Sunday, February 27, 2011


Peter Schiff's "Crash Proof 2.0" is an alarming book - not because its conclusions are shocking, but because they are highly logical.  And they paint a troubling picture about the US economy.

Schiff, who ran unsuccessfully for a US Senate seat in Connecticut last year, argues that current government economic policy punishes savers and encourages debt.  By holding intererst rates down to artificially low levels, Schiff argues that the US is doing whatever it takes to keep Americans spending at a time when they should be pulling back and retrenching.

With over $2 trillion of stimulus spending since the economy soured in 2008, Schiff believes that rapid and uncontrollable inflation is a very real possibility, and that investments in precious metals like gold and silver will be a better store of value that the US dollar, which is being deflated through mass circulation.

Schiff also looks at the historical path of the US dollar, from the famous "Bretton Woods" agreement that established the dollar as the world's currency after World War II to Kennedy's incorporation of Keynesian economic theory (expanding the money supply) in the 1960s to Nixon's decision to take the US off the gold standard in 1971 to deal with the country's rising debt problems.

Today, in Schiff's view, the US needs to turn its attention away from spending and back toward increasing our capacity for the production of goods.  An overleveraged credit bubble has created artificial demand by allowing people to purchase and acquire goods without first creating or saving wealth.  We are entering an era of "forced austerity" where we will need to rebalance our capacity to produce with our propensity to consume.

One interesting concept in Schiff's book... the author's recommendation that current homeowners pull as much money out of their homes as possible by taking out a 30-year fixed rate loan at today's historic low interest rates.  Future dollars will be cheaper to repay than today's dollars, as inflation devalues the currency and prices rise.  Schiff argues for investing some of those funds in overseas economies that will benefit from a US recession as global markets develop to replace the demand artificially created through the US credit bubble era.

While extreme in places, Schiff's worldview overall is worthy of consideration.  If dollars are going to be devalued going forward, fixed return investments will not be a good vehicle for funding retirement.  And if your dollars today will be worth more than dollars ten years from now, there are reasons to consider leveraging yourself into today's low fixed interest payments.  

If an investor can purchase a rental property which cash flows today, with a low fixed rate payment, how much more powerfully will that investment cash flow ten years from now when rents have doubled but payments remain the same?

Peter Schiff's Crash Proof 2.0 serves as a valuable reminder that we are all responsible for our own economic well being.  To have a better portfolio in the future, we need to make better decisions today.  And understanding the trends and policies that will impact our wealth portfolio ten years from now is an essential part of planning for the future. 

Tuesday, February 15, 2011


The Denver housing market saw some sharp and abrupt changes during January, and these shifts bode well for most buyers and sellers going into the spring market.

At every price point, we saw substantial and dramatic drops in the absorption rate, which is the hypothetical calculation which projects how long it would take to sell all homes on the market at the current pace of sales.

December's overall absorption rate, which I pegged at 11.20 months, was the worst reading I have seen since I began tracking these numbers in the Denver market in 2005.  The previous high mark was 10.45 months in September of last year, when the market was still recalibrating and going through a severe post tax-credit hangover.

Real estate economists will tell you that a six month inventory represents a balanced market.

Now the good news:  in January, the overall absorption rate for the seven-county metro Denver area dropped all the way to 7.19 months, a four month reduction of inventory in a single 30 day cycle.  Despite the fact the December market is always slow, that bounceback in January is neither small nor insignificant, because it shows we had buyers entering the market in fairly large numbers compared to the number of homes for sale.

Additionally, while the number of homes for sale in January of 2010 increased by about 1,000 from December of 2009, last month we saw almost 400 fewer homes for sale than we had in December.   

One factor driving buyers off the fence is the rapidly rising interest rate environment we have seen since the first of the year.  The average interest rate on a 30-year fixed payment mortgage has increased by nearly a full percent in the last month, now pushing 5.25%.  After months and months of predicting a signficant jump in rates, improvement in the overall economy is turning those forecasts into reality, and buyers are scrambling so as to not be left behind.

The most improved segment of the market?  It's the $250-400k range, traditionally the primary move-up market.  The inventory of homes here fell from 11.83 months to 7.11 months, and there are just 4.43 homes for sale in this price range to each one under contract.  In January of 2010, by comparison, the absorption rate for homes in this price range was 9.98 months and there were 5.16 homes on the market to each one under contract.  (And that was with two highly attractive tax credits in play)

So what does it mean?  We're still living in a very segmented housing market, with very different realities for folks buying a first home compared to those trying to sell a luxury estate.  The entry level of the market (below $250k) remains balanced and competitive; the move up market ($250-400k) is improving; the upscale market ($400-600k) is stagnating; the high end ($600k-$1M) is losing value; and no one can say where the bottom is for the luxury market ($1M and up), where there is currently 35 months of inventory and there are 16 homes on the market for each one under contract.

With 85% of the sales in our market taking place at $400k and below, for most buyers and sellers the market is looking more stable than it has in three or four years.  I'm not afraid of this sector of the market, and with rates still attractive and competitively priced homes, there is good value to be found here.

From $400-600k it's dicey, and I think most homes in this price range are probably just treading water or gradually drifting downward in value.  Until our economy starts producing jobs and growing again, there just aren't enough confident buyers to offset the number of people looking to get out from under pricier homes.

Above that, it's flat out risky, and I don't see improvement in the luxury market any time soon, despite the cheerleading you hear from certain members of the real estate community and brokerages around town.

Colorado has always been a seasonal market, and spring is historically the busiest time of the year.  Last year the inventory of homes for sale increased from 17,000 in January to 23,000 in July, and we'll see another surge of inventory here shortly. 

The way the numbers are looking to start the year, however, it might be a better idea for sellers to list early than to wait for the traditional spring surge, because there are buyers in the market right now.

Sunday, February 13, 2011


Have you ever signed a contract without reading it?

For 99% of people (including anyone who has ever acquired a cell phone or visited a doctor’s office), the answer is probably yes.

I’ve done a couple of deals lately involving builders, and if there was ever a contract you should read before signing, it’s a builder contract.

In Colorado, the standard real estate commission purchase contract is 14 pages. The last builder contract I looked at was 58 pages, plus addendums.

What on earth do they write into 58 pages of legalese?

Here’s some of it:

The seller makes no warranties about soil condition, and your acceptance of the soils report is your acceptance of the risks associated with shifting soils

• The seller makes no warranties regarding the presence of mold or radon

• The seller makes no warranties about future development (or lack thereof) of additional phases of the subdivision

• Seller makes no warranties regarding completion of amenities, including parks, clubhouses, pools or other common areas

• During construction, the seller reserves the right to change the home’s elevation or modify the position of the home as it rests on the lot

• The buyer may not have the home professionally inspected until it is “substantially complete” (no “work-in-progress” oversight by licensed inspectors hired by the buyer)

• If the buyer (or the buyer’s lender) causes closing to be delayed beyond the agreed upon closing date (unilaterally enforced upon buyer only), the buyer agrees to pay a penalty of interest on the full purchase price at 18% per annum for each day of delay

• The seller has a “targeted” (but unenforceable) closing date – per the contract the seller has 24 months to finish the home, no matter what they tell you

Additionally, in a clause that is utterly absurd in today’s lending environment, the seller reserves the right to cancel the deal (and keep the buyer’s earnest money) if the buyer cannot furnish a written loan commitment (with a completed appraisal as the only outstanding condition) within 30 days of acceptance.

So as you can see, there are some compelling reasons to read the contract, understand it, and negotiate on some of these points.

To blindly sign a builder’s contract is to waive 95% of your rights as a buyer, yet people do it every day.

One last tip for anyone looking at new construction… if you do pursue new construction, make sure a title company (and not the builder) holds your earnest money. With so many builders declaring bankruptcy, you don't want your earnest money deposit to be tied up in bankruptcy court.  (But make sure your title company is solvent as well!)

New construction is most definitely a retail purchase in a value driven market, so buyers need to be careful.  Read the contract.  Write down your questions.  And don't sign on the dotted line until you've reached a comfort level with builder and the builder's product. 

Talk to other owners.  Ask for bank references.  Do your homework.  Now, more than ever, it's up to buyers to get educated and choose wisely.

Thursday, February 10, 2011


Home sales numbers being reported by the National Association of Realtors are being disputed by First American CoreLogic, a data aggregator for the title insurance industry.

At issue:  NAR reported that real estate sales in 2010 fell about 5%, to 4.9 million, while CoreLogic contends that there were only about 3.6 million completed sales last year.

The dispute is relevant because having accurate information about the current pace of sales is critical when determining how much excess inventory exists in the US housing market.  It also indicates how long it will take for demand to catch up with supply, so a 30% overstatement (as CoreLogic contends) means that prices may be slower to recover and that the current national downtown may last even longer than has been forecast.

Based on CoreLogic's numbers, the nation's overall inventory of unsold houses stands at 16 months, while NAR reports an overall inventory of about 9.5 months.  Here in Denver, our inventory of unsold homes is just over seven months.

CoreLogic argues that NAR's methodology for reporting home sales has not been updated since 2004, and with many MLS systems consolidating and a much smaller percentage of For Sale By Owner transactions, NAR's calculation formulas are out of date.  In Colorado, for example, many of our MLS systems began sharing data in 2009, meaning that the same home sold in Denver could be reported as a sale in the Denver MLS, the Northern Colorado MLS, and the Pikes Peak (Colorado Springs) MLS, which could be interpreted as three sales when only one actually occured.  

NAR is defending its numbers and its methodology, but it will be interesting to see where this goes.  The truth is that what matters most is what happens locally, and our market continues to show more strength than is seen in national averages.  But a slower real estate market does impact the overall economy, and if there are distortions in the numbers being reported by NAR, they need to be corrected.