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Our January 30, 2006 Newsletter Edition
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IN THE NEWS:
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HOME CONSTRUCTION FALLS IN DECEMBER: Census Bureau Says Residential
Construction Fell Sharply Last Month - By DAN ARNALL, ABC News
.
Jan. 19, 2006 -- The government issued a report this morning that
showed residential construction fell significantly in December. The
Census Bureau's monthly housing-starts report shows that builders broke
ground on new homes at a seasonally adjusted annual rate of 1.933
million units. That's well below the 2.050 million units most
analysts had expected, and is 9 percent lower than the revised November
pace of 2.121 million units. This is the biggest decline in housing
activity in nine months. Building permits -- a good indicator of
future housing activities -- fell by 4.4 percent during December to an
annual pace of 2.068 million permits issued. What does this mean?
Most industry analysts say we're starting to see a national trend to a
cooler housing market.
.
http://www.abcnews.go.com/Business/story?id=1521540
.
EDITORS NOTES: The deflation of the housing bubble? Is this
what George Soros was talking about? Most industry analysts say
we are starting to see a cooler housing market. Are we talking
about a sub zero deep-freeze kind of cool, or are we talking about the
perfect refrigerator temperature of a good white wine kind of cool?
.
.
ADJUSTABLE RATE-LOANS COME HOME TO ROOST - Some squeezed as interest
rises, home values sag, By Kimberly Blanton, Boston Globe - January 11,
2006
.
Squeezed by rising interest rates, homeowners who stretched their
finances to buy properties while the market was hot are scrambling to
pay higher monthly payments on adjustable-rate mortgages that were the
least expensive option at the time they purchased their homes.
The first to experience difficulty are those with no-down-payment
mortgages, a product that was popular among buyers who could not save
enough for a substantial down payment on a high-priced home, mortgage
counselors and brokers said. The no-down-payment loans got them into
the market quickly, before they were locked out by rising prices. But,
as rates increased, these loans, which often carry an adjustable
interest rate, become more expensive. Now, he said, they're
sweating it and not knowing what the future will bring. A lot of
people live paycheck to paycheck, and they're losing a couple hundred
bucks a month due to higher rates, said Edmund Poli of Poli Mortgage
Group in Norwood. More homeowners are coming to his firm for help, but
'sometimes there's not much they can do because they have 100 percent
financing.
.
http://www.boston.com/business/globe/articles/2006/01/11/adjustable
_rate_loans_come_home_to_roost/
.
EDITORS NOTES: We talked about this before so enough said.
However, just for fun, you may want to read the following articles that
appeared previously in 2004 and 2005 that warned about these pending
problems:
.
THE MIRACLE MORTGAGE - HOW DO YOU BUY A HOME IN A BOOM?
The answer may be a new loan that's part blessing, part time bomb.
By Cybele Weisser, MONEY Magazine - May 16, 2005
.
http://money.cnn.com/2005/05/05/real_estate/re2005_mortgage_0506/
.
The standard FHA mortgage requires a down payment equal to only 3
percent of the value of the house, and as noted above, FHA also offers
a no-down payment mortgage under certain conditions to qualified
buyers. It is worth noting that as a consequence of these existing FHA
down payment concessions and less rigorous qualification standards, FHA
suffers from high delinquency and default rates on the home mortgages
it insures. As of the second quarter of 2003, FHA's delinquency rate
was 12.59 percent of loans compared to 3.14 percent for conventional
mortgages.
.
Source: http://www.heritage.org/Research/Budget/wm378.cfm
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The percentage of Americans who own homes rose from 66.2 percent in
2001 to 68.6 percent in late 2003. But the foreclosure rate is rising
much faster than the homeownership rate. The foreclosure rate for home
mortgages has tripled since the early 1980s.
.
http://www.lewrockwell.com/bovard/bovard8.html
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There Goes the Neighborhood: Why home prices are about to plummet--and
take the recovery with them. By Benjamin Wallace-Wells. April 2004
.
http://www.washingtonmonthly.com/features/2004/0404.wallace-wells.html
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IS BEN BERNANKE A CONSERVATIVE? By Hunter Lewis, 1-18-06 Forbes
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On one level, Bernanke sounds reassuring about inflation. He has been
quoted over and over again emphasizing the importance of price
stability. But he has also spoken of making helicopter drops of new
money if necessary to avoid deflation and has generally defined price
stability not as zero inflation but rather as low inflation. In the
same 2002 speech cited above, he said: The U.S. government has a
technology, called a printing press (or, today, its electronic
equivalent), that allows it to produce as many U.S. dollars as it
wishes at essentially no cost...to...generate...inflation". All true no
doubt, but odd coming from a Fed official and not reassuring to
inflation hawks.
.
Bernanke not only defines price stability as low inflation. In
addition, he would like the Fed to inflation target, that is, to set a
desired level of inflation and "print" as many new dollars as necessary
to avoid anything lower. This policy has many admirers, including the
respected bond manager Bill Gross, who thinks that it would keep bond
yields lower than they otherwise would be. Some conservative critics,
however, contend that inflation targeting is illogical.
.
http://www.forbes.com/2006/01/18/bernanke-fed-politics-cx_hl_0118bernanke.html
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EDITORS NOTES: Good old helicopter Ben. He says we should
just run the presses until the ink runs out (or something like
that). Throw the money out of airplanes, and why not? It
worked pretty well for the Weimar Republic Government in Germany during
the first part of the 20th Century, so what the heck. They claim
many Americans are over-weight, so using a wheel barrel to carry all
that paper money to the store would be good exercise - don't you
think? Anyone check the price of gold lately?
.
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TREASURIES MAY FALL AS $100 BILLION OF DEBT OVERWHELMS BUYERS
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Jan. 17 (Bloomberg) -- Treasury yields may rise in coming weeks as the
U.S. government overwhelms investors with $100 billion of debt
sales. The Treasury plans to borrow $171 billion between January
and March to pay for rebuilding after Hurricanes Katrina, Rita and
Wilma, $27 billion more than in last year's first quarter. The
machine has been turned on and we are going to see a lot of paper
hitting the street, said James Collins, an interest- rate strategist in
Chicago at Citigroup Global Markets Inc. That will be an overall
negative for bonds,'' he said in a Jan. 11 interview.
.
http://www.bloomberg.com/apps/news?pid=10000087&sid=azrTz0.O0E44&refer
=top_world_news
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EDITORS NOTES: The machine has been turned on and we are going to
see a lot of paper hitting the street, the man says. An
interesting way to put it as one thinks about the very comments made by
helicopter Ben himself. Hmmm - The machine has been turned
on. Everyone with me now in unison - The machine has been turned
on, the machine has been turned on.
.
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BUFFETT WARNS US TRADE DEFICIT COULD CAUSE POLITICAL TURMOIL
By Scott Sonner - The Associated Press, January 20, 2006
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Why the U.S. trade deficit scares people - The trade deficit grows when
people in foreign nations spend less money to buy goods and services
from the United States than people in the United States spend buying
from foreign nations. As the deficit swells, people in
foreign nations with an excess of U.S. dollars invest them in
dollar-denominated assets, like stocks, U.S. Treasury debt or the U.S.
currency itself. Some economists fear that if those foreign
holders of U.S. assets lose faith, they will dump or reduce their
holdings of U.S. assets in a way that could cause investors to panic,
markets to crash and an economic depression.
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RENO, Nev. -- The U.S. trade deficit is a bigger threat to the domestic
economy than either consumer debt or the federal budget deficit,
billionaire investor Warren Buffett warned this week. Right now,
the rest of the world owns $3 trillion more of us than we own of them,
Buffett told business students and faculty Tuesday at the University of
Nevada, Reno. "In my view, it will create political turmoil at some
point. ... Pretty soon, I think there will be a big adjustment," he
said without elaborating.
.
http://www.journalstar.com/articles/2006/01/19/business/doc43cecc16607
ec500103299.txt
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EDITORS NOTES: OK, so what you are saying Mr. Buffett is that the
US is now a debtor nation (they need to borrow money from everyone else
to pay their bills) AND that the folks loaning the money might now
think that US Treasury Securities are not such a good deal and maybe
STOP loaning money to America? Now, why would foreign investors
ever loose faith in the United States? Could it be that they are
concerned about helicopter Ben and the devaluation of the
currency? Those damn foreigners, and all that we have done for
them. The US has brought them civilization for goodness
sake. We brought them Coca-Cola, McDonalds, no money down
financing, sports utility vehicles, frozen bagels, instant cup-a-soup,
democracy, truth, liberty and the IMF, and this is how they repay
us? They refuse to loan us more money - the nerve of those
ingrates. In any event, Buffett talks about a big
adjustment. I love it when people never say what they mean.
The politicos and folks at the Federal Reserve use words like softness
when discussing economic conditions. For me, softness refers to
pillows and maybe toilet paper. A big adjustment is something
involving a wrench and steel pipe. Why not just come out and say
it. Recession, Depression, Stagflation (inflation coupled with
high unemployment and recession) - which is
it?
.
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STOCKS TUMBLE ON EARNINGS, OIL ABOVE $68 - By Jennifer Coogan
.
Investors are worried about interest rates and inflation and they felt
technology stocks like Google, Apple, Yahoo and others were able to
withstand these kinds of pressure, but now that ability is in doubt,
said Herb Kurlan, president of Vtrader LLC, an online stock, options
and futures trading firm based in San Francisco. Some of this
pressure will be alleviated once the new Fed chairman gets into place
and it may be very likely that one of the first things he does is to
lower interest rates, Kurlan said. As investors sold off
equities, the price of gold hit a fresh 25-year high in the United
States and Europe. The metal is seen as a safe haven amid mounting
international political tension and an alternative to cash since the
U.S. dollar is also losing ground on global risks.
.
http://www.localnewsleader.com/elytimes/stories/news-00128013.html
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EDITORS NOTES: Lets wait for helicopter Ben - he will know what
to do. Cut interest rates, yeah that's the ticket. Wait a
minute. Did we not hear Greenspam tells us we need to NOW raise
interest rates because we got a little of that inflation thing going on
because they artificially kept the interest rates too low before and
were printing money like madmen to starve off recession and deflation
in 2002 - 2003? So, now we are going back to that cutting rates
and printing deal again? Sort of like a dog chasing his tail -
no? It has been noted that Roman Emperors were guilty of clipping
coins (reducing the gold or silver content) and or trying the mine more
gold to shore up the treasury (causing devaluation of the Roman
currency, or inflation which is the same thing). And it was noted
that at one point it took about 37 years for local prices in Rome to
double. It also took Rome about 500 years to completely devalue
the Danarii coins of the empire, to a point whereby they were worth
nothing. It took the US just 100 years to devalue the US Dollar
by 95-percent. And regarding prices - how long does it take in
today's modern and sophisticated world to see prices double? You
see - we are indeed making progress and are much better at managing our
economy than the ancient Romans. Today we do everything faster
and more
grandiose.
.
.
MISERY LOVES COMPANY: The US is not alone in their economic plus
public - private social welfare or pension woes. England and
Western Europe have the disease too (the BBC and other reports out of
the UK below).
.
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RISE IN DOMESTIC SALES BUT ECONOMY STILL WEAK - By Jamie Chisholm, Economics Reporter - January 20 2006
.
Responses on export sales and orders worsened, however, and David
Frost, director-general of the BCC, expressed concern for producers'
prospects. Manufacturing has persistently failed to sustain a recovery
and, in spite of the modest fourth quarter improvement, the sector
faces acute threats, he said. Any UK recovery in 2006 is likely
to be weak and below trend. Without supporting action by the Bank of
England and the chancellor, there is a danger of renewed relapse.
The BCC survey added to the evidence the labour market was weakening.
Official data released on Wednesday showed the rate of unemployment
breaching 5 per cent for the first time in two years, and the BCC
report showed a fall in the balances of employment expectations for
both manufacturers and service companies. Commenting on the
report, Howard Archer, of Global Insight, said it showed the capital
expenditure plans of manufacturers and services companies currently
remain somewhat limited. The deterioration in the labour market
threatens to weigh down on future consumer spending. Overall, the
survey supports the case for a further interest rate cut.
.
EDITORS NOTES: In plain English: Yeah, things are not looking so
good here in merry old England. We need the Central Bank to play
god again with the economy and cut interest rates, so they can inflate
the money supply some more, otherwise we could be in you know what.
.
http://news.ft.com/cms/s/abbe27d2-8959-11da-94a6-0000779e2340.html
.
CRITICAL YEAR AHEAD FOR PENSIONS - By Julian Knight, Jan. 16. 2006
.
It may only be a fortnight old but 2006 is already shaping-up to be
another difficult year for pensions. In recent weeks, major
employers, including the Co-op, Arcadia, Provident Financial and
Rentokil have cut back on their pension provision. Employees in
these firms face a grim start to 2006, either paying much more into the
workplace pension or seeing their final salary pension scheme
mothballed by their employer.
.
http://news.bbc.co.uk/1/hi/business/4585008.stm
.
For many pensioners, the state pension is their only source of income.
Therefore the financial position of millions of Britain's pensioners
relies on the state pension.
.
http://news.bbc.co.uk/1/shared/spl/hi/pop_ups/05/business_pension_report/
html/2.stm
.
In 1980 the link between state pensions and earnings was abolished. As
a result, the value of the basic state pension compared to average
earnings is falling. Are the people who rely on the state pension
condemned to live in relative poverty?
.
http://news.bbc.co.uk/1/shared/spl/hi/pop_ups/05/business_pension_report/
html/3.stm
.
Over the next few decades' global populations will age. The more people
that are drawing a pension, the greater the demand there will be on
government resources - taxpayers' money.
.
http://news.bbc.co.uk/1/shared/spl/hi/pop_ups/05/business_pension_report/
html/1.stm
.
.
AGEING SOCIETIES AND THE LOOMING PENSION CRISIS:
.
Nearly all OECD countries face the need to reform their pensions
system. Some have already taken steps, while others are getting ready
to. Reforms are necessary to ensure the sustainability of pay-as-you-go
schemes. But this is only one part of the equation. Pension reform
needs to go hand in hand with changes in the behavior and attitudes of
all actors involved to promote a longer working life. If nothing
is done quickly to extend working lives, living standards will fall in
the course of the coming decades. We know, because of the ageing of our
populations, that there will be fewer and fewer persons of working age
to support more and more older people. For the OECD as a whole, the
dependence ratio of older people (i.e. those aged 65 and over as a
proportion of those aged 20-64) will rise from the current figure of
22%, to 46% in 2050. In these circumstances, it is essential to have as
many people working as possible - young people, women and especially
older workers.
.
http://www.oecd.org/document/59/0,2340,en_2649_37435_2512699_1_1
_1_37435,00.html
.
EDITORS NOTES: The quote is: If nothing is done quickly to extend
working lives, living standards will fall in the course of the coming
decades. In these circumstances, it is essential to have as many
people working as possible - young people, women and especially older
workers. What does that mean exactly? We should encourage
people to work until they drop dead? Don't let them retire and do
not allow them to take their old age pension? Is that what the
OECD is suggesting for you? Keep them alive, even on respirators,
whatever it takes to keep them at their desks, just make sure whatever
you do - Do NOT allow them to retire.
.
Here is where we start to talk about what I like to call, the revenge
of the Third World. You are going to really love this (or maybe
not), so here we go. When we say OECD, what we are talking about
is the US, Canada, France, Germany - you know, all the so-called
wealthy industrialized nations north of the equator (keep this equator
thing in mind, because it is important) that have government run state
welfare systems that are going broke. I know, I know - some of
the politicians say this all is just much hot air. They say that
the system will not go broke and everyone will get their check
(although incredibly enough the OECD reports suggest perhaps you should
never retire as a cure for the problem). They say we have our
secret weapon - helicopter Ben, who will make sure there is always
enough money by creating it out of thin air. Besides, we are
geniuses, and we will figure something out (Yeah, that is exactly what
I am afraid of).
.
Today, in 2006, about 16-percent of the US population is over the age
of 60. In forty years that number is going to increase up to more
than 26-percent. One of four Americans will become old fogies
tapping into that government social security deal. But wait, it
gets even better (or worse) for Europe and the Asians. The number
of old people (over the age of 60) goes from 25-percent up to
41-percent in Italy, from 10-percent to 31-percent in China AND from
13-percent up to 41-percent in South Korea. By the way, the
Aussies will have it worse than the Yanks in terms of old folks, just
as an FYI (although on a positive note they are the ONLY wealthy
industrialized modern country that has a surplus with China - meaning
they sell them more stuff than they buy, namely iron ore, nickel, etc.).
.
The ONLY place where this trend will be opposite is in Latin
America. In 2005, 11-percent of the population is over the age of
60. By 2050, just 8-percent of the population will be above the
age of sixty. The statistics are probably a bit similar for
Thailand, India, and some other Third World nations I would bet.
What does this all mean?
.
Well, in many of these so-called poorer Third World nations, they have
no expensive social welfare state programs (nor high taxes to pay for
them). They could never afford them before, so they never
bothered. Not only that, they will have even LESS people under
the age of 60 going forward, NOT more. But here is something
else. Noted investment guru Marc Faber predicts a coming bull
market for commodities. Assuming he is correct, who has all the
commodities? The answer is that most of the world's natural
resources (oil, copper, zinc, gold, silver and other minerals) are
located south of the equator, where most of the poor Third World
countries are located (note that we mentioned Australia earlier, which
is certainly not considered to be a poor third world nation, making it
the one notable exception). Now, what happens to commodities like
gold and oil when paper money devalues? You are correct, the
price of the commodities go up as the value of the paper money goes
down. Other things can of course affect commodity prices, such as
scarcity of supply or when demand exceeds supply, but it is also true
that commodities and other kinds of hard assets (we can throw real
estate into the mix too) usually go up in value, when the worth of the
paper money goes down. Why did the US have a housing
bubble? Because everyone all of a sudden was dying to buy a
house, or because gold was recently discovered again in California and
everyone wanted to live there? Like water always seeking the
lowest point in terms of gravity, money too filters down and flows into
different nooks and crannies. It could go into the stock market
(and create a stock market bubble, which it already did before), it
could go into real estate, or it could go into wages and consumer
prices. So what happened? Well, quite a few people were
burned in the last stock market bubble, so there was great hesitation
to send it there again. So, instead it went into the housing
market. Some economists say the next bubble or recipient of
inflation will be consumer prices (as the argument is with stocks and
real estate, been there - done that). We will have to wait and
see. Maybe it will go back into the stock market again? Maybe
that inflated money will go into commodities instead? Who has the
commodities?
.
One way to inflate the money supply is to simply print it and throw it
out of helicopters, but that is not how it is done (and I would bet
that Ben does not even have his pilots license). What the central
bank does instead is to sneak the money in through the back door.
So, they lower interest rates artificially (when these rates have
nothing to do with where the economy is at the moment and therefore
becomes a hidden way to inflate the money supply). Lower rates
usually spur business and people on to borrow. So, where do we
borrow the money from exactly? Well, you go to the local corner
bank and they loan you the dough. Where do they get it?
Aha, they go back and get it from the Central Bank as a loan,
transferred electronically to the banks bank account at the Central
Bank (a book keeping entry really). They do some other things too
to make the whole thing work, like create mortgages and then turn
around and sell them to quasi agencies like Ginnie-Mae, Freddi-Mac and
so on, who in turn sell them to others as well. In addition, the
sale of bonds or securities are another way, the Central Bank creates
more money in the system without actually printing more green paper
money, at least not right away. Without getting too complicated
they create electronic equivalents to the paper money first, and then
the other stuff comes later on. Now you might ask, but in the
case of Treasury Bonds and so on, are they not taking in existing money
when they sell these paper things they created on a printing press (the
Treasury Bonds, Notes and T-Bills)? The answer is yes, BUT where
is the interest coming from? Is the government taking that money
to invest it into something that truly gives a return to cover the
interest, or are they merely printing more new funny money to pay off
the interest? Are they borrowing this money to pay expenses (such
as peoples salaries or to cover social security checks) or are they
building toll bridges and toll roads with it (something that might be a
true investment that pays a dividend)? What happens to you
personally if you kept borrowing more and more money to pay your
monthly bills? You would go broke - right? But, what if you
had a magic printing press in your basement and anytime you needed more
money, you simply flip the switch on the printing press? Remember
the previous comment - the machine has been turned on. Indeed-
listen to it hum.
.
Why do they do this? Because everyone loves a good party and no
one wants to see it end? What happens when you have a really
great party at your house, and everyone is having a great time - and
then all of a sudden, you run out of beer? What do you do?
You make a beer run to the local liquor store - don't you? If it
were 3:00AM it might be a better idea to put on a pot of coffee, get
everyone sobered up, and start sending the guests home. But,
everyone is having such a great time and you are too. You and
none of your guests really want the party to end, not just yet.
One more beer, one more song, you know how it goes. So, you make
a beer run. That is what artificially lowering interest rates by
the Central Bank really is - - - a beer run. You got it? If
you were a responsible host, you really should cut people off from the
alcohol and put on the coffee, but what happens? The people get a
bummed out when you do that, so you keep the party going (and the
politicians usually do not get re-elected if the party ends either, and
they of course want some job security). Some people will make it
home safe, while others will be probably end up too drunk to drive and
result in a car accident, but we do not want to talk about that.
So, who are the party sponsors? The politicians in charge of
course. And who is helicopter Ben? Why, he is the master of
ceremonies, and we like him (the politicos at least do) very much
because he has already promised he will never, never cut off the
alcohol. He promised us that he is going to keep that party
cranking all night long - oh baby. He has not told us about what
he will do about all the people that allow themselves to get really,
really drunk, but that is a theme to be discussed only after the party
ends. Ben thinks the party will never end (he has so much told us
so), so it is a mute point. However, we did have a previous
master of ceremony that did try to caution us to take it easy.
The retiring Alan Greenspam did testify publicly about irrational
exuberance. What he was saying was, I see some folks at the party
are drinking a bit too much. I am not going to shut down the bar,
but I think it to be a good idea that some people voluntarily cut
themselves off - you know? Of course they did not. One more
drink for the road, and then, and then - they had a crash. Not a
car accident exactly, but rather it was the stock market that went into
the ditch. Now it looks like the housing market is heading the
same way, but never mind (we trust they know what is best).
.
To
be fair, it is not just the Americans with this problem. The
British have their own version of helicopter Ben, and let us call him
helicopter Bentley. In the above news article from the London
based Financial Times, the partygoers are yelling up to the MC: Hey
man, send down some more booze, the party looks like it is drying
up. And so, he probably will because everyone truly loves a real
good party, the whole world over - even the
British.
.
Lets talk about the people and personal finance. Poor people do
not have credit cards. In fact they usually cannot get any kind
of credit at all. Even if they could, who in their right mind
wants to pays 28-percent compounded interest? The result is, in
so-called poorer Third World countries, MOST people own their own homes
- outright (no mortgage, no bank loans, no nothing). It might not
be a very fancy home, but it is still theirs. How so, you might
ask? Well, what they do is buy their little building lot for cash
(if they can) or buy in on a 5-year installment deal until such time
they pay off the lot or property in full within 5 years. Next,
they save some money and start to build their house (or their little
casita as they say in the Dominican Republic). When they have
some extra cash, they start with the foundation of the house and do as
much as they can, but often enough they run out of cash. So they
stop and wait until they have some more to keep going. At that
rate, it could take them 10 years to finish, but when they do, they
will have a home free and clear of any bank debts (hopefully).
This is why, when you visit countries like the Dominican Republic, you
see all these unfinished shells up containing nothing more than raw
cinder block. Foreigners that see this think - the economy must
be really terrible here, look at all these ugly unfinished
houses. What they do not see or understand is a group of people
buying a home and managing their own personal finances with cash.
What a novel idea? The foreigners come and say what a bunch of
backwards, poor hayseeds. We in the modern wealthy country
(America) do things the sophisticated and civilized way. We
borrow money from the bank and buy the big expensive house right away -
plus we have helicopter Ben to keep the rates low for us. Of
course the modern sophisticated way means you are in debt up to your
eyeballs for 30-years, and by the time you are done, including the
interest, you have actually paid double or triple for the property over
time. Which is better? Own a home that is fully paid for
with cash over ten years, or pay triple with finance charges over 30
years? Who is the real hayseed or fool?
.
Toward the end of 2005, the US government was shouting their hoorahs
because the final statistics would seem to indicate that about
70-percent of all Americans now own their own home, an all time high -
or do they? Well, of all the single family owner-occupied homes
in the United States, about 70 percent of homes were mortgaged and 30
percent were not. The plot thickens. These new no money
down adjustable rate deals made up at one time (right around 2003 -
2004) 60 percent of all mortgages. That trend has backed off a
bit, and as of January 2006 this type of mortgage makes up about 30
percent (with predictions it will go down to about 25-percent of all
new mortgages). So, what we have is 7 out of 10 Americans who own
their own home (or they think they do, the bank really owns it) and of
those 7 people, roughly 4 to 5 have 30-year conventional fixed rate
mortgages and perhaps 2 to 3 have these new funky no money down
adjustable deals. We see the result from the news articles above
regarding what happens when interest rates creep up, the economy goes
south (sometimes literally, or east towards China as the case may be),
and when people loose their jobs (and their homes) - it is not very
much fun, no sir.
.
In the so-called Dominican Banana Republic, sure it is true that not
everyone has a new 40-inch flat wide screen TV (made in China and
purchased with no money down financing) or the latest Nintendo nor do
they buy a US$7 cup of coffee at Starbucks on their way to work
either. BUT, the vast majority of the population in the so-called
banana republic, do indeed own their own homes - without a bank
mortgage. Roughly 30 percent of Americans do own homes without a
mortgage, or at least this is what the statistics tell us. In the
Dominican Republic, and many countries like it, while it can be
difficult to get accurate or concrete statistics, I am going to say
from what I do know, that the number ranges anywhere from 60 up to 85
percent. The numbers are similar for many, many other so-called
third world nations as well. Poverty has its privileges - it
keeps you sober and out of financial trouble. When you do not get
invited to the party (and you cannot get easy no money down credit),
one positive result is that you cannot drink too much and get a
hangover - can you?
.
Where is all this going overall? It can be difficult to predict
precisely, but if it quacks, has feathers and webbed fit - chances are
it's a duck (of course it might be a platypus also). The
price of oil could go to US$100 per barrel, making that beer run pretty
costly (if you can find any gas to buy). The Chinese, Japanese
and South Koreans could stop loaning money (as the new owners really of
the liquor store, they could refuse to give us more booze). We
might not be able to party any more anyway - bummer. Some of our
neighbors might loose their job, their house and want to move into our
garage. Our fellow citizens are getting up there in age and they
might not want to party any more, but the OECD has a solution - keep
them working. We can install wheelchair ramps in the office
buildings for all those senior citizens - no?
.
Anyway, I told you at the beginning of all this we are going to talk
about the revenge of the third world. Who really has the equity,
the cash, the financial solvency - and who does not? It is hard
to swallow or even believe, I know. Are we saying that that those
hayseed banana farmers actually are financially more solvent in reality
than the people in the modern, educated wealthy industrialized country
because their economy is based on real savings and not artificially
cheap borrowed credit? Maybe. What is the current savings
rate of the average American? Zero - Nada - Zippo -
Nothing. What is the average savings rate of the hayseed rice
farmer in China? The dopey hayseed rice farmer in China saves
about Twenty-Five percent of his income. Granted it's not much
when you consider the poor guy is only making two dollars a day, but he
has savings, he has equity, and chances are he owns his own home.
Ditto for Thailand, The Dominican Republic, Nicaragua, India and most
of the other so-called poor dumb countries in the world.
.
In contrast, the American (and the British are starting to get this
disease too) has a huge brand new house in the suburbs, a new SUV from
Ford, but considering it was all acquired with no money down financing
- he owns nothing and has zero equity (and probably zero savings
too). Granted, it is unfair to paint the entire population with
the same brush, and there are indeed people that have not gotten into
debt, do have cash, do have savings (and maybe own a bit of gold too) -
but these people are in the minority.
.
We have a popular television program called desperate housewives.
How about a real time real life reality show called desperate
governments? What do governments do when they run out of dough
and become desperate? Do they try to confiscate MORE of the
private wealth inside their own country or less? Who are they
going to call when the foreigners cut off the credit and stop buying
the debt? Chances are, they are going to call you.
Roosevelt did it during the Great Depression of the 1930s and got away
with it. He basically confiscated all the private gold from local
citizens. Remember this slogan because you are going to hear it
often in the future: We are all in this together, so you need to be a
good citizen and conform. Sound familiar?
.
But here is something else. Do democracies become more democratic
when severe economic problems crop up - or less? If history is
any guide, the latter part of the answer seems to be correct.
Collectivism, central planning, or socialism (it does not matter what
you call it because it is the same thing) has a tendency to lean
towards totalitarianism because normal rational people would not submit
to such nonsense otherwise. In addition, what happens when the -
you know what - hits the fan, economically speaking? Everyone is
all of a sudden in favor of strong central government to makes things
right - no? Some politician comes along and says -
give me the power to fix this mess, and I will. Give me absolute
authority and I will give you absolute results. People that are
broke and desperate usually will agree to anything - do they not?
.
I wish I could tell you for sure what the future holds, but I
cannot. However, we all can take a very educated guess based on
history, based on past experience and based upon some logical reasoning
in terms of where it is most likely TO go. Where do you want to
be ten, fifteen or twenty years from now? Do you want to be with
Jose, the banana farmer that is not broke and not rioting (he is not
super wealthy, but he is not homeless and totally desperate either) -
OR do you want to be shall we say, someplace less stable? Do you
want to be someplace whereby the government maybe does not let you
leave (or more importantly your money), or do you want to be someplace
that is less restrictive (less restrictive because they do not have to
be)? It is not about the taxes folks. Taxes are just one of
the symptoms. It is about a whole lot more than that. It is
about survival I think. Having some place to call home (if you
need a new home), and some place you can go because you already are a
legal resident or a citizen. Being a citizen of someplace that
because of that fact, you can do something as simple as getting a bank
account open in another country (whereas as otherwise, with the other
passport, you cannot). On that note, an American client of mine
recently asked me - What is the difference between an immigrant and a
refugee? An immigrant is someone who is emotionally and
economically prepared to make a move if he has to, but regardless he is
doing so voluntarily and with some stability and a plan. A
refugee is escaping, probably broke, and flying by the seat of his
pants. Which would you rather be - an immigrant or a refugee?
.
.
READERS WRITE IN:
.
.
Happy New Year John - I'm writing to see if you could inform all your
readers about the Dominican neighborhoods from YOUR perspective.
Often times some of the people who write in forget that the information
given freely is based upon your expertise living in the Dominican
Republic. Please list the neighborhoods that would be ideal to live in
if you are from a lower-to middle class background. I know of a
few neighborhoods that are considered dangerous: 27 de Febrero, Villas
Agricolas, and 24 de Abril. A few that are very good: Gascue,
Zona Colonial, La Universidad, and Piantini - Which are the
neighborhoods that a new American that speaks fluent Spanish shouldn't
be caught in day-or night?
.
EDITORS REPLY: A very interesting and valid question. The
first general comment I can make is that one needs to understand the
old preconceived stereotypes that exist in your home country do not
always apply when looking at neighborhoods or real estate
elsewhere. Which is to say, do not always judge a book by its
cover, or what you think makes a good cover or not. Here is what
I mean by that. You are very correct in that there are some
neighborhoods or areas you would prefer not to live in (and probably
would not want to even visit for that matter). We have the exact
same issue in London, Paris, New York, Los Angeles and the world
over. However, there are neighborhoods or areas that are middle
class sections whereby your neighbors take care of their homes and
their neighborhood. These people might be schoolteachers, bus
drivers, and small business owners - whatever. You might visit
such an area and think - gee, these folks do not have a lot of money or
some of the houses are not as fancy and the same as what exists back
home. Perhaps so, but these folks are not necessarily broke, many
indeed own their own homes outright (no mortgages) AND being less well
off than a foreigner does not mean they are without morals or are not
concerned about keeping their neighborhood safe. The
problem in the US especially is, money and or race always would seem to
be the great qualifier, whereby we make up an opinion of what
constitutes a good neighborhood, or not. This is not so in many,
many other countries. In the Dominican Republic, and especially
among the working class and more middle class people, being a good
neighbor, family and community is VERY important. Which is to
say, it is not about money, it is about - you are my neighbor and I am
yours. I will give you some examples of what goes on in the
working class and lower middle class neighborhoods (the wealthier are
more reserved and perhaps less involved with their neighbors). If
someone passes away on the block, usually everyone chips in and tries
to help out the family one way or another, sometimes financially if
they can but not necessarily. It might be to help out to get set
up for the wake at the house or to help out with cooking. At
Christmas time, when people cook special things in their homes for the
holidays, they often go door to door to share. Which is to say,
Mrs. Sanchez sends her 10-year daughter down to the house of Mrs.
Hernandez with a plate, and so on. This type of community and
voluntary desire to help one another has been lost in Amerika and I
tend to think Socialism has something to do with it.
Collectivism, central planning and or socialism brainwashes us to
believe the government should and will take care of us.
Dominicans know better. They do not have any great government
institution handing out free checks - they have each other. It is
very funny and ironic really. The one thing that socialism is
supposed to do much better than libertarianism or the free market is to
take care of people. The thing often criticized the most about
free markets and liaise faire government is that it is cruel, callous,
and uncaring - yet it motivates people to voluntarily do these things
on their own. Go figure.
.
Anyway, one final point I also want to make about this is, the
permanency of neighborhoods. Some clients often ask me - do the
neighborhoods go bad in the Dominican Republic? First of all,
there is somewhat less social mobility in the Dominican Republic, which
means neighborhoods normally do not change. With the exception of
newer residential projects that have gone up, there is more permanence
in terms of neighborhoods and Dominicans do not move as often as their
American counterparts either, or at least people with their own homes
do not. Heck, it might have taken them ten years to save, sweat
and work to get that house built (and it is theirs, no mortgage).
They are not so ready to simply pack up and often enough they
cannot. Where are they going to go? There is a positive
side to this. People do not simply flip out because a Chinese
family just moved in. People have a long-term vested stake in
their homes and their neighborhoods. They are not buying houses
to speculate or trade up. They are struggling to own their own
house, which is a home, not an investment - without a landlord or
banker on their necks. Because of this, there is more work and
emotion tied into it (and tied into keeping it).
.
Moving right along, the question is where to live or investigate buying
a home? I am going to give you some ads for New Construction or
New Projects right out of the local newspaper with contact information
included. This is for all the folks that say there is not any
affordable housing because the only things they have seen on the
Internet are US$500,000 apartments in some project marketed to
foreigners. However, before I do, in terms of looking for a
decent home in an acceptable neighborhood (in Santo Domingo), you can
look in the areas directly behind Carrefours off of Autopista Duarte,
and in general some of the new residential projects going up north of
there (off Autopista Duarte a bit further up). You can look in
the Zona Oriental: Alma Rosa, Cancino, Coralles, Italia, and generally
speaking some of the new residential sections off of Ave. Espana and
Charles de Gaul. While real estate prices for new apartments in
Naco, Piantini, Evaristo Morales and other such areas are starting to
creep up into the US$150,000 to US$175,000 range - there still are many
other options. However, keep in mind that what I just mentioned
in the pricier areas would be for a roughly 1,700 square foot
3-bedroom, 2 or 3 bath apartment in a building with an elevator, door
man, off the street parking, 24-hour emergency generator for the
building, with maid quarters. The places listed below are going
to be less luxurious, but certainly a clean decent place to live
nonetheless.
.
Here are the advertisements from the week of January 23, 2006.
Keep in mind this is ALL brand new construction, but probably smaller 2
and 3 bedroom lower-end middle class apartments or houses (probably
anywhere from about 1,000 to 1,400 square feet). Also, whoever
answers the phone will probably not speak English, so just a warning:
.
In Alma Rosa, New Construction (ready in March 2006) 2 and 3 bedroom
apartments with maids room (service room), mahogany kitchen cabinets,
gated entrance RD$1,575,000 (about US$46,400)
.
Colinas De Los Rios, New Construction (ready in 12 months) 3-bedroom,
2-bath apartments, maid quarters, gated parking RD$1,850,000 (about
US$54,500)
.
Altos De la Colina, New Construction, 3-bedroom, 2 bath apartments
RD$1,150,000 (about US$33,900)
.
Tierra Llana III (about 5 minutes past Carrefours off Autopista Duarte)
, New Construction, 3-bedroom, 2 bath apartments RD$1,395,000 (about
US$41,000)
.
Contact for above: Guderian Marte Tel. 809-541-2020 or 809-440-0910
Email: mmarte@remax-metroplitana.com
http://www.remax-metropolitana.com.do
.
In Arroyo Hondo, New Apartments, 3-bedroom, 2 bath, service room,
balcony, 2 parking spaces inside gated parking area RD$1,950,000 (about
US$57,400)
Tel. 809-596-3555 or 809-444-7150
.
In Zona Oriental, New Single Family Homes in New Residential Project,
paved streets with services (electricity, telephone, cable) - One and
Two Story 3-bedroom homes with 2-car Garage (different designs and
sizes) From RD$1,400,000 up to RD$2,000,000 (from about US$41,200 to
US$58,900) Telephone 809-596-3555 or 809-596-2000
http://www.arenalinmobiliaria.com.do
.
In Arroyo Hondo, gated residential project with 4 houses, two floors
each with 3 or 4 bedrooms, each bedroom own bathroom, patio, house is
2,400 square feet on 3,000 square foot building lot RD$5.3 Million
(about US$155,000) Tel. 809-563-4941
.
Good luck and happy house hunting.
.
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