have confidence that their money would be safe with their local bank branch, then they would try to pull out most or all of their cash and literally place it under their mattresses at home, or in other seemingly less secure places. Some people also just dug holes in their backyards, and planted their money there. Sadly, money does not literally grow on trees though.

Shortly after the creation of the FDIC in 1933, certain bank accounts had coverage protection of up to $2,500. In 1950, insurance limits rose to $10,000. In the mid 1960s, the FDIC insurance limits reached $15,000 which later increased to $20,000 in 1969. In 1974, the FDIC increased their coverage amounts to $40,000. Then, FDIC limits increased to $100,000 back in 1980. In recent years, FDIC insurance limits reached as high as $250,000.

The FDIC and the Savings and Loan Bailouts

Prior to the start of the Credit Crisis, the last major financial implosion event here in the USA took place in the late 1980s through the mid 1990s. Back in the 1960s and 1970s, a very high percentage of Americans borrowed their money to purchase homes from their local Savings and Loan (S & L). Even though banking customers used to earn relatively low rates of return on their savings deposits with S & L’s, many Americans felt confident about the relative safety of these investments due to the existing Federal Savings and Loan Insurance Corporation (FSLIC).

Sadly for S & L’s, they had existing interest rate ceilings in place which limited how much they could pay their banking customers. As a result, many S & L customers began to pull their funds out of their local banking branches, which hurt their banks’ abilities to cover their portfolios of performing or non-performing loans at the time.

As short term interest rates like the Prime Rate reached 21.5% by December 1980 due to then Federal Reserve Chairman Paul Volcker’s alleged concerns about increasing inflation rates, banking customers started demanding or searching for higher rates of return from sources other than their local S & L. Many banking customers pulled their funds out of S & L’s, and later invested them in money market funds, stocks, or real estate investments.

Parallel to the increasing rates in the USA back in the early 1980s, banking laws and rules were eased so that S & L’s may later diversify their investments, and invest in potentially higher yielding investments like commercial real estate, residential and land development, consumer, and business investments. Additionally, capital reserve requirements were eased so that S & L’s did not have to hold onto as much cash on hand as they used to in years past.

Tragically, over seven hundred (700) S & L’s collapsed as a result of increasing rates and non-performing loans. Almost half of the U.S. banks which existed back in 1970 were no longer in business by 1989. As a result of the massive insurance coverage losses, the Federal Savings and Loan Insurance Corporation (FSLIC) later became insolvent. The FDIC had to later step in and take over FSLIC in order to try to cover so many of the billions of dollars of banking losses.

In 1989, a U.S. taxpayer bailout measure named Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) was created in order to provide upwards of $50 billion to help out the failed financial institutions. Shortly thereafter, the RTC (Resolution Trust Corporation) entity was established, in order to help sell or liquidate real estate assets for a fraction of their once recent market values to try to generate much needed cash.

The FDIC vs. Bank Customers in 2008: Who had more cash reserves?

Just a few weeks before the near financial implosion of the world’s then existing financial system in late September 2008, the FDIC announced that they only had about $45 billion in cash reserves left in their accounts.

Shortly after this announcement, Wachovia Bank, Countrywide, Lehman Brothers, Bear Stearns, Fannie Mae, Freddie Mac, AIG, and Washington Mutual (the largest bank failure in U.S. history) all imploded too. Just the collapse of Washington Mutual alone wiped out the FDIC’s $45 billion dollars of insurance cash reserves at the time. So, who really had more cash reserves back in the Fall of 2008 – bank customers or the FDIC?

With the perceived or very real threat of a domino like implosion of the banking, investment banking, and insurance sectors partly due to the exposure of $1,500 trillion in primarily unregulated derivatives (i.e., Credit Default Swaps, Interest Rate Option Derivatives, etc.), then the U.S. government and Federal Reserve stepped in with trillions of dollars of anonymous, and not so anonymous bailouts.

Even large and respected financial institutions like Wells Fargo were admitting that they were borrowing at least $25 billion in these bailout funds in order to better stabilize their investment portfolios at the time. For many of the largest U.S. banks in recent years, they received the bulk of their income from on and off balance sheet derivatives investments as opposed to loans made to their banking customers. As a result, banks still aren’t as motivated to make loans to their customers these days, sadly.

The Quadrillion & A Half + Dollar Meltdown

As I have been writing for many years now, the unwinding of the $1,500 + trillion (a quadrillion and a half) dollar derivatives market is truly the root cause of “The Credit Crisis” financial implosion. This is not just a “sub-prime mortgage problem” as the mainstream media likes to tell their viewers. In fact, less than 1% of all non-performing loans worldwide were supposedly U.S. sub-prime mortgage loans.

Most of the problem “Credit Crisis” loans or derivatives investments (a hybrid of a loan and an insurance contract) were “Interest Rate Option Derivatives” when investment banks bet on the future directions of interest rates. Interest Rate Option Derivatives are at the heart of the “LIBOR Scandal” (London Interbank Offered Rate – the biggest financial scandal in world history), the benchmark interest rate index used by hundreds of trillions of dollars of loans worldwide. In this scandal, banks and investment banks were supposedly told the exact direction of the future rigged interest rates so that they may profit from their derivatives bets.

The origin of “The Credit Crisis” was a downward plummet into a black hole-like financial Abyss. It should not be blamed entirely on U.S. homeowners or “flippers” as opposed to reckless investment bankers who enjoyed leveraging trillions of dollars with their risky financial bets.

Many large U.S. banks, Wall Street firms, automobile companies, airlines, and major insurance companies might have been technically insolvent in recent years. If they were forced to use standard bookkeeping methods like the rest of the Americans, their debts would greatly exceed their assets. As a result, these multi-billion dollar companies would be in bankruptcy court.

What is most frustrating to many Americans today is that these trillions of dollars of bailouts have helped many financial institutions better stabilize their overall portfolios and their balance sheets. Yet, these same banks have not rapidly increased their lending options for individual Americans or small to mid-sized businesses.

Financial Implosions & Investment Opportunities

After the end of The Great Depression and World War II and the collapse of the Savings and Loan industry, many investors created the bulk of their family’s generations of assets by picking up assets for literally cents on the dollar. Why pay retail prices when one may pay wholesale prices from motivated financial institutions or individual sellers?

I used to hear stories shortly after the creation of the RTC (Resolution Trust Corporation) which involved apartment building deals in Texas which sold for something like $800 or $900 per apartment unit back in the early 1990s. If the apartment building was a small 10 unit apartment deal, then the sales price may have been close to just $8,000 or $9,000. If the apartments were possibly 100 units, then the apartment might have sold for $80,000 or $90,000.

I wonder what these same apartment buildings may sell for today. I also wonder if the monthly net cash flow today exceeds their original purchase prices. There are few better real estate investments anywhere in the USA than apartment buildings because we all need a place to live.

The word “Crisis” allegedly is derived from two characters in the Chinese language, which may represent both “Danger” and “Opportunity.” Yes, the financial implosion we have endured since 2007 has been quite scary. Tragically, the real estate implosion when considering median home price percentage losses was even worse in recent years than what people experienced during the depths of The Great Depression.

In almost every well known financial implosion time period, recession, or depression these past one hundred (100) years, boom time periods preceded bust time periods when “easy money” time periods such as “The Roaring 20’s” and the early 2000s were followed by “tight money” time periods (or “slam the brakes” on capital access), due to higher interest rates, tougher margin or capital reserve requirements, and / or more challenging underwriting guidelines like today.

When “tight money” time periods later ease up again, then property values typically increase significantly such as what he have seen between 2012 to 2013 primarily due to near record low interest rates. The most important factor for real estate is related to the availability of capital in order to get in, and to get out of the investment. Let’s hope that underwriting guidelines ease up a bit more so that more people may qualify for loans again!

Fortunately, the combination of near record low interest rates, home listing inventory levels near twenty (20) years lows, and motivated real estate investors who are tired of earning negative net returns from their local bank branches are helping to lead the way back for impressive real estate price gains in recent times (6% to 20% + annual price gains in various U.S. regions).

Life and investments are truly akin to a “rollercoaster ride.” We must hang on through all of the booms and bust time periods, and twists and turns just like so many Americans did through The Great Depression, The Savings and Loan Collapse, and the ongoing Credit Crisis. With persistence also comes opportunity, so please continue focusing on the goals or targets in your life as opposed to the obstacles that may stand in all of our ways.

Author: Rick Tobin

Look for Rick’s ebook on Amazon Kindle: The Credit Crisis Deals: Finding America’s Best Real Estate Bargains.

You can visit Rick Tobin at RealLoans.com.