Gentrification with Justice

Gentrification With Justice
BOB LUPTON, ISSUE NUMBER 9, JUNE 2006
http://byfaithonline.com/page/in-the-world/gentrification-with-justice

Building a new home in a run-down neighborhood in Atlanta was a decision that neither of our parents supported. It was a bad financial move, they counseled us, not to mention the danger. But my wife Peggy and I were not relocating into the inner-city for economic reasons. We had finally come to the conclusion that our ministry would be more effective if we lived among the people we felt called to serve than continue to commute from the suburbs. And so we graciously thanked our parents for their love and concern and went ahead with our construction plans.

New construction in the neighborhood was unheard of – at least for the past 50 years – and so the activity attracted much local attention. And some unexpected attention from outside real estate developers, as well. Within a few months of moving into our new home we were delighted to see four new homes go up just two blocks from us, as well as a good number of renovations beginning throughout the neighborhood. Our property value was going to increase after all!

But during prayer and sharing times at our neighborhood church we began to hear prayer requests for housing needs. "Please pray for us – our rents have just doubled." "Please pray for us – we've just gotten an eviction notice." It wasn't until Opal, a church member who lived within sight of the church, came in weeping one morning that I first made a disturbing connection. She had just received an eviction notice from the home she had lived in for many years – the city told the landlord to fix it up or board it up, and he had decided to board it up until property values made it attractive to sell. For the first time it dawned on me that as my property value was nicely increasing, so was the value of the surrounding affordable homes. As my wealth was accumulating, Opal's poverty was deepening. It was my investment that was the catalyst for her displacement. I could no longer sit in the circle and pray with integrity. I was the problem.

There was a name for this dilemma, I soon learned: gentrification. It comes from the old English word gentry, the land-rich ruling class of the 16th century who controlled the economy by virtue of their land holdings. They were literally "landlords," the rulers of all who lived as serfs on their vast estates. They eventually disappeared from the social landscape with the emergence of the industrial revolution as wealth shifted away from the land and to the factories in burgeoning cities. The term gentry has been resurrected in our generation to describe the return of landowners to the city. I discovered that I was one of them. And it was not a complement.

Gentrification by contemporary definition is "the restoration and upgrading of deteriorated urban property by the middle classes, often resulting in displacement of lower-income people." It is a new national norm. Over the past 50 years American cities have declined as the suburbs blossomed. This pattern is quite different from most of the large cities of the world where wealth and power are concentrated at the center and poverty spreads outward toward the outlying and less developed outskirts. In developing nations, people migrate from the rural areas, settle in poorer edge cities (or sometimes shantytowns outside the city) and try to work their way toward the prosperous center.

U.S cities, on the other hand, are like donuts with a hole in the middle and the dough around the outside. Our center cities are where our poverty is concentrated. But all this is changing. A massive demographic shift has begun, a great reversal as wealth returns to the inner core, and poverty is pushed to the periphery. U.S. cities are beginning to conform to the pattern of most world cities, and in the process a diaspora – an uprooting and scattering – of the poor has begun.

Devastating Impact, Absolute Need

I have now seen firsthand (yes, inadvertently participated in) the devastating impact that gentrification can have on the poor of an urban community. I have faced panicking families at my front door who had just been evicted from their homes, their meager belongings set out on the curb. I have helped them in their frantic search to find scarce affordable apartments and have collected donations to assist with rent and utility deposits.

But I have also seen what happens to the poor when the "gentry" do not return to the city. The effects of isolation are equally severe. A pathology creeps into a community when achieving neighbors depart - a disease born of isolation that depletes a work ethic, lowers aspirations and saps human initiative. I have seen courageous welfare mothers struggle in vain to save their children from the powerful undertow of the streets. I have witnessed the sinister forces of a drug culture as it ravages unchecked the lives of those who have few options for escape. Without the presence of strong, connected neighbor-leaders who have the best interests of the community at heart, a neglected neighborhood becomes a desperate dead-end place.

The romantic notion that the culture of a dependent, poverty community must somehow be protected from the imposition of outside values is as naive as it is destructive. Neighborhoods that have hemorrhaged for decades from the "up and out" migration of their best and brightest need far more than government grants, human services and urban ministries to restore their health. More than anything else, they need the return of the very kinds of home-owning, goal-driven, faith-motivated neighbors that once gave their community vitality. In a word, they need the gentry.

This leaves us in a bit of a quandary. The poor need the gentry in order to revive their deteriorated neighborhoods. But the gentry will inevitably displace the poor from these neighborhoods. The poor seem to get the short end of the stick either way.

Reclaiming With the Poor

But must gentrification always spell displacement for the poor? To some degree, yes. Yet displacement is not entirely bad. There are drug dealers and other rogues who need to be dislodged from a community if it is going to become a healthy place to raise children. Over-crowded tenements and flop houses should be thinned out or cleaned up, and this inevitably means displacement of some of the vulnerable along with their predators. Bringing responsible property management back into a neglected community does spell disruption for those who have chosen or been forced by necessity to endure slumlord economics. But what may be disruptive for the moment can become a blessing for those who yearn for a better way of life if - and this is a big if - the poor are included in the reclamation process by the returning gentry.

Opal forced me to look squarely into face this big if. Housing had not been on my radar screen when I moved into the city. It was not part of my ministry game plan. But neither could I sit passively in a prayer circle asking God to help my sister Opal knowing that my well-intentioned move was working to her detriment, knowing too that the same thing was about to happen over and over again to more of my church members and neighbors. And so I reordered my priorities.

In addition to my church planting and mercy ministry strategy, I ventured into the arena of justice. I rallied suburban church partners to come to Opal's aid, bought and restored her house and structured a loan that enabled her to become a homeowner. Then as my property value went up, so did hers. She became vested. Opal's house became for me a modern day parable of "good news to the poor." Many of those who volunteered their time and skills to transform her home were deeply moved as they cared for a widow in this personal and practical way. They asked if there were other Opals in our church. Indeed there were. The end result was the creation of a housing division within our ministry that has mobilized thousands of volunteers and enabled hundreds of Opals to become homeowners in our community.

"Gentrification with justice" - that's what is needed to restore health to our urban neighborhoods. Needed are gentry with vision who have compassionate hearts as well as real estate acumen. We need gentry whose understanding of community includes the less-advantaged, who will use their competencies and connections to ensure that their lower-income neighbors share a stake in their revitalizing neighborhood. The city needs land-owning residents who are also faith-motivated, who yield to the tenets of their faith in the inevitable tension between value of neighbor over value of property. That is why gentrification needs a theology to guide it.

A Theology of Gentrification

The people of the kingdom have a unique mandate to care for the needs of the vulnerable and the voiceless. Our scriptures are quite clear about this. It has been from antiquity both our birthright and our responsibility. We cannot rightly take joy in the rebirth of the city if no provision is being made to include the poor as co-participants. It will not be enough to offer food baskets at Christmas to migrating masses of needy people who are being driven by market forces away from the vital services of the city. Nor will our well-intentioned programs and ministries suffice for those being scattered to unwelcoming edge cities. We must be more intelligent than this. More strategic.

While we remain committed to fulfilling the Great Commission, there is a prior command the followers of Christ are called to – the Great Command. Loving God and its inseparable companion – loving neighbor – form the bedrock of our faith. All the Law and Prophets are built upon this foundation. The prophet Micah captured its essence: "He has told you, oh man, what is good and what the Lord requires of you, that you do justice and love mercy and walk humbly with your God" (Micah 6:8).

The body of Christ is amply resourced with the very talents needed to bring about both mercy and justice in our changing cities. In addition to those more spiritual-sounding gifts – those we have heard sermons about – there is a vast untapped reservoir of giftedness ready to channel into the work of the kingdom – secular-sounding gifts like deal-making, lending, insuring, lawyering, marketing, architecture, and real estate developing, to name a few. Under Christ's lordship, these become spiritual gifts ideally designed for the work of biblical justice.

Christians who believe that their highest calling is to love God and love their neighbor are the very ones equipped to infuse into our culture both values and actions that will have redemptive outcomes. We can buy crack houses and renovate them for residences for mission-minded couples. We can structure deals to develop mixed-income housing. We can create innovative housing policies that will induce developers to include lower-income residents in their plans. We can pass ordinances that that will give tax relief to seniors on fixed incomes so they can remain in their homes. We can establish loan funds to give down payment assistance to lower-income home buyers. If we are both caring and thinking people, we can use our influence and resources to develop the means by which "the least of these" can share in the benefits of a reviving city - and foster healthy growth at the same time. We can harness the growing tide of gentrification so that it becomes a redemptive force in our cities. In a word, we can bring about gentrification with justice.

A Market With a Conscience

Resisting gentrification is like trying to hold back the rising ocean tide. It is surely coming – relentlessly – with power and growing momentum. Young professionals as well as empty nesters are flooding into our cities, buying up lofts and condos and dilapidated historic residences, opening avant-garde artist studios and gourmet eateries. If market forces alone are allowed to rule the day, the poor will be gradually, silently displaced, for the market has no conscience. But those who understand God's heart for the poor have a historic challenge to infuse the values of compassion and justice into the process. But it will require altogether new paradigms of ministry.

The urban church that seeks to minister in disadvantaged areas faces the eventual disappearance of lower-income renters from their communities. Such urban ministries are approaching an inevitable fork in the road. If they remain committed to the poor, they must decide to either follow the migration streams as they gravitate to the periphery of the city, or get involved in real estate to capture affordable property in their neighborhood to ensure that their low-income neighbors retain a permanent place. "Migrant ministries" move with the people, establish ministry centers in the affordable suburban apartments, and remain flexible. "Community development ministries," on the other hand, remain rooted in the parish, purchase housing and land, form partnerships with builders and developers that enable their members (neighbors) to remain in a reviving community that has a healthy mix of incomes. Either strategy is legitimate. Both require significant retooling.

Gentrification brings to the suburban church an altogether different challenge. The poor are now showing up in the classrooms and bus stops and grocery stores of homogenous neighborhoods once thought to be safely beyond the reach of inner-city troubles. Mission-minded churches that for years have been journeying down to the ghetto to serve those in need now find these needs at their own doorstep. The new hues, the unfamiliar languages, the unintelligible signs on new businesses in the strip malls – these are the sure indicators that gentrification is affecting the suburbs. They also signal a new era of opportunity for the suburban church. It is a divine invitation to the church to extend a welcoming hand, to start new congregations, to share facilities, to hire new workers, to teach ESL classes, to acquire and manage housing that insures a hospitable environment. It is a unique time in history to "let your light so shine before others [in your neighborhood] that when they see your good works they will glorify your Father who is in heaven."

Harnessing Gentrification for the Sake of the Kingdom

Definitive works have yet to be written on how to harness gentrification for the purposes of the kingdom. However, a few guiding principles are rising to the surface from some of the best practices around the country. Here are just a few:

Gentrification is here to stay. Some rail against it; others laud its arrival. For good or ill, it is our new reality. And it will only increase in the years to come. It means welcoming new economic and social life for our cities and, with the proactive involvement of the saints, can introduce a whole new era of hopefulness for the poor. Our mantra must be "gentrification with justice."

Diversity is a gift. Communities that are economically and racially mixed can be the richest of environments for families as well as singles and older adults. Diverse community is God's plan, the final destination toward which all the righteous are heading – the city of our God where people of every tribe, every nation, every tongue will take up eternal residence.

Community doesn't just happen. This is especially true in a diverse community. It must be built. Focused and sustained effort must be invested in getting to know neighbors, organizing community activities, modeling neighborliness and communicating good news. Love of neighbor must be practical and visible over time.

Indigenous neighbors are a treasure. It is easy to ignore seniors, easy to push on past less-communicative neighbors, easy to exclude those who don't show up at community functions. But the rich history of the neighborhood is imbedded in the lives and family albums of long-term residents. The effort to extract and honor this history is well worth the time and effort. And everyone, no matter how unlikely, has some valuable talent to contribute to the life of the community.

Economic viability is essential. A community will not be healthy unless it has ample neighbors with discretionary income to attract and sustain businesses. The gentry are essential. However, justice demands that we ensure that the poor are embraced and included as beneficiaries in a healthy community.

God's shalom must be worked at. The roles of peacemakers, communicators, gatherers, organizers, and connectors are some of the most vital talents needed for the establishment of "peace and prosperity" and a prevailing sense of well-being that God desires for His creation. Shalom is not merely the absence of crime on the street, it is the prevailing presence of peace and goodness in the relationships of God's diverse family. It is achieved only by intentional effort.

Bob Lupton is founder and president of FCS Urban Ministries in Atlanta, Ga., a community development organization that revitalizes urban neighborhoods. He has lived and served in the inner-city for the past 35 years. He holds a Ph.D. in psychology, has authored four books on urban ministry, and consults and lectures internationally on urban issues.

Arguments against buying a house

US Housing Crash Continues

What are their arguments?

1. Houses always increase in value in the long run.
   FALSE. Price is what you pay and value is what you get. The value of a house is constant. It just sits there. You get shelter, but you have to pay property tax and maintenance and the loss of alternative uses of capital. A house is a dead asset. The price of a house rises with salary inflation, but house prices cannot increase more than incomes in the long run. This is obvious if you think about it. If house prices go up more than people can afford to pay, buying stops, like it has stopped now.For example, prices in the Netherlands are about the same as they were 350 years ago, in terms of how many years of work it takes to buy a house. Warren Buffett and Charles Schwab have both pointed out that houses don't increase in intrinsic value. Unless there's a bubble or a crash, house prices simply reflect current salaries and interest rates. Consider a 100 year old house. Its value in sheltering you is exactly the same as it was 100 years ago. It did not increase in value at all. It did not spontaneously get bigger, or renovate itself. Quite the opposite - the house drained cash from its owners for 100 years of maintenance, taxes, and insurance - costs that never go away. The price of the house went up about as much as salaries went up.
   My grandmother always used to complain about the cost of milk. "Why, when I was a girl, a gallon of milk cost a dime! Just look at how much people are overcharging for milk now." I asked her how much people got paid back then. "Oh, about $15 a week", came the reply. Hmmm, sounds very much like the reasoning people use now when they talk about how much their father's house appreciated "in the long run" without considering that inflation and salaries rose a proportional amount.
   I don't see any salary inflation in our future for years to come, and that's the only kind of inflation that boosts house prices. Inflation in everything else (food, energy, medical) just takes away from the money people have to spend on housing.
    
2. As a renter, you have no opportunity to build equity.
   FALSE. Equity is just money. Renters are actually in a better position to build equity through investing in anything but housing. Renters can get rich much faster than owners, just by saving the money that owners are wasting on mortgages, taxes, and maintenance. Renters are getting paid to wait, both by the monthly savings and by watching the value of their savings increase relative to housing.
   • Owers are losing every month by paying much more in interest than they would pay in rent. The income deduction does not come close to making owing competitive with renting.
   • Owers are losing principal in a leveraged way as prices decline. A 14% decline completely wipes out all the equity of "owners" who actually own only 20% of their house. Remember that the agents will take 6% if they possibly can.
   • Owers must pay taxes simply to own a house. That is not true of stocks, bonds, or any other asset that can build equity. Only houses are such a guaranteed drain on cash.
   • Owers must insure a house, but not most other investments.
   • Owers must pay to repair a house, but not a stock or a bond.
3. Renting is just throwing money away.
   FALSE, renting is now much cheaper per month than owning the same thing. If you don't rent, you either:
   
   • Have a mortgage, in which case you are throwing away money on interest, tax, insurance, and maintenance.
   • Own outright, in which case you are throwing away the extra income you could get by converting your house to cash, investing in bonds, and renting a similar place to live for much less money. This extra income could be 50% to 200% beyond rent costs forever, and for many is enough to retire right now.
   Either way, owners lose much more money every month than renters. Currently, yearly rents in the San Francisco Bay Area are about 3% of the cost of buying an equivalent house. This means a house is returning about 3% rent minus taxes and maintenance, bringing the landlord's return down to 0%.
   Landlords are loaning a house to their tenants at a 3% interest rate, called rent. This is a fantastic deal for renters. When it is possible to borrow a million dollar house for 3% yearly rent at the same time a loan of a million dollars in cash costs 6.5% interest, plus 1.3% property tax, plus 1% maintenance, something is clearly broken. Renters are enjoying an extreme discount at the owner's expense.
   If someone tells you that you are throwing money away, you can reply "The landlord is giving me a huge gift. He's subsidizing me to live in his rental. I'll take free money any day."
   If someone tells you that you are "Not building equity", you can reply you are not LOSING equity, which happened to millions of people, and is still going on right now.
   To add insult to "owners", their property is declining in value. Renters are completely protected from the massive losses owners are experiencing. Here's a great quote from NPR:
   Underwater owner: "We would do it [pay the mortgage] if the equity was there, but in a case where we're already so behind... Imagine that for five years, say, we're gonna pay four grand a month and then we're just gonna be back up at what we bought the house for. We feel like we're throwing away money."
4. There are great tax advantages to owning.
   PARTIALLY TRUE. It's true for high-income couples with expensive houses and big mortgages, but not for modest-income couples in modest houses, especially if there is no mortgage.Every married couple filing jointly automatically gets to subtract an $11,400 deduction ($5,700 for singles) from their adjusted gross income to arrive at their taxable income. Alternately, you may add up modest deductions in seven categories: Medical, Taxes, Interest, Charity, Casualty and Theft, Job Expenses, and Other Misc. If the total of your expenses in these categories exceeds the standard deduction, you can itemize them on Schedule A of your tax return to reduce your taxable income.
   Let's assume that your only deductible expenses fall into the Taxes and Interest categories. Taxes mainly include the income tax you pay to the state (or its sales tax) and the property taxes on your home or other non-investment real estate. In a high-tax state like New Jersey, you might easily pay $7,200 in property taxes and $200 in income taxes, for a total of $7,400. So the first $4,000 of interest expenses just brings your deductions up to the standard $11,400, without reducing your taxable income.
   For a high-income couple, let's assume they can itemize their state income tax of $3,400, contributions of $1,000, and medical expenses of $1,000. These deductions use up $5,400 of the $11,400 standard deduction. So the first $6,000 of property taxes and interest save them nothing. After that, their savings depend on their tax bracket, which could be as high as 35 percent.
   For couples with modest incomes and mortgages, the first $11,400 of taxes and interest save them nothing.
   Evaluate your situation before making a buy-rent decision based on potential income-tax savings. Be sure to consider the deduction limit imposed by the AMT, too. Interest is paid in real dollars that buyers suffered to earn. That money is really entirely gone, even if the buyer didn't pay income tax on those dollars before spending them on mortgage interest. You don't get rich spending a dollar to save 30 cents!
   Buyers do not get interest back at tax time. If a buyer gets an income tax refund, that's just because he overpaid his taxes, giving the government an interest-free loan. The rest of us are grateful.
   If you don't own a house but want to live in one, your choice is to rent a house or rent money to buy a house. To rent money is to take out a loan. A mortgage is a money-rental agreement. House renters take no risk at all, but money-renting owners take on the huge risk of falling house prices, as well as all the costs of repairs, insurance, property taxes, etc.
   Even if you pay outright, you're still renting the house to yourself, losing alternative uses of that money, and taking the risk of falling house prices.
   Compare the cost of owning to renting.
5. All real estate is local, so you cannot say anything about the national market.
   FALSE. Lending is global. All loans are harder to get. This will push prices down everywhere.
6. OK, owning is a loss in monthly cash flow, but appreciation will make up for it.
   FALSE. Appreciation is negative. Prices are going down, which just adds insult to the monthly injury of crushing mortgage payments.
7. As soon as prices drop a little, the number of buyers on the sidelines willing to jump back in increases.
   FALSE. There are very few buyers left, and those who do want to buy will be limited by increasing difficulty of borrowing.No one has to buy, but there will be more and more people who have no choice but to sell as their payments rise. That will keep driving prices downward for a long time.
8. House prices don't fall to zero like stock prices, so it's safer to invest in real estate.
   FALSE. It's true that house prices do not fall to zero (except in Detroit), but your equity in a house can easily fall to zero, and then way past zero into the red. Even a fall of only 4% completely wipes out everyone who has only 10% equity in their house because agents will take 6% if they can trap the seller with a contract. This means that house price crashes are actually worse than stock crashes. Most people have most of their money in their house, and that money is highly leveraged.
9. The bubble prices were driven by supply and demand.
   FALSE. Prices were driven by low interest rates and risky loans. Supply is up, and the average family income fell 2.3% from 2001 to 2004, so prices are violating the most basic assumptions about supply and demand.The www.census.gov site has data for Santa Clara County for the years 2000-2003 which shows that the number of housing units went up at the same time that the population decreased: year units people
   
   • 2000 580868 / 1686474 = 0.344 housing units per person
   • 2001 587013 / 1692299 = 0.346
   • 2002 592494 / 1677426 = 0.353
   • 2003 596526 / 1678421 = 0.355
   So housing supply in Santa Clara County increased 3% per person during those years. There is an oversupply compared to a few years before, when prices were lower.At a national level, there is a similar story in the years 2000 to 2005:
   
   • 2000 115.9M / 281M = 0.412 housing units per person
   • 2005 124.6M / 295M = 0.422
   At a national level, there is 2.4% more housing per person now than in 2000. So national prices should have fallen as well.A for-sale sign in a yard instantly increases the supply of houses on the market. There is no need to wait for builders.
   The truth is that prices can rise or fall without any change in supply or demand. The bubble was a mania of cheap and easy credit. Now the mania is over.
10. They aren't making any more land.
    TRUE, but sales volume has fallen 40% in the last year alone. It seems they aren't making any more buyers, either.Japan has a severe land shortage, but that hasn't stopped prices from falling for 15 years straight. Prices in Japan are now at the same level they were 23 years ago. If we really had a housing shortage, there would not be so many vacant houses.
11. Your calculator says the house I'm interested in is worth far less than the asking price. That's not very helpful in coming up with an offer. FALSE. It's very helpful to be able to document that you could be paying much less to live in the same location and same quality house, just by renting. It's a great negotating point.
12. It is hard to find a rental that is the equivalent of this home. PARTIALLY TRUE. Sometimes there just is no equivalent rental available in the same area. Placing an ad saying you're looking for a rental in that area in a certain rent range is often enough to bring new rentals out of the woodwork though.
13. Attractive areas will not follow strict economic laws of their worth. If I keep bidding what a home is strictly worth, I will always lose to someone who simply wants to live there, even if their money could be better invested elsewhere. FALSE. You can't lose by winning. Renting the same quality house in the same area for much less money every month than an owner pays is winning. Maybe others get the intangible feeling of ownership, but you get the cash that they are losing.
14. If you don't own, you'll live in a dump in a bad neighborhood.
    FALSE. For the any given monthly payment, you can rent a much better house than you can buy. Renters live better, not worse. There are downsides to renting, such as being told to move at the end of your lease, or having your rent raised, but since there are thousands of vacant rentals, you can take your pick and be quite happy renting during the crash. There are similar but worse problems for owners anyway, such as being fired and losing your house, or having your interest rate and property taxes adjust upward. Remember, property taxes are forever.Some people want the mobility that renting affords. Renters can usually get out of a lease and move anywhere they want within one month, with no real estate commission. On the other side, if you can get a long-term lease, you will probably find it worthwhile to repair the place to your taste. The average time of owning a house is only seven years anyway.
    It is cheaper to rent a house in a good school district than to buy a house in the same place. In fact, children benefit in several significant ways from living in a rental. Aside from having a choice of school district, kids in a rental benefit from better parks in nicer neighborhoods, more living space, and less stress in their parents' voice -- all because it is still so much cheaper to rent than to own in bubble areas.
    A fun trick to rent a good house cheap: go to an open house, take the agent aside, and ask if the owner is interested in renting the place out. Often, desperate sellers will be happy to get a little rental cash coming in and give you a great deal. Sometimes they will rent to you for free ($0) as long as you keep the place up and pay the utilities.
    The biggest upside is hardly ever mentioned: renters can choose a short commute by living very close to work or to the train line. An extra two hours every day of free time not wasted commuting is the best bonus you can ever get.
15. Owners can change their houses to suit their tastes.
    FALSE. Even single family detached housing is often restricted by CC&Rs and House Owner's Associations (HOAs). Imagine having to get the approval of some picky neighbor on the "Architectural Review Board" every time you want to change the color of your trim. Yet that's how most houses are sold these days.In California, the HOA can and will foreclose on your house without a judicial hearing. They can fine you $100/day for leaving your garage door open, and then take your house away if you refuse to pay. There's a good HOA blog here.
    
16. The house down the street sold for 25% over asking, and that proves the market is still hot.
    FALSE. agents have been known to create the false impression of a hot market by deliberately "underpricing" a house, especially in California. I personally have seen this happen repeatedly. Say a seller's agent knows that house will probably go for $400,000. He places ads asking $300,000 instead, a price lower than the buyer would accept. (Bait-and-switch is illegal when selling toasters, but apparently not when selling houses.) The goal is to first of all prevent buyers from knowing what a realistic price is, and secondly to get buyers to blindly bid against each other. There are four players in this game and three of them are against the buyer -- the seller, the seller's agent and the buyer's agent. Yes, the buyer's own agent works against the buyer, because there is no commission if there is no sale. There's a saying in Las Vegas: "There's a patsy in every game, and if you don't know who the patsy is, you're it."If you want to prove your agent is not on your side, ask to see houses "for sale by owner" or houses listed by discount brokers. If the agent cannot make a commission, you will not be told about the house.
    There is a way around the conflict of interest inherent in being a buyer's agent: let the seller's agent be your agent too, just for that one house he's trying to sell. Then the seller's agent has a big motive to lower the price, because he will get double the commission if you buy it rather than some buyer with his own agent.
    Note that you are free to bid far lower than the asking price. You might be pleasantly surprised to find out how desperate the sellers are. Another good reason to start low: you can easily raise your offer, but it's awkward to lower it. A suggestion from a reader: have all your friends bid extremely low for the house before you, then your own low bid will seem more reasonable.
    Another suggestion for dealing with underpricing:
    

    Get over it, and just beat them at their own game: Beat out all other bidders by bidding unrealistically high, and just be sure to have your offer contingent upon financing & house inspection. Since the bank won't finance you above the appraised value, you're then in a very strong position to re-negotiate the price far lower during escrow. The other bidders will be long gone.

17. I was lucky that my agent told me to increase my bid by $50,000. Otherwise I would have lost, because my agent knew about a secret bid $40,000 above mine.
    FALSE. Your agent gets paid nothing if you don't buy the house, and he gets more if you waste more money by bidding too high. It is unwise to take at face value "secret" information that costs you money.
18. The MLS proves things are great.
    FALSE. The MLS (Multiple Listing Service, a private network of databases controlled by real estate agents) is a used-house sales tool designed to restrict access to critical market information to prevent the free market from working efficiently.I have been told that all sorts of funny things happen in the MLS. For example, if a house just doesn't sell, that agents can remove its record in the MLS so that you cannot see that it failed to sell. Then the house comes back on the market at a lower price, and unsuspecting buyers think it's on the market for the first time. Their agent can "prove" it's a new listing by showing the MLS record to the buyer: "See, here's the listing date, just came on the market. Better hurry and buy it, this one is hot."
    There is no government agency checking that the MLS shows true transaction prices.
    Furthermore, the MLS will not list any house for sale by owner, and will resist listing property for sale through a discount broker, or bank-owned property, or extreme discounts from builders, or many other cases where you could save huge amounts of money. Those cheaper prices are often not in the system, because if you save money, they lose money. Even if some cheaper properties are listed, your agent is not likely to tell you about them if they require more work on his part, or get him a smaller commission.
19. I'll just amortize the commissions and other transaction costs over 30 years and they'll be OK.
    FALSE. The average length of ownership is seven years, not thirty. That means the 7% or so that you'll pay in commission and closing fees comes out to about 1% per year, and that's actually a lot of money. You may think you're different and will actually stay put for 30 years, but statistically you're not, and you won't.
20. Rich Chinese (or Europeans, or Arabs) are driving up housing prices.
    FALSE. The percentage of US houses bought by rich foreigners is tiny. Furthermore, American housing is clearly a bad investment at this point. Foreigners can just wait and watch American housing continue to fall, and then buy for much less in a few years. Rich foreign investors are not dumb enough to buy into a badly overpriced market, but your agent is hoping that you are.Patrick.net reader John H. points out that when the Chinese property bubble implodes, there will probably be sales of property in California and British Columbia to cover their losses at home.
21. Local incomes justify the high prices.
    FALSE. Most bankers use a multiple of 3 as the maximum "safe" price-to-income ratio. We are well beyond the danger zone, into the twilight zone. The price to income ratio is still around 10 in the SF Bay Area.
22. Prices were always way beyond equivalent rent in San Francisco (or whatever expensive town)
    FALSE. Price to rent ratios were normal in San Francisco and other the other expensive towns in 2000. That ratio more than doubled by 2005. See page 34 of John Talbott's excellent book called "Sell Now!"
23. Higher-income people can afford to spend a larger portion of their income on a mortgage, so your 6% rule of thumb does not apply to them.
    FALSE. Even if you can spend more than 6% of the purchase price each year on a mortgage and other costs to own a house, that does not mean you should. In fact, gross rents are almost always less than 6% in richer neighborhoods, making it an even worse deal for the buyer in these places. The renter living in the same quality house next door loses far less money per month.
24. You have to live somewhere.
    TRUE, but that doesn't mean you should waste your life savings on a bad investment. You can live in a better house for much less money by renting during the crash. A renter could save hundreds of thousands of dollars, not only by paying less every month, but by avoiding the devastating loss of his downpayment.
25. Newspaper articles prove prices are not falling in my neighborhood.
    FALSE. The numbers in the papers are not complete and have murky origins. Those prices are "estimated" from the county transfer tax and making that tax public record is optional. A buyer who does not want you to see how little he paid has only to ask to put the transfer tax on the back of the deed and it will not show up on computer searches of the deed, which show only the front. Others voluntarily pay more tax than they have to, in order to inflate the apparent price to fool the next buyer. At a tax rate of about $1 per thousand of sale price, as in San Mateo county, you have to pay only $100 extra tax to make your purchase price look $100,000 higher.Even though you can in theory go to your county building and get sale price information, in reality the county will give it to you in a painfully slow and inconvenient way. For example, in Redwood City's county building there are PC's where you can look at data for any particular house, but you cannot print, you cannot save to a floppy disk, you cannot email data out. All you can do is write things down manually, one at a time. And that's how real estate interests like it. Your elected representatives are serving them, not you.
    Supposedly impartial sources like Dataquick are paid for entirely by people with a large financial interest in "proving" that prices are not falling. This makes it unwise to take their numbers at face value.
    For the obviously biased sources like real estate agents, you should assume that their sales price numbers do not include the effective price reductions from "incentives" like upgrades, vacations, cars, assumed mortgages and backroom cash rebates to buyers.
26. My appraisal proves what my house is worth.
    FALSE. "An appraisal in its typical residential real estate form is little more than a comparative analysis conducted by someone with no skin in the game offering confirmation that other lemmings are paying too much for their houses as well." -from an article on morningstar.comAmazingly, government house price measures do not include houses with jumbo mortgages. This excludes well over half of all houses in California. So the government can report a slight price rise, but fail to mention that prices actually fell for the other 60% of houses in California.
27. Foreclosures destroy neighborhoods, so we should stop foreclosures.
    FALSE. Empty houses destroy neighborhoods. Houses remain empty only because the prices are too high. "Anti-foreclosure" programs just keep prices too high, and keep houses empty. In areas where there are jobs, if prices were allowed to fall enough so that salaries can easily cover the cost of owning, people would move in and take care of the houses. In areas without jobs, the first priority should be jobs.
28. It's not a house, it's a home.
    FALSE. It's a house. Wherever one lives is home, be it apartment, condo, or house. Calling a house a "home" is a manipulation of your emotions for profit. Don't let them push your buttons.A house is a wooden box that sits out in the rain and slowly rots. No one would buy in this market if they really thought about how much pain it's going to cause them in the long run. That's why they sell you a home, not a house.
29. If you don't own, you're a failure.
    FALSE. Maximizing your savings and escaping the slavery of debt is success. Most people have a hard time understanding this, but they do understand cash. You could show them your bank statements to prove you're way ahead of the game as a renter, but then they would probably just ask you for a loan!The use of the status card is another well-known button that agents push to trick people into making foolish purchases. Don't let them do it.
30. Property in the San Francisco Bay Area is a luxury good, and so will be less affected by economic downturns.
    FALSE. Most San Francisco Bay Area mortgages are ARMs, and ARM loans are not taken out by the rich. People on the border of bankruptcy take out ARMs because they can't afford fixed rate loans. The rich don't have loans at all.Many of these ARM loans have exceptionally deadly repayment terms, and so are known as "neutron mortgages". Like the neutron bomb, they destroy people, but leave buildings standing. They are also known as "suicide loans".
31. House ownership is at a record high, proving things are affordable.
    FALSE. The percentage of their house that most Americans actually own is at a record low, not a high. We do have a record number of people who have title to a house because they have dangerous levels of mortgage debt, but that is no cause to celebrate.
32. Rents could shoot up, making it a better deal to buy.
    FALSE. Rents are limited by the money people actually earn, not by how much they can borrow. Try walking into a bank and asking for a loan to pay your rent. For rents to shoot up, salaries would have to shoot up first. Salaries are not likely to rise at all given the current unemployment rate.
33. You failed to factor in emotion. More houses are sold on emotion than will ever be sold based on perceived value. They buy all they can afford plus.
    FALSE. Buyer emotion doesn't matter at all to the lenders, not on the way up or on the way down. Most people will borrow as much as the possibly can. The limiting factor is lending, not emotion.
34. It's unpatriotic to talk about mispriced houses. It might drive down prices.
    FALSE. Lower prices are better for America, especially for new families. Aren't lower food and energy prices better for America? Housing prices are the same: lower is better. Most Americans directly benefit by a decrease in house prices. Only the banks benefit from increased mortgage debt.If you own a house, lower prices have very little effect. If you want to sell and buy another house, higher prices mean you'll just have to pay more for the next house, while lower prices mean you will get a discount when you buy. If you want to buy a bigger house, you come out ahead with lower prices.
35. My wife will divorce me if I don't buy a house.
    FALSE. She will divorce you if you do buy a house and go bankrupt trying to pay the mortgage. She won't divorce you if you rent a much nicer place than you can buy, and then take her to Paris for a month each spring, which you can do just by avoiding that suicidal mortgage.If she's religious, you could also point out Proverbs 22:7: "The rich rule over the poor, and the borrower is servant to the lender."
36. My new baby needs a house.
    FALSE. If you're pregnant and desperately want to buy a house for your new child, that's a perfectly normal feeling called "nesting". It is also the leading avoidable cause of financial fatalities! You most definitely do not need a house for a baby. A baby is utterly unaware of whether it lives in a rental or not. Babies also don't need much space.Your baby will do better if you're not stressed out about a mortgage. You have five years before school quality becomes an issue, and at that point you can more easily move into the best school district as a renter than as an owner. Avoid debt and save your money so your child has a better start in life.
37. I just want to own my own house.
    TRUE, most people do. There's nothing wrong with that. Buyers will get their chance when housing costs half as much and they have saved a fortune by renting. House ownership is great - unless you ruin your life paying for it. If you can save even just 10% on the price of a house, you can retire several years earlier than you would otherwise. If you can save 50%, then you can easily take a ten year vacation and still come out ahead. Great quote from http://healdsburgbubble.blogspot.com/: "People want to buy a house, they want to have someone tell them it is the smartest decision they are making in their lives, and they don't want to hear about any downside risk."Housing is the biggest expense in nearly everyone's life, far more expensive than food, gas, energy, even more expensive than education or medicine. To reduce the time you spend working to pay for housing is to increase the time you have for everything else.
    Cheap housing is good for us all! High housing costs take away from families' ability to save for retirement, fund their children's education, travel and lead a quality life.
    How can we make lower house prices our official government policy? How can we completely eliminate the mortgage interest deduction which drives up housing costs and discriminates against renters? How can we wipe out Fannie Mae, Freddie Mac, the FHA, and other agencies whose job it is to enslave Americans to mortgage debt?
    As reader Sean Olender put it: "Many people have forgotten that the number one restriction on their future freedom to do what they want, when they want, and to go where they want isn't the Iraqis, or Iranians, or North Koreans -- it's their mortgage lender."

What should you do?

First of all, both sides should avoid using agents, especially Realtors(R), who are corrupting our laws in Washington with lobbyists. Agents suck money out of the deal and monopolize the critical information of exactly how many bids there are and at what prices. Just find a property or buyer on your own, have the property inspected, and get a real estate lawyer to draw up or review the offer. If you make an offer, mail the offer to the seller yourself so that your agent or the seller's agent can't block it. If you are accepting or rejecting an offer, mail that information to the bidder yourself so that your agent or the bidder's agent can't block it. agent have been known to block offers that don't give their own agency both sides of the commission, or that exclude some other buyer they want to favor.

Never sign any contract with any agent! Agents try to trap you with a contract so that you cannot know for sure what is going on or make independent decisions. If you don't want to sell a house yourself or negotate a purchase, hire a lawyer or someone else by the hour to do the work for you. You're likely to save many thousands of dollars by avoiding commission fees.

Post on the patrick.net Addresses Forum to get uncensored feedback about a particular property.

If you own an expensive house, sell now so you can actually keep some of that funny money that appeared out of thin air. Otherwise, it will be painful to watch it vaporize back into thin air. Investors in mortgage-backed bonds subsidized the increase in the price of your house. Now they want their money back, and your challenge is to prevent them from getting it. The only way is to sell before your neighbors do. Time is not on your side.

If you can't sell without a loss, it's probably best to just walk away and free yourself from mortgage slavery. It depends on whether your loan was "recourse" or "non-recourse". In the latter case, the deal is simply that you can stop paying the loan and give back the house at any time. It's perfectly legal and moral according to the terms of the mortgage. Now that the government has temporarily stopped taxing forgiven debt, you can do it without owing anything! But talk to a lawyer and accountant first. If you refinanced, you may have given up your non-recourse status.

A long-term rental with a multiple-year lease is a good way to get stability with the economic benefits of renting. Many landlords are desperate, and you'll probably find them quite willing to negotiate a long term lease. Make sure they can't raise the rent much during the lease term, and make sure there is only a small penalty for ending the lease early. Even if you sign a normal 1-year lease, most landlords are happy to keep good tenants as long as possible.

If you want to buy, look around and see that house prices are falling. Why hurry to buy into a falling market? Time is on your side. Save your cash and buy for much less in the future. All your savings on the price of a house are tax-free earnings! For Californians: buy after the earthquake, not before.

Good advice from reader Stephen G. Bishop:

Signing a 30-year commitment is absurd. Can you guarantee your income will be uninterrupted for 30 years? It worked in the previous generation, when Dad worked at the same factory for 40 years and retired. Those days are gone. 80% of all mortgages are never kept to maturity. Triple the price of the property when you add interest for 30 years in. It's only worth it if the property doubles in value every ten years. Those days are gone.

Do not buy anything that wasn't built properly, no matter how cheap it gets. Many foreclosures are houses that weren't built properly, and these houses tend to be foreclosed over and over again. Lots of houses are ugly, but an ugly but well built house is often the best deal.

The way to win the game is to have cash on hand when others cannot get a loan. You do not want to be bidding your hard-earned savings against people who are bankrupting themselves with debt. It will be time to buy when lenders once again demand a 20% downpayment from everyone and get serious about checking ability to repay. You'll know prices are reasonable when it's cheaper to own than to rent the same thing. We're not there yet, not even close. Find a nice cheap rental, invest your savings every month, and enjoy the show till then.

Please tell friends about patrick.net, because people need to know the arguments against buying a house.

---

Distinct patrick.net readers per day

Plus about 4,500 email subscribers.

---

And a little comic relief (illustration courtesy of Rick LaForce, RickL@ci.union-city.ca.us)

Annual income twenty pounds, annual expenditure nineteen six, result happiness. 
Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.
--Charles Dickens, David Copperfield, 1849

Saying it is "good" for housing prices to rise is saying that it is good for housing to take an increasing share of salaries each year, forever. There's a limit, and it is somewhat shy of 100%. --Bryce Nesbitt

If you need a mortgage, you can't afford it. --Stephen G. Bishop

From anonymous: The Mexican Dream is to escape from debt peonage. The American Dream is to get into debt peonage.

Lowering interest rates will help the housing and stock market for about as long as peeing your pants will help when you have to go. It will give a warm feeling for a minute.

Everybody hates house-agents because they have everybody at a disadvantage. All other callings have a certain amount of give and take; the house agent simply takes. -- H. G. Wells

Nick Naylor, in Thank You For Smoking: "99% of everything done in the world, good or bad, is done to pay a mortgage. Perhaps the world would be a better place if everyone rented."

From The Politics of Life by Craig Crawford: "Beware the boss who encourages you to buy a house or new car. Mortgages and car payments enslave you to the paycheck that your boss controls."

From Benjamin Graham, in The Intelligent Investor: "The outright ownership of real estate has long been considered as a sound long-term investment, carrying with it a goodly amount of protection against inflation. Unfortunately, real estate values are also subject to large fluctuations; serious errors can be made in location, price paid, etc.; there are pitfalls in salesmens' wiles."

Why do the buy side idiots ALWAYS fall for the FALSE CHOICE FALLACY????
Choice 1: Buy today, right now, this second.
Choice 2: Rent until you die.
Um, I'll take door #3: let prices fall another couple hundred $K on a home
like this, and buy it in a year or two. What did I win?
--Roberto Aribas

What the public believes, or can be induced to believe, no matter how wrong, is reality to politicians.

Subsidies simply increase prices by increasing demand. Subsidies benefit the first few recipients, but the sellers quickly catch on to the new source of revenue and increase prices to negate that benefit for all subsequent recipients. Ultimately, all subsidies flow directly to businesses as excess profit at public expense. This is true especially for housing and health care subsidies, and the businesses that benefit from these subsidies spend lavishly on lobbying and campaign contributions to make sure the subsidies continue, in the name of the "public good" even though subsidies are obviously a public harm. The true solution to shortages is to increase supply of houses, doctors, or whatever. But increased supply harms profits, so business interests squash all public talk of increasing supply.

Republicans think the rich are not rich enough, and the poor are not poor enough.

Just as an unobserved tree falling in the forest makes no noise, a big beautiful home out in the lonely woods does little to increase status. The key to appreciating status is to have an audience-and there is no bigger audience than that of our major cities and the playgrounds of their wealthiest residents. -- John Talbott

They hang the man and flog the woman Who steals the goose from off the Common;
But let the greater criminal loose Who steals the Common from under the goose

Interest never sleeps nor sickens nor dies it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels; it takes no pleasure; it is never laid off work nor discharged from employment; it never works on reduced hours. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you. -- J. Reuben Clark

It is better to get a poor interest rate than own a depreciating asset. -- Michael Surkan

I'll repeat that the best approach [to buying a car] is to use the Internet, have the car delivered and avoid going to dealerships altogether. -- Edmunds.com

Everyone in Western Europe, Japan, Canada, Australia, Singapore and New Zealand has a single-payer system. If they get sick, they can devote all their energies to getting well. If Americans get sick, they have to battle two things at once, the illness and the fear of financial ruin. ... And don't believe for a second that rot about America having the world's best medical care or the shortest waiting lists: I've been to hospitals in Australia, New Zealand, Europe, Singapore, and Thailand, and every one was better than the "good" hospital I used to go to back home. The waits were shorter, the facilities more comfortable, and the doctors just as good. --Lance Freeman at escapefromamerica.com

The first truth is that the liberty of a democracy is not safe if the people
tolerate the growth of private power to a point where it becomes stronger than
their democratic state itself. That, in its essence, is fascism -- ownership of
government by an individual, by a group, or by any other controlling private
power. ~ Franklin D. Roosevelt

From Our Lot by Alyssa Katz: "The secret, he was learning, was to trigger buyers' emotions, specifically women's emotions."

50 Ways To Leave Your Mortgage

You just slip out the back, Jack
Make a new plan, Stan
You don't need to be coy, Roy
Just get yourself free
Hop on the bus, Gus
You don't need to discuss much
Just drop off the key, Lee
And get yourself free

I don't think I'll get married again. I'll just find a woman I don't like and give her a house. -- Lewis Grizzard

Cashtration (n.): The act of buying a house, which renders the subject financially impotent for an indefinite period of time.

  

The End

Martin A. Armstrong -Modelo de Confiança Economica

The Business Cycle And the Future

By Martin A. Armstrong

Princeton Economic Institute
© Copyright September 26, 1999

Economic_confidence_model

For many years, I have pursued a field of study that is at best non-traditional. My discovery of a global business cycle during the early 1970's was by no means intentional. As a youth growing up in the 1960's, the atmosphere was anything but stable. I don’t really know if it was Hollywood that captivated my interest in history with an endless series of movies about Roman and Greek history, but whatever it was that drove me, I can only attest to what resulted.

My father had always wanted to return to Europe after serving under General Patton during the war. My mother insisted that she would go only when he could afford to take the whole family. That day finally came and something inside me insisted upon being able to earn my own spending money. I applied for a job despite my age of only 14. It wasn’t much, but on weekends I worked with a coin/bullion dealer. In those days, gold was illegal to buy or sell in bullion form so the industry centered on gold coins issued by Mexico, Hungary and Austria. I soon became familiar with the financial markets as they were starting to emerge. It was this experience that began to conflict with the formal training of school.

One day in a history class, the teacher brought in an old black and white film entitled "Toast of the Town." This film was about Jim Fisk and his attempt to corner the gold market in 1869 that created a major financial panic in which the term "Black Friday" was first coined. In the film was a very young support actor named Cary Grant who stood by the ticker tape machine reading off the latest gold prices. He read the tape and exclaimed that gold had just reached $162 an ounce. I knew from my job that gold was currently selling for $35. At first I thought that the price quote of $162 in the movie must be wrong. After all, Hollywood wasn’t known for truthfulness. Nonetheless, I was compelled to go to the library to check the newspapers of 1869 for myself. This first step in research left me stunned – the New York Times verified $162 was correct.

For the first time in my life, I was faced with a paradox that seemed to conflict with traditional concepts. How could gold be $162 in 1869 and yet be worth only $35 in the 1960's? Surely, inflation was supposed to be linear. If a dollar was a lot of money in 1869, this meant that adjusted for inflation gold must have been the equivalent of several thousand dollars. If value was not linear, then was anything linear?

I began exploring the field of economics on my own and reading the various debates over the existance of a business cycle. Kondratieff was interesting for his vision of great waves of economic activity. Of course, others argued that such oscillations were purely random. Over the years that followed, this nagging question still bothered me. I had poured my heart and soul into history, quickly learning that all civilizations rose and fell and there seemed to be no exception.

I was still not yet convinced that a business cycle was actually definable. Kondratieff’s work was indeed interesting, but there was not enough data to say that it was in fact correct. On the other hand, it seemed that the random theory crowd was somehow threatened by the notion that the business cycle might be definable. After all, if the business cycle could be defined, then perhaps man’s intervention would not be successful. Clearly, there was a large degree of self-interest in discouraging any attempt to define the business cycle. I knew from my study of history that a non-professional German industrialist took Homer and set out to disprove the academics who argued that Homer was merely a story for children. In the end, that untrained believer in Homer discovered Troy and just about every other famous Greek city that was not supposed to have existed beyond fable.

I didn’t know how to go about such a quest to find if the business cycle was definable. Admittedly, I began with the very basic naive approach of simply adding up all the financial panics between 1683 and 1907 and dividing 224 years by the number of panics being 26 yielding 8.6 years. Well, this didn’t seem to be very valid at first, but it did allow for a greater amount of data to be tested compared to merely 3 waves described by Kondratieff.

The more I began to back test this 8.6-year average, the more accurate it seemed to be. I spent countless hours in libraries reading contemporary accounts of events around these dates. It soon became clear that there were issues of intensity and shifts in public confidence. During some periods, society seemed to distrust government and after a good boom bust cycle, sentiment shifted as people ran into the arms of government for solutions. Politics seemed to ebb and flow in harmony with the business cycle. Destroy an economy and someone like Hitler can rise to power very easily. If everyone is fat and happy, they will elect to ignore drastic change preferring not to rock the boat.

The issue of intensity seemed to revolve around periods of 51.6 years, which was in reality a group of 6 individual business cycles of 8.6 years in length. Back testing into ancient history seemed to reveal that the business cycle concept was alive and well during the Greek Empire as well as Rome and all others that followed. It was a natural step to see if one could project into the future and determine if its validity would still hold up. Using 1929.75 as a reference point, major and minor turning points could then be projected forward in time. For the most part, I merely observed and kept to myself this strange way of thinking. In 1976, one of these 8.6-year turning points was quickly approaching (1977.05). For the first time, I began to use this model expecting a significant turn in the economy back toward inflation. My friends thought I was mad. Everyone was talking about how another Great Depression was coming. The stock market had crashed by 50% and OPEC seemed to be undermining everything. I rolled the dice and stuck to it and to my amazement, inflation exploded right on cue as gold rallied from $103 to $875 by January 1980.

As my confidence in this model increased, I began to expand my research testing it against everything I could find. It became clear, that turning points were definable, but the wildcard would always remain as a combination of volatility and intensity. To solve that problem, much more sophisticated modeling became necessary.

As the 51.6-year turning point approached (1981.35), there was no doubt in my mind that the intensity would be monumental. Indeed, interest rates went crazy with prime reaching 22% and the discount rate being pushed up to 17%. The government was attacking inflation so hard, they moved into overkill causing a massive recession into the next half-cycle date of 1985.65. It was at this point in time that the Plaza Accord gave birth of the G5. I tried to warn the US government that manipulating the currency would set in motion a progressive trend toward higher volatility within the capital markets and the global business cycle as a whole. They ignored me and claimed that until someone else had such a model, they did not believe that volatility would be a concern.

The next quarter cycle turning point was arriving 1987.8 and the Crash of 1987 unfolded right on cue. It was at this time that a truly amazing development took place. The target date of 1987.8 was precisely October 19th, 1987 the day of the low. While individual models specifically based upon the stock market were successful in pinpointing the high and low days, I did not think for one moment that a business cycle that was derived from an average could pinpoint a precise day; it simply did not seem logical.

After 1987, I began to explore the possibility that coincidence should not be just assumed. I began researching this model even more with the possibility that precision, no matter how illogical, might possibly exist. I began viewing this business cycle not from a mere economic perspective, but from physics and math. If this business cycle were indeed real, then perhaps other fields of science would hold a clue to this mystery. Physics helped me understand the mechanism that would drive the business cycle but mathematics would perhaps answer the quantitative mystery. I soon began to understand that the circle is a perfect order. Clearly, major historical events that took place in conjunction with this model involved the forces of nature as well. If this business cycle was significant, surely it must encompass something more than the mere economic footprints of mankind throughout the ages.

The Mystery of 8.6

At first, 8.6 seemed to be a rather odd number that just didn’t fit mathematically. In trying to test the validity of October 19th, 1987 being precise or coincidence, I stumbled upon something I never expected. This is the first time I will reveal something that I discovered and kept secret for the last 13 years. The total number of days within an 8.6-year business cycle was 3141. In reality, the 8.6-year cycle was equal to p (Pi) * 1000. Suddenly, there was clearly more at work than mere coincidence. Through extending my studies into physics, it became obvious that randomness was not a possibility. The number of variables involved in projecting the future course of the business cycle was massive, but not completely impossible given sufficient computer power and a truly comprehensive database. The relationship of 8.6 to p (Pi) confirmed that indeed the business cycle was in fact a perfect natural cyclical phenomenon that warranted further investigation. Indeed, the precision to a day appeared numerous times around the world in different markets. Both the 1994.25 and the 1998.55 turning points also produced clear events precisely to the day. The probability of coincidence of so many targets being that precise to the day was well into the billions. Indeed, the relationship of p to the business cycle demonstrated the existence of a perfect cycle that returned to its point of origin where once again it would start anew. The complexity that arose was that while the cycle could be measured and predicted, precisely which sector of the global economy would become the focal point emerged as the new research challenge.

It was also clear that the driving forces behind the business cycle had shifted and intensified due to the introduction of the floating exchange rate system back in 1971. My study into intensity and volatility revealed that whenever the value of money became uncertain, inflation would rise dramatically as money ceased to be a store of wealth. Numerous periods of debasements and floating exchange rate systems had taken place throughout recorded history. The data available from Rome itself was a spectacular resource for determining hard rules as to how capital responded to standard economic events of debasement and inflation. The concept of Adam Smith’s Invisible Hand was valid, but even on a much grander scale involving capital flow movement between competing economies. The overall intensity of the cycle was decisively enhanced creating greater waves as measured by amplitude by the floating exchange system. As currency values began to swing by 40% in 4-year intervals, the cycle intensified even further causing currency swings of 40% within 2-year intervals and finally down to a matter of months following the July 20th, 1998 turning point.

Economic_confidence_86_year_cycle

The Domino Effect

The events that followed 1987 were all too easy to foresee. The G5 talked the dollar down by 40% between 1985 and 1987 essentially telling foreign capital to get out. The Japanese obliged and their own capital contraction led to the next bubble top at the peak of the 8.6-year cycle that was now due 1989.95. As the Japanese took their money home for investment, the value of their currency rose as did their assets thereby attracting global investment as well. Everyone was there in Tokyo in late 1989. Just about every investment fund manager globally was touting the virtues of Japan. As the Japanese bubble peaked, capital had acquired a taste for foreign investment. That now savvy pool of international investment capital turned with an eye towards South East Asia. Right on cue, the capital shifted moving into South East Asia for the duration of the next half-cycle of 4.3 years until it too reached its point of maximum intensity going into 1994.25. At this point, international capital began to shift again turning back to the United States and Europe, thus causing the beginning of a new bull market in a similar manner to what had happened in Japan. In fact, 1994.25 was once again the precise day of the low on the S&P 500 for that year. As American and European investment returned home, the steady outflow of capital from South East Asia finally led to the Asian Crisis in 1997. In both cases, Japan and South East Asia blamed outsiders and sought to impose punitive measures to artificially support their markets. In Japan, these interventions have left the Postal Savings Fund insolvent as public money was used to support the JGB market. Financial institutions were encouraged to hide their losses and even employees from the Minister of Finance were installed in some cases engaging in loss postponing transactions of every kind. Major life companies were told not to hedge their risks for fear that this would make the markets decline even further. Thus, the demise of Japan that would have been complete by 1994 was extended by government intervention that has most likely resulted in a lengthening of the business cycle decline into 2002.85.

The next peak on the 8.6-year business cycle came in at 1998.55, which was precisely July 20th, 1998. While the intensity was defined rather well by the model’s forecast of 6,000 on the Dow by the quarter-cycle target of 1996.4 followed by 10,000 for 1998, the development of highly leveraged hedge funds created a trap that was not fully anticipated. It was clear that the European markets had captured the greatest intensity between 1996 and 1998 and that Russia too had reached our target for maximum intensity. However, the excessive leveraging of funds like Long-Term Capital Management had significantly created the peak in volume as well. Thus, the spread trades were so excessive, that the collapse that was to be expected, took on a virus type of affect. As Russia moved into default, and LTCM moved into default, the degree of leverage caused a cascade of liquidation that was spread around the world. Everything became affected causing the collapse in liquidity and credit to further undermine the global economy as a whole. Despite the new highs in US indices into 1999, the broader market has failed to keep pace and the peak in both liquidity and volume remains clearly that of 1998.55.

The Future

While this business cycle can be calculated on quarter-cycle intervals of 2.15 years into the final peak for this major wave formation of December 24th, 2032. Though this is long beyond my life expectancy, there is so much more behind the true understanding of the driving forces within the business cycle. I have learned that it is easy to claim coincidence and ignore the telltale signs of a hidden order. It is easy to argue that there is no basis for such a model without ever making an effort to test results. If everyone stopped with such criticism, most of ancient Greece would still be buried and Homer would still be considered a book for children. Man would not fly or travel to the moon. A cure for cancer would not be sought and progress would simply not exist. But furthering our understanding is part of humanity. Like law, that when strictly enforced deprives society of justice when circumstances are ignored, it is also the sin of ignorance toward new concepts that deprives mankind of progress and ultimately our posterity.

The Economic Confidence Model in 2.15-year intervals

1998.55... 07/20/98

2000.7.... 09/13/00

2002.85... 11/08/02

2005.... 01/02/05

2007.15... 02/27/07

2009.3... 04/23/09

2011.45... 06/18/11

2013.6... 08/12/13

2015.75... 10/07/15

2017.9... 12/01/17

2020.05... 01/26/20

2022.2... 03/22/22

2024.35... 05/16/24

2026.5... 07/11/26

2028.65... 09/04/28

2030.8... 10/30/30

2032.95... 12/24/32

In the next issue of the WCMR, the details of this business cycle will be expanded to provide a list of turning points down to the 8.6-month interval. There is a wealth of knowledge that lies ahead if we are not afraid to explore. Regularity of the business cycle does not mean that we lack free will. For it has taken me 30 years of observation to get this far. The peak for one nation may be the low for another. For within the scheme of global capital flows, not everyone can enjoy a boom simultaneously. For every gain in trade, there must be someone who loses. This is simply the nature of the global economy. The greatest booms unfold when capital concentrates in one sector. When that capital shifts, you also find the result of the greatest financial panics in history. An individual will always possess the free will to follow the crowd or strike out with his own independence to buck the trend. There will be those who believe in the business cycle and use it to their advantage just as there will be those who refuse to acknowledge its existence. As long as not everyone believes, the cycle will exist forever. The regularity of the business cycle is not determined by man alone; for within its deep calculations resides the very heart of nature itself. Like the Biblical forecast of Joseph that seven years of plenty will be followed by seven years of famine, understanding the nature of the business cycle can certainly enhance our ability to better manage our affairs rather than constantly add to the intensity of the cycle through our own error of intervention. For now, it is more likely that the politics will continue to act in the opposite direction of the cycle adding to its intensity and enhancing its volatility. Perhaps I have been an evangelist seeking to point out that the economy is like a rain forest – destroy one species and it will ripple through the entire system. The global economy to me is the same delicate system that cannot be viewed in isolation, but only through its collective integration. The failed labor policies of Europe have created perpetually high unemployment and the worst record of economic growth for the past 30 years. Instead of objectively reviewing what has happened, Europe seeks to federalize and strengthen the very controls that already exist. Communism and socialism are all political byproducts of our failure to understand the business cycle. Blaming the rich, your neighbor or a particular race are all vain quests to explain the cause of a cycle that has moved through the boom bust phase. Who knows, perhaps it is possible that if for one moment we truly understood the business cycle and worked in harmony with it, the possibility of reducing the amplitude just might result in a more stable political-economy for all mankind.

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Comentários

1) Este aponta para a Bear Stern , que foi quando o sistema financeiro desmoronou.

I only picked up on the Bear Stearns problems when the press reported the Merrill- BS fight on June 19. It took me the weekend playing with what it meant to realize that was no ordinary run of the mill spat. When I worked the Street, many years ago, no one trashed another' major's collateral but aways tried a work out. I scaled back immediately the following week and reduced to a focused PMs and NAFTA based oil minors.

However, lately the media here in the UK and elsewhere have been attributing the credit crisis start to events in late Feb, rather than the August date usually used. For me these were still masked by the massive LBO nonsense, but I'm told by those in the know that interbank credit began siezing up from the end of Feb and that the Qatar LBO for Sainsburys PLC was amongst the first hit. August is certainly right for the ABCP lockup in Toronto. Dullard me, it took MER nuking BSC collateral and a heightened sense of alert following the May 31 - June3 Bilderberg meetng in Istanbul, to realise that the rules had changed. By then it was already June 25.

If Mr Armstrong is onto something and if it applies to this at all, presumably the credit problem grows until the next date coming up in March 08. Since the end of Feb or early March, I haven't seen any more about Armstrong cycles in the media.

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2) Um pouco de historia e modestia.




I have to say that I thoroughly enjoy your blog. I've been studying cycle theory for some time. I have to say that reading this post was rather eery. I've got a degree in applied mathematics and I find the concept very intriguing. But, I have to say there isn't a whole lot of rigor here. Without relevant data points, I find it hard to believe anyone has been able to highly historical events of significance over for hundred years ago. I'd be inclined to believe some but those would likely be European. What about Asian or other data points which would not be as readily available. China was the world's dominant economy 400 years ago. It is also rather hard to believe how this cycle seems to perfectly fit into Greco-Roman times with a passing commentary. We know so little about many events of that time even the author admits much was considered fable. It is almost as if he is spoofing his own findings.

Yet, I hold out that maybe there is more information available and the information on current events is very interesting. Although, again, it bothers me that this was not published till 1999. I have little doubt there is much that we do not understand. Be it of ourselves, our history, the cosmos, cycles, etc, etc. There is definitely something unexplained about economic cycle theory.

Well, thanks for sharing. I enjoyed it very much.

Posted by: cd | June 26, 2006 at 11:41 PM

CD:

The model was first published a couple of decades ago but was used to forecast the 1980-81 peak in inflation in the late 1970's. It is known as the Princeton Economic's 'Economic Confidence Model' and was a part of Armstrong's 32,000 variable artificial intelligence super-computer model, which Armstrong said had "perhaps the largest economic database in the world, some of which he got from the london museum, including record from ancient Babylon, so I believe him when he says that he backtested the cycles into the ancient world. The CIA and Chinese government tried to aquire the model in 1998 after it forecast the crash of 1998 to the day on July 20. He had forecast the the dow would hit 6000 by 1996 and 10,000 by 1998 in the early 1990's. He also forecast in 1996, that oil would hit minimum $65 and that inflation would heat up after late 2002 going into 2007 and possibly extending into 2012. Armstrong said no to the CIA and Chinese and a few months later ended up in prison where he has now been for 6.5 years on contempt of court.

Armstrong was managing 3-4 billion dollars for the Japanese after he predicted the nikkei would peak in late 1989 and then lose 20,000 points within 10 months. Equity Magazine in Vancouver Canada named Armstrong 'North America's Top Economist' in 1990. All of this research has been around for quite some time, it did not just appear in 1999.
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