Real Estate's Harsh Realities

“Nothing comes from nothing…nothing ever could…

“So somewhere in my youth or childhood, I must have done something good…”

CNN worries about a “tidal wave of foreclosures” hitting central Florida.

“Orlando has blown up,” says a source quoted by CNN.

The man doing the talking runs a website where desperate sellers can try to get rid of their houses fast. The houses are put up for sale at prices below appraised values…and then marked down systematically until they sell.

“There’s been a 700 percent increase in traffic of people filling out our forms,” he continued. “I could put a bull’s-eye on Orlando and write the headline for what will be going on in January and February.”

Today, dear reader, we take up a profound subject in a superficial way – what is real?

When you need to make a monthly mortgage payment, there is not much fantasy or romance to it. It is real. When you don’t have the money, it is even more real…which is to say, the experience is more intense and more memorable.

In the financial world today, some experiences are much more real than others.

As you know, we are enjoying what Mises called a “Crack-Up Boom.” It’s great fun…as long as it lasts. But it has some very un-real parts to it.

The whole thing is tricked along by money that is, essentially, not real. Central banks create money “out of thin air.” The quantity of money is growing very rapidly, all over the world. Everywhere you look, money is increasing two to 20 times faster than GDP growth. (In Zimbabwe, the increase is infinite…since the money supply is growing by thousands of percent, while GDP growth is negative.)

Can you get something real from something un-real? Does something come from nothing?

We don’t know…

But what we do know is that there are a lot of phony parts to this boom. In the West, art, stocks, houses – they’re all going up. Just look at a chart of almost any stock market in the world. Or a chart of housing prices. Or a chart of almost any tradable asset class. Asset prices are rising; and the people who own them feel they are much richer. But is this increase real? Are these assets actually worth more? Or are they merely being teased up in price by a higher volume of money? Is a Monet more attractive today than it was 10 years ago? Not really. Does a house give better service? Is the yield from a stock higher? The answer is no. Much of the extra wealth that people think they have is un-real.

Meanwhile, in the East, factories are being built…output is going up…people who used to tend ducks and till the soil by hand are now working on assembly lines and living in air-conditioned apartments in brand new cities. This wealth is real and growing at breakneck speed.

Meanwhile, back in the Homeland…and Britain too…ordinary people are suffering their prosperity. They have enjoyed more apparent wealth – bigger houses, more vacations, more dinners out – but this is wealth consumed, not wealth created. In order to afford to spend so much more money, they had to borrow. So their real net wealth actually went down.

“Lost your pay slip? Call us…” say signs along the highways in Britain. We had no idea what this meant. Why wouldn’t people just ask their employer for a copy?

“Oh no…it’s a big scam,” MoneyWeek editor Merryn Somerset Webb enlightened us. “There’s a whole industry of people who provide fraudulent pay slips so that you can get a mortgage to buy a house.”

And now many of these people are living in bigger houses, but sending in higher mortgage payments and more property taxes, and these larger houses cost more in utilities. When the going was good, it looked as though it would be no trouble to keep up this level of extra wealth consumption. But now that the going is not so good, many of these people are in real trouble. Some are trapped between two mortgages and need to sell a house fast. Others simply have mortgage payments that are too large.

Mortgage rates are rising in the United States. And in Britain, last week, the Bank of England raised rates. “Now it REALLY hurts,” shouts a headline in The Daily Mail.

Freddie Mac predicts that house sales this year will drop 7% – to their lowest level since 2001. And an article in Barron’s explains why. The REAL mortgage rate is the difference between what a person pays for a mortgage loan and how much the property goes up. If mortgage money costs 6%, and a house goes up 6%, in effect, the real cost of the mortgage is zero.

A couple years ago, people might have paid only 5% for mortgage money…while their houses went up 15%. It was as if the mortgage rate was really MINUS 10%. But now, house prices aren’t going up…they’re going down – at least in America.

So much so, in fact, that our friend Mish Shedlock recently informed readers of his Survival Report that if the current price collapse follows previous boom-bust cycles, housing values could crash 43.5% – between now and 2011. Ouch. (For Mish’s full report, and to find out how you can hedge protect yourself and your assets against the coming housing fall-out.

Barron’s put the real cost of a mortgage at about 6%. But in an area such as Orlando, where house prices could be falling fast, the real cost of a mortgage could be 10%…or 15%. No wonder sales are sluggish. Who wants to buy a house under those conditions?

Not only is the marginal homeowner subjected to some real pain, so are the rich professionals who lent him money. Credit Suisse estimates that real total losses from CDOs (collateralized debt obligations – derivatives backed by mortgages) will top $52 billion. Of course, that assumes that no one panics…and nothing else goes wrong.

Bill Bonner
The Daily Reckoning
London, England
Tuesday, July 10, 2007

More news:


Addison Wiggin, reporting from Baltimore…

“Ben Bernanke is speaking today before the National Bureau of Economic Research – the quants who officially declare the nation in recession, when the time warrants. Bernanke is expected to confuse them over ‘inflation targeting’ and explain away the nation’s housing woes…look for both the pound and the euro to rally.”

For the rest of this story, and for more market insights, see today’s issue of The 5 Min. Forecast


And more thoughts…

*** What else is unreal in the real world?

The International Energy Agency warned yesterday that the world will face an oil “crunch” in five years. Crunches are just the thing that oil is supposed to prevent…the black goo, after all, is a lubricant. But something must be going wrong. IEA says supplies are falling faster than expected. Instead of growing at 2% per year; it’s now thought that oil consumption will grow at 2.2% per year.

Even that seems as though it might be on the low side…if the global Crack-Up Boom continues, that is. Which is what makes our job of reckoning so difficult lately. There are so many phony and precarious trends to reckon with. The dollar is a fraud, as explained above. More dollars bring forth more yen, more yuan, more euros…and so forth…which, in turn, bring forth more production, more sales, more investment, more consumption, and more energy use!

More “money” – even fraudulent money – begets more economic activity, which begets more use of raw materials, especially oil. New houses in America are about 15% larger than they were just six years ago. They need to be heated and cooled. On a really hot day, Phoenix – one of the fastest-growing metropolises in North America – can use more electricity than New York City.

Half of the new houses and apartments in China are equipped with air-conditioning. Millions of people who, only 10 years ago could barely afford to buy bicycles, are now driving around in automobiles. And now even the poor in America fly on airplanes…use air-conditioning…and keep their TVs running day and night.

Thanks to the worldwide Crack-Up Boom, people all over the planet are building new cities and new lifestyles. But they are all basing their plans on yesterday’s oil prices! And yesterday, there was still plenty of oil. Oil from Britain’s North Sea is now in decline…and by 2015, Dubai’s oil boom will be over. And many geologists – including, notably, our friend Byron King – believe that the entire world supply of oil has peaked out.

On the one hand, it looks to us as if the oil market has underestimated this huge new demand. On the other, it looks to us as if this huge new demand cannot continue to grow at the same pace – because a Crack-Up Boom must crack up. And when it does, demand for oil…art…stocks…and many other things…will go down in a hurry.

There. Is that helpful? Probably not. But that is the state of our reckoning with the oil market. We think oil is probably under-appreciated. But we suspect it will be appreciated even less when the credit bubble starts to go flat.

*** More bad news for the hedge funds. It is as if the press were finally waking up to what hedge funds really are – a way to separate a rich fool from his money.

Hedge funds, like all public spectacles, begin with deception. How could anyone paying 2% in fees and 20% in profits ever hope to make much money after taxes? Yet, some of the savviest investors believed they could.

After deception, the stage was set for farce, as Forbes reported recently:

“Hedge funds are a hotbed of questionable behavior, whether at blue-chip Wall Street firms or at fly-by-nights. Two youngsters and a 53-year-old assistant literature professor at a small college in New York formed a hedge fund, JB Stanley, and lost most of the $400,000 they raised from 15 investors. They siphoned off the rest for car payments, ATM cash withdrawals and other personal uses, according to SEC claims that led to a summary judgment against the three managers.”

But things could soon stop being funny.

“The hedge funds have been flooding the market with subprime mortgage bonds in order to raise cash needed to return to investors,” says a recent report by Roddy Boyd. “That has driven down prices across the board, depressing fund performance and making the bonds less attractive as collateral for loans.

“Investors are expected to learn over the next two weeks just how much damage hedge funds have sustained as a result of the subprime mortgage mess, and if the news is as bad as some market players expect, there is a fear that investors could pull out in droves.”

That will be when the final stage of the Crack-Up Boom comes along and farce turns into disaster.

The Daily Reckoning PRESENTS: Hans Sennholz, who passed away two weeks ago, was a died-in-the-wool doomsayer, a charismatic speaker, and an influential player in the financial freedom movement. Mark Skousen, who was a close friend of Dr. Sennholz’s, gives us a snapshot of his life, below…


Two weeks ago, an old dear friend in the financial freedom movement died at the age of 85: Hans Sennholz.

Hans was an inspirational speaker at investment conferences in the 1970s and 1980s. I heard him first at a Howard Ruff conference in the early 1980s. Speaking in a mesmerizing German accent, he was spellbinding and always got a standing ovation. I wished I had his facility of expression.

But Hans Sennholz was also a died-in-the-wool doomsayer who throughout his life was probably wrong more than right about the outlook for stocks and bonds. He always thought high inflation was just around the corner, and Wall Street was headed for collapse at a moment’s notice.

Sennholz was a thorough-going gold bug, a devoted follower of Ludwig von Mises and a critic of anyone who opposed the gold standard. He wrote books with titles such as “Inflation or Gold?”, “Debts and Deficits,” “The Age of Inflation,” and “Money and Freedom.” When Milton Friedman died late last year, he took the Chicago school to task for advocating monetary inflation. “In its search for stability,” wrote Sennholz, “the Friedman amendment, unfortunately, proceeds on the old road to nowhere. There is no absolute monetary stability, never has been, and never can be.” For Sennholz, a true Misesian, there was only one solution to inflation: return to the classical gold standard, where the dollar is backed by gold.

Sennholz’s plane was shot down by allied troops and he spent several years as a POW in the United States. After the war, he discovered Mises and returned to the United States to earn his Ph. D. in economics in 1955 from New York University, where Mises taught. For 37 years, he taught some 10,000 students Austrian economics at Grove City College in western Pennsylvania. (Peter Boettke, top Austrian economist at George Mason University, is one of his students.)

Sennholz was a prolific advocate of the Austrian school, writing 17 books and over 500 articles during his career. He wrote regularly for “The Freeman,” “Human Events,” and financial publications such as “The Inflation Survival Letter.” Since 2000, he wrote online columns ( He and his wife Mary (also an editor and writer) once met Ronald Reagan, who said “I’ve been plagiarizing you for years.”

But Hans Sennholz was best as a powerful electric speaker with that unforgettable German accent. He flew his plane all over the country giving speeches on the evils of inflation, deficit spending, and the falling dollar before bankers, stockbrokers, businessmen and religious leaders. I first met him at a Howard Ruff conference in the late 1970s. After hearing him for only a few minutes, you were smitten by this true believer and a gold bug. He was the Douglas McArthur of Free-Market Economics.

Like Ludwig von Mises, Sennholz was a pessimist. In the 1970s, he warned that America was headed toward an inflationary Armageddon. During the inflationary seventies, he debated John Exter, a former Citibank executive, on “Inflation or Deflation?” While Exter predicted massive deflation, Sennholz warned of triple-digit inflation. Both were proven wrong, and did not anticipate the supply-side revolutions of Reagan and Thatcher, which brought sanity back to the global economy.

Even then, Sennholz thought the Reagan-Thatcher revolution was temporary, and remained a pessimist. His final column, “Money is flooding the world markets,” written May 19, 2007, states: “A few pessimistic economists are convinced that a devastating economic cataclysm lies ahead. They usually point to three threats that may have a serious impact on the American economy. There is the burgeoning tower of public and private debt resting on a foundation of greed and overindulgence. There are a multimillion dollar list of promises to a retirement system and a vast building of government guarantees and promises that are bound to be unkept. There even is a world of complex derivatives, the value of which depends on something else, such as stocks, bonds, futures, options, loans, and even promises. They all, according to these economists, will be the victims of the coming cataclysm. This economist, who has observed central bank policies since the 1950s, is in basic accord and feels sympathy for these pessimists.”

Yet the amazing thing is that despite this negative outlook, Hans Sennholz was an astute investor and died a very wealthy man. How is this possible? He was always predicting a crash in the stock market, he was bearish on bonds, and he seldom did well trading commodity futures. What’s left? Surprisingly, he made millions in small town real estate! Over the past 50 years he bought and sold numerous rental properties in his college town of Grove City, Pennsylvania, and other near-by locations. At one time Hans Sennholz was probably the largest landlord in Grove City. He even owned the property where we held his funeral!

He sold off a lot of his real estate when, in 1992 at the age of 70, he and his wife Mary took on the daunting task of reviving the Foundation for Economic Education. FEE was the first free-market think tank founded by Leonard Read in 1946 in Irvington-on-Hudson, New York. After Read died in 1983, FEE struggled financially and lost its influence. Sennholz came in and over the next five years righted the ship. He fired people and slash the budget, and got it back on course. In 1996, FEE celebrated its 50th anniversary by having Margaret Thatcher as the keynote speaker.

It was during his tenure as president of FEE that I got to know Hans Sennholz personally. He frequently invited me to speak at FEE’s monthly lecture series. I invite all my subscribers to come and we had big crowds at the FEE mansion. At the beginning of my talk, I’d turn to Hans and ask him to tell my subscribers all about FEE. In that unmistakable German accent, he spoke eloquently for 10-15 minutes and convinced people to donate to a good cause. Later he asked me to be a columnist for “The Freeman.” He also had FEE published the third edition of my book, “Economics of a Pure Gold Standard.” I am convinced that my becoming the president of FEE in 2001-02 was directly the result of Hans Sennholz’s unwavering support.

I was privileged to participate in writing a collection of essays in honor of Sennholz when he retired from full-time teaching at age 70, A Man of Principle (Grove City College, 1992). My favorite book by Hans Sennholz is called “The Politics of Unemployment” (Libertarian Press, 1987). His books are available at, run by his son Robert.

Douglas McArthur used to say, “Old soldiers never died, they just fade away.” Hans Sennholz may have faded away, but he shall never be forgotten.


Mark Skousen
for The Daily Reckoning
July 10, 2007