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Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson,... More
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  • Green Shoots For A Frozen Housing Market

    Almost exactly two years ago, Federal Reserve Chairman Ben Bernanke told “60 Minutes” that he was beginning to see “green shoots” in the economy. Like the first buds after winter, he said, these events and statistics were signs that the economy would soon grow again.

    Now I find myself spying hints of green in the housing market, the first part of the economy to enter the recession’s deep freeze.

    The official reports on housing are still dispiriting. The S&P/Case-Shiller index, which tracks home prices in 20 U.S. cities, fell 2.4 percent over the past year. The index also dropped on a quarter-to-quarter basis from the third quarter of 2010 to the fourth quarter and on a month-to-month basis from November to December. The trend is likely to continue, according to economists surveyed by Bloomberg. On average, they predicted prices will drop almost as much this year as they did last year.

    Foreclosures, too, are expected to continue. In 2010, there were around 1.2 million bank repossessions, up from 900,000 in 2009, according to Rick Sharga, a senior vice president at RealtyTrac, an online marketplace for foreclosure properties. “We expect we will top both of those numbers in 2011,” he told The Wall Street Journal.

    But when I drove into Miami over President’s Day weekend, I saw encouraging signs. The downtown area, which was crushed by the housing crisis, appeared to be flourishing once again. Stores were doing business and there were people on the streets.

    Miami was one of the epicenters of the condo boom. Over 20,000 condos were built in the downtown area alone in the past decade, the Miami Herald reported. I remember driving through the area five years ago and thinking that, with so many construction cranes, it looked like a photo of a Persian Gulf emirate.

    The new construction promised to transform a once blighted neighborhood into a vibrant urban hub. There was already a new sports center, the American Airlines Arena, built in 1998. In 2006, Miami became home to the country’s second-largest performing arts complex, the Adrienne Arsht Center for the Performing Arts. Only New York’s Lincoln Center is larger.

    But just as many of the gleaming new high-rises surrounding those facilities were completed, the economy tanked, and no one moved in. In May 2009, developers had sold only 62 percent of those new condos. However, a new study found that 78 percent of those condos sold by the end of 2010. Even better for the neighborhood, an influx of renters has driven the overall occupancy rate up to a nearly-respectable 85 percent. Downtown is no longer a ghost town.

    Many of those buying Miami condos right now are foreign investors, who are probably encouraged by the area’s newfound liveliness. The new occupants, owners and renters alike, create business for local stores and restaurants and make the area more attractive to additional residents who may soon follow.

    There are promising signs on the other coast as well. Emile Haddad, a former Lennar Corp. executive who is now chief executive of FivePoint Communities Inc., is staking his money on recovery in San Francisco and Los Angeles, aiming to build two large planned communities in each city. While Haddad recognizes that the demand is not yet in place, he said, “I don’t want the party to show up and I’m not dressed. When the market says ‘I’m here,’ we’ll be one of the few that can deliver inventory.”

    Haddad’s developments will be close to the cities, while the worst-hit areas are farther inland, in Riverside and San Bernardino counties, east of Los Angeles, and in the San Joaquin and Sacramento valleys, east of San Francisco. But as is often the case, the economic core has to recover for the fringe areas to have a chance, and that process is now beginning. Once prices return to their old heights in urban centers, people looking for deals will once again begin migrating to the outer areas.

    A similar process is starting to play out in New York City. Prices in Manhattan began to rise last summer, after a sustained slump. The median price of a co-op or condo in Manhattan is now $880,000, 3.5 percent more than in 2009, according to the realty firm Prudential Douglas Elliman. The average time apartments spend on the market has dropped. As in San Francisco and Los Angeles, this rebound in Manhattan will likely drive sales increases in the outer boroughs and suburbs.

    Places like Seattle and Chicago, which saw the housing market slide later, are finding themselves at the later end of the recovery as well. But even in Seattle, which had a dismal fourth quarter, anecdotal evidence of change has gathered since the start of this year. “I think folks are more positive,” one real estate agent said. Granted, many real estate agents would see a buying opportunity even in the midst of a major earthquake, but vibrant regional hubs like Seattle and Chicago will, in fact, turn around sooner than less fortunate places like Cleveland.

    I think the recovery we are starting to see is occurring more in spite of official policies to help housing than because of them. The first-time homebuyer’s credit just shifted the timing of demand, rather than actually creating it. And the strategic adjustment of mortgage terms for those struggling with payments simply kept people in houses they couldn’t afford, preventing those properties from going to people who could afford them. The noise on Capitol Hill about paperwork flaws in foreclosure processes delayed things even further.

    I said, in response to each of those government efforts, that the only way to truly move forward would be to allow the wave of foreclosures to run its course. Now, that is actually happening. In a year or two, the foreclosure rate will drop, and many of the homes now being foreclosed will be in the hands of new owners.

    Healthy housing markets need a strong national economy as their foundation, solid local and regional economies for superstructure, and a desirable local atmosphere for the rest. Not every place that suffered in the housing drought will recover at the same rate, or even recover at all. But, given the proper encouragement, at least some of today’s green shoots will grow.
     

    A Revolutionary Idea: Stasis Is Not Stable
    Why countries like Kuwait, Saudia Arabia and Russia need to worry about Libya.
    By Larry M. Elkin, CPA, CFP® | Posted: 02-24-11 | 10:21 AM | E-mail Article

    Financial markets around the world recoiled this week at the spectacle of Libya’s bloodbath, but it was not out of empathy or compassion.


    We are now seeing what happens when the opposition’s fortitude exceeds that of the regime.

    In Tunisia and Egypt, the autocrats called on a certain level of thuggery to defend their positions. But the real power resided with those countries’ militaries. In both cases, the military essentially refused to join the fight against the citizenry, which was quick to recognize that it could win a war of attrition.

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    Larry M. Elkin, CPA, CFP, is President & Founder of Palisades Hudson Financial Group LLC. His firm strives to provide impartial information and advice that promotes our clients’ financial security, the well-being of their loved ones, the satisfaction of their legal obligations, and the achievement of their philanthropic goals.

    It became an “us-or-them” situation because--as the demonstrators in Cairo’s Tahrir Square quickly realized--going home meant giving the regime a chance to regroup and pick off its opponents one by one. The demonstrators realized that if they did not hang together, they would certainly hang separately.

    Similar dramas seem to be building in Yemen and possibly in Algeria, where repressed populations are steadily increasing their demands for change. We could add Bahrain to the list, but there the royal family has done an about-face and tried to assure demonstrators that they can enter negotiations without fear of reprisals. The regime’s opponents, having been double-crossed just a week ago in a 3 a.m. assault, are trying to decide whether to trust the government again.

    Then there is Libya, where Gadhafi and his sons promised a civil war to defend their positions, and have delivered on that promise. With key eastern cities already in rebel hands, this is a more extreme us-or-them battle than any we have seen recently. Gadhafi promises a scorched-earth policy against his own people. Everyone believes he would have no hesitation about carrying it out.

    The lesson in all these events, which people around the world are observing, is that no regime can make its population live under tyranny; however, it can make a lot of people die under it. Any regime will fall when the people it oppresses decide that they would rather die on their feet than live on their knees.

    There is no stability in tyranny. There is only stasis, and stasis only persists as long as the opposing forces remain in balance.

    Social stability, paradoxically, comes from democracy, which gives people a way to peacefully change a society without tearing it apart. Democracies can be conquered by brute force, but they are never overthrown from within because there is no reason to overthrow them. They change of their own accord.

    The stability of a repressive regime is like the ground above a major geologic fault. It may seem steady for a long time, but eventually the forces beneath become too great and something violently ruptures.

    The markets may be waking up to the fact that repressive governments all have these social fault lines. Libya and its oil are not a major loss. But what of Kuwait, the emirates, and Saudi Arabia itself? What of Iran, whose rulers have launched their own reign of terror to crush opposition that emerged after 2009’s bogus elections? What of Russia, which only pretends to have a veneer of law? What of China, the world’s second largest economic power, whose leaders are trying to keep more than 1 billion people from following events in Africa and the Middle East?

    These regimes have good reason to fear the wave of change now sweeping the African and Arabian deserts. And everyone who has made an investment or built a business on the assumption that such governments can be stable has reason to reconsider. Stasis is only stable until the moment that it isn’t.

    For more articles on financial, business, and other topics, view the Palisades Hudson newsletter, Sentinel, or subscribe to my daily opinion column, Current Commentary.

     

    Mar 08 9:35 AM | Link | Comment!
  • A Revolutionary Idea: Stasis Is Not Stable

    Financial markets around the world recoiled this week at the spectacle of Libya’s bloodbath, but it was not out of empathy or compassion.

    We feel such human emotions as individuals, but they do not apply in a marketplace. A market is where buyers and sellers get together. If the savagery unleashed by Col. Moammar Gadhafi makes you want to sell something, does it simultaneously inspire someone else to buy? Is there anyone out there who wants to take a long position in one aging, embattled, crackpot dictator? I don’t think so.

    For further proof that markets do not care particularly about civic turmoil for its own sake, consider last week’s performance. American stock markets reached post-crash highs and oil prices rose only modestly when Bahrain’s Sunni rulers wielded similar violence, though on a smaller scale, against their protesting majority-Shiite citizens. The obvious difference is that Bahrain is not an oil exporter, while Libya is.

    Global stocks tumbled Monday, when American markets were closed for President’s Day, and continued falling yesterday as the U.S. indexes joined in the swoon. Meanwhile, oil prices climbed levels not seen since mid-2008, and investors piled into currencies perceived as safe havens, including the U.S. dollar and the Swiss franc.

    If this was in response to Libyan unrest itself, it was a pretty dramatic overreaction. Libya accounts for less than 2 percent of global oil production. There is plenty of crude oil and refined product in storage all over the globe, and if Libya’s entire production of 1.5 million barrels per day went offline, Saudi Arabia has enough spare capacity to make up the entire shortfall – twice over.

    By itself, therefore, Libya is not very important, especially in the short term. It is just a North African desert country of only 6 million people, most of whom are quite poor, despite the nation’s oil wealth. That wealth has been hoarded and largely dissipated by Gadhafi, a screwball Army officer who overthrew a constitutional monarch 41 years ago.

    True, Libya has the largest known oil reserves in Africa, and its convenient position directly across the Mediterranean from Europe makes it an extremely attractive development target. It’s irresistible, in fact, to European oil producers like Britain’s BP and Italy’s Eni SpA, which leapt at the chance to do business with the erratic Gadhafi despite his longstanding and well-documented blood lust. Those companies were presumably too busy evacuating their personnel from Libya this week to reflect on their past business judgment.

    I do not believe the financial markets are terribly worried about Libya itself. I think the markets, instead, are reacting to a dawning realization that what was presumed to be “stability,” in important locations from Africa to China is, in fact, something else – “stasis,” or equilibrium, in which equal and opposing forces keep anything from happening. The two are not the same thing.

    In the case of repressive governments, a population’s demands for change can be held in check by threats, intimidation, arrests and violence. But as those demands increase, so must the repression. Survival of the regime – what we have mistakenly presumed was stability – endures as long, but only as long, as the repression can be increased to match the opposing demands. A repressive regime bets that its willingness to use force and coercion exceeds the opposition’s willingness to suffer the same.

    We are now seeing what happens when the opposition’s fortitude exceeds that of the regime.

    In Tunisia and Egypt, the autocrats called on a certain level of thuggery to defend their positions, but the real power resided with those countries’ militaries. In both cases, the military essentially refused to join the fight against the citizenry, which was quick to recognize that it could win a war of attrition. It became an “us-or-them” situation because, as the demonstrators in Cairo’s Tahrir Square quickly realized, going home meant giving the regime a chance to regroup and pick off its opponents one by one. Without citing Benjamin Franklin, the demonstrators heeded his warning that if they did not hang together, they would certainly hang separately.

    Similar dramas seem to be building in Yemen and possibly in Algeria, where repressed populations are steadily increasing their demands for change. We could add Bahrain to the list, but there the royal family has done an about-face and tried to assure demonstrators that they can enter negotiations without fear of reprisals. The regime’s opponents, having been double-crossed just a week ago in a 3 a.m. assault, are trying to decide whether to trust the government again.

    Then there is Libya, where Gadhafi and his sons promised a civil war to defend their positions, and have delivered on that promise. With key eastern cities already in rebel hands, this is a more extreme us-or-them battle than any we have seen recently. Gadhafi promises a scorched-earth policy against his own people. Everyone believes he would have no hesitation about carrying it out.

    The lesson in all these events, which people around the world are observing, is that no regime can make its population live under tyranny, though it can make a lot of people die under it. Any regime will fall when the people it oppresses decide that they would rather die on their feet than live on their knees.

    There is no stability in tyranny. There is only stasis, and stasis only persists as long as the opposing forces remain in balance.

    Social stability, paradoxically, comes from democracy, which gives people a way to peacefully change a society without tearing it apart. Democracies can be conquered by brute force, but they are never overthrown from within, because there is no reason to overthrow them. They change of their own accord.

    The stability of a repressive regime is like the ground above a major geologic fault. It may seem steady for a time, even a long time, but eventually the forces beneath become too great and something violently ruptures.

    The markets may be waking up to the fact that repressive governments all have these social fault lines. Libya and its oil are not a major loss. But what of Kuwait, the emirates, and Saudi Arabia itself? What of Iran, whose rulers have launched their own reign of terror to crush opposition that emerged after 2009’s bogus elections? What of Russia, which only pretends to have a veneer of law? What of China, the world’s second largest economic power, whose leaders are trying to keep more than 1 billion people from following events in Africa and the Middle East?

    These regimes have good reason to fear the wave of change now sweeping the African and Arabian deserts. And everyone who has made an investment or built a business on the assumption that such governments can be stable has reason to reconsider. Stasis is only stable until the moment that it isn’t.

    For more articles on financial, business, and other topics, view the Palisades Hudson newsletter, Sentinel, or subscribe to my daily opinion column, Current Commentary.

    Feb 23 11:16 AM | Link | Comment!
  • Under Housing's Weight, Uncle Sam Finally Shrugs

    Three years after the housing market’s collapse, the federal government finds itself backing nine out of every 10 new residential mortgages, some of which still require buyers to put less than 10 percent down.

    Like Atlas with Earth on his shoulders, Uncle Sam is bearing the weight of nearly the entire housing industry, such as it currently is. If today’s mortgages go bust like their predecessors in recent years, the American taxpayer will have to bear the losses.

    With apologies to devotees of Ayn Rand, it seems to me that Uncle Sam has, at last, shrugged.

    Last week the Obama administration gave Congress its recommendations – or more accurately, some options – to deal with the financial mess at Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that were at the heart of the mortgage crisis that has so far cost $134 billion to mop up. Together with the Federal Housing Administration, the GSEs have squeezed private lenders almost entirely out of the housing market. You may go to a privately owned bank for a loan, but in all probability the loan will either be backed by the FHA or will promptly be bundled with other loans into securities that are guaranteed by the GSEs and sold to investors.

    Treasury Secretary Timothy Geithner presented three options for transitioning to a mortgage market less dependent on the government. They range from getting the government out of the mortgage market almost completely to something much like our current system.

    Preserving the current system, however, will eventually take us back to the same place we began. If the government backs everyone’s mortgages, lenders have little incentive to make loans only to those who can pay them back, and investors have less reason to care.

    House Republicans seemed relieved, or at least hopeful, in the wake of Geithner’s proposal. Rep. Randy Neugebauer, R-Texas, said he hoped the report would make it easier for Democrats “to embrace some of these principles,” that is to say, principles for reducing government presence in the mortgage market. The fact that all three proposals, even the one closest to the system in place, advocate reducing the role of the government signals an understanding that we need the private sector to return to this business.

    Count me in with those who believe the government should not back private, residential mortgages at all – or at least as little as possible. Certain constituencies, like military veterans, seem almost certain to be singled out for special treatment under any alternative.

    If Congress does pursue the option that would make the mortgage market almost entirely private, rates would certainly go up. For borrowers with good credit, I believe we can expect an increase of 1 percentage point or so. This would put the rates in line with current rates for those for “jumbo loans” that are too large for Fannie Mae or Freddie Mac to guarantee. Borrowers with weaker credit can expect to pay more.

    The people who make their livings building and selling homes want the federal taxpayer to keep subsidizing the flow of customer money, of course. They predict a disaster in the housing market if it does not. While I don’t believe the gradual wind-down of federal involvement would severely harm the market, it certainly would have a lot of side effects – nearly all of them good.

    First, Americans would stop buying more house, or houses, than they need. People are most concerned with their monthly mortgage payment, not directly with interest rates, so they will be inclined to take out smaller loans at the new, higher interest rates. While this will help restrain house prices (not a bad thing for buyers in itself), I think the bigger effect will be to steer people, at the margins, toward buying smaller residences, or forgoing a vacation home.

    Many Americans are overhoused, especially as the population ages and family sizes get smaller. A more realistic cost of credit will help correct this.

    Taking the principle further, fewer people will want mortgages at all. This will lead to a more realistic balance between buying and renting. People will be more apt to buy houses for shelter, rather than as investments.

    While it will remain true that renting doesn’t build equity, the upsides of renting will become more apparent when buying is a bit harder. Chief among these is flexibility: If the factory that employs you shuts down, but there’s another job available across the country, it’s much easier to relocate if you do not first need to sell your house.

    Despite warnings from mortgage bankers, it is unlikely that the 30-year fixed rate mortgage will disappear entirely, even in a nearly all-private system. Long term, fixed-rate loans will become rarer and harder to come by – as they should, since they pose the greatest risk to the issuers – but buyers who want them badly enough to brave the higher interest rates will still find them available.

    The last consequence will be less direct, but no less important. Banks and thrift institutions will get back into the business of making and holding mortgages if they don’t have to compete with GSEs that can borrow at the Treasury’s unbeatable rates. To make these mortgages, financial institutions will need to attract deposits by paying savers a reasonable rate for the use of their funds. This is healthy for a nation that presently saves too little and borrows and spends too much.

    Getting private lenders back into the mortgage business, and getting the government out, is an important step to get this country to use its capital more rationally and productively. Besides, with the Treasury’s own debt rising by more than $1 trillion each year, Uncle Sam had better save some debt-carrying capacity for himself. Those shoulders are big and strong, but even Atlas had his limits.

    For more articles on financial, business, and other topics, view the Palisades Hudson newsletter, Sentinel, or subscribe to my daily opinion column, Current Commentary.

    Feb 16 9:29 AM | Link | Comment!
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