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Featured Article:

Is House Price Appreciation Dead?

Many are wondering if the recent nationwide uptick in house prices is only temporary. After all, isn’t the myth of house price appreciation dead?  Here is an interesting concept that may shed some light on the situation…

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Featured Article:

Ballad of the Creative Down Payment

Jack and Jill
Went up the hill
Their first home to buy.

Smiling bright,
In the sunlight,
Anticipation in their eye…

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Articles include:

How to Save Over $30,000 on Your Home Purchase

Most home buyers today are looking for a great deal.  What if there was a unique way to save tens of thousands of dollars on your home purchase WITHOUT asking the seller for a huge reduction in price?

Kids and Goals: The Similarities Between Soccer and Life

Many adults set yearly goals. Fewer set monthly or weekly goals and only a lucky handful set daily goals. Why lucky? Because chances are that the daily goal setters reach more of their goals than others…

10 Tips to Synergize Your Team – Part 2

SUPPORT THE TEAM-ESPECIALLY WHEN THERE’S CONFLICT It’s easy when everybody gets along … the real test of a team is when there’s disagreement. If team…

7 Keys to Sales Success

There are many ingredients necessary for success in sales. Here are 7 keys to help you achieve your sales goals.

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Articles include:

Two Reasons Why House Prices Will Go Up

There are two major reasons why house prices are likely to go up over the next few years. Are you aware of these issues and are you prepared to participate in the market recovery?

Financially Intelligent Children Begins With Financially Intelligent Parents

Turning children into financially responsible adults has proven to be quite a challenge for many, if not most, parents. They don’t know how to talk to their kids about money, and…

Risk: What is the Alternative?

Is there any such thing as a “risk free” choice in life?  How do we know which decision carries the least amount risk?

10 Tips to Synergize Your Team – Part 1

Will teamwork bring in more clients and keep the ones you’ve got? Yes! People who work together may develop the dreaded “Who cares?” disease…

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Articles include:

Why the First Time Home Buyer Credit Matters to YOU
Are you or someone you know thinking of buying your first home? Here is an easy-to-understand explanation of the first-time home buyer tax credit along with great financing strategies to go along with it!

Is Housing Still Over-Valued?

It is no secret that house prices have declined dramatically in many parts of the country. Yet, many people are still arguing that housing still has a long way to fall before it becomes affordable. Are they right?

What’s in a Word?

Daniel Webster once reported that if all his skills were taken from him, with the exception of one, he would choose to keep his communication, for with it he could regain all the rest…

Confidence: How do we Gain It?

Whether we are trying to find a new job, build deeper relationships, meet new people, or achieve success in any other area of life, confidence is essential. Yet, we all lack confidence in one way or another. Here’s a little story…

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How Miserable Are You?

Okay fine. It’s getting old already. All the negativity in the market, that is.

Who wants to make a bet that this is NOT the worst economic crisis since the days of the Great Depression?

Deal?

I’m in!

The US Unemployment Rate is soon to be over 7% when the numbers come out later this week. In the hardest hit areas of the country (like MI, OH, CA) we’re looking at over 10% unemployment. However, the good news is that we can still afford the cost of living! Imagine losing your job and, at THE SAME TIME, the little remaining cash you have sitting in the bank is losing value. You want to save your money to weather the storm, but you know that unless you spend your money NOW, it will be worth less next week, or next month or next year. THAT is misery: when you have no income coming in to buy food (and cell phone minutes) and the little money that you still have in your checking account buys only half or a quarter of the food (and cell phone minutes) that it bought last year.

There’s a nifty measurement for this called the “Misery Index”. Essentially, the Misery Index is the rate of unemployment (the percentage of workers who have no jobs) PLUS the rate of inflation (the rate at which money loses its purchasing power).

Currently, the misery index in the US is approx. 10% (approx. 7% unemployment + 2%-3% annual inflation).

In a worse case scenario, let’s pretend the unemployment rate goes up to 10% or 12% all across the country (not just in MI, OH, CA). In that case, the misery index would be about 13% – 15%.

Now for comparisons, here’s a nice chart that illustrates the Misery Index over the last 60 years:

Misery Index

Misery Index

As you can see, the last time the Misery Index reached over 10% was NOT the Great Depression! It was in 1992 – just 17 years ago. The last time the Misery Index reached over 15% was in 1982 – just 27 years ago. In fact, the Misery Index hit a high of over 20% during the recession of the early 1980s. In other words, we were twice as miserable in the early 1980s as we are today!

Oh, and in case you were wondering, we made it through the 1980’s just fine…at least those of us who have made the switch to iPods from cassette tapes…

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The OTHER 50%

Just last week, I was giving a speech in Pasadena, CA, to the local chapter of the California Association of Mortgage Brokers.  As I interacted with the attendees, I noticed that many people seemed to be literally depressed about the current market conditions.  Foreclosures, short sales, plummeting home values, and distressed home owners take their toll on morale after a while!  Many of the people in my audience seemed to be wondering if they were slated to be the next victims of this crisis that keeps hitting our industry like a never-ending tsunami.

The Mortgage Meltdown began in July 2007 and has only gotten worse since that time.  In fact, the Great Financial Crisis of 2007-2009 has claimed 50% – 70% of all mortgage loan originators in the country as casualties.  It is estimated that over 200,000 men and women have completely left the industry.  To be sure, a significant number of people who left the mortgage business should have never been there in the first place.  Even so, many others have left the business after a long and storied career of fighting ethically and courageously on behalf of their clients and business associates.

The main theme of my presentation to the California Association of Mortgage Brokers was how the survivors in the audience could pick themselves up and do business with the OTHER 50% of homeowners who can still qualify for financing.  Here’s the reasoning that I laid out (very eloquently, I might add):

  • 50% + of mortgage originators have left the business
  • 50% + of homeowners in CA (and some other markets for that matter) are in or near a negative equity situation and cannot qualify for financing (until, of course, our government’s plan to save the world takes effect in a few weeks)
  • Therefore, if you are part of the 50% of people who are still in the mortgage business, the only way to pick up the pieces and do a brisk business is to focus on working with the 50% of homeowners who can qualify for your services!

Makes sense, doesn’t it?

I then proceeded to outline all the great opportunities of this down market.  I laid out my step-by-step plan for how to find and do business with the right people…and we all lived happily ever after…

You see, the problem with all of us human beings is that we allow ourselves to get dragged down by all the negativity surrounding us.  By wallowing in our misery, we lose sight of the opportunities that exist right in front of our eyes.  We are dying of thirst and we refuse to take a single sip of life-sustaining water because we are so depressed that the glass in front of us is half empty!

I find myself in this trap many times.  Every day (literally) I must constantly remind myself that the key to my own success and happiness is sitting right in my pocket.  All I need to do is get up out of the mud, clean myself off, and unlock the door in front of me.

Moral of the story: focusing on the 50% of business or life that is gone (may it rest in peace) will do nothing to help you capture the 50% of business or life that is sitting right in front of you.

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Many thanks to those of you who have commented on my two previous posts!

The main concern that some of you have expressed is that I am calculating the US debt ratio using our total national economic output (GDP) as opposed to looking at the actual tax dollars received by the government.  This is quite normal when discussing the economics and debt ratios of sovereign governments like the United States.  Here’s why:

Let’s go back to the homeowner in my example who is earning $140,000 per year.  Part of that $140,000 is being budgeted for food, part of it is going toward clothing, part of it is being spent on shelter, etc.  No one area of that person’s life is receiving the full $140,000.  You see, if the household spends their entire $140,000 of income on just one area of their life such as food or shelter, there would be no money left over for anything else.  The household would quickly die of either starvation, exposure to the elements, or both.

The same is true with the total economic output of a sovereign nation like the United States.  Part of the $14.5 trillion we produce collectively as a nation is going toward consumption, part of it is being taxed and going to support our government.  No one area of our economic “life” gets the full $14.5 trillion.  If the government were to tax the full $14.5 trillion at 100%, our economic output would quickly collapse because there would be no cash left over for anything else.  Let’s not forget however, that just like a household can decide how to manage its $140,000 of annual income, our government (all of us collectively through our elected officials) can choose how to manage our $14.5 trillion of annual economic output. In other words, a sovereign government does have the authority to raise taxes to 100%, just like a household has the authority spend 100% their income on only one area of life.

THAT my friends, is the reason why economists look at total debt levels compared to total economic output when calculating the debt ratios of sovereign nations like the United States!

Here’s an interesting fact:

During World War 2, the US debt ratio (using these exact same metrics) reached a high of over 100%.  Interest rates remained low and we did not collapse from over-indebtedness.  After the crisis was over, our economy came back to life and grew at a much faster rate than the growth of our national debt burden.  So yes,we have been through this before and we came out on the other side just fine.

Also, let’s remember that although this method of calculating the debt ratio is the most popular among economists, there are other measurements that are sometimes used by economists to judge the solvency of a sovereign nation.  For example, let’s go back to the homeowner in our example with a total debt burden of $120,000.  Assume that this homeowner has a home worth $720,000.

The total loan-to-value ratio would be 16.67%.

($120,000 debt burden / $720,000 home value)

Now, let’s apply this concept to the United States as a sovereign nation.

As of the third quarter of 2008 (the latest available statistics), US households and businesses had a total net worth (assets minus liabilities) of over $72.6 trillion.  Let’s calculate a loan-to-value ratio on the United States:

If you don’t include the liabilities of Fannie and Freddie, the total US loan-to-value ratio is approx. 9.6%

($7 trillion total US debt / $72.6 trillion total US net worth).

If you do include the liabilities of Fannie and Freddie, the (as yet) unused bailout funds, and the latest economic stimulus package that is likely to pass in the next week or so, the US loan-to-value ratio would be 16.7%

($12.14 trillion total US debt ceiling / $72.6 trillion total US net worth)

So in other words, the US has a loan-to-value ratio of 9.6% – 16.7% and equity of 83.3% – 90.4%.

Would you make a loan to this borrower?

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