“Most Americans still have yet to stick a single financial toe across the border,” I explained, “but more and more are considering it…Because internationalizing your financial life means dealing with the unfamiliar, the project can seem more complex than it really is, so it’s best to start with the simplest measures, even if by themselves they don’t give you all the safety you’re looking for. Even from a simple beginning, what you learn with each step will make the next step easier to plan. Start with the first rung on the ladder of internationalization. Then climb, at your own speed, to reach the right level of protection.”

Yesterday I described the first three rungs of this ladder. Today, I present the rest…

Rung 4: A Swiss Annuity

A conventional annuity contract is a device for accumulating investment returns and eventually converting the value into a lifetime income. The investment return on an annuity from a US insurance company is tax deferred until it is paid out to you. If you buy an annuity from a foreign company, tax deferral is available only if the annuity’s value is tied to the performance of a pool of investments (a variable annuity).

Swiss annuities have long held a special place in personal financial planning. Such an annuity is denominated in Swiss francs, i.e., it’s francs, not dollars, that are owed to you. The Swiss insurance industry has a perfect record; policyholders have never been hurt by a default. And a Swiss annuity comes with an element of protection from would-be lawsuit creditors.

The Swiss franc is, like every other modern-day currency, just a piece of paper. It’s not redeemable for anything, not even a piece of chocolate. But the Swiss National Bank has a remarkable record of restraint in issuing new francs, which means that the franc’s prospects for holding its value have long been rated better than for any other currency.

I believe that is still the case, despite the Swiss National Bank’s current policy of suppressing any further increase in the price of the franc. In September, in order to save export industries from being crushed by the franc’s rapid appreciation against other currencies, the Swiss National Bank announced that it would purchase euros without limit to enforce a minimum exchange rate of 1.2 francs per euro — which implies printing enough francs to pay for those euros. By itself, it is an inflationary move, but it’s not a suicide pact with the European Central Bank (the issuing authority for euros). If the ECB turns to a policy of rapid inflation, I would expect the Swiss National Bank at some point to decouple the franc from the euro and let the franc’s price rise. So owning some Swiss francs, whether directly or through an annuity, is still a good step toward internationalizing your financial life.

Under Swiss law, an annuity is protected from the owner’s creditors if the beneficiaries consist of family members or if the owner has made a beneficiary designation that is irrevocable. For an owner in the US, that protection is not an impenetrable barrier to the winner of a lawsuit, but it is a barrier, and it makes the annuity a less-than-ideal prize for an attacker.

Earnings that are accumulating in a Swiss annuity are not eligible for tax deferral for a US taxpayer. The advantages are currency protection, the reliability of Swiss insurance companies and a measure of asset protection.

Rung 5: Foreign Real Estate

Owning real estate in another country gives you a suite of protections that distinguishes it from other steps toward internationalization.

First, the property’s value will depend on economic conditions in the country you’ve chosen, not on what happens in the US. If the economy of the foreign country grows and prospers, there is likely to be a spillover effect on the market value of your house, apartment, farm or patch of land — regardless of what is going on in the US.

Second, a foreign real estate investment would be hard to digest for any future capital controls imposed by the US. New rules could compel you to repatriate the cash you have in a foreign bank; rules forcing you to liquidate your foreign real estate and bring the money home would be another matter. Selling real estate isn’t quick or easy. How does the government compel an unwilling citizen to do what an eager seller often finds difficult to accomplish?

Third, as a potential prize for a lawsuit attacker, foreign real estate is a stinker. Even if he wins a judgment against you, foreclosing on your foreign property would be difficult to impossible, since it would require the cooperation of the courts in the foreign country, about whose rules and procedures the attacker’s attorney probably knows nothing. But he does know that even if he persuades a court in the US to order you to sell the property, the inherent illiquidity of real estate would give you plenty of opportunities for foot-dragging.

Where to buy? The whole world is open to you… which can be a problem. So many possibilities and no obvious place to start. One approach is to think about where you’ve been that you’d like to visit again or about some place you’ve long wanted to see. Plan to spend a few weeks there. Minimize your hotel hours, to maximize your exposure to the rest of the locale. Try to meet Americans, perhaps expatriates, who know their way around the place and who can point you toward a real estate broker who won’t try to treat you as an out-of-town sucker.

Buying foreign real estate isn’t for everyone. It requires a big investment in time and effort, but it could repay you with an asset that is low on the list of things anyone might try to take from you.

Rung 6: A Foreign LLC for Investments

A limited liability company organized under the laws of a foreign country is easy to set up and not too expensive. To bring the company into existence, you (or a service you hire) would file a simple form with a government office in the country you’ve chosen and pay a small fee. Then you as the LLC’s Manager and you as the LLC’s owner would enter into an agreement (the “operating agreement”) that would be the company’s governing instrument.

As the LLC’s Manager, you would open a non-US bank account or brokerage account in the name of the LLC and transfer your personal cash and investments to that account. Again as Manager, you would make all the investment decisions.

For a US person, a foreign LLC can be a powerful door-opener. It is welcome at many banks and brokerage firms where you personally would be turned away. This enables you to keep a wider range of assets outside the US, which puts more wealth beyond the reach of any arbitrary bureaucratic action. It also gives you investment choices that aren’t available at home.

Access to foreign investments and overseas financial services is reason enough to consider using a foreign limited liability company. But it can do much more for you, although at the cost of some complexity.

Notice the fundamental difference between a foreign LLC and what is going on at the first four rungs of the ladder of internationalization. With the LLC, you no longer personally own the assets you are trying to protect; the company owns them. This makes the LLC a powerful device for reducing your family’s expose to gift and estate taxes. And with the right provisions in the operating agreement, it can provide strong protection against loss to any malicious lawsuit.

If you are the sole owner of a foreign LLC intended for holding investments, you can and almost certainly should file an election for the LLC to be treated as a disregarded entity (indistinguishable from you for income tax purposes). If your spouse or anyone else is going to share in ownership of the LLC, the company can and should elect to be treated as a partnership for income tax purposes.

Rung 7: A Foreign LLC for Business

A business that operates outside the US does even more than a portfolio of foreign investments to give you the benefits of internationalization.

By its nature, a foreign business lives in a different environment than a business in the US. Economic troubles at home might not touch it. If it’s a business that depends on your personal efforts, it’s even less attractive as a lawsuit prize than foreign real estate. Being foreign, it would be outside the range of capital controls in the US. And many of the financial institutions that might turn away an investment-owning LLC because it is owned by an American will welcome an LLC that makes or sells goods or services.

If you already have a business in the US that has foreign customers or foreign suppliers, you may be able to relocate the business’s non-US activities to a foreign LLC. Internet-based businesses are especially amenable to internationalization.

Locating your business in a low-tax or no-tax jurisdiction, if it is practical to do so, can reduce your overall tax burden. In many cases, a foreign LLC that operates a business should elect to be treated as a foreign corporation for US income tax purposes. That can allow the business to reinvest its earnings while it pays little in current taxes and you personally pay nothing.

Rung 8: An International Trust That You Establish

Establishing a trust outside the US is the strongest internationalization step you can take for yourself and your family. Doing so costs more than any other measure, but the costs needn’t be prohibitive if your goal is to move $500,000 or more into the safest structure possible. What you achieve is a very high level of protection from aggressive lawsuits, from potential capital controls and from the possibility of a gold seizure. The trust also puts your wealth in a far better environment for income tax planning and for estate planning.

To serve the purposes of protection and tax savings, an international trust is irrevocable (you can’t simply call the institution you’ve chosen as trustee and say you’ve changed your mind) and discretionary (meaning that the trustee has a responsibility to decide when to send a check to you or to any of the other beneficiaries you’ve included). Putting assets under the control of a trust company under such an arrangement is a big step. You’re not going to do it unless you’ve done the homework needed to understand how and why you can count on the trustee to handle the assets in the way you intend.

Getting the protection and tax savings of an international trust doesn’t require you to give up management control of the assets. The trust can be limited to owning just one thing — an LLC that you manage. The LLC owns all the investments, under your supervision as LLC Manager.

If you establish an international trust, it will be tied to you for income tax purposes. But at the end of your lifetime, it will completely disconnect from the US tax system. At that point, for the benefit of your survivors, it becomes…

Rung 9: An International Trust Someone Else Established

Being a beneficiary of an international trust established by someone other than a living US person is as good as it gets. It’s not linked to you by any transfers you’ve made to it, and you don’t have a determinable percentage interest in it (since it’s a discretionary trust). So until you actually receive a distribution, there is nothing for you to report, nothing for you to pay tax on and nothing a potential lawsuit creditor can hope to take from you. And, having no living connection to the US, the trust is as far beyond the orbit of any conceivable US gold seizure or currency controls as the former planet Pluto.

One Toe over the Line

It’s a long way from walking into the local coin shop and buying a few one-tenth-ounce gold Eagles to setting up a trust in a foreign country. But the distance isn’t nearly as great as you might imagine, and it will get shorter both in fact and in apprehension with each step you take.

As you move up the ladder, you’ll learn about the reporting requirements for US taxpayers. Rung 1 (gold coins in your pocket) entails no reporting, nor does Rung 8 until you actually receive a distribution. Rung 5 (foreign real estate) also is free of reporting requirements, at least for now. But under rules in effect now or soon to come, everything else covered in this article entails filing a form with the US government. The most reliable way to make sure that you stay within the rules, so that internationalization adds to your safety and not to your problems, is to let your accountant know what you are doing. Keep him informed, so that he can see to it that all the reporting requirements are satisfied.

Regards,

Terry Coxen,
for The Daily Reckoning

Protecting Your Assets from an Out-of-Control Government, Part II originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

The basic idea is that local intelligence has a remarkable tendency to collect in little pools in hotel bars where travelers and locals mix. You can learn a lot on a bar stool talking to a local or even chatting with another traveler just blowing through who you might not get otherwise.

(The title, by the way, comes from a line by H.R. Knickerbocker, a renowned Hearst correspondent from the 1930s, who wrote: “Whenever you find hundreds of thousands of sane people trying to get out of a place and a little bunch of madmen struggling to get in, you know the latter are newspapermen.” I think this applies equally well to those hard-boiled — and successful — investors who love and seek out lonely or forlorn markets.)

I’d amend Rosenblum’s advice to include the airport lounge bar. I was sitting in one in São Paulo, waiting for my long overnight flight back to New York. It was crowded, as everything in São Paulo seems to be. I ordered another Caipirinha, and this Brazilian guy sat on the one empty stool next to me.

We got to talking, and eventually it came out that I was an investor hunting around for ideas in South America.

“You should invest in real estate,” he told me.

“In Brazil?” I said.

“[Expletive] no!” he said. “In the US. Brazil is expensive. Everything is expensive in Brazil.”

I told him he might be the first Brazilian I met who wasn’t gung-ho about putting money in Brazil.

“The problem with Brazil is that it is good, but then it goes very bad. It has always been this way. When it is good, you put your money somewhere else before it goes bad again. Now it is good,” he said. “The problem with Brazil is the Brazilians,” he added with a chuckle.

“I’ve heard that joke before, but it was about Argentina and the Argentines.”

He laughed. “Well, for them, it is true!”

He told me he was with a group buying apartments in New York. They are good buys, he says. He gave me some figures about what his group owns, but since I had a head full of Caipirinhas and it was nearly 11:00 at night, I had no desire to pull out pen and paper and start taking notes. We talked for a while longer, and then our flight began boarding. We exchanged cards and wished each other well.

Of course, now I can’t find his card. But it doesn’t matter. The story highlights an interesting point: For overseas buyers, US real estate is cheap. This influx of foreign capital helps boost the prices of US real estate, providing almost a floor on valuations.

Recently, I chatted with the co-manager of a Florida real estate fund. He made the same point. There’s been a flood of South American investors looking for second homes and investor properties. In some markets, this is more pronounced than others, of course. The Brazilians, for instance, aren’t buying property in Detroit. But in Miami, yes. I remember reading reports last year about how more than half of all condo sales were to foreign buyers. And for newly built condos, that figure jumped to 90%.

I could be wrong about this, but my gut tells me most Americans still think US property is headed lower. Or at a minimum, they think it is dead money. Investors have a tendency to look behind them. They tend to shun what’s done poorly in the recent past.

There have been some surveys with results in this direction. This from the Real Estate Economy Watch reporting on a survey of US homeowners: “The five-year-long real estate depression has taken such a toll on homeowners that they fear falling values four times more than fires, and they are twice as likely to monitor local prices than their own cholesterol levels.”

Yet even in commercial property, you can get better deals in the US than in comparable markets abroad. In New York, you can get yields on commercial property twice what you could get on comparable property in London (non-distressed). As a result, the money is starting to flow back to the US. This from the Wall Street Journal:

European investors bought $1.6 billion worth of real estate in the US in 2011, more than double the $700 million they invested in 2010, according to data from Jones Lang LaSalle. While the figure is still far below the $8.4 billion bought in 2007, it shows activity is picking up.

It’s an interesting dynamic that sometimes gets overlooked. It also seems to put a floor on high-quality US real estate in big cities where such foreign money might look to park some cash — New York City, Miami, Chicago, Los Angeles and the like.

There is still a lot to do in cleaning up the wreck of the epic bubble. According to the real estate firm HFF, banks have $3-plus trillion of commercial real estate debt on their books:

Banks have approximately $2 trillion of core commercial real estate loans on their books: CMBS [collateralized mortgage-backed securities] account for $1 trillion, and life companies are approximately $300 billion of direct loans maturing throughout the coming decade.

This mountain of maturing property loans will require a lot of refinancing. Given the huge bubble that created this debt, much of this loan pool will also require additional equity. In other words, borrowers are going to have to come up with more money to roll over or refinance the debt. This is the opportunity for investors — Brazilian or otherwise.

Because of those maturing loan pressures, pricing for new investors who want to put money in is not bad. Nobody is stealing properties these days, at least not many of them. There is a lot of competition hunting around US real estate right now. But good values are not hard to find, depending on the market and property type.

I’ve surveyed a number of the larger deals. With interest rates so low, borrowers are locking up 10-year notes on commercial property for 4.7-5.8%. If you want a shorter term, you can get even lower rates. Healthcare Properties did a three-year deal last year at 2.7%. And I’ve seen plenty of five-year notes at 3.6% and 3.7%. It’s a once-in-a-lifetime chance to own property at über-low financing costs.

Property owners on current rents can earn cash-on-cash yields of 6.5% to as much as 11%, depending on the property type, quality and location. That’s better than what you can earn in other assets taking similar risks. And at the end of the day, you own a tangible asset that central bankers can’t print. In fact, money printing probably aids you in the long run, as it eats away at the value of your debt and raises the replacement cost of building your asset (discouraging competitors). Plus, your rental rates will rise over time.

Remember that real estate is cyclical. We just had a huge bubble that peaked in 2007. We had a very painful bust that found its bottom sometime in 2009. We are now in the gradual recovery phase. Investors have begun the long process of refurbishing property, recapitalizing it and refinancing it.

There is still more to do, and there are still good values out there in US real estate. If you don’t see it, you’re too close to it. Just talk to someone in Brazil.

Chris Mayer,
for The Daily Reckoning

Bar Stool Wisdom from São Paulo originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Yes, dear reader, we were on our way to Sea Island. We looked across the bridge at another island — Jekyll Island. You know Jekyll Island, don’t you? It’s where the monster was created…

A group of the nation’s richest, biggest, and most powerful bankers got together there — in secret — in November, 1910. They figured it was time to put in place a system that would make it a little easier for them to make money. Instead of competing head to head, without any backstop to protect them when things got rough, they decided to set up a central bank.

The meeting was so cloaked in secrecy few believed it ever took place. Implausibly, it was first reported by the poet Ezra Pound. How Pound learned of it…and why he reported it…we don’t know. But that’s the word on the street.

B. C. Forbes reported in 1916:

Picture a party of the nation’s greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily riding hundreds of miles South, embarking on a mysterious launch, sneaking onto an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was once mentioned, lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance. I am not romancing; I am giving to the world, for the first time, the real story of how the famous Aldrich currency report, the foundation of our new currency system, was written… The utmost secrecy was enjoined upon all. The public must not glean a hint of what was to be done. Senator Aldrich notified each one to go quietly into a private car of which the railroad had received orders to draw up on an unfrequented platform. Off the party set. New York’s ubiquitous reporters had been foiled… Nelson (Aldrich) had confided to Henry, Frank, Paul and Piatt that he was to keep them locked up at Jekyll Island, out of the rest of the world, until they had evolved and compiled a scientific currency system for the United States, the real birth of the present Federal Reserve System, the plan done on Jekyll Island in the conference with Paul, Frank and Henry… Warburg is the link that binds the Aldrich system and the present system together. He more than any one man has made the system possible as a working reality.

And now it’s official. Ben Bernanke went there to give a speech in 2010, marking the 100th year of the meeting.

The role of the Fed…apart from greasing the skids for rich bankers…was supposed to be to protect the value of the dollar. Why the dollar needed protection was never explained. For the previous 100 years, it had been solid enough — except for during the War Between the States, when Lincoln printed up far too many of them in order to pay for his attack on the South. But Lincoln’s paper dollars came and went. And on the day the Fed was officially set up, in 1913, the dollar was still worth about as much as it had been when Napoleon Bonaparte set off for Russia.

Whatever the Fed was supposed do to, what it did not do was protect the greenback. Instead, the dollar slipped and slid throughout the 20th century and is now worth only about 3 cents.

Which is why we return to yesterday’s theme. There’s no guarantee. But we have a feeling that the dollar will continue to lose ground. Maybe not right away. But sooner or later.

And if someone will lend you money at the lowest mortgage rates in history…in advance of what could be the greatest inflation in US history…perhaps you should take it.

We’re down here at a financial conference. Among the attendees is colleague Steve Sjuggerud, who believes US real estate may be the best investment of all time. Adjusted for inflation, housing prices are back to 1979 levels, he says. But they’re much better deals now. Because mortgage rates in ’79 were 3 times higher.

“If you took out a mortgage in 1979,” says Steve, “you’d be paying 15% to 20% interest. So, over the life of a $200,000 mortgage, you’d pay as much as $700,000, including interest.

“And you got a lot less house for your money in 1979,” he continues. “The typical house sold in ’79 had only 1,600 square feet of living space. Today, the average is about 2,200 sq. ft. It’s a much bigger house.

“So, in terms of dollars per square foot, you’re paying about $75 now compared to about $100 back then.

In terms of affordability, and value per dollar, the US house is a better deal now than it has ever been, Steve concludes. It would have to increase in value by $100,000 just to get to normal affordability levels.

“There are unbelievable bargains around,” Steve goes on. He found a farm in Florida that had been appraised at more than $10 million in 2006. Now, the owner is bankrupt and the bank is desperate to get rid of it.

What bid will it take to buy it?

“Maybe less than $1 million,” says Steve.

There’s a time to be a borrower and a time to be a lender. As long as the Great Correction continues (and we think it will continue for a few more years…perhaps 10) it will be a good time to be a lender. Interest rates will tend to go down, not up. That is the lesson of Japan, where bonds have been the only decent investment for the last 22 years.

But thanks to that clandestine meeting on Jekyll Island 102 years ago, we probably won’t stay in a Japan-like rut forever. Ben Bernanke promises. He has ‘a little technology’ called a printing press. And he knows how to use it!

Your editor is not a good example. He bought a house and paid more than he needed to pay. But he was buying a house, not an investment. At least that’s what he told himself.

Still, he figures that he will mortgage the place and let Ben Bernanke help make it a better deal. It may be a good time to be a lender now, but we will borrow anyway. The borrowers’ time must be coming.

What are the odds that a dollar’s worth of debt…at 4% interest…will still be worth a dollar 10 years…20 years…30 years from now? The odds can’t be very high.

The headline story over the weekend was that GDP growth in America, in the last quarter, was “disappointing.” Which just goes to show how little people understand what is going on.

The Great Correction began 5 years ago. The feds have been fighting it ever since — with trillions of dollars’ worth of fiscal and monetary stimulus. You can see what good this does. Just look at the Dow. After Lehman went broke the index dropped to the 6,000 level. Then, the feds began dumping in money. Remember TARP? And tax cut extensions. And ‘cash for clunkers’? And ZIRP? And QEI, QEII, and now…the Twist?

Naturally, the markets…and the economy…react. GDP growth resumed in 2009. But most of the growth depends on further spending and money-creation by the feds. We don’t know how much of it…maybe all of it.

There is no ‘recovery.’ Instead, the private sector is correcting…or trying to…and the economy is merely returning to its trend. GDP growth rates have been going down for 40 years. Growth rates averaged about 4% in the ’70s…3% in the ’80s and ’90s…and then about 2% in the ’00s. On a 10-year trailing average basis, they are down to about 1.6% now. And they still seem to be headed lower.

What caused this drop off in growth is a matter of debate. (We have our ideas!) But the decline in the last quarter was right in line with what has been going on for more than a generation.

As long as growth is disappointing, the feds will fight it…and they’ll fight the Great Correction too. The US government borrows a trillion dollars a year…with no end in sight.

And last year, 61% of that money came from…Ben Bernanke’s printing press.

Keep up the fight, Ben! And our long-term fixed-rate mortgage will eventually be worthless.

Regards,

Bill Bonner
for The Daily Reckoning

How to Invest With a Declining US Dollar originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

This morning we received a bouquet of flowers. It was from the woman who just sold us a house in Baltimore. She sent the flowers to say ‘thanks.’

“We must have paid too much,” we said to Elizabeth. ”She likes us. She probably figures she was lucky to find such retarded buyers.”

We needed a house. We found one we liked. It was one of a kind. We bought it, even though the price seemed high. We weren’t even bidding against anyone. She hadn’t had an offer in months…maybe years. But she held out…and got the price she wanted.

Meanwhile, The Wall Street Journal reports that the housing market may have bottomed out. Of course, that’s what the press has been saying for the last 4 years. But now, the WSJ says buyers are bidding against one another:

A new development is catching home buyers off guard as the spring sales season gets under way: Bidding wars are back.

From California to Florida, many buyers are increasingly competing for the same house. Unlike the bidding wars that typified the go-go years and largely reflected surging sales, today’s are a result of supply shortages.

“It’s a little surprising because we thought bidding wars were done with,” said Andy Aley, who is looking to buy his first home in Seattle’s Beacon Hill neighborhood. The 31-year-old attorney was outbid this year when he offered up to $23,000 above the $357,000 listing price and agreed to waive inspections and other closing conditions.

Competitive bidding in the current environment isn’t producing huge price increases or leaving sellers with hefty profits, as occurred during the housing boom. Still, the bidding wars caused by tight inventory provide the latest evidence that housing demand is starting to pick up after a six-year-long slump.

An index that measures the number of contracts signed to purchase previously owned homes rose in March to its highest level in nearly two years, up 12.8% from a year ago and 4.1% from February, the National Association of Realtors reported on Thursday.

“We very much believe we’ve hit bottom,” said Ivy Zelman, chief executive of a research firm, who was among the first to warn of a downturn seven years ago. Earlier this week, she raised her home-price forecast for the year, calling for a 1% annual gain, up from a 1% decline.

We don’t know. But our guess is that there’s more pain to come from this housing bear market…lower prices. And more collateral damage too.

In the 1960s, Americans had housing equity equal to 70% of their homes’ values. Now, it is barely 40%. Forget about trading up…homeowners don’t have anything to trade with.

And with 4 million homeowners still underwater, that’s a lot of inventory to work down. It could take a while…and lower prices…before the bottom is finally reached. Recent buyers are still losing money. And CoreLogic says prices are still falling. Here’s a Reuters report:

(Reuters) — More than 1 million Americans who have taken out mortgages in the past two years now owe more on their loans than their homes are worth, and Federal Housing Administration loans that require only a tiny down payment are partly to blame.

That figure, provided to Reuters by tracking firm CoreLogic, represents about one out of 10 home loans made during that period.

It is a sobering indication the US housing market remains deeply troubled, with home values still falling in many parts of the country, and raises the question of whether low-down payment loans backed by the FHA are putting another generation of buyers at risk.

As of December 2011, the latest figures available, 31 percent of the US home loans that were in negative equity — in which the outstanding loan balance exceeds the value of the home — were FHA-insured mortgages, according to CoreLogic.

Many borrowers, particularly since late 2010, thought they were buying at the bottom of a housing market that had already suffered steep declines, but have been caught out by a continued fall in prices in wide swaths of America.

Even for loans taken out in December — less than four months ago and the last month for which data is available — nearly 44,000 borrowers, or about 7.5 percent of the total, now find themselves under water.

“The overwhelming majority of the US is still seeing home prices decline,” said CoreLogic senior economist Sam Khater. “Many borrowers continue to be quickly wiped out.”

According to the S&P/Case-Shiller 20-city composite index, which tracks home values in 20 major US metropolitan areas, US home prices were down 3.5 percent in February from a year earlier and are now at their lowest level since late 2002. Over the past 12 months, 15 of the 20 major metropolitan areas monitored saw declines.

But that doesn’t mean that houses are a bad deal. Or that you will lose money buying now.

To the contrary, this could be the best time to buy in many, many years.

Things are a’changin’. And they affect the outlook for housing for many years into the future.

For one thing, young people don’t seem to be getting together and pitchin’ woo the way they used to. They’re waiting longer. They used to get married and have children in their 20s. Now they wait until their 30s.

So, they don’t need to buy a house until years later. In the meantime, they rent. Rentals are up…which could be good news — if you’re a landlord.

Home ownership is at its lowest level in 13 years; it seems to be going down, even though houses are much more affordable than they’ve been in many years.

Unemployment among young people is much higher than usual; fewer young people have the wherewithal to buy a house.

Young people also have much more debt than they used to. Student debt, for example, recently topped the $1 trillion level. No jobs…no spouses or children…shackled to student debt — young people are unlikely prospects for house-builders.

But “US housing is the best value play in America,” says colleague Chris Mayer. ”If you own a house then look to buy and rent another.”

Here’s the idea. You can now buy a decent house for $60,000 to $80,000 depending on where you are. You spend a little to put it into rentable condition. Then, you can rent it for $1,000 a month…maybe $1,500. At $1,200 a month on a $60,000 house you have a gross rental yield of nearly 20%. Assume you spend half of that on taxes, maintenance, etc. That leaves you with 10% net. Not bad.

Better yet, mortgage it for 30 years. Say you put up cash of $20,000…and mortgage the rest. Your mortgage payments should be a good deal less than $250 a month. So, after expenses (assuming they are 50% of your gross rent) you are netting $250 a month, which works out to a 15% yield on your cash.

And what happens to that $40,000 mortgage? Could be that it is a burden for years…and you pay it off with no gain or loss. More likely, it gets cheaper, year after year. Inflation knocks it down. Perhaps slowly at first — 3%…5%…

But we wouldn’t be at all surprised to see it get knocked away completely in a few years. Most likely, within 10 years a $40,000 mortgage…at today’s fixed rates…will be worth less than half of what it is today. So, you’ll make another $20,000 over 10 years…giving you a real yield on your investment over 20%…

This seems to us like the perfect investment for a retired person with time on his hands. Put $60,000 of savings into a money fund and you’ll get…what…$100 a month?

Instead, buy 3 houses for $60,000 each…mortgaging $40,000 on each one. You’ll have to work to fix them up and find the right tenants. But you’ll end up with positive cashflow of about $750 a month…plus, maybe a bonus of $60,000 more over 10 years as your mortgages get whittled down by inflation.

*** We were wrong about Harley Davidson.

A few months ago we guessed that it was time to sell the big hog builder in Milwaukee. We noticed who rides Harleys. Big, fat, old guys. Not much future in that, we reasoned. Especially when times are tough. The old guys will sell their bikes, we said.

Alas, your Daily Reckoning stock research department seems to have erred.

A report in The Financial Times tells us that Harley Davidson profits rose 44% in the first quarter of this year. Turns out they’re selling more bikes in the US than they expected. To whom?

Foreigners. Two thirds of the sales happen overseas.

A total of a quarter of a million motorcycles are expected to sell this year.

Amazing. We didn’t know there were that many fat, old guys overseas.

Harley Davidson seems to have created a worldwide brand.

Regards,

Bill Bonner,
for The Daily Reckoning

Is It Time to Buy a House? originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

The lack of a 13th floor comes from the same fear that prevents people from walking under ladders or causes them to shiver when a black cat crosses their path. But Arnaud decided to make a business out of it. The idea is to find value where others fear to go.

Arnaud is the managing principal and co-founder of 13th Floor Investments. The firm manages the Florida Real Estate Value Fund, which, as the name implies, focuses on real estate value investing in Florida. Recently, while in South Beach, I tried to catch up with Arnaud, but our mutually jangled schedules couldn’t mesh. We talked later by phone a couple of times.

I want to share what Arnaud and 13th Floor are up to, because you’ll get a fascinating ground-floor view of what’s happening in real estate in the post-bust world. There is also much investing wisdom in what he shared. Finally, the Florida Real Estate Value Fund itself is a fine alternative investment idea. (Later in this letter, we’ll look at another opportunistic way to play distress in real estate.)

Arnaud and I started talking about how there can be a big gap between the big picture and the view on the ground.

“There’s been a lot of conflict in the data,” Arnaud told me. “Housing is a great area where you can take out the paper every day and read about pricing going down or unemployment pressures, yet the local data in Dade and Broward counties [in Florida] indicate a reverse trend. One challenge for us is to decide what we believe and try to cut through some of the noise of the big macro stuff to really understand what’s going on.”

To do this, Arnaud and his team rely on the good old spadework of due diligence. His business partner, Robert Suris, is a local developer and contractor with a keen sense of property value. Together, they meet with builders and bank presidents and dig into local markets.

This helps avoid the two big problems with the big-picture statistics: They are backward looking and tend to paint with too broad a brush. Still, Arnaud says there are unmistakable big-picture trends unfolding in real time that are worth paying attention to. He highlighted some important ones:

Housing has bottomed. Housing sales and starts are as low as they’ve been going back to the 1960s. Prices have fallen and interest rates are at all-time lows. In most markets, it is now cheaper to buy than rent. Strong rental yields help set something of a floor under prices. There is still a lot of distressed inventory, which is an opportunity that investors slowly munch away on.

There is a continued influx of foreign buyers. Buyers from South America in particular fuel a lot of activity in South Florida. Arnaud noted they typically pay all cash. They also focus on Miami’s urban core. To a Brazilian, Miami is cheap. While I was in South Beach, I was not surprised to hear so much Spanish. I was surprised to hear so much Portuguese.

Money is cheap. The amount of money sloshing around and the cost of that money drive real estate activity. With interest rates at all-time lows, some rental properties already trade above pre-recession levels. Cheap money won’t last forever, but with the Fed committed to low interest rates to 2014, it seems unlikely to change soon.

A shift from homeownership to renting. The homeownership rate dropped big-time when the bubble popped. After peaking at 69.4% in 2004, the national homeownership rate is now the lowest it’s been in 13 years. There are a lot more renters now, and not only because of the stresses of the bust.

“It used to be that people got married and then they’d move into a house,” Arnaud said. “Now people do that in their 30s. If you look at what people are doing for that extra 10 years of single life, you see that they are spending more time renting.”

Let this speak to the danger of looking too much at past statistics and thinking that they will automatically revert to some magical mean (or average) of the past. “You can’t just pick one statistic and then assume that things are going to revert to the mean because the mean itself changes,” Arnaud said. “Secular changes within a trend can affect the mean permanently.”

I asked Arnaud about how long of a window he thinks we have to pick up bargains in real estate. His answer was it depends on the property type and location.

“In Miami, forget about it,” he said. “Apart from a couple of special situations that we are involved in, I think it is very hard to find distressed opportunities in Miami right now, as most of it has been picked through. The world has decided that ‘Miami is back.’ It’s almost a boom-like feeling. I thought it would’ve haven taken longer to come back. But it’s right here before us now. People are developing everything from condominiums and multifamily to retail and hotels.”

Arnaud’s fund, though, is not purely focused on distressed opportunities, nor is it focused on Miami. “It’s just that distress has been where the most opportunity and action have been in the last couple of years,” he said. “And we’re not focused just in Miami. We have a minority of our holdings in Miami. We’re very active in other parts of Florida, such as Naples and Fort Myers. And we’re starting to get active in Orlando.”

The challenge is to balance value investing principles with growth. “If you read about Seth Klarman’s investing approach, for instance, it’s all about buying below book value, below liquidation value, below replacement cost [or the cost to rebuild].” Klarman, as you may know, is a great investor. His Baupost Group has delivered a nearly 500% return to its investors over the past 11 years, while the market rose 7%.

“If you do your job right as a value investor, you’re going to benefit from the growth whether you like it or not. But if you rely strictly on your value investing lens, you may miss out on some growth opportunities,” Arnaud warns. “Still, as an opportunistic value guy, you have to be able to live with the trains you didn’t catch.”

There are other pitfalls in being too cheap. “One of the dangers of value investing in real estate is buying the wrong product,” he said. “Buying something at a big discount to replacement cost could be a mistake. We just passed on a deal that we could still buy for below replacement cost. But we realized that the reason was the product itself was not a quality product. If you just value everything off a spreadsheet, you can lose sight of some of the intangibles of real estate that drive demand.”

Those intangibles include aesthetic considerations. “The Brazilian guys who come and want to buy property in Miami are only going to buy quality. They are going to buy value, but they also want something that they think is attractive.”

So far, 13th Floor has done a great job navigating the waters. It was early picking up condos in Miami and is now in a position to sell a condo tower for a 36% annualized return. It land-banked a lot of inventory for national homebuilders when no one wanted empty lots. Now 13th Floor is in a position to sell lots to national builders seeking new land, earning annualized returns of 21%, 34% and 29% on three projects. These returns kill what the stock market has done over the same short time frame.

Regards,

Chris Mayer,
for The Daily Reckoning

The Missing 13th Floor originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

At first, they are loose, fluid…and watery. Then, over time, they dry up…and develop more body…more shape…more substance.

Our recollections from our trip to Argentina are still congealing…setting up like a stone wall. We’ll show it to you in the days ahead.

But today, let’s turn from the pampas to the developed world…to the world of money. That is, let us turn our attention from the vivid world of real things and real people…to the absurd blah blah world of economics.

What happened in the 2 months we were gone? Anything important? Not that we can tell from the papers. The headlines are almost the same as they were when we left.

The Great Correction, for example, hasn’t gone away. Instead, it seems to be intensifying.

In America, 11 million homeowners are still ‘underwater.’ Every one of these houses is a candidate for foreclosure…and every one puts downward pressure on the housing market, which has been falling for the last 5 years with hardly a let-up.

Yes, Dear Reader, this month marks the 5th anniversary of the Great Correction. It began in April ’07, when its weakest link — subprime mortgage debt — snapped. Since then housing has been losing value. And with 11 million houses still priced below the amount of their mortgages, this housing bear market could last for another 5 years before it finally comes to an end.

When housing goes down so do the balance sheets of America’s households. And without improving balance sheets it is very unlikely that households will substantially increase spending. This will leave the economy hobbling along about as it is now…with the lowest growth rate of any post-war ‘recovery’…and completely dependent on more loose change from the feds.

No, that hasn’t changed either. When we left the feds were still trying to sort out a debt crisis by adding more debt. Nothing has changed since. America’s feds keep lending money they don’t have to borrowers who can’t pay it back.

This time, students are the subprime borrowers. Can you imagine a more subprime group? Students don’t have jobs. They’ve never proven they can earn money. Their credit histories are as thin as their resumes. And yet the feds have extended $1 trillion to this group. How long will be before that blows up? Probably not too long.

Meanwhile, in Europe, subprime debt is concentrated at the government level. The subprime borrowers were the countries at the periphery of Europe — Ireland, Portugal, Greece and Spain — who would have a very hard time paying their bills when the lending stopped. When we left, Greece was struggling. Now, it’s Spain.

Seems Spain was able to borrow more money this weekend. But its costs rose; Spanish debt now yields over 6%.

At 6%, according to the experts, European nations can still keep going. If the debt rises to 7%, on the other hand, their goose is cooked…cuit…cocinado…

It’s amazing to us that Spanish debt isn’t already at 7% or more. These countries should have gone broke years ago. The only way they avoid it now is by promising to do things they can’t do. Cutbacks — austerity measures — are solemnly put into budgets. They lower GDP, lower employment, and raise opposition parties to new levels of absurdity and notoriety. And never quite reach their objectives.

But thanks to central banks…they never go broke.

In America, the deal is pretty straightforward. The Fed prints. The feds borrow the counterfeit money and spend it.

In Europe, the central bank prints up money too. It lends it to the banks. The banks lend to the marginal governments around the periphery. This puts the banks in a bad situation. They’re holding a lot of subprime government debt. But the central bank keeps lending them money to buy more!

Bloomberg has the story:

April 18 (Bloomberg) — Spanish, Italian and Portuguese banks are loading up on bonds issued by their own governments, a move that shifts more of the risk of sovereign default to European taxpayers from private creditors.

Holdings of Spanish government debt by lenders based in the country jumped 26 percent in two months, to 220 billion euros ($289 billion) at the end of January, data from Spain’s treasury show. Italian banks increased ownership of their nation’s sovereign bonds by 31 percent to 267 billion euros in the three months ended in February, according to Bank of Italy data.

German and French banks, meanwhile, have cut holdings of those countries’ bonds, as well as Irish and Greek debt, by as much as 50 percent since 2010 in some cases. That leaves domestic firms on the hook for a restructuring such as Greece’s last month and their main financier, the European Central Bank, facing losses. Like Greece, governments would have to rescue their lenders with funds borrowed from the European Union.

The jump in sovereign-debt holdings by Spanish and Italian banks has been fueled by the ECB’s 1 trillion-euro long-term refinancing operation, or LTRO, initiated in December, to provide liquidity to the region’s lenders. Encouraged by their governments to take the money and buy bonds, banks borrowed 489 billion euros on Dec. 21 and 530 billion euros on Feb. 29.

For lenders in so-called peripheral countries — Spain, Portugal, Ireland, Greece and Italy — profit also was an inducement: They could borrow at 1 percent to buy government bonds yielding between 6 percent and 13 percent.

In Europe as in America, nobody goes broke…until they all go broke.

Meanwhile, in Greece, farmers are organizing special “food relief” programs to help children in the cities who are said to be almost starving. The government, meanwhile, is preparing to head off “food riots.”

In France, the communist party, which was practically dead a few years ago, is coming back to life…like the zombie it is…under the leadership of Jean-Luc Melenchon. Unlike the ‘responsible’ politicians in Europe, Melenchon wants no cutbacks in government spending. Just the contrary. He wants to increase it. For example, the minimum wage would go up from about $1,600 per month to $2,300 per month. And the top marginal income tax on rich people, those who earn more than about $500,000 per year, would go to 100%.

Melenchon’s star is rising. His left coalition could get 12% or more of the vote on Sunday. Which is only natural. Promise the mob that you will give them free money; few will resist it.

*** Alone among the developed nations…America has something the others don’t have…and by the look of things, something they don’t want. The US population is growing!

Yes, dear reader, when it comes to having babies…or importing babies from other countries…America still has what it takes. The UN says that US population will increase by nearly 27 million people by 2020.

Twenty-seven million people is about 40 cities the size of Baltimore. If each one of these people lives in a household of four people, it’s more than 6 million new houses…and, assuming they are all two-car families, about 12 million autos. And, of course, each family needs a dishwasher, a toaster oven, a refrigerator, and so forth. A lot of stuff, in other words.

Compared to the rest of the developed world, America is still enjoying a major population boom. After all, Japan’s population is shrinking. So is Germany’s. Europe as a whole is still growing, but not by much. And after 2020, it begins to shrivel up too.

But American population growth may not be as strong as it is advertised. Why? Because more and more people are sneaking out.

As we reported yesterday, illegal immigrants are going home…as well as the children of legal immigrants. And now comes word that native-born Americans are slipping away too. Yes, according to our sources, 742 US citizens leave the country every hour — and don’t come back.

So many are leaving that Sen. Barbara Boxer has proposed legislation — a law that would make it impossible for Americas to cross the border until they settle up with the IRS.

The noose tightens…

Regards,

Bill Bonner
for The Daily Reckoning

Subprime State of Mind originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Since that declaration, house prices have continued drifting lower in most parts of the country. The Case-Shiller index of national home prices is down about 4% year over year. Even so, we’re betting this professional investor was merely early…not wrong. US housing isn’t just cheap; it is the cheapest it has been in more than 40 years. And when one considers the possibility that inflation may rear its head soon, housing looks even cheaper still.

If you think we’re crazy, you’re not alone. The housing market is a complete bust right now. The following chart shows the median home price in terms of per capita disposable income. Based on this calculation, home prices are lower than they have been in 40 years!

And it isn’t just that home prices have fallen a long way. For most home buyers, the price of the home is only one part of the true cost of a home. Mortgage rates matter as much, or more, than the purchase price itself. In other words, buying a house is not just a bet on real estate; it is also a bet against interest rates. For the typical buyer of a home who takes out a 30-year mortgage, an increase in interest rates is just like an increase in the price of a home.

Today, because home prices and interest rates are both at extremely low levels, the cost of buying a home with a 30-year mortgage is at an all-time low. To illustrate this stunning fact, the chart below shows the average monthly mortgage payment on the median-priced home, expressed as a percentage of per capita disposable income.

If you can get a mortgage, you are basically taking a reverse bet on the bond market. You could be a long-term borrower at fixed rates, instead of a long-term lender. Right now, you can borrow for 30 years at around 3.3%. After the mortgage tax deduction, for some people the net effective interest rate is nearer to 2%! That’s going to prove an awesome deal if we see inflation again.

But here’s the factor that clinches the case for investing in residential real estate: the long-term supply and demand for housing. Let’s start with supply.

Consider how long it will take to bring new supply to the market. As investors, we want new supply to come slowly.

The number of housing starts is currently lower than at any time in at least the past 50 years. Moreover, new construction is only about half the long-term average. Again, good news for investors in housing, since this means that new supply is growing very slowly.

Meanwhile, housing demand — based simply on demographic trends — should rise inexorably for years to come. Take the growth in households — driven by population growth — and apply a home ownership rate. Demographically, the US is still a growing country. By 2030, there will be 370 million Americans. Even using the long-term average home ownership rate means we’ll need 1.1-1.2 million new single-family homes per year.

In other words, busted markets don’t last forever. The cure for low prices, as the old saw goes, is low prices. Furthermore, a bet on the housing market is not merely a bet on real estate; it is also a bet that inflation will rise.

The US economy may be idling in neutral for the moment, but inflation is revving its engines. How should you prepare?

“Buy gold” is the time-honored answer, and we don’t quarrel with it. But an alternative answer, especially this time around, might be: “Buy a house.”

That’s the advice offered by a growing — but still small — number of very successful investors. John Paulson is one of them. He is the guy who said about a year ago, “If you don’t own a home, buy one. If you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home.”

He was early…and his hedge fund performed very poorly last year, mostly because he was too early betting big on a rebound in the US economy. Double wrong! But we still think Paulson’s call on housing may be close to the mark.

Despite his dismal performance in 2011, Paulson is the guy who turned one of the greatest trades of all time. Betting against the housing market, he netted a cool billion dollars for himself in 2007. One fund he managed rose 590% that year. Today, he is one of the richest men in America…still.

His advice today is very different than it was in 2007. “Buy a house,” he says.

And he has put money where his mouth is…He already owns posh digs in Manhattan on 86th Street, plus a Southampton house he nabbed in 2008. In 2010, he snapped up an 8-acre ranch in Aspen for a cool $24.5 million, before buying a Fifth Avenue condo at a 23% discount to the asking price. (This 26th-floor pied-à-terre will be his “guest house.”)

Let’s flash back in time for a second…

Another successful investor gave similar advice in 1971 — the dawn of one of America’s biggest housing bull markets. The investor was Adam Smith (George Goodman) on The Dick Cavett Show. Here is a snippet from that conversation:

Smith: The best investment you can make is a house. That one is easy.

Cavett: A house? We were talking about the stock market. Investments…

Smith: You asked me the best investment. There are always individual stocks that will go up more, but you don’t want to give tips on a television show. For most people, the best investment is a house.

Cavett: I already own a house. Now what?

Smith: Buy another one.

How good was that advice?

Houses, as an investment, trounced stocks during the inflationary 1970s. The chart below tells the tale.

In the 1970s, US stocks returned about 5% annually — failing to keep pace with inflation. Still, it was an up-and-down ride. In 1974, the stock market fell 49%. But here are the average selling prices for existing homes in the 1970s, as inflation heated up:

1972 — $30,000
1973 — $32,900
1974 — $35,800
1975 — $39,000
1976 — $42,200
1977 — $47,900
1978 — $55,500
1979 — $64,200

That was a pretty impressive run-up in home prices. Today, I think we could be on the threshold of another once-in-a-generation buying opportunity in the housing market.

The homebuilding stocks seem to agree. Many of them have doubled during the last five months from their very depressed levels. Although the ISE Homebuilders Index is still down about 80% from its 2006 peak, it has been gaining steady ground relative to the rest of the stock market.

The chart below shows the rolling three-year price performance of the S&P 500 index, minus the rolling three-year price performance of the ISE Index. As you can see, the ISE has been lagging far behind the S&P 500 for most of the last five years. But during the last few months, this index has been closing the gap…and looks like it is about to begin a period of outperformance relative to the rest of the stock market.

So we like select homebuilding stocks, but we don’t love them. Unlike the housing market itself, homebuilding stocks have priced in quite a bit of good news already. Not surprisingly, therefore, the insiders at these companies have been doing a lot more selling of their own shares than buying. (Pulte is one conspicuous exception.)

We also like housing-related stocks. As Chris Mayer, our colleague over at Capital & Crisis, observes, “Companies such as Lowe’s (LOW) and Home Depot (HD) would benefit from a recovering housing market…as would the makers of flooring, Mohawk Industries (MHK), the makers of kitchen cabinets, Fortune Brands Home & Security (FBHS) and a whole bunch of stuff in between…In a robust housing market, good fortune would also smile on A.O. Smith (AOS), which makes water heaters for homes.”

But again, we don’t love these stocks. Not at their relatively rich valuations. Even so, we’ll be combing through this sector very carefully for promising investment ideas. In the meantime, for those with the means and the inclination, the best buy in the housing sector is an actual house!

This picture is unequivocal. US home prices are very, very cheap today. “Cheap” does not preclude “even cheaper,” of course. Home prices could certainly continue sliding. But even if that were to occur, mortgage rates might begin rising, which would cause the effective price of a home to increase.

Obviously, buying residential real estate at both a housing market low and an inflationary low would be the optimal entry point — in fact, it would be a screaming buy. And that’s exactly what today’s circumstances seem to be offering.

Perhaps that’s why a large number of very successful professional investors are licking their chops over opportunities in the US residential real estate market.

This out-of-favor asset class has attracted the attention of David Ackman, a hedge fund manager with a fondness for contrarian investments. He calls them SFHRPs, an acronym for “Single Family Home Rental Property.”

“The best investments we have made are the ones no one else would touch,” Ackman explains.

As housing prices have continued drifting even lower, Paulson and Ackman have picked up a little bit of company. The US housing market is becoming a central focus of several “deep value” investors. Over the past weeks, I’ve bumped into three very successful professional investors who were much more eager to talk about their real estate investments than about their stock market investments.

One gentleman in particular, who has made billions of dollars for his investors by buying deep value stocks, was much more eager to talk about his recent real estate investments than his recent stock market investments. He was talking glowingly — if not giddily — about the opportunities in real estate he was coming across.

“I’m not finding much to buy in the stock market at the moment,” he explained. “But real estate is a different story. I wish I had the capital to act on more of the ideas that are coming across my desk.”

We asked this investor if he was concerned about the risk of real estate prices falling even further.

“Nah,” he said as he waved the question aside, “I assume the housing market will remain soft for a while. But the kinds of deals we’re finding should work out well, even if the housing market keeps sliding for a bit. Besides, there’s one lesson I’ve learned repeatedly as a value investor in the stock market: You can have good news or cheap prices. You can’t have both.”

The US housing market has absolutely no good news…but plenty of cheap prices.

Regards,

Addison Wiggin & Samantha Buker,
for The Daily Reckoning

Buy a House! originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

In other words, housing prices are back where they were when the space shuttle Columbia blew up and Washington was about to foment the doctrine of “preventive war” in Iraq.

Good times.

(The index’s year-over-year decline works out to 3.8%. It would likely have been worse if the weather in January had felt, well, more like January.)

Alas, the Case-Shiller is but one of several limp housing numbers that have been released in recent days.

“From home builder sentiment to housing starts,” writes Diana Olick, one of the more sensible observers of the housing market in the mainstream press, “to home builder earnings right through to sales of newly built homes, there was not one hopeful headline in any of it…”

That Ms. Olick is employed by CNBC is one of those freakish facts we can chalk up only to… who knows, sunspot activity.

A year ago, in these pages, we covered a study from Wells Fargo gushed that “there are 51.5 million potential first-time homebuyers born between 1979 and 1991. Roughly 6 million more of these Millennials are reaching the prime home buying age than baby boomers did in 1977.”

The “Millennial” generation – age 30 and under – concluded the Housing Wire[link], will ride to the housing market’s rescue… restoring the National Association of Realtors (NAR) version of the American Dream.

And yet, one year on the opposite appears to be happening.

“Homeownership rates for young adults have plunged back down to near-1990 lows,” writes the aforementioned Neil Howe, “despite record-low interest rates and very attractive prices for a new home.”

What’s more, first-time buyers are disappearing: From 2009-11, only 9% of people age 29-34 got a first mortgage. A decade earlier, it was 17%.

The reasons are legion: According to a Chicago Fed study, several factors are at work: Young couples are waiting longer to have kids… thus the urgency to buy a home is less.

They’re also at what the study delicately calls “heightened income risk”… or what you and I would call “unable to find a dang job.” Unemployment among people 25 and younger is double that for people older than 25.

Too, their inflation-adjusted wages are lower than a decade ago.

All of these downward pressures on the “Y me?” generation arrive at a bad time.

“For someone in his or her 30s,” Mr. Howe continues, citing a separate New York Fed study, “the average college loan balance is now $28,500, and balances over $50,000 are common.

“Debt at this level stifles consumer spending and can render many young people ineligible for home mortgages, no matter how low the interest rate.”

Conclusion: If you’re expecting a Millenial to come and prop up your “investment” in a primary residence… well, dude, he or she might be around the corner looking for a cheap rental instead.

Addison Wiggin
for The Daily Reckoning

Counting on Millennial Homeownership originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

The Beach is almost a religion in Brazil. It’s where you spend your free time, your weekends, and your vacations. It’s where you meet up with friends, hang out with your family, and play with your kids. It’s where you picnic, savor a chilled beer, or party the night away.

And with 4,655 miles of coastline, there’s a beach to suit everyone in Brazil.

The beaches in the country’s south grab most of the headlines and column inches. But the beaches in Brazil’s northeast are stunning — and they come with year-round beach weather to enjoy the sand and surf.

Joao Pessoa’s urban beaches are pretty. Joao Pessoa is a city of more than 723,000 residents with big-city amenities. You’ll find good medical care. You won’t run short of shopping or dining options. But it’s also got a safe, friendly, small-town atmosphere that’s hard to resist. And it lacks the crazy bustle, the dirt and the noise of many other cities I’ve spent time in.

Social life focuses on the beach and boardwalk in Joao Pessoa. Everyone comes to the boardwalk to jog, roller blade, walk the dog, or socialize. There’s a great mix of cafes, restaurants and beach bars along the boardwalk. But (unlike many Brazilian cities) you won’t see a string of high-rises on this boardwalk. Strict planning laws restrict building height and density. That adds to the small beach town feel you’ll enjoy in Joao Pessoa.

You can swim, sunbathe or relax on the city beaches. And the beaches outside the city are gorgeous. You’ll find lots of different types of beaches, from buzzing little spots that party all weekend to quiet crescent beaches that you’ll have to yourself.

Wealthy Brazilian families own beach homes in Joao Pessoa. They buy large properties, big enough for the whole family to enjoy. The city’s a popular spot with Brazilian retirees, too. They’re usually younger, in their fifties, retiring from the civil service or professional life. But these retirees don’t want to downsize. They buy large homes with plenty of living space. Because they know that their family and friends will come and stay with them for long beach vacations.

This condo is typical of the larger properties you’ll see in Joao Pessoa. It covers 383 square meters (4121 square feet), with four bedrooms and bathrooms, a games room, plus an indoor and outdoor kitchen. It’s on the fourth (top) floor of the building. It’s one of only two penthouses that share the top floor.

The condo comes with a large terrace with an outdoor kitchen, hot tub and amazing ocean and beach views. The seller is currently fitting out the interior of the condo with high-end materials.

From the terrace, you can see the beach, the ocean and the city skyline.

The building is complete and includes a swimming pool, social area, gym and barbeque area. The building sits right next to a long stretch of white sand beach in the Ponto do Campina neighborhood. This is a quiet urban beach without a boardwalk. A glass wall around the building’s social area makes the most of the beach views:

Walk a few steps from the swimming pool and social area, through a low gate, and you’re right on the sand:

The condo is listed at 1,915,000 reals ($1.12 million). It will come with high-end finishes featuring wood, granite and marble, and kitchen cabinetry from one of Brazils’ leading design companies.

The asking price works out to 5,000 reals per square meter. That’s a good price when you consider that pre-construction property in the same area is listing at 5500-7500 reals per square meter.

Regards,

Margaret Summerfield,
for The Daily Reckoning

There’s a Beach for Everyone in Brazil originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Before dawn the first surfers race toward the ocean and the sun begins to unroll a carpet of yellow light across the beach. Neighbors on foot or on horseback stop to chat in the surf in front of the new luxury clubhouse which is buzzing with the breakfast crowd. Soon families will gather by the beachfront pool while mom or dad, laptop flipped open, checks in on business back home. The more physically active sip a freshly-squeezed juice after their morning run along the beach and through the nature trails. Next stop: The tennis court.

These are luxurious surroundings, yet casual and relaxed. Think super high-end California without the pretensions. No place for pretensions here, in Rancho Santana on Nicaragua’s southern Pacific coast.

Rancho Santana has two miles of the most dramatic coastline you’ll see. Vertical cliffs drop to flat rocky plateaus. Some of the world’s best surf breaks and beaches are here. Close by you’ll find sandy beaches perfect for swimming and rock pools where you can bag the freshest lobster of your life.

Playa Santana stretches out in front of the new clubhouse. Across the ranch, and her 2,700 acres, you have another four beaches to choose from. Luxury homes are dotted throughout the community.

But, you can buy this luxury for a fraction… one-sixth, probably less…of what you might pay along the Pacific coast in California. For example, perched on a cliff above the ocean in Rancho Santana you can buy a one-quarter acre lot for $125,000.

Around $250,000 will build you a luxury 2,500 square foot home with plenty of extra outside space for dining, grilling, evening massage or cocktails. And (of course) your own pool above the roaring Pacific.

The pink sands of Playa Rosada are a gentle stroll down the hill. To learn to surf, get on your quad bike and shoot across to the beach at Los Perros. The five-minute drive brings you through some of the community’s protected nature areas, a wonderland of monkeys and butterflies.

Try finding a building plot this jaw-dropping at this price in Malibu. And because labor is so cheap here you have all the help you need for a tiny fraction of what you would pay back home. I’m talking about your cleaner, gardener, pool guy…or chef when you don’t feel like cooking or leaving home.

But I want to be clear on one thing. This is a unique and world-class community. I’m not telling you about this opportunity just because your dollars stretch further. I’m telling you about it because it’s such a special community on one of the world’s finest coasts.

And better yet, it’s on the up.

Throughout the community you will see progress. The new clubhouse is hosting a convention as I write. Plans are progressing for a boutique inn and new spa area. Furniture and wood finishes are designed and manufactured onsite in a 10,000-square-foot wood shop. Homes are dotted throughout the 2,700 acres Forbes magazine described as “simply stunning.” The onsite construction crew can barely keep up with demand for their services to build luxury homes.

Fresh vegetables arrive from the organic gardens that have been planted near the stables. There’s the buzz of community and progress everywhere you look.

An experienced rental management team is onsite. The demand for rentals is strong. Folks need somewhere to stay when they are visiting to check up on construction of their home. Groups come for equestrian and surf vacations, or for a spot of sun-worshipping. When the convention center hosts a group, the community is packed to the rafters. If you are looking for your own piece of luxury living in the sun don’t do anything until you have visited Rancho Santana.

Regards,

Ronan McMahon
for The Daily Reckoning

Luxury Living in the Sun originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".