BFP Management Blog

Archive: August 2011

Slow Moving Train Wreck

In the October 2009 issue of the Apartment Reporter, I posted Figure 1 and predicted that the housing market had yet to find a bottom (remember the $8,000 first time home buyer tax credit from the US Government that could be monetized was going to stabilize the market?). The graph projected 48% of borrowers owing more on their homes than it would be worth in the 1st Quarter of 2011. As discussed, the market has continued to fall and the tax credit was one of the first kicks at the can.

Figure 1

Blog 0811 #1






While I take pride in seeing my predictions come true, I’m sorry that the housing market continued and continues to fall. Currently in Las Vegas, 65% of all homes listed for sale are short sales (where the bank will need to forgive debt for the property to be sold). As the prices have continued downward, we see in Figure 2 that the value of home equity is at a 64 year low.

Figure 2

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Source: GaveKal

Federal Reserve Chairman Ben Bernanke has stated that QE2 will come to an end as planned. One can argue that without the interest rates being pushed down by the Fed’s Treasury purchases that real estate prices would be even lower. There is no question that the low rates has been a boon to Fortune 500 companies who have been borrowing as much as possible. Unfortunately for the economy as a whole (and I’m thinking about people like our tenants on whom we depend), food and energy prices have been going up while there has been little to no wage growth. In other words, our residents have less money to pay more rent when they have to pay more to eat, fuel their cars and heat / cool their apartments.

The government has been quick to use the US Express card and simply add the liability to the nation’s balance sheet. While I predicted the real estate crash and severe recession, I did not see the massive government intervention given past official statements railing against that action when other countries pursued that course. To many economists, the bail-outs / stimulus was and is necessary to prevent an even worse calamity while I believe it simply makes for a slower moving train wreck and likely an even bigger one at that.

Let’s take stock of how the US keeps our books for us given that we as taxpayers and theoretical beneficiaries of entitlement programs (at 44, I’m pessimistic on my chances of cashing a Social Security check in 20+ years and benefitting from medicare). When a corporation takes on a liability (i.e. a medical benefit given to its employees), it is required to show it as a loss. Our government doesn’t count the entitlements as a liability until it actually has to write the check.

$1.5 Trillion of new debt was added last year to finance the governments real time operations. That took the deficit to about $14 Trillion; which is money actually borrowed from foreign countries, bond funds and individuals. According to USA Today who calculated federal finances using standard accounting rules, there are $61.6 Trillion of unfunded obligations or over $534,000 owed by each American household.

It is easy to see that the US will not go down the current path of borrowing $.40 of every dollar spent and paying entitlements and programs (social security, medicare, military, schools, roads) at current levels. A weak dollar policy is already being pursued although no US politician will admit it and this will cause inflation. I share these staggering figures to make the point that the current path of borrowing and promising is simply unsustainable.

Given the interventionalist policies over the last few years, I have no reason to believe that a more hands-off approach is in store in the near term. In coming issues, I will discuss not if there is QE3 but what it will look like and how trading in ever cheapening greenbacks for brick and mortar will make very good sense. You are in the right place and it will be the right time!


Kyle Kazan


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