september 2009 charleston market report

8/9/2019 September 2009 Charleston Market Report

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www.charlestonmarketreport.com


The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.William Arthur Ward

September 2009 Edition

In This Issue:

eCONomic Decession

US Dollar and Deficit

US Housing Market

Commercial RE

Stock Market Rally


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eCONomic Decession

I am dedicating this months version of the CMR to what I would call an eCONomic Decession. I came up with thword or slang to put into perspective where our economy is at the present time. I would define an eCONomicDecession as the evolution of an economy into a stage somewhere between a severe recession and depression due tpoor government oversight and outright fraud by many players in the public and private sector. The eCONomicDecession could get much worse if our fearless elected leaders in Congress, the President and his Administration, tFederal Reserve and the private sector do not develop a more free market mentality before a genuine economiccollapse does occur. This will be difficult to attain with a president who has socialistic tendencies, a bunch of idiotin Congress and a serial money printer running the Fed.

The question I want all you to think about since the Credit Meltdown in September 2008 is the following:

What has really changed in our financial industry to prevent another bubble from forming?

Except for a few trillion dollars on a bunch of acronyms created by the Fed and Treasury Dept. such as TARP, TALStimulus, etc. to plug some holes in major banking institutions from failing nothing has really changed.

Has our country re-examined economic and financial theory taught in university and graduate schools? Nope.

Has the typical response by the Fed to manipulate interest rates by lowering them to zero helped? Nope.

Have chartered bank institutions across the country received an epiphany and become experts at risk management aimproved banking practices? In most cases.Nope.

Have the toxic financial products, such as Credit default swaps (CDSs) and credit debt obligations (CDOs) that wernever truly regulated by our government and directly responsible for this mess been eliminated or re-engineered?Nope.

Do bankers and other lenders have any perspective of past bubbles such as the Tulip Mania of 1637 or the collapse Long Term Capital Management? Nope.


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Do the banks truly understand how to perform internal stress tests, diversify and manage the portfolio risk of their restate portfolios? Nope.

The root of this eCONomic Decession is real estate that was securitized and recklessly lent out in the form ofresidential and commercial mortgages by many different institutions around the country and the world. At the endthe day credit was being extended without collateral beyond the actual cash reserves of the institution in

question. If the banks and Wall St. firms had just followed this simple rule over the past couple of years then wewould not be in the mess we are today. Unfortunately, these institutions were allowed to lend to individuals and

companies without any money down for residential/commercial properties and land or collateral to back the loans icase of default while the Fed aggressively pushed rates down for years. Why? To help provide the mirage of abooming economy by flooding the market with liquidity?

Irrationality, fear and greed are all behavioral states of the mind that we all fight on a day to day basis and the trickto know when to stop. Easier said than done right? Too many people in our society turn on news and believe thechatter from people like Ben Bernanke, Alan Greenspan, President Obama, Tim Tax Cheat Geithner, Hank PaulsJim Cramer, Lawrence Yun, etc. If individuals and many of the leaders in our government have monkey brains ttake them into the realm of irrational behavior on a daily basis what makes you believe that the financial industry wsuddenly learn its lesson and avoid another bubble down the road? Just remember that the media and so calledexperts chatter are not based on thorough research and is typically noise.

When Bernanke says the recession has ended it does not mean that: The economy has recovered to previous production levels. Jobs have stopped disappearing and hiring will immediately begin. Interest rates will suddenly begin to rise.

Total credit market debt to GDP in the US is a record 373% as of June 30th. In the UK it is 233%. In Japan it is225%. We have become the most profligate borrower of the large countries in the world. We are undisciplined creaddicts!

Private sector and household debt is not the problem. In the last two months the household debt declined by a huge

$37 billion. Non-financial corporate debt is also not the problem. It is barely increasing. The problem simply isgovernment. It is borrowing at all levels and without restraint. From Japan we learned that increasing borrowing ccontinue for a very long time. And that we can get it without much inflation and with persistent very low interestrates. The reason is that borrowing is a way of loading a debt burden on the economy. The larger the debt burden thslower the economy will grow. This is especially true when the borrowing is for consumption purposes. That is thecurrent condition of the United States.

We borrow from ourselves when we have savings. That is the case today as the savings rate has risen due to an afteshock of the financial crisis.

We borrow from others when they are willing to lend to us or when they are motivated by other than economic

returns. The Chinese loan to us because that is the way they can maintain their currency peg. They need to do that iorder to keep their export prices very low. We buy the stuff cheaply and trade our debt to them in return for theircheaply produced goods.

On July 28, 2009 you read where I presented the case for deflation and the many similarities the U.S. faces that aresimilar to what Japan has experienced since the 1990s. Since this date many very well known economists andinvestors have begun to come to the same conclusions. I am not saying they are reading the CMR to come to theseconclusions but they are looking at similar data that I analyze to strategically target investments based on existingconditions. They are just a bit late on their analysis versus the CMR.


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The chart below really says it all when comparing what has happened to the velocity of money during the

Great Depression and the current eCONomic Decession.

Case in point:

1. Pimcos Gross Buys Treasuries Amid Deflation Concern (September 29, 2009)http://www.bloomberg.com/apps/news?pid=20601087&sid=aEHQiqgK1vdQ

Bill Gross, who runs the worlds biggest bond fund at Pacific Investment Management Co., said hes been buyilonger maturity Treasuries in recent weeks as protection against deflation.

There has been significant flattening on the long end of the curve, Gross said in an interview from Newport

Beach, California, with Bloomberg Radio. This reflects the re- emergence of deflationary fears. The U.S. is at

the center of de-levering as opposed to accelerating growth.

2. Stiglitz Deflation Threat Pushes Fed to Stay at Zero (October 2, 2009)http://www.bloomberg.com/apps/news?pid=20601068&sid=ame31IjWda6w

The U.S. faces the possibility of deflation for the first time since the Eisenhower administration, a threat that m

prompt the Federal Reserve to keep interest rates near zero through next year.

3. Deflation Taking Root in Global Economies (October 2, 2009)http://www.theglobeandmail.com/report-on-business/crash-and-recovery/deflation-taking-root-in-global-

economies/article1306056/

We are certainly in a deflationary state, said David Rosenberg, chief economist and strategist with Gluskin

Sheff and Associates in Toronto. Of that, there's no doubt. I think people still have no clue as to just how weakthe economy is, Mr. Rosenberg said.


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David Rosenberg, summed up the differences between recession and depression quite well. Recessions aretypically characterized by inventory cycles 80% of the decline in GDP is typically due to the de-stocking in thmanufacturing sector. Traditional policy stimulus almost always works to absorb the excess by stimulatingdomestic demand.

Depressions often are marked by balance sheet compression and de-leveraging: debt elimination, asset liquidation arising savings rates. When the credit expansion reaches bubble proportions, the distance to the mean is longer anddeeper.

1. A depression was borne out of high levels of private sector debt, the unsustainability of which becameapparent after a financial crisis.

2. The effects of this depression have been lessened by economic stimulus and government support.3. Government intervention led to a reduction in asset price declines, which led to stock market increases, whi

led to asset price stabilization and more stock market increases and eventually to asset price increases. Thishas led to a false sense that green shoots are leading to a sustainable recovery.

4. In reality, the problems of high debt levels in the private sector and an undercapitalized financial system arestill lurking, waiting for the government to withdraw its economic support to become realized

5. Because large scale government deficit spending is politically impossible, expect a second economic dipwithin three to four years at the latest.

De-leveraging of debt is the main culprit behind the nastiness of the Credit Meltdown. The U.S. Government ispulling out every trick in the book to try and reduce the pain from de-leveraging, which includes:

1. Purchasing falling assets from banks via TARP and TALF.2. Eliminating mark to market FASB accounting rules so banks can hide the true nature of how much their

balance sheets have declined to the public.3. Manipulating interest rates by keeping them historically low to prevent more defaults as mortgages reset.

US Dollar and Deficit

First, when about 40% of the worlds wealth collapsed in a few months in the last year, there was every possibilitythat the US was in for deflation. But the US has nearly $11.8 trillion in debt and about $107 trillion in unfunded fut

obligations. When the Federal Reserve Bank of St. Louis published an article in mid 2006 claiming that the US wabankrupt, the total debt at that point was only about $67 trillion. But since then, the total debt has gone up $40 trilli

The US Dollar has gone down 12% in the last six months which is a huge move for a major currency.


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I have been saying that the current credit crisis will eventually become a currency crisis for so long that I can'tremember when I first laid out the case. For months, the warning signs have been apparent in dollar rebalancingpronouncements by central bank leaders, but the effects have been muted, as the dollar decline has been slow enougto avoid panic.

Heres a quote from the story, from theIndependentof Britain

In the most profound financial change in recent Middle East history, Gulf Arabs are planning along with China,Russia, Japan and France to end dollar dealings for oil, moving instead to a basket of currencies including the


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Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan anBrazil to work on the scheme, which will mean that oil, will no longer be priced in dollars.

The plans, confirmed to The Independentby both Gulf Arab and Chinese banking sources in Hong Kong, may helpexplain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nineyears.


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The transitional currency in the move away from dollars, according to Chinese banking sources, may wel

be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia,Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

Bud Conrad from Casey Research writes:

The story in the Independent points to a more serious development, as it revolves around the sellers of oil to the U.S

who are apparently looking to avoid having to accept dollars up front in their transactions. The problem of finding

satisfactory alternative for these sellers of oil is that the obvious alternatives, the euro and the yen, are also flawed

don't see SDRs issued by the IMF coming to the forefront, as there is no ready market for them, and the Chineserenminbi is government controlled and has a link to the dollar. More importantly, the track record of communist

countries on honoring their obligations over time is poor. The article mentions gold, but there isn't enough gold.

Rather than relying on reports of secret meetings, we need to keep an eye out for other evidence confirming that

trading around the dollar system is becoming reality. I dont think well have to look very hard, as I believeconfidence in the dollar will continue to erode. Remember, the dollar is an abstraction representing a debt owed b

bankrupt government. As such, it has an intrinsic value of zero. Once it becomes obvious that the emperor has n

clothes, we could see a serious loss of confidence that feeds back on itself, and the dollar, at least in its current

form, could dry up and blow away.

From theFinancial Times:Central bankers and finance officials across the Asia-Pacific region have signaled their concern about the appreciatof their countries' currencies against the dollar, write FT reporters.

"If the symptoms behind the trend [of won appreciation] do not improve, we will come up with necessary measures

with the government," Ahn Byung-chan, director-general of the Bank of Korea, told state media yesterday. The Sou

Korean won has gained 25 per cent against the dollar since hitting an 11-year low of 1,574 to the greenback inMarch, closing yesterday at 1,174.

As the yen rose above Y90 to the dollar last week, Hirohisa Fujii, Japan's finance minister, suggested Tokyo might against "irregular" currency movements, in comments seen as a change of tack after he had said recent currency

movements were "not abnormal" and that he was opposed to intervention "in principle".

The New Zealand dollar has risen by almost a quarter against the US dollar this year. Bill English, finance ministeryesterday said Wellington had limited tools to do more than "lean" against the rise. He indicated the governmenthoped to bring the kiwi back to 50-55 US cents from 72 cents yesterday.

Taiwan's central bank usually avoids commenting on currency but said last month it was prepared to intervene ifflows of speculative "hot money" made the rate too volatile. Traders say they see signs of attempts by the central bato stop the currency overheating, pointing to swelling foreign reserves and sudden fluctuations in the intraday rate.

In other words, in exactly the same way that the U.S. Treasury and Fed are pursuing domestic priorities by

debasing our currency, other nations are trying to look after their own interests by doing much the same.

But I think the leaders nestled in their leather chairs in capital cities around the world havent yet acknowledged thefact and, instead of redoubling their efforts to open up new markets, are looking to reduce the value of their owncurrencies so as to better compete for U.S. business.

As the citations above point out, this could very well lead to a race to the bottom for the fiat currencies a ra

in which the ultimate winners will actually be gold, silver, and other tangibles. And, just maybe, the Australi

and Canadian dollars, both considered resource currencies.


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While golds sharp rise of the last few days gives me some concern that its moving too fast, I think the run is farfrom over. In fact, I think the best of the show is still ahead. And that goes double for gold stocks, which will beneffrom the leverage they offer to the underlying commodity. To be simplistic, to a company sitting on one millionounces of gold that are already economical to extract, a $100 price increase translates to an additional $100 millionthe bottom line.

As investors, its important to pay attention to the race to the bottom, by watching for continued signs from the U.Sadministration that it is not interested in protecting the dollar, and by watching how other countries respond. Or youcan save yourself the trouble by watching the price of gold.

CMR readers, unfortunately the writing is on the wall. The fiscal deficits are projected to be about 11% of nominaGDP, which is now roughly $14.3 trillion. The Congressional Budget Office currently projects that deficits will stilbe $1 trillion in ten years.

According to the current Office of Management and Budget (OMB) projections, US federal expenditures areprojected to be $3.653 trillion in FY 2009 and $3.766 trillion in FY 2010, with unified deficits of $1.580 trillion an$1.502 trillion, respectively. These projections imply that the US will run deficits equal to 43.3% and 39.9% ofexpenditures in 2009 and 2010, respectively. To put it simply, roughly 40% of what our government is spendin

has to be borrowed.

At some point, the consequences will be significant and put even more pressure on an already fragile economy. Theare two scenarios that could play out.

First, we might see inflation kick in and actual rates rise. Since so much of our national debt is short-term debt, thatmeans yet another rise in the deficit as rates rise. Mortgage rates rise, putting pressure on the housing market. Therewill be even more pressure on commercial mortgages. Consumer debt will be harder to get and cost more. It willmean funding costs for businesses will rise, and that hurts employment. It would be a return to the 1970s of highinterest rates and stagnant growth in a very slow-growth environment.

Second, we could see deflation kick in and, even though rates stay more or less where they are, real (after-deflationrates could rise as they did in the 30s and in Japan. Then the deflation morphs into hyperinflation.

There are no real good scenarios for this economic pickle. It is getting tougher and tougher to write these CMRreports when I know the unfortunate economic truth as to what reality really is in the U.S. and other areas around thworld. Currently, the bond market is telling us that deflation is the problem which I agree with.


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Due to the fact that the US Governments mentality is to spend, spend, spend without making the hard choices toreduce the deficit is cause for alarm and the reason the rest of the world wants to push the sell button on the USDollar. The next leg down in the US economy may be the straw that breaks the camels back.

US Housing Market

Sales of U.S. Existing Homes Unexpectedly Decrease (Update1)

By Bob WillisSept. 24 (Bloomberg) -- Sales of existing U.S. homes unexpectedly fell in August for the first time in four months,signaling the housing recovery will be slow to gain speed.

This comes on top of the news that a record 7.58% of all U.S. homeowners were a minimum of 30 days late on theiAugust payments. The number for sub prime is even worse. Actually, catastrophic, at 41%. That is not a typo, but ia disaster.

According to a story inReutersAugust marked the fourth consecutive monthly increase in delinquencies and the report showed an acceleratingpace. By comparison, 4.89 percent of mortgages were 30 days past due in August 2008, while in August 2007, the

rate was 3.44 percent, Equifax data showed.

The rate of sub prime mortgage delinquencies now tops 41 percent, up from about 39 percent in each of the prior fi

months.

http://www.reuters.com/article/ousivMolt/idUSTRE58K29E20090921


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Existing Home Sales declined 2.7% month over month. They improved 3.4% above the August 2008 levels, as thenational median existing-home price fell to $177,700 in August down 12.5% from year ago levels.

New Home Sales also disappointed coming in at 0.7% gain from the prior month, about half of consensusexpectations. Again, sales disappointments took place despite a record drop in prices. Median new house pricedropped 9.5% in August from July the biggest decrease since records began in 1963. New Home Sales were off3.4% from a year earlier, as prices fell 12% from August 2008.

Beyond the seasonal observations, consider the implications of such weak sales accompanying a record drop inprices. That suggests that 1) demand is not strong; 2) credit for purchases is limited in availability; 3) prices are stiltoo high; 4) all of the above.

So to conclude: Sales have stopped free-falling year over year; The were improving, in part due to foreclosure drivbargains, and in part due to first time tax credits. We now enter the weakest stretch of the year for monthly sales expect them to continue sliding until January.


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Forbes lists eight reasons to "remain worried about housing": The federal tax credit, worth $8,000, is set to expire at the end of November. That will make housing $8,000

more expensive for first-time buyers. The Fed is also ending its $1.45 trillion shopping spree. It has been supporting housing by buying mortgage

backed derivatives. What will happen when it stops?

Mortgage lending standards are tightening up generally. Houses are still not cheap.Forbes cites Shiller's numbers, putting the average house 41% higher than it was

2000. Incomes did not increase during that period; ergo, houses are still too expensive. Damaged psychology. It will take time for potential homeowners to get over the shock of a bear market. The end of summer has arrived. Housing sales always go up in the summer. People relocate in summer, whe

school is out. Then, sales fall with the autumn leaves. There are still huge numbers of houses that will be foreclosed. Forbes says only 12% of option ARMs have

been reset. More foreclosures will increase the supply of desperate sellers and decrease prices. There's a 'shadow inventory' hanging over the housing market; it could be vast. Everyone knew it would be

hard to sell a house in 2009. Many potential sellers held back, waiting for the market to stabilize. As they putheir houses up for sale, that too will hold prices down.

The Housing Market is about to Become Even More Oversupplied

While both the media and stock investors believe that housing has bottomed, they are unaware of the massiv

supply of homes that are already in the foreclosure process that will certainly drive home prices down even

further when they are sold. The shape of the second leg down is almost completely dependent on the level ofgovernment intervention that will take place.

For a number of reasons, banks have not been aggressively taking title to homes and selling them, which has resultein very few distressed sales in comparison to the actual level of distress in the market. This delay in REO sales, alowith historically low mortgage rates and an $8,000 tax credit, has helped to stabilize the housing market - temporar

It is very clear that price stabilization is temporary unless something is done. Here are some facts to help project whousing will be like in 2010: 13.54% of the 44.7 million mortgages tracked by the Mortgage Bankers Association are delinquent. 7.57 million homeowners are delinquent, applying the same percentage to the 11.2 million mortgages not trackeby the MBA (55.9 million total mortgages in the U.S.). That means that 10% ofall homeowners in the country are delinquent. Based on historical trend analysis by Amherst Securities, 6.94 million homes that are already delinquent will beliquidated, which is more than a one year supply of distressed sales poised to hit the market sometime in 2010 and


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20 years and started in 2000) means that current economic conditions and current stock market position could chanto the downside in the next year.


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Disclaimer

The research done to gather the data in The Charleston Market Report involves examining thousands of listings. Wthis much data inaccuracies will occur. Care is taken in gathering and processing the data and information within threport is deemed reliable. IT IS NOT GUARANTEED. The real estate market is cyclical and will have its ups anddowns. Past performance cannot determine future performance. The purpose of the Charleston Market Report is toeducate you on current and consistent market conditions by reporting leading market indicators with the support oftraditional real estate data.

This information is offered with the understanding that the author is not engaged in rendering legal, tax or otherprofessional services. If legal, tax or other expert assistance is required, the services of a competent professional arerecommended. This is a personal newsletter reflecting the opinions of its author. It is not a production of myemployer. Statements on this site do not represent the views or policies of anyone other than myself.

Investing in real estate is not a get-rich-quick scheme nor is there any guarantee you will make a profit. Every efforhas been made to make this report as complete and accurate as possible. However, there may be mistakes. Thereforthis report should be used only as a general guide and not as the ultimate source for making money in real estate.

september 2009 charleston market report

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