U. S. Real Estate BuzzThis short overview of our current economic and real estate conditions is what I think, presented in a simplistic, broad-brush narrative of the affairs that lead us to where we are today with some realistic long term ideas to prosperity and solid economic recovery and growth.HistoryFirst, we know every industry is like the tide each with it’s own ebbs and flows. To be certain the real estate market is experiencing these changes, so in many respects this is very normal. The real estate industries ebb and flow is generally 10 to 12 years. The last time we hit bottom was at or around 1995-1997. What’s not normal is how dramatic this occurrence really is. The ripple effect is clearly worldwide, which illustrates this is not just a real estate problem but a financial one also. We did have a disastrous real estate market in the mid to late 1970′s, which, resembles much of what we’re going through today but it was more of a national problem than worldwide.CurrentThe current state of our economy is a direct result of several factors that have been building for many years. The main contributing factor in my estimation, which is usually the case, is government policies. What government does and or does not do effects all us in profound ways, such as raising taxes, creating regulations, and spending policies to name a few, and of course politics; in short this is social engineering. The courses of action our politicians adopt have a direct effect on how we live our lives, how we invest money and what we invest in. Investors invest in assets that will make them money or provide them the means to do so.For the past 5 to 6 years, the real estate market had been flooded with new home buyers previously renters, along with many “step-up” home buyers. Financing was very easy to get for most people, many of who perhaps should have never had it so easy. With that, poor spending habits ensued throughout the general population, in other word’s we were acquiring large amounts of debt without the income to match. Many businesses such as the financial institutions also had their fair share of shady dealings. Additionally, Governments at all levels were doing the same thing. They’ve never seen this kind of money come in at such a fast pace and of course with policies put in place years before you get an economic condition, i.e. government spending, regulations, taxes & fees that couldn’t be absorbed anymore by the general population, corporations and the financial institutions. A very serious unstable market had been created.Finally, if all the previous spending wasn’t enough, the government went on a monumental spending binged over the past 10 months dragging the economy further down. Now you may ask why is this so important? It’s because everything the government does, as I have said, has a profound effect on each and every one of us. Why? Investors and investments! It’s no accident that we have the most dynamic and advanced economy in the world. The United States embraced an open market place long ago where investors, influential people, empire builders and entrepreneurs alike have the freedom to invest their money, products and ideas into our system. No other place in the world can you do this quite the same way.
The problem is over the past 20 or so years corporate regulation and tax burdens are out of control, Influence on public employees to do favors has never been so far-reaching and nearly 50 % of the population doesn’t pay income taxes. The country has been changing in ways, which leads the Movers & Shakers to rethinking their investment strategies. Earning money has some how now become a bad thing politically. Be clear making money is a good thing and should never be frowned upon. Not withstanding unethical and illegal activities.The Investor class of people are very astute, and rests assure they are watching everything going on, and until they see clear skies ahead they will either remain on the sideline or invest elsewhere. Several things in the near term need to happen before we can see clear skies.Solutions
The financial markets need to finish cleaning-up their books with their bad debts, which will lead to improved lending.

Taxes in all forms including “pass-through taxes” such as the new Cap & Trade energy tax cannot go up and or be implemented as they are scheduled too. Congress must keep this from happening.

Congress must repeal the planned stimulus-spending bill, which will go into high gear just after the 2010 elections.

Commercial real estate, nationwide, is headed for huge loan defaults unless something allows the property owners a way to refinance without adding cash equity into the asset we will see more than 700 Billion dollars of loan defaults; this will be ugly.

Interest rates must remain low and balanced with possible inflation and deflation conditions.
Once the above happens and or moves in that direction businesses can once again begin their empire building, which leads to growth, which will spark employment, which will allow mom & pop investments to occur. Remember 80% of jobs are from small businesses. The employment market must be stabilized! Then the residential housing market can go into a full recovery swing that will promote a more stable economy. We believe residential real estate will lead commercial real estate out of this recession. Additionally, Multifamily will lead the way in the commercial market.Long term, we need to be concerned with public policy and the spending that comes with it. It is my opinion; we should embrace and employ a whole new breed of Entrepreneurship along with a core focus on Research & Development in all of our industries. This type of R&D spending will help ensure future growth of our economy. In order to have a strong real estate marketplace we need a strong economy. In order to have a strong economy we need good public representatives.
The people of this great country need to understand, we will be better served to plan the future many, many years ahead of time should we plan to continue to lead the way for the rest. We have a great economic system and therefore the promotion of such a system should be pursued.Bright Side

Loan defaults will spark a lot of buying with new money.

By 2010-11 we should be on our way to recovery and out of this mess by 2013 as long as government policies improve.

Interest rates should remain low for a little while.

Our country has always bounced back each time we’ve gone through recessionary periods.

We favor investments that are low cost, tax efficient, diversified, liquid, and simple. Many investors often run into trouble when they invest in things that do not have these five characteristics. Investments with these five characteristics have been profitable over time, but typically are not very exciting. There is generally not a “hot story that you need to act on now!” associated with them. The financial services industry generally does not favor these type of investments because they generate very little profit from them. We are in the business of helping to maximize the wealth of our clients, not the financial services industry. Keep in mind that this list of investment characteristics is not comprehensive. Other factors to look for in investments might include attractive valuation, low correlation to your other holdings, a nice dividend yield or interest income, a tilt towards areas of the market that have produced higher returns such as value stocks, an appropriate risk level for you, etc.Low Cost. We typically invest in low cost index based funds and exchange traded funds (ETF’s). The funds we invest in have an average expense ratio of only.30% per year. The typical actively traded equity mutual fund has an average expense ratio of 1% or more. With investment funds, the best predictor of future relative performance is the expense ratio on the fund; the lower the better. Hedge funds typically have annual expense ratios of 2% plus 20% of any profits earned. Some variable annuities and permanent life insurance “investments” can have annual expenses of 2% or more. By keeping a close eye on the costs of our investments, we can save our clients significant amounts of money each year and help them achieve higher returns over time (all else being equal). With investment products, you don’t get better performance with a higher cost product, in fact you typically get worse performance.Tax Efficient. Our investments (index based funds and ETF’s) are extremely tax efficient and they allow the investor to have some control over the timing of the taxes. These types of funds have low turnover (trading activity), which is a common characteristic of tax efficient investments. We recommend avoiding mutual funds with high turnover due to their tax inefficiency. After the recent big increase in the U.S. stock market, many active equity mutual funds have “imbedded” capital gains of as much as 30%-45%. If you buy those mutual funds now you may end up paying capital gains taxes on those imbedded gains even if you didn’t own the fund during the increase. ETF’s typically do not generate long and short-term capital gain distributions at yearend, and they do not have imbedded capital gains like active mutual funds. Hedge funds are typically tax inefficient due to their very high turnover. In addition to investing in tax-efficient products we also do many other things to help keep our client taxes minimized such as tax loss harvesting, keeping our turnover/trading low, putting the right type of investments in the right type of accounts (tax location), using losses to offset capital gains, using holdings with large capital gains for gifting, investing in tax-free municipal bonds, etc.Diversified. We like to invest in diversified funds because they reduce your stock specific risk, and the overall risk of your portfolio. Bad news released about one stock may cause it to drop 50%, which is horrible news if that stock is 20% of your whole portfolio, but will be barely noticed in a fund of 1,000 stock positions. We tend to favor funds that typically have at least a hundred holdings and often several hundred holdings or more. These diversified funds give you broad representation of the whole asset class you are trying to get exposure to, while eliminating the stock specific risk. We are not likely to invest in the newest Solar Energy Company Equity Fund with 10 stock positions, for example. We don’t believe in taking any risks (such as stock specific risk) that you will not get paid for in higher expected return.Liquid. We like investments that you can sell in one minute or one day if you decide to do so, and those which you can sell at or very close to the prevailing market price. With liquid investments you always (daily) know the exact price and value of your investments. All of the investment funds we recommend meet this standard. We don’t like investments which you are locked into for years without the ability to get your money back at all or without paying large exit fees. Examples of illiquid investments would be hedge funds, private equity funds, annuities, private company stock, tiny publicly traded stocks, startup company stock or debt, illiquid obscure bonds, structured products, some life insurance “investments,” private real estate partnerships, etc. We prefer investment funds that have been around for some time, are large in size, and have high average daily trading volumes.Simple. We prefer investments that are simple, transparent, and easy to understand. If you don’t understand it, don’t invest in it. All of our investments are simple and transparent; we know exactly what we own. Complicated investment products are designed in favor of the seller, not the buyer, and usually have high hidden fees. Examples of complicated and non-transparent investments that we generally avoid are hedge funds, private equity funds, structured products, some life insurance “investment” products, variable annuities, private company stock, startup company stock or loans, etc. “Make everything as simple as possible, but not simpler.” -Albert Einstein.We believe most investors should have the majority of their portfolio invested in things that have these five excellent characteristics. By doing so you will avoid plenty of mistakes, negative surprises, and risks along the way. In addition, we believe your after tax investment returns will likely be higher over long periods of time. Of course not every smart or good investment will have all of these characteristics. For example, income producing real estate property is illiquid (and often not diversified) but can be an excellent long-term investment if purchased and managed properly. Owning your own business is illiquid and not diversified but can be an excellent way to build wealth as well. We believe these five investment characteristics become even more important as you enter retirement, since at that point you may be more focused on reducing risk and preserving your wealth than building it, and you may need the liquidity to spend and gift part of your wealth during retirement. These five excellent investment characteristics can be a good screening device for possible investments and good factors to think about when investing.