Posted on Thursday, 9th May 2013 by Robert Domini

Economic Developments

In an article by James R. DeLisle, PhD, in the “Appraisal Journal”, Winter 2013, he writes that it’s the same thing all over again, or in the words of Yogi Berra, it’s Déjà vu all over again. We seem to be caught in a holding pattern brought on by extraordinary Fed action. DeLeslie cautioned that the recent euphoria brought about by the surging stock market and commercial/residential real estate might not last. In order to become a sustainable bull market some hard choices will have to be made and implemented. He believes that when the “tide of low-risk capital flows back out as it will inevitably do” the market may be in for a significant correction. He has observed that some players are already cashing out and others are taking on a more defensive position and that an inflection point may be on the horizon. What does all this mean? He really doesn’t explain the details behind his broad warning that there may be storm clouds on the horizon. He may be referring to that day of reckoning when the Fed reverses its position. For sure when that day arrives we will see an immediate reaction in the stock market. The real estate markets will take much longer to respond, of course. The question now is how much longer the Fed can go on printing money. The age-old bugaboo of inflation is certainly tame. Why is that? The entire world appears to be in a bit of a slowdown which is causing commodities to fall in price. Inflation is very subdued despite years of non-stop fiscal and monetary stimulus. Some feel this is a sure-fire formula for economic success. I joked recently with a friend who was teasing me because I have been a doomsayer warning of the next coming of the Weimar Republic. He asked me how that Weimar Republic business is working out for me. I told him he should write a book on economic policy for future generations featuring a new revolutionary formula for long-term economic success, namely to run trillion-dollar deficits and print about a trillion dollars annually. No doubt, the formula is a big winner for the stock market and it certainly doesn’t hurt residential real estate to have $40 billion pumped into mortgages each and every month. I say, “let the good times roll”.

Bill Gross, chief investment officer of Pimco, has doubled his forecast from 1.50% to 3.0% GDP growth for 2013. He went on to say that U.S. GDP is improving because of the housing revival. Lawrence Fink of Black Rock, Inc. also said he’s bullish on the U.S. economy because of the strong banking system, improving housing and large supply of natural gas. He also cited an improving stock market as well as a falling unemployment rate. The unemployment rate fell to 7.6% in March because of a dramatic reduction in the labor participation rate. Nearly 300,000 people left the workforce while only about 90,000 jobs were added. Then in April the figures improved to 7.5% and 165,000 jobs added.

An April 5, 2013, Marcus & Millichap report stated that the most recent job-growth figures indicate that only 95,000 jobs were added in March. That’s down from February’s 268,000 jobs. They laid the blame on the sequester, increased payroll taxes and the Affordable Care Act.

USA Today, May 7, 2013, reported that only four out of 37 economists surveyed felt that the April jobs report was enough to assuage their fears of a slowdown in the U.S. economy in the second and third quarters of this year. The March report has been revised upward to 138,000 jobs. Bank of America Merrill Lynch economist Ethan Harris reportedly believes that the tax increases and the spending cuts are the culprits. Notice how few ever mention the ever-increasing regulation and the new healthcare law having an effect on the economy. Still, most economists feel that the year will finish at about the 2.5% rate of growth with unemployment sinking to 7.3%.


Residential Real Estate

What about housing? When utilizing residential housing as an investment vehicle, we don’t have the luxury of instant selling. Let’s say you are a fool who still owns Florida condos. They appear to have finally bounced off the mushy bottom. Florida had been drowning in foreclosures until very recently. The glut of foreclosure sales is finally coming to an end. In fact, the inventory is finally just about gone and some buyers are finding themselves in that familiar position where delaying a day and can lose the deal. With most boomers now able to sell their residences, the retirement markets are sure to benefit.

There are two sides to the housing coin. Housing prices have risen 8% year over year, but some caution is warranted because the increase in housing prices is being driven by artificially low mortgage rates, not by market fundamentals such as rising real incomes. The fact is that the Federal Government is guaranteeing nearly 90% of all new mortgages. There is even a push for relaxed lending standards. For now, however, with the Federal Reserve pumping $40 billion per month into mortgage-backed securities, the rates will stay low and housing should continue to surge. In fact, most markets are currently reporting a shortage of housing which is driving competition among buyers which is a formula for rapidly rising prices due to the interaction of supply and demand. A surging housing market, while it lasts, bodes well for household wealth formation, consumer confidence and the overall level of economic activity.

According to the Council on Foreign Relations, the U.S. economic recovery officially started in June 2009. According to the report, this economic recovery has been anemic compared to any and all in the post World-War II period. In a WSJ story on April 24, it was reported that the demand for raw materials is declining because of slowing manufacturing activity in China, the U.S. and Germany. Copper, cotton and oil are falling in price. The article says that commodities are a barometer of worldwide economic health. China is leading the way demanding less copper and cotton. They have also been a big consumer of steel, lead and tin. Germany’s manufacturing sector is slowing as well as is the U.S. which is not contracting, but growing at a slower rate. This could partially explain the persistently low level of inflation in the U.S.


Is Miami the Barometer for Florida Condos?

Way back in aught six, while I was sitting on my balcony enjoying the formerly great view of the open bay complete with beautiful mangroves, then lined with construction cranes, I sipped my tea and enjoyed the morning issue of the Miami Herald. The featured story was about the overbuilding in Miami, not just condos, everything. Being the shrewd investor that I am I surmised that the condos on the horizon and the 10,000 overbuilt homes/condos in Miami would and could not affect me because my holdings were at a lower price point than those other units. A rising tide does lift all boats and a receding tide drops them just as fast. We now know that the receding tide did eventually sink all boats.

Here we are again. It’s the Miami Herald, the harbinger of all that is right and just. The housing boom we find ourselves in is the result of government action, make no mistake about it, and as  soon as that government action comes to a close, the bubble is likely to burst. Yet, the Miami Herald is once again trumpeting Florida Condos. They report that 45 new condo towers are in various stages of development. Sunny Isles Beach has 1,200 under construction. Three of the Miami projects are 97% sold out while two haven’t even broken ground yet. Remember the last time we reached this type of hysteria? It was before the crash, but how much before the crash. The peak was hit in 2006, and by 2010, the crash was going full bore. So, it did take a few years. Condos were being sold out of aluminum trailers during the boom times. Entire residential subdivisions were selling out in a day. By the way, last time they were “selling” condos and houses, for the most part, many never closed and “buyers” merely lost their deposits leaving developers holding the bag.

The Herald is now trumpeting the Florida recovery with the same words which were spoken in 2006, except there has been very little new construction compared to 2006. The baby boomers are that much further along. The leading edge is just 67, still in prime Florida real estate buying territory. In addition the boomers haven’t been able to sell their homes these last six or seven years. Few were willing to take the plunge into a Florida property until the old homestead was sold. As an indication, in Perrysburg, Ohio, there have been three mansion-type properties on the Maumee River which have sold in the last few months. The Herald is saying that the current boom could last up to ten years, which seems a bit optimistic.

In Southern Florida the highest highs and the lowest lows are in Miami. Check out the website Also check out The Villages just off I-75 near Ocala, and only about  one hour from Disney. This is a 55 and over community, and currently homes are selling at a rate of 500 per month. In fact, construction on the third downtown area is well underway and listings are lasting only a few days in the more desirable areas. Check out the Lake Sumter area next time you’re driving down I-75. This community is known for its golf carts. Every residence is within a short distance of golf courses, recreation centers and a central downtown area. Gentlemen, start your golf carts.


Don’t Let Politics Influence Your Investment Decisions

I shamelessly borrowed the following line of reasoning from my good friend, Denny Kersten and his two fine young boys who do an investment radio show on Saturday mornings. Let’s say you are a conservative. You probably feel that the sky is falling right now with national debt at $17 trillion and with money printing having gone wild these last five years. You probably feel that all investments right now carry significant risk. If you’re a liberal, you believe we are on the right course and have taken all the right steps these last five years. The Kerstens, however, have injected some common sense into our thought process. The stock market is once again reaching all-time highs and Miami, Florida is experiencing a real surge in residential sales and building not seen since 2006. There was a budget surplus in 1969, the first year of the Nixon Administration. The next time there was a surplus was 1998 through 2001 starting with Clinton and into the Bush Administration. Let’s look at 1969. If you invested in the stock market that year you would have experienced a nearly 20-year period of time when the Dow went no higher than about 1,000 where it started in 1969.

The years following the 1998-2001 Clinton-Bush surpluses were largely flat with a substantial dip in 2003. The market then surged to an all-time record high in 2008 to about 1,400 right before the crash in 2009 when stocks fell to the 650 level. The years preceding the market top in 2008 were deficit years. Thus, if the government is running big deficits, it is generally beneficial to stocks. In the period from 2009 to the present the government has been on an unprecedented deficit spending spree accompanied by the Fed printing trillions of dollars. This has been highly beneficial to stocks which have once again surged past the historic 2008 highs of 1,400 to a new high of 1,500.


And Now for the Good News

It is baffling that interest rates and inflation have remained relatively tame. The Fed has promised to keep rates low until the unemployment the rate dips below 6.5%. Do you really think they will stop printing money as soon as the unemployment rate hits 6.5%? I think not. It’s that inertia thing. The Fed is not likely to turn off the spigot until confronted by incontrovertible evidence that inflation is heating up. There is a lot more riding on this fiscal and monetary expansion, particularly the fiscal one. The national debt is $17 trillion and counting. The annual interest on the debt is about $700 billion. If rates go up one or two  percent, the interest on the national debt will rise substantially. There is also a fear that the economy is addicted to the stimulus. This economy has been under extraordinary stimulus now for five years and still, growth is very modest. Even very small efforts to rein in the deficit have been met with criticism from most economists.

There has been much written about the surge in disability income claims, that is, successful disability income claims. There has also been much written about the deluge of food stamp recipients. It is postulated now that the income is so great from these sources that low-wage workers can no longer afford to work. Numerous business people are complaining that finding good people to take jobs is becoming increasingly more difficult. How is it possible to break that cycle? Clinton/Gingrich did it somehow. When Clinton swung to the right for the ’96’ election he and Gingrich ended welfare as we knew it. Subsequently, to everyone’s amazement, the policy was very successful in substantially trimming the welfare rolls. Imagine that.

James DeLisle believes that the inflation and interest rate outlook will remain subdued into the short and intermediate term. As he says, natural forces will bring them back in line with historical averages. He warns that if that process is abrupt it could create a lot of unexpected waves.


Why is Government Suing S&P, the Only Ratings Agency to Downgrade U.S. Debt?

In a February 5, article, Jason Hamlin wrote that each of the Big Three rating agencies, S&P, Moody’s and Fitch were handing out AAA ratings for MBS and CMBS, all types of mortgage-backed securities in the run-up to the financial collapse. So now, the Justice Department is clamping down on just one of the ratings agencies, S&P. Several articles have been written pointing out that S&P’s ratings were not significantly different from those of the other agencies. Yet, it appears they have been singled out. This question appears not to be addressed by anyone but Mr. Hamlin, to our knowledge. The news media seems to be dancing around the fact that the Justice Department has apparently decided to hammer just one of the three rating agencies, the very one which lowered the U.S. bond rating to AA+ from AAA back in 2011. You don’t think the Administration would clobber S&P just because they lowered the U.S. bond rating, do you? I wouldn’t look for any further lowering of the U.S. bond rating in the near future, let’s put it that way.

By the way, the reason S&P lowered the U.S. bond rating was that they neglected to get spending under control after the last debt-ceiling increase. This author does not know the answer, but Mr. Hamlin does offer a compelling argument. Prior to the downgrading the talk on the street was that Moody’s was expected to downgrade U.S. debt. Is it unusual or unheard-of that the U.S would retaliate against a business for unfriendly action towards the government? It probably isn’t. Politicians play hardball most of the time.


What Were Teddy Roosevelt’s Political Views?

At dinner one evening I blurted out that Teddy Roosevelt was a left-wing president. The lady across the table, who is a Ph.D., told me I was wrong. Of course, the next day I did a little research and found the following.

Teddy Roosevelt ran for a third term in 1912, but was defeated in the primary by Ohioan William Howard Taft who subsequently broke up U.S. Steel with the Sherman Anti Trust Act. Roosevelt  founded the Progressive Party, a third party, and ran against Taft in the general election of 1912. His election platform included the following:  
  • National Health Insurance
  • Social Insurance for the elderly
  • Minimum wage for women
  • An 8-hour work day
  • Worker’s Comp
  • Inheritance tax
  • A Federal Income Tax
His beliefs and positions in the 1912 campaign and during his presidency were that he;

  • Regarded commercialism (e.g. capitalism) as “mean and sordid”.
  • Pushed for government control of industry through antitrust prosecutions and government regulations.
  • Presided over birth of the conservation movement.
  • Was strong on defense, the navy.
  • Tried to find ways to go around Congress.
  • Pushed for increased government regulation of insurance, drugs, child labor, railroad shipping rates.
  • Avoided the Constitution to justify his actions.
Some of his other beliefs were as follows: 
  • He did not believe in American Exceptionalism.
  • He challenged property rights.
  • He believed in redistribution of wealth.
  • He believed that government should bring social justice through redistribution.
  • He believed in referendums to overturn court decisions.
  • He believed in direct democracy, direct vote by the people, rather than through their elected representatives.
Our founders were very much opposed to direct democracy which is a system where majorities force their will on minorities. The danger is that there are no checks and balances as laid out in the U.S. Constitution.
A Message From the Editor

I hope you enjoyed this wide-ranging newsletter. It’s a compilation of recent news stories sprinkled with a few of my candid opinions. I hope I have not offended anyone. This is not intended to be a political newsletter, but remember, economics is political. The intent is to share information and a few opinions on the economy and the real estate market.

Continental Valuations, Inc. is a commercial and right-of-way appraisal firm. We are not in the residential appraisal business as far as doing mortgage work for financial institutions. We do, however, provide residential appraisals for our clients for specific needs such as for estates, divorce or other legal disputes. In addition we do write residential appraisals for our right-of-way projects. Our business is primarily providing commercial appraisals for mortgage financing; however, we routinely provide commercial appraisals for a wide variety of purposes. Continental is also in the right-of-way appraisal business. We do appraisals for the acquisition of right of way. Our V.P., Pam Casper, is a right-of-way appraisal-review specialist. I am very blessed to have Pam and a group of great appraisers and fine human beings. They are all very much appreciated.

In short, we can and do provide real estate appraisals for a wide variety of purposes and uses across a wide spectrum of property types. In our twenty-five years of experience, we have tackled nearly all property types with the exception of a nuclear power plant. Believe it or not, one of our good friends, Larry Golicz, Ph.D, MAI, is currently working on one of those down in Florida. So, if you need your nuclear power plant appraised, give us a call and we’ll bring Larry up to work on it with us.


Best regards,

Continental Valuations, Inc.    Robert D. Domini, MBA, MAI


Certified in OH, MI & FL

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