Three Strikes… Residential Real Estate is Out

by Addison Wiggin & Ian Mathias

  • Three strikes and residential real estate is out: A troika of ugly numbers, and what they mean going forward

  • Evidence central banks may continue scarfing up gold

  • Why “the worst is not in yet” for the euro… and what to do about it

  • Congress punts on constitutional duty… Middle-class taxpayers beware

  • Readers write: Central bankers and gold, expatriation and taxes


 The U.S. real estate market stepped up to the plate this week… and struck out, again. Completely whiffed on three pitches, in fact.

  Strike one came on Monday… when the Treasury released its latest numbers on the Home Affordable Modification Program. The background: 1.24 million borrowers have enrolled in the program — which was launched with the hope of helping 4 million.

Of those 1.24 million, more than one-third have now failed their “trial modifications.” In fact, more people have blown their trial modifications than have succeeded in converting to a permanent one.

This is because “until recently, loan servicers weren’t required to verify borrowers’ eligibility before starting them on trials,” according to The Wall Street Journal, In other words, when the government launched the program last year, it was all about “juking the stats,” crowing about how many people were being “helped.” Now comes the whirlwind.

And the people who are “success stories,” who have a permanent modification? On average, their monthly debt payments, including mortgage, credit cards, auto loan, etc. are 64% of pretax income. Oy.

  Strike two came yesterday – another one of those “unexpected” numbers that keep whacking the stock market of late. In this case, existing home sales fell 2.2% in May.

Yes, the homebuyer tax credit expired at the end of April, but that simply meant the buyer had to have a home under contract. Presumably, that’s a lot of homes that haven’t gotten to closing yet… and closings are what the National Association of Realtors uses to come up with the numbers. So much for presumption.

Dig deeper into the numbers and the picture is even uglier. For the second month in a row, inventory is actually higher than it was a year ago. Not good when there’s still a historically high 8.3 months of supply on the market.

  Strike three came a half-hour after the opening bell today, with new home sales. They plunged 33% from April to May. In fact, sales were the lowest since record keeping began in 1963.

In fairness, even the “experts” were expecting a big drop here. Unlike existing home sales, new home sales count as soon as a contract is signed. (Is it too much to ask the NAR for a little consistency?) So any glow from the tax credit has already worn off.

Still, the consensus expected a drop of maybe 20%. 33% is a gut punch.

  So where from here? It’s now inescapable: The tax credit had the effect of taking a whole bunch of home sales that were going to take place anyway during 2010 and pulling them into the first four months.

Even mainstream economists polled by the firm MacroMarkets are conceding this. Last month, 40% of them expected home prices to fall this year. Now, it’s 56%.

And whatever recovery they see will be a slow one…

By the end of 2014, they reckon home prices will be back to late-2008 levels. Which, by the way, are also mid-2004 levels.

  For yet another sign of a moribund real estate market, witness this — a rental property raffle for charity. $20 buys you a chance at this…

TV viewers here in Baltimore are being treated this week to commercials for a drawing on this multifamily property in the happenin’ Bolton Hill neighborhood. Three stories, four units, renovated in 2006, assessed at $550,000. “Winner will acquire the building free and clear of mortgages and liens,” declares the raffle’s website, “and he or she will not be required to pay closing costs.”

Exactly who holds the title now and how this person or persons came into possession the website doesn’t say. Presumably, there’s more in the way of disclosure that takes place if you win the auction.

  With the release of the new home sales, U.S. stock indexes that treaded water on the open promptly slipped more than 0.5%. That’s on top of losses of roughly 1.5% yesterday, driven in part by existing home sales.

  Traders, meanwhile, are awaiting one of the regular pronouncements about interest rates from the Fed’s Open Market Committee. That comes around the time this missive hits your inbox. We’ll follow up tomorrow to see if there’s any change from the now customary “exceptionally low for an extended period” language.

  Gold has been beaten down to the $1,225 area this morning, largely following the lead of oil. Crude slipped below $76 on a forecast from the International Energy Agency that points to a price of $86 by 2015. (To learn about a wild card that could blow that forecast to bits, check this out.)

  It’s not just the Saudis whose central bankers are taking a shine to gold. A survey of 80 central banks by UBS reveals one-quarter of them believe gold will become the most important reserve asset over the next 25 years.

As we told you yesterday, the Saudis “restated” their gold reserves this week, more than doubling them. And as we’ve mentioned on several occasions, last year was the first time since 1988 that central banks grew their gold stockpiles.

Of course, this survey also shows about half of the banks polled still believe the dollar will be the most important reserve asset. Asian currencies and the euro pulled up the rear.

  The euro has firmed up slightly this morning to $1.222 as traders await the Fed announcement. But the longer-term outlook at the Richebacher Society remains unchanged.

“We do not believe the worst is in yet,” says a special report prepared by macrostrategist Rob Parenteau and currency specialist Richard Lee, titled 5 Ways to Play the Euro Implosion. “The strings attached to the European Central Bank’s open checkbook require the governments of the troubled nations to take draconian measures to improve their balance sheets. Essentially, they are being forced to increase taxes and cut spending — the so-called austerity measures — to improve their overall debt load.

“On paper, that sounds like a wonderful idea. In practice, it is just going to cause the disaster to widen.”

Rob and Rich see the euro reaching parity with the dollar by summer’s end. To learn about the five ways to successfully position your money to benefit, get a copy of your report here.

  Congress has hit on the perfect way to avoid the problem of a yawning deficit: Hand off the problem to a blue-ribbon panel.


"It isn't possible to debate and pass a realistic, long-term budget,” says House Majority Leader Steny Hoyer, “until we've considered the bipartisan commission's deficit-reduction plan, which is expected in December. I believe that Congress must take up and vote on that plan." Conveniently, after the election.

Congress’ refusal to carry out its constitutional duties is one of a number of odd and ominous doings we’re seeing with the budget this week…

  • Treasury Secretary Geithner estimates that taxpayer losses from TARP will total $105 billion. Of course, at one time, he said it would be a moneymaker for taxpayers

  • White House budget chief Peter Orszag is leaving before the summer’s out. We don’t know if he was ever serious about his stated desire to put Fannie and Freddie’s $6.3 trillion in liabilities on the government’s balance sheet. But with him gone, no one will be left to speak up for this notion of honest accounting

  • Back to Steny Hoyer: He says it may not be possible to extend the Bush-era tax cuts for the middle class, not permanently anyway. They expire at the end of this year.

We warned about this last item in the April issue of Apogee Advisory: “Yes, the president is committed to allowing the cuts to expire for households earning $250,000 a year or more. But they go away for everyone else unless Congress passes a new tax law. The lowest bracket of taxpayers would see its rates go up from 10% to 15% — an effective 50% increase. That’s not gonna happen.

“So yes, there will be income tax legislation this year. But will it only hit households above the magic $250,000 threshold? Or will the scramble for revenue hit other people as well? And how soon?”

Evidently, we won’t know until just weeks or even days before the tax cuts expire. The sound you hear is payroll managers everywhere tearing their hair out.

(By the way, we're extending the beta test of Apogee Advisory for three more issues. We're still welcoming reader feedback as we perfect the product. If you'd like to take part with no obligation, sign up here. (Serious inquiries only, please.)

“All this news about central banks buying gold makes me wonder,” a reader writes. “Where are the days when central banks were falling over each other to announce their sales of gold? And wasn't that the buying opportunity of a lifetime? Then how to interpret their gold buying now? A selling opportunity?

“Perhaps these central banks are just as incompetent as any other big government or corporate entity. They end up selling at the bottom and buying at the top.”

The 5: Good point, but the last sustained buildup of gold by central banks was in the 1960s. They still have a long way to go… which leaves a lot of room for the gold price in dollars to run up.

  “If this is true,” another reader writes about the claim that the United States still holds the biggest gold stash, “would that mean that the Fed and Treasury have the means to eventually back the increase in money supply and T-bonds issued?

“Could they actually have a ruthless strategy behind their front-running foolish spending in which the world goes broke but at the 11th hour the dollar is resurrected as the global reserve currency?

“Once again, the Empire lives.”

The 5: We’re far too cynical to believe anyone at the Treasury is competent enough to devise a plan so forward-looking and actually pull it off, devious as it might be.

 “To correct the reader who claimed that expats renouncing citizenship to avoid taxes are prohibited from doing so,” admonishes a third, “he or she is not up-to-date on the latest law. The government has since realized they cannot reasonably divine a person’s true intentions, and so in 2008 they changed the law so that you are subject to ‘exit’ taxes or penalties only under any of these circumstances (per IRC 877A):

1 – Net Income Tax Test: For the five-year period before expatriation, the individual had an average annual U.S. income tax liability of at least $139,000 in 2008 (this number will be adjusted annually); or

2 – Net Worth Test: The individual’s net worth is at least $2,000,000; or

3 – Certification Test: The individual fails to certify that he or she satisfied all applicable U.S. tax obligations for the five years before expatriation.

“If you meet any of these, then you are subject to a mark-to-market tax on any unrealized capital gains you have on any assets up to the day of expatriation, with roughly the first $600,000 of gains exempted. Otherwise, you can shout from the rooftops that you’re leaving to avoid taxes — the government cares only about the cold, hard numbers now.”

The 5: Thanks for the update. There’s been a raging debate over the benefits and pitfalls of expatriation over the past week in The Daily Reckoning. For your entertainment, we refer you to this compiled essay of reader comments from Joel Bowman and Eric Fry.


Addison Wiggin

The 5 Min. Forecast

P.S. Yesterday, we learned one of Patrick Cox’s biotech picks made a huge breakthrough on an anti-viral drug. Patrick, who’d been anticipating the announcement, says the development is “as significant scientifically as the discovery of vaccines in the 1770s by Edward Jenner.”

We’ve seen several of Patrick’s predictions come to fruition in 2010… several more are still in the early stages, with life-changing profit potential. If you’re not already a reader, his insights and the companies he’s following are really worth the read. Check them out here.


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