Curried Wealth Building
Finding an Edge

If you want help with your finances, give me a call at 703-791-3243.
November 27, 2010
Issue 124  -  Housing Musings
I'll start with a chart from
The main part I want you to focus on is the bottom third.  This shows the average homeownership rate in the U.S.  You can see that the long time average is about 65.5%.  However, this has been skewed up by the bubble of 1998-2006.  The real average is about 64.5%.  Right now we sit at just under 67%.  If we revert to the average, and there is no reason to think we won't, then we are about half way through the correction. 
There are a little bit more than 1.1 million houses per 1% on the chart.  This means that there are roughly 2.5 million houses that need to come out of the hands of their current owners.  They will become renters.  This long term average is not by chance, it was determined by people living as they wanted without government interference.  When the interest rates were lowered to unnatural levels, the people responded by buying houses.  The "deals" were too good to pass up. 
So this overhead of homes, not to mention the millions of homes already bank owned which haven't been put on the market yet, will keep a lid on prices and drive them down.  By the way, the banks have been trying to "manage" the housing market supply with these tactics, which has kept prices artificially up. 
I received a Money magazine special issue this past week and it had an interesting article.  The title of the article is "Buying a Home Now is a No-Brainer."  If you believe that Money magazine is a fountain of wealth building ideas, then my condolences.  This is a contrary indicator meaning we are no where near the bottom.  When Money has an article saying that homes are a money pit, then I'll be buying.  I distinctly remembering Money proclaiming the virtues of home ownership in 2006, right at the peak. 
The authur of the article is Ali Velshi, who you may have seen on CNN:
Seems like a nice enough guy, but he just WANTS to believe the housing market is close to the bottom.  (maybe because he just bought an apartment this year.....)  We're not.  I wish we were.  Two interesting quotes out of the article bring to light the wrongheadedness  of the article.  The first is the title of the graphic showing the total cost of home ownership over the last four years.  The title is "A Bargain, but for How Long?"  The graphic shows housing inching up for the first time in three years.  First off, the gain is a very small 2%.  This will be short lived as the excess inventory comes on the market.  Of course the title of the article makes it appear that there is almost a hurry to rush back into the market.  There isn't.  Also if interest rate rises of the last week or so continue, housing prices are in trouble. 
This leads to the second example of Mr. Velshi's ignorance of the way these things work.  When talking about his predictions from last January he says, "At the time, I thought that prices and rates were more likely to rise than fall.  I was half right."  Think this through for a second.  If rates on mortgages had risen, is it possible that house prices would have risen also?  Not with static to falling incomes.  If rates had risen, then housing prices would have fallen as buyers would've qualified for lower payments.  It's just math.  Of course there is an exception to this scenario, high inflation.  I don't think Mr. Velshi thinks that's possible though so his prediction had no chance of being correct.  If inflation does start kicking in, and I mean in a BIG way, then housing prices will rise.  They won't keep up with the inflation rate, but they will rise as paper values fall.
Another reason for my pessimism is the woeful state of the average American's finances.  Read it and weep: 

U.S. consumers unprepared for rainy day expenses

06.11.2009 United States

Half of all US consumers would struggle to meet an unexpected expense...
New York, November 4th 2009. Half of all US consumers would struggle to meet an unexpected expense according to the TNS Personal Risk Assessment and Risk Literacy Survey. The report shows that many consumers, particularly in the UK, US, Germany and Mexico, currently lack the resources to meet an unexpected financial crisis like sudden car or home repairs or minor health related expenditures.

The TNS Finance Personal Risk Assessment and Risk Literacy Survey is a consumer survey developed by TNS in association with professors from Harvard Business School and Dartmouth College. The survey analyzes nationally representative consumers across eleven countries with respect to their risk literacy, household financial fragility, and financial experience and behavior during the economic crisis of 2008-2009.

According to Peter Tufano of Harvard Business School, "These figures include more than just the unemployed or lowest income households. In many countries, there is widespread financial fragility with a significant number of seemingly middle-class consumers extremely vulnerable to sudden financial emergencies."

No Financial Safety Net
To measure capacity for risk bearing, the survey probed if consumers could come up with enough money for a major car repair in a month. Around half of American, British and German respondents reported that they would not be able to come up with $2,000 in 30 days from savings, borrowing, friends or family: at 46% in the US, 49% in the UK, 47% in Germany. Mexico fared worst of the results analyzed with 58 % unlikely be able to find the funds.

Where to turn for help? Savings, credit or social networks?
Savings would be the primary source of emergency funds in most of the countries polled; savings being the most likely course in Luxembourg (86%) and the Netherlands (89%), and used by around half of respondents from US (49%), Germany (52%), UK (50%) and Canada (52%).

Informal social networks are the predominant sources for funds in some countries. Mexican and Argentinean respondents were least likely of the countries polled to be able to access savings and most likely to look to family for help. Over half the respondents from Mexico (53%) and Argentina (43%) would seek help from family. Yet, around 30 percent of respondents from the US, Germany, the UK, and France thought they would ask for help from their family. In general women are significantly more likely to ask family for help than men. In the US 32% of woman compared to 24% of men would borrow or ask for help from family.

In all countries, the younger the consumers, the more frequently they mention borrowing from family as source to fund an unexpected expense. According to Trish Dorsey, SVP TNS Finance, "While it is not necessarily unexpected that younger consumers would rely more on family than older consumers, it does hint at a potential area of concern. That is, older consumers have seen their savings and retirement nest eggs decrease as a result of this crisis; increased reliance on them from their younger family members may put an additional burden on their funds."

While credit cards are ubiquitous, households don't expect to turn to credit for emergencies. Credit cards were surprisingly low on the list of emergency options. After savings, credit cards are cited as an emergency option in Canada (28%) and Luxembourg (27%). Only 20% of the US and UK respondents would use plastic and fewer than 1 in 10 of respondents from the other countries surveyed would reach for their cards in an emergency.

This is a survey I heard about through the Freakonomics podcast.  It shows that only about 50% of Americans could come up with $2,000 in 30 days!  That's four weeks!  All I can say is wow.  What makes this so amazing is that they can use ANY means to get it:  credit, savings, or friends/family members.  That is pathetic.  It also means a lot of people are this
close to disaster.  I pray that everyone reading this can come up with 2,000 bucks in 30 days.  Another aspect of this survey which I found on the podcast was even scarier.  25% of those making $100-150,000 couldn't come up with the money either!!!!!  What is going on in this country?  Someone with a gross income of $10,000 a month couldn't come up with two?  Geez, that is a mind numbing.
So we have a savings problem in this country and no quick fix at the ready.  Could there be disincentives for the middle class in place?  How about having more disposable income while making minimum wage versus $60,000 a year:
Zero Hedge, Tyler Durden

Tonight's stunning financial piece de resistance comes from Wyatt Emerich of The Cleveland Current. In what is sure to inspire some serious ire among all those who once believed Ronald Reagan that it was the USSR that was the "Evil Empire", Emmerich analyzes disposable income and economic benefits among several key income classes and comes to the stunning (and verifiable) conclusion that "a one-parent family of three making $14,500 a year (minimum wage) has more disposable income than a family making $60,000 a year." And that excludes benefits from Supplemental Security Income disability checks. America is now a country which punishes those middle-class people who not only try to work hard, but avoid scamming the system. Not surprisingly, it is not only the richest and most audacious thieves that prosper - it is also the penny scammers at the very bottom of the economic ladder that rip off the middle class each and every day, courtesy of the world's most generous entitlement system. Perhaps if Reagan were alive today, he would wish to modify the object of his once legendary remark.

From Emmerich:

You can do as well working one week a month at minimum wage as you can working $60,000-a-year, full-time, high-stress job.

My chart tells the story. It is pretty much self-explanatory.

Stunning? Just do it yourself.

Almost all welfare programs have Web sites where you can call up "benefits calculators." Just plug in your income and family size and, presto, your benefits are automatically calculated.

The chart is quite revealing. A one-parent family of three making $14,500 a year (minimu wage) has more disposable income than a amily making $60,000 a year.

And if that wasn't enough, here is one that will blow your mind:

If the family provider works only one week a month at minimum wage, he or she makes 92 percent as much as a provider grossing $60,000 a year.

Ever wonder why Obama was so focused on health reform? It is so those who have no interest or ability in working, make as much as representatives of America's once exalted, and now merely endangered, middle class.

First of all, working one week a month, saves big-time on child care. But the real big-ticket item is Medicaid, which has minimal deductibles and copays. By working only one week a month at a minimum wage job, a provider is able to get total medical coverage for next to nothing.

Compare this to the family provider making $60,000 a year. A typical Mississippi family coverage would cost around $12,000, adding deductibles and copays adds an additional $4,500 or so to the bill. That's a huge hit.

There is a reason why a full time worker may not be too excited to learn there is little to show for doing the "right thing."

The full-time $60,000-a-year job is going to be much more demanding than woring one week a month at minimu wage. Presumably, the low-income parent will have more energy to attend to the various stresses of managing a household.

It gets even scarier if one assumes a little dishonesty is throwin in the equation.

If the one-week-a-month worker maintains an unreported cash-only job on the side, the deal gets better than a regular $60,000-a-year job.  In this scenario, you maintain a reportable, payroll deductible, low-income job for federal tax purposes. This allows you to easily establish your qualification for all these welfare programs. Then your black-market job gives you additional cash without interfering with your benefits. Some economists estimate there is one trillion in unreported income each year in the United States.

This really got me thinking. Just how much money could I get if I set out to deliberately scam the system? I soon realized that getting a low-paying minimum wage job would set the stage for far more welfare benefits than you could earn in a real job, if you were weilling to cheat. Even if you dodn't cheat, you could do almost as well working one week a month at minimum wage than busting a gut at a $60,000-a-year job. 

Now where it gets plainly out of control is if one throws in Supplemental Security Income.

SSI pays $8,088 per year for each "disabled" family member. A person can be deemed "disabled" if thy are totally lacking in the cultural and educational skills needed to be employable in the workforce.

If you add $24,262 a year for three disability checks, the lowest paid welfare family would now have far more take-home income than the $60,000-a-year family.

Best of all: being on welfare does not judge you if you are stupid enough not to take drugs all day, every day to make some sense out of this Mephistophelian tragicomedy known as living in the USA:

Most private workplaces require drug testing, but there is no drug testing to get welfare checks.

Alas, on America's way to to communist welfare, it has long since surpassed such bastions of capitalism as China:

The welfare system in communist China is far stringier. Those people have to work to eat.

We have been writing for over a year, how the very top of America's social order steals from the middle class each and every day. Now we finally know that the very bottom of the entitlement food chain also makes out like a bandit compared to that idiot American who actually works and pays their taxes. One can only also hope that in addition to seeing their disposable income be eaten away by a kleptocratic entitlement state, that the disappearing middle class is also selling off its weaponry. Because if it isn't, and if it finally decides it has had enough, the outcome will not be surprising at all: it will be the same old that has occurred in virtually every revolution in the history of the world to date.

 Looking at the chart in the middle of the story reveals a host of problems in this country.  The big thing that sticks out is the fact that the household making minimum wage, actually makes more then their wages just for being alive.  This is socialism, plain and simple.  Also look at the NUMBER of programs giving people money (your money) for a wide array of "noble" reasons.  There are 7 programs of give aways.  This is just plain wrong and eliminates all incentive to do the right thing.  There is no way a private charity would give people money in this way.  They properly monitor and determine fitness to receive before money goes out.  Not our government, just spend it as fast as you can.  Damn the torpedoes!  We can't let gravity take hold.  The number of programs also masks the total from casual viewing.  Before you know it, people will be paid government salaries just for signing up.  This has to change before we can make a meaningful recovery.  These people spending the money that other people paid in taxes does NOTHING for the economy on a net basis.
 There was also very good GORO news:

Gold Resource Corporation Commences Mining Arista Vein System

Hires Mexico Country Manager DENVER, CO--(Marketwire - 11/23/10) -

Gold Resource Corporation's polymetallic Arista vein deposit contains high-grade gold and silver mineralization with by-product credits of copper, lead and zinc. The Arista Vein system is made up of multiple en echelon veins with the two predominant veins being the Baja and the Arista veins. Both veins have been intercepted and as mine development continues high-grade ore is being stockpiled.

Mr. Juan Manuel Flores joins Gold Resource Corporation as Mexico Country Manager. Mr. Flores has over 30+ years of experience in the mining, metallurgy and construction industries. His experience includes country manager, general manager, operations manager, project manager, mine superintendent of different mines and processing operations, in some of the most productive underground and open pit mines in Mexico.

Mr. Flores' mining company associations include Minera Rio Tinto SA De CV, Constellation Copper, Pan American Gold Fields, Harrison Western, Mine Finders, Minera Frisco, Industrial Minera Mexico (ex-Asarco), Minas de Bacis, Cozamin, Grupo Mexbel and Groupo Summa. Mr. Flores graduated as a Mining and Metallurgist Engineer from the Universidad Autonoma de Chihuahua and in 1973 and 1974 attended the courses of the Master of Science Program, Mineral Economics, at the Colorado School of Mines.

Gold Resource Corporation's President, Mr. Jason Reid, stated, "We welcome Mr. Flores as he will complement our excellent team of professionals. We are building a first class underground mine under the expert direction of our Project Manager, Mr. Jorge Sanchez Del Toro, and with the addition of Mr. Flores, in concert with our dedicated staff of professionals, the Company is executing its plan for aggressive growth."

Mr. Jason Reid continued, "Commencement of stockpiling underground Arista ore, in the fourth quarter as planned, is a significant milestone for the El Aquila Project. We are presently mining the Baja vein and developing the Arista vein on the 4th level. Our spiral decline (see photo) will be to level 5 shortly where we will add additional working faces to the mining of the Baja and Arista veins."

"We have asked our team to evaluate an accelerated schedule to process the Arista deposit high-grade polymetallic ore as soon as practicable. We want to process our highest grade ore during this time of historically high metal prices," stated Mr. Jason Reid.

With GORO now mining their super high grade ore, their earnings should increase quickly.  They also added a "country" manager.  Why would they do that, as they are only IN Mexico?  I believe it is another hint from management.  They just LOVE to give out hints of what lies ahead.  I think this means they are close to buying another property in another country.  This would be great as large investors love diversification.  This would open up GORO to a much wider base of investors.  Gold Resources continues to perform in an outstanding manner.
Goro  (closed at $24.52, up $1.42, average price paid, $6.10) 
Mexus Gold  (closed .23, down 4 cents, average price paid, $0.20)   
GORO June 11, call options, strike $20 (closed at $6.05, up $0.25, [due to the low option volume, I'm going to start using the average of last bid and call, which is a more realistic price] average price paid, $5.60)
Closing this week I have a video from last year, but I missed it.  Another brilliant explanation of how politicians use our inability to visualize large numbers against us. (thanks to John P.)  Have a great week!