US Federal Reserve – courtesy Wikipedia

Last month Bankrate released their most recent forecast on mortgage rates, which outlined the Federal Reserve’s continued vestment in mortgage backed securities. The moves, aimed at reducing the burden of unemployment on the economy, also has positive effects for those interested in buying homes, as well as those interested in refinancing for gain. Barring a slowed economy for whatever reason, very low interest rates are here to stay for the near future.

We spoke earlier today with McBride (below right) about the Fed, the so called fiscal cliff (the effects of the Budget Control Act of 2011), and the overall economy. McBride offered this with regard to the generalities of Bankrate’s position:

“2013 will be favorable to home buyers and refinancers alike, with 30-year fixed mortgage rates staying between 3.5% and 4% for much of the year owing to the slow growth economy, high unemployment, and active Federal Reserve.”

A “go to” analyst who has appeared on hundreds of financial broadcasts including NBC “Nightly News,” CBS “Evening News,” and ABC’s “World News Tonight,” Greg McBride provides not only in-depth commentary, but practical advice for consumers.

According to many experts, interest rate stability and the overall economy depends greatly on how well Congress deals with the potential negatives that can arise via the “fiscal cliff” harbinger. On top of these concerns, I spoke with the Bankrate analyst about overall economic issues, for one, consumer confidence and spending. Even despite these continual low interest rates, the seeming inability of the administration and lawmakers to instill confidence seems at the core of America’s economic conundrum.

Regardless of actions by the Fed, which McBride pointed out at simply re-instituted past policies, investor and consumer confidences have to be shored up. In short, the biggest reason for the lukewarm economic recovery resides in infirmities from the problem solvers themselves, namely our own lack of confidence in decision-makers in Washington. Be that as it may, Bankrate and other analytics companies understand the public’s purse strings (corporate too) remain very tight. But in ending our conversation this afternoon, McBride pointedly suggested those with the wherewithal to buy a home, needn’t hurry to closing, he say’s these rates are with us for a while (6 months out).

Even as I write this, various financial reporting entities are announcing both concern and tentative actions being considered by the FOMC where this bond buying actions are concerned. The minutes of the meetings back in December can be read here, and the video below of the press conference with FOMC Chairman Ben S. Bernanke, offer more insight into what Bankrate and McBride partially project from.

Meanwhile, from the BBC to the Wall Street Cheat Sheet reports suggest these same FOMC board members have concerns that spending upwards of $85 billion dollars a month buying these bonds may kindle an inflationary fire America and the world does not need. A last note, McBride actually commented on the basic physics of the economic situation in our conversation, the point of our discussion being how action on the part of the Fed or other regulators always leading to a counterpoint elsewhere. The take away here should probably be, the Fed using “same old” tactics, will not likely affect a big fiscal change.

We’ll keep you updated.

Image by Colonel Flick/WilliamBanzai7 via flickr.com

Well yes, if you are a banker or a government, holding trillions in toxic mortgages, in the midst of what is still a very depressed housing market, deflation is a problem. They need those toxic mortgages to go back up in value. As such, Bernanke has taken it upon himself to buoy the housing market by buying $45 billion dollars worth of mortgage backed securities each month from now until–well, until the housing bubble has been re-inflated to a satisfactory degree.

And the federal government, strapped by massive budget deficits costing almost one-half TRILLION dollars in interest payments, (even with interest rates near zero), for fiscal 2012, are getting desperate for more and more cash. The interest payments on federal borrowing are so high, they are now the 4th largest expenditure that the government has. If interest rates were to rise, even only slightly, the government would be faced with a choice between paying their creditors or paying for defense, food stamps and social security. Indeed it’s already been that way for a number of years now, so they have devised clever ways of manipulating their debts. But the fact is that their manipulating and maneuvering is leaving you with less and less buying power as a consequence.

Anyone who has been shopping for groceries lately has noticed that those prices have been rising much faster than home values. QE1, 2,3, and 4 may have kept interest rates from rising, but it did nothing to help reduce food prices. Those of you on a budget are well aware that $100 does not buy nearly as much at the grocery store as it did 10 years ago. And to boot, many product manufacturers are helping maintain the “game” by reducing the sizes of food packaging as a way to keep the price more or less the same. So even where prices seem to be holding steady, chances are the amount of actual contents you are purchasing is getting smaller.

Take coffee as a prime example. 30 years ago, coffee sold for less than $2 per pound, and a package of coffee actually weighed 1 full pound. (16 oz) But today, coffee, (depending on the brand) has gone up to about $5 for that same package of coffee. Except that now, the typical pack of coffee only weighs 11 ounces. It looks about the same sitting there on the shelf, but the contents have been gradually reduced over time to keep the price “low”.

Sugar has been repackaged from 5 pounds to 4 pounds, to keep the price from obviously going up. Ditto with cereals, and thousands of other grocery items which can be reduced in quantity, without actually reducing the packaging size. So it looks like you are getting the same amount, but there is actually less and less content inside the package.

Prices for a dozen eggs on the other hand, have gone up about 80% in my area over the past 3 years or so. It’s more difficult to sell a dozen eggs if there are only 10 or 11 eggs actually in the container. So, the price had to rise, to keep pace with the falling value of a dollar. Milk would already be near $7 a gallon if not for subsidies paid to dairy farmers. If those subsidies were to be discontinued, we’d see drastic increases for basic food products in a matter of days.

Incomes on the other hand, are falling across the board, even for those with advanced college degrees, as globalization moves companies to look for cheap labor in other countries. So incomes are not keeping pace in America, with the rising costs of living. To hide this fact, the government has conveniently changed the way that the Consumer Price Index is calculated, in order to make it seem as if prices are not rising. And this game has been going on now for over 30 years.

Ultimately for the general public, the cost of living is rising despite what the politicians claim. In fact, one of the big points of argument over the so called “fiscal cliff” was about whether to use a handy smoke and mirrors tool called “chained CPI” to continue the “no inflation” charade. The idea with this one is to use a calculation of the cost of living that will be lower than reality, so that the government can reduce it’s social security payments to seniors. Check this article on shadowstats.com for a detailed analysis of how the manipulation is accomplished.

Keeping interest rates at ridiculously low levels has not done much to help bolster the housing market, but it has reduced the amount of interest that the government has to pay each year on it’s debts. If interest rates go up just a few percentage points, those interest payments would balloon to unsustainable levels. Calculating the inflation rate to keep it artificially low means that the government pays less to social security recipients.

But the bottom line is that they are “robbing Peter to pay Paul” as the saying goes. Unfortunately you are Peter, not Paul. Your buying power is being reduced, as the real costs of living continue to escalate. I believe this is already impacting the housing market to the extent that you cannot expect home prices or sales figures to rise substantially or “recover” to any respectable level if people have to spend more and more of their income just to eat and put gas in the car.

The problem is that inflation, whether it is 2% as Bernanke claims or higher, has a CUMULATIVE effect on your income. In other words, the 2% inflation from last year stays and another 2% gets added to that the following year. Over ten years that low 2% inflation rate that Bernanke loves to quote will become 20%. Since 1980, the official inflation rate has compounded to a total of 179.4% according to inflationcalculator.com. and this is based on “official” inflation numbers.

This means that if you earned $300 per week in 1980, you would need to earn $838.18 per week today, just to keep pace with the official inflation rate. This is why playing the lottery is now one of today’s hottest retirement plans. It’s why people are desperate to “get rich” and why everyone needs to constantly increase their income. It’s also why nearly 50 million people are now on food stamps. Fewer people today are able to even support themselves without some type of government assistance.

Unfortunately the housing market will have to begin “downsizing” itself just like they have done with coffee, sugar, and other commodities. Eventually we’ll be back to building and selling those 1000 square foot, 2 bedroom houses that were so common in the 1950′s. Only instead of costing $5000 they will sell for $42,320.04.

The government is chasing it’s proverbial tail. Monetary policies create more inflation, and that inflation leads to more people on the government dole, and fewer people who can afford to buy and pay for a home. The fiscal cliff is just a little preview of what awaits our economy, as we continue to do things that will eventually lead to the edge of a fiscal abyss.

Image by Occupy* Posters via Flickr.com

They say they want to create jobs. But as a small business owner, struggling to maintain profits in this economy, I have to ask myself “how can people who are not responsible for a business, have never hired anyone and never had to make a payroll, understand how to solve economic problems which they themselves created in the first place?”

The guys in Washington just got a pay raise courtesy of a presidential order. That was handy. Congress can now avoid being lambasted for voting themselves a raise, the president simply ordered that they get one. But it doesn’t work that way for the small business owner. No one I know of can sign a document that will automatically guarantee that my income will increase in 2013.

So let me get this straight… we have people who receive a regular paycheck, can order or vote themselves a pay raise, exempt themselves from any particular law they don’t like, like the social security system and Obamacare, for example…claiming they are going to solve the economic problems in an economy that they don’t have to deal with and whose operation few of them even understand.

Hmmm, what’s wrong with this picture? If I wanted to hire a consultant to help me make my business more profitable, would I hire someone who’s business model involves taking money from others by a threat of force? Isn’t that also the definition of “armed robbery”?

The reality is that our economy, at the small business level, does trickle down and even occasionally trickles up. As my mom used to say, “poop always runs down hill”. But sometimes poop can get backed up and go up hill as well.

I’ll be candid about my own experiences as a small business person as an example. Most of the time we all like to give the impression that things are rosy, but I think it’s time we took a hard look at how the economy really does trickle down and trickle up for the small business owners who are supposed to be the primary job creators in this country.

By 2005 I had been in the real estate industry for 10 years. I was part of a group that operated a well established, well funded business that employed a core team of folks, but had revenues that were spread among as many as 100 commissioned people who contributed to our sales base.

Prior to the market peak, we were buying and selling more than 200 cash flowing properties per year to real estate investors. The company generated revenues in excess of 1 million dollars per year, and paid nice salaries, bonuses and/or commissions. But by 2006, steady increases in housing prices, property taxes and insurance had virtually eliminated all the positive cash flows.

Properties began to sit on the market, unable to generate a positive cash flow for their owners. Within a year the entire business collapsed. This didn’t just happen in my market, Atlanta, GA. Local governments riding the backs of property owners all across the U.S. helped destroy the goose that was laying the golden property tax eggs. A clear case of government policies causing a trickle down effect for property owners.

Local governments increased taxes on real estate with relentless regularity, using the money to pay themselves higher salaries, increase department budgets and build fancy new municipal buildings to work in. This process trickled down onto the heads of every private property owner, and helped destroy the real estate market.

Today hundreds, perhaps thousands of municipalities worry about how they will collect enough “revenue” to keep their massive bills paid. In this case, the “poop ran back up the hill” to the ones who dished it out in the first place. Local and state government has been forced to eliminate several million jobs as a result. This is an example of “Trickle up economics” at it’s finest.

With my real estate business hitting the rocks, I started another small business involving boat and RV storage. From 2002 to 2005 I grew this business while caring for a husband who was terminally ill at the time, and built a small property into a thriving business. By 2005 my little lot was full of vehicles, and our shop was busy refurbishing boats for customers. I also had a boat trailer dealership, selling trailers manufactured by a local small business that had been around since the 1960′s.

The storage business continued to chug along, until late 2007, when other cutbacks in defense spending at the local Lockheed plant forced several of my storage customers to transfer out of state, resulting in less income for my business. Next a few customers who were also in the real estate industry suddenly lost their businesses, resulting in the repossession of their vehicles. A few more spaces opened up and revenues continued to fall.

By late 2009 I had lost 40% of my storage business, due to my customers losing jobs and incomes as the market crash ensued. The problems my customers had were trickling down to me. The boat trailers stopped selling as well. With folks losing their boats, who needs a new trailer? By 2009 my trailer sales had evaporated, and the trailer manufacturer went out of business after 40 years. More trickle down economics.

Image by uvw916a via Flickr.com

I was able to stay in business by cutting my expenses to the bone, and eventually I regained most of the storage business. But the shop is currently closed and the trailer dealership is long gone. That resulted in reduced business for my vendors – more trickle-down economics. Taxable incomes were falling, so we owed less in federal and state taxes. The government was collecting less and less from me – another example of “trickle-up economics” at it’s finest.

Governments will never succeed at increasing tax revenues by implementing administrative, tax or monetary policies that continue to send unending streams of poop flowing down from “the hill”.

Donna S. Robinson is a real estate investor, author, and housing market analyst located in Atlanta, GA. Follow her on twitter at donnaconsults. Her latest book is now available on Amazon.com. It’s called Basics Of Real Estate Investing

Image by DonkeyHotey via flickr.com

Yes, “real progress” has been made, over the issue of how to get money out of your pocket without you even realizing it. In fact, they are pretty much betting that since this is all happening over “the holidays” you’ll be too busy worrying about sports and gift buying to pay any attention to what is actually happening in Washington. Pretty good timing eh? By the time you wake up and get over your new years eve hangover, our budget problems will all be “solved”.

The solution is based upon our already-phony inflation rate, and there will be yet another “adjustment” to reflect “actual” consumer behavior. The “official” inflation rate measurement was created by the government several decades ago, to measure how much the cost of living was rising, as a way of determining yearly increases in social security, SSI and other benefit programs. The idea was that if the cost of living went up, so would benefits for seniors and the poor, thereby guaranteeing that “entitlement programs” would always keep pace with inflation. We all know this number as the “CPI” or “Consumer Price Index”. But over the years, the government has gotten more and more creative with the CPI and how it is calculated.

Today there are several versions of CPI numbers. One of them in particular is the “Chained CPI”. Here’s a good article explaining how Chained CPI works and is calculated.

For purposes of this article, the short answer is that the chained CPI is a new type of calculation that was begun in 2002. It is a new way to calculate the CPI and help insure that the “official” CPI is lower, and therefore inflation is lower and thus you do not need as much of a cost of living adjustment,(COLA), as you might have thought.

This means that the government can reduce or eliminate a cost of living adjustment in any given year, simply by adjusting their calculations. Thus, you have “cut” the federal budget. So, in essence the new budget agreement is nothing more than agreeing on how to make the numbers “work” so that the government can reduce expenditures as needed, or implement other policies, such as printing phony money and destroy the value of the dollar without you even noticing.

As you may be aware, the inflation index is now a “favorite” benchmark for Fed Chairman Ben Bernanke, who has embarked on his own plan to save the economy by spending $85 BILLION per MONTH on a combination of mortgaged backed securities and U.S. Treasuries. Bernanke is sure that inflation will remain low, in spite of the unprecedented levels of dollars being injected into the economy by the Fed.

Bernanke is clearly not a prophet, as we all learned in 2008, but he knows that as long as both sides of the congressional aisle can agree on how to manipulate the inflation numbers, he can use “tools” such as open-ended rounds of quantitative easing – printing dollars – for as long as he deems “necessary” to help “improve employment” while keeping inflation “low”. These phony calculations allow Bernanke to provide any amount of money necessary to keep the political game going, while allowing congress and the president to claim victory in fixing the economy. This is merely “the right hand washing the left hand”.

Here’s is a short excerpt from a detailed report on the CPI and how it has been changed:

“Federal Reserve Chairman Alan Greenspan and Michael Boskin, the chairman of the Council of Economic Advisors, were very clear as to how changing or “correcting” the CPI calculations would help to reduce the deficit. As described at the time by Robert Hershey of the New York Times, “Speaker Newt Gingrich, Republican of Georgia, suggested this week that fixing the [CPI] index, with its implications for lower spending [Social Security, etc.] and higher revenue [tax bracket adjustments], would provide maneuvering room for budget negotiators …” [vi]

“Alan Greenspan, chairman of the Federal Reserve, is among the other Government officials who have spoken optimistically about financial benefits of a more accurate [CPI] index …” [vii]

“[E]conomists believe one of the most important [CPI upside biases] is when consumers shift their buying patterns in response to changing prices, substituting one product for another. The [CPI] index is based on a fixed market basket of goods and services. But, for example, if the price on an item like steak gets too expensive, consumers may switch to hamburger.” [viii]

Yes, you read that right. The government has concocted a way, with the help of the Fed, of deliberately lowering the Consumer Price Index by saying that if steak gets too expensive you’ll just switch to chicken. Problem solved. Your costs did not actually go up. Therefore, no increase in inflation. Simple huh? And you though that government was ineffective. Silly you.

Here’s the entire report, as published on Shadowstats.com that provides the detailed proof on how they came up with this and how it has been developed more fully in recent years.

The net result of all this is that nothing will change where you and I are concerned. We still live in the real world. The government has concocted an alternate reality which they keep adjusting as the need arises.

But reality is that the damage is real. Since 2002 our “low” inflation rate of “only” 2.46% has accumulated a total of 27% inflation. Perhaps most folks miss the fact that inflation is cumulative. It works like compound interest, only in reverse. Instead of making money, it’s a measure of money you are losing. Even if you did switch from steak to chicken, your costs of living are still officially up 27% since 2002. But chances are your income has gone down. Even if your income has gone up, unless you are making 27% more than you did in 2002, you still have less money to spend today.

The media will be trumpeting the news about who “won” and who “lost” when the fiscal cliff is averted with a last minute agreement. But make no mistake, the real agreement has already been reached. And average Americans are guaranteed to be the real losers.
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Donna S. Robinson is a real estate investor, author and residential market analyst located in Atlanta, GA. Follow her on twitter at donnaconsults. Her latest book, Basics Of Real Estate Investing is now available on Amazon.

Image by Ondrej Kloucek via Flickr.com

That ought to be enough to just buy the fiscal cliff, put a fence around the edges, and turn it into a public park. It won’t get rid of the cliff, but we will be able to get close enough to actually see the bottom and marvel at how big and deep it looks in person.

For the average individual, this plan is pretty much the same as taking out multiple credit cards, using them to pay your bills and calling it prosperity. Never mind that this whole mind boggling process is destroying the purchasing power and incomes of ordinary americans, causing food and household prices to rise, and there is absolutely no oversight or approval from the congress or any other governmental authority.

A policy of open ended QE3 and now essentially a “QE4″ for treasuries, is raising plenty of concern from folks who really understand what kind of economic problems this program could, and probably will lead to.

Here are Rob Chrisman’s comments, as taken from his piece on Mortgage News Daily: (bold type added for emphasis)

“The Fed caught the market’s attention yesterday,…and we are reminded that one branch of the government is issuing securities while another branch is buying them. What’s wrong with this picture? The Federal Reserve said it will buy $45 billion a month of Treasury securities starting in January, …The buying announced today will be in addition to $40 billion a month of mortgage-debt purchases (don’t forget that the $40 billion is over and above prepay reinvestments)…

“Success consists of going from failure to failure without loss of enthusiasm.“… “In many areas housing is mostly improving based on the Fed purchasing Freddie and Fannie (and some Ginnie) MBS. What happens when it stops?“…When the Fed stops buying securities, the laws of supply and demand dictate that prices will drop and rates will go up – plain and simple.“

No worries, we’ll just turn the cliff into a park! © freshidea – Fotolia.com

Richmond Federal Reserve President Jeffrey Lacker has gone public with his belief that Bernanke is interfering in fiscal policy.

Finally, Dallas Federal Reserve President Richard Fisher has compared the Fed’s actions to a famous Eagles song, saying that this buying program may be tougher to get out of than “Hotel California”.

Bernanke is planning a fiscal cliff “overlook” sort of like they have at the edge of the grand canyon. Only this park will have a stunning view of an enormous canyon of debt with a river of dollars flowing at the bottom, digging it deeper and deeper. Oh, and there will be your choice of donkeys or elephants which you can ride all the way to the bottom.

 
Donna S. Robinson is a real estate investor, author and residential investment analyst. Follow her on twitter at donnaconsults. Her latest book, Basics Of Real Estate Investing is now available on Amazon.

Image courtesy by DonkeyHotey via Flickr.com

In short, we have two parties that have completely opposite viewpoints and objectives, with a lot of money at stake. A compromise is virtually impossible without one team or the other being willing to give up what they want.

There is simply no way that Boehner can give in to Obama on the idea of eliminating the debt ceiling. Obama basically wants a “blank check”, while Boehner pretty much believes that the cure for our debt related ills is less spending and less debt, not more. They couldn’t be farther apart.

It’s interesting to me that both sides can produce a pulitzer prize winning economist who is supportive of their position. So will things be rough either way? Will things go better either way? Who knows? If the so-called experts can’t agree, then who’s to say that going over the cliff is going to be a bad thing or a good thing? It will certainly be bad for some, but will also be better for others. No matter what, all of us will be affected in some way.

There is simply no consensus on what to do or how to do it. Neither side believes that the other side’s plan is the right one. There is no grounds on which to compromise. Either more debt will help us, or more debt will hurt us. Which is it? Maybe it’s time to jump off the fiscal cliff and own the consequences. At least we can stop kicking the can down the road. If we’re going to have another recession, bring it on. If we’re going to see things improve drastically, bring it on. It wouldn’t be the first recession we’ve had and it won’t be the last.

There can be no compromise that does not involve one side or the other giving in on major principles that they strongly believe in. Obama has the White House for 4 more years, but the same voters who sent Obama back for a second term, also sent back a majority of republican representatives, thus allowing Boehner to hold on to enough power to continue to hinder the Obama Administration. Maybe the voters are more willing to go over the fiscal cliff now, rather than later. Perhaps the voters understand that you can’t spend more than you are taking in, without getting into big trouble sooner or later. At least that is how life is for the voters, regardless of the niceties of government accounting methods, which are illegal for voters, who must live in the real world.

As the end of the year approaches, we all know that, where government is concerned, there is never any real progress to be made. For them it’s all about finding a way to cling desperately to the edge of the cliff, while pretending that everything is OK – at least until the next crisis comes along in 2 or 3 months. The sequestration plan we see before us IS their version of a compromise. A compromise that they came up with as a result of their total inability to agree on anything else.

I say it’s time to grab your parachute, get ready to jump and let’s get it on. If Obama and Boehner have the guts to let sequestration happen at least we’ll find out what it’s like to start cutting the debt that everyone agrees has to be cut. That in itself is the only real compromise that we can look forward to.
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Donna S. Robinson is a real estate investor, author and residential market analyst located in Atlanta, GA. Follow her on twitter at donnaconsults. Her latest book, Basics Of Real Estate Investing is now available on Amazon.

Federal Budget Discretionary Spending – chart courtesy of National Priorities Project, Inc.

But how much of this is really “defense” and how much of it is related to our modern policy of geo-political intervention?

If we are going to start wars or enter existing wars, I’d like to see us plan to win them instead of dragging them out endlessly. Personally I think that one of the great travesties of our modern age is the way that we’ve stopped winning wars, and instead concentrate on operating them as open ended geo-political businesses. We send our country’s bravest and finest into wars that they are not allowed to win, facing enemies that they are often not allowed to even shoot at. This isn’t as much a defense of the nation as it is old fashioned “gun-boat diplomacy“.

President Dwight Eisenhower was prophetic in his farewell speech to the nation, when he said:

“In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists, and will persist.”

It would appear from the chart shown above, that this is exactly what has happened. And not only has this so called military-industrial-complex grown, it is now consuming 58% of all federal discretionary spending. In short, the M-I-C has become the biggest government subsidized “business” in the United States. And now that major cuts in it’s budget are looming, everyone is crying that this is a calamity that must be avoided.

Don’t get me wrong. I support a strong defense, but where does defense spending legitimately end? I do agree that President Ronald Reagan used a strong military build up to force the Soviet Union into capitulation in the late 1980′s. But we had more money back then, and basically were able to out-spend the soviets. Once the cold-war was won, what were we to do with our vast military industrial complex? Bush I, Bill Clinton, Bush II and now president Obama have all seen the need to start or continue various military actions around the world, in response to various perceived geo-political situations.

When you have a large military presence, there seems to be some overriding need to find a place to use it. As a result we’ve seen one “justifiable” military action after another, with little benefit to the US as a result. If we are going to have a military as our largest industrial employer, we need to see some bang for our buck. Funding endless wars such as Afghanistan, with no political will to win, is keeping the military in business, but at a horrible cost in US lives, with virtually nothing to show for it.

Is war too big a business to be allowed to fail? © Oleg_Zabielin – Fotolia.com

The Iraq war, many claimed, was supposedly to get oil. But did we get any of it? Donald Trump famously argued that we did not know how to take advantage of our wars to get some of the spoils for ourselves. I suppose he was right.
But at the end of the day, we did keep the military-employment and contractor machine busy, which in and of itself adds to jobs in the US.

Now we stand at the edge of the fiscal cliff, and no one is yelling about the fallout more than the military industrial complex. I don’t have to link to any reports of how many defense and military related jobs will be lost if those cuts in defense spending take place. They will. The housing market will definitely suffer in areas that are most dependent on military activity. So will local businesses located near military installations.

Franklin Roosevelt, it is thought by many, actually knew about, and allowed the Japanese attack on Pearl Harbor in December of 1941, as a way to get the U.S. into WWII, which effectively ended the great depression. World War brought big business and manufacturing which ignited an economy that had been struggling with depression for over a decade. A recession quickly followed the end of that war, in 1945.

Many, if not most of our recessions in the 20th century have come after a war ended. Major recessions occurred after WWI, WWII, Korea, Vietnam, and the end of the cold war in 1988. War, whether justified or not, results in more employment and manufacturing in the U.S.

I don’t doubt that the looming cuts in defense spending will have a drastic impact on our economy, at least in the short term, and yes it might put us back into a recession. From the perspective of the defense industry, one of the nations largest employers, the business of war is too big and too important to our economy to be allowed to fail.

Donna S. Robinson is a real estate investor, author and the wife of a US Army veteran. Follow her on twitter at donnaconsults. Her latest book, Basics Of Real Estate Investing is now available on Amazon.

Assuming there is no agreement forthcoming for avoiding the “fiscal cliff”, real estate investors should be giving some serious thought to how your real estate investments, rental houses and commercial buildings might be impacted. For some there will be little change, but for others who have properties located in or near markets that will be directly impacted, the changes could be swift and severe.

According to reports concerning analysis of the impact, one of the most significant aspects of the sequestration bill would be large cuts in various types of defense related spending. If you own rental real estate in an area near a major military base, chances are you could see a local impact that would potentially reduce demand for rental housing, and could lead to an increase in tenants who would lose their jobs.

One such area that would be dramatically impacted is Fayetteville, North Carolina, home of Fort Bragg. The required automatic cuts in new defense contracts, reductions in personnel, and budget cuts dictated by the sequestration process are designed to reduce government outlays. And as painful as this will be, something has to be done to avoid an even worse situation somewhere down the road. But some communities will experience dramatic changes in their local real estate market, at least for a few years. Unemployment among veterans will rise. Communities where military and defense related jobs are concentrated will see a relatively fast impact that will quickly bleed over into the local housing market.

The government posturing over sequestration is getting somewhat tiresome, as everyone is merely jockeying for position, and no detailed terms for an agreement have yet been identified. Here is a list of the general cuts that would be implemented. Your challenge is to determine how this list might impact your real estate investments, or any investments for that matter.

My guess is that falling off of this particular fiscal cliff might be less painful that waiting for a higher fiscal cliff to arise, so in some ways perhaps we’ve got a better chance of long term survival if we go ahead and accept these cuts now. I get that. But as real estate investors, this is a classic example of a looming change in the fundamentals that will come quickly in some markets. Therefore, it’s important to know whether your properties are located in a market that will be sensitive to these changes.

Other states most vulnerable to military and defense cuts are Virginia, Texas, California and Florida. Virginia has a major concentration of military and defense related jobs and industries. And there will be specific local areas within each state that will be most affected.

Investors located near military and defense related installations or businesses should take careful note as to how the approaching changes might impact your local market. It would appear that a reduction in demand is a very likely outcome if the planned cut backs begin to take hold. The military-defense sector would be one of the first, and would be big enough to have a significant impact on local markets in a variety of areas.

In today’s challenging market, it pays to remain alert and vigilant to follow your local market fundamentals, and be aware of how any negative changes in those fundamentals could impact your properties and your cash flow.
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Donna S. Robinson is a real estate investor, author and residential market analyst located in Atlanta, GA. Follow her on twitter at donnaconsults. Her latest book, Basics Of Real Estate Investing is now available on Amazon.

© Stephen VanHorn – Fotolia.com

But this year, I find myself wondering whether I should plan to take some educational courses in 2013 or just go ahead and kill myself. I’m torn between being totally positive about our country and our spirit of determination versus a constant series of dooms day scenarios.

The talk shows on the financial and news channels parade an endless variety of “experts”, “strategists” and politicians who can be counted on to argue constantly about whether we are experiencing the growing pains of the worlds brightest and most successful nation or this is actually a real crisis so severe that we all need to dig a hole and crawl in it.

I’m weary of the endless arguments that never bear any fruit. It’s just a jumble of information and opinions. Very little actual truth or clear, unbiased, documented facts. But it’s great for TV ratings and government program creation when everyone is up in arms over something – anything.

From my perspective, it is pretty clear that this whole entire mess has been gradually created by Federal entities over many decades of our existence. From the original income tax, created to pay for the civil war, to the birth of the Fed in 1913, social security, medicare, medicaid, fiat money, wars, deficit spending, pet programs created with “government money”, along with the resulting special interests that were created to take advantage of various opportunities to get “government money”.

It seems to me that the collective federal government authorities and their cronies on Wall Street and the Federal Reserve are clearly responsible for this, if we are, in fact, standing at a fiscal cliff. On the other hand, if we’re not, it wouldn’t be the first crisis we’ve averted. These things are getting to be old hat. So either we really are in serious financial trouble, as half the experts say, or times are getting better and better so don’t worry, be happy, as the other half of the experts say.

Or perhaps politicians and wall street have figured out that crises are a great way to justify funneling public money into programs contrived to benefit fellow cronies and supporters. After all, the fix for every single crisis has been more money, more money and more money. Everyone has a crisis that needs more money in order to fix it. I suppose if we just let Ben Bernanke actually drop more money from helicopters, we can eventually fix every single problem we have.

How is it that the same organization that spent years creating the collective mess, the organization that created the very deadline we are facing, are going to somehow fix this entire problem over some eggnog at a Christmas – er – holiday party? I think we’ve lost our collective minds if we remotely believe that a meaningful solution is going to happen before new years day. But so what? Everyone has apparently forgotten that we’ve still got to get through the “gateway to the next epoch” on December 21, 2012. The media and the government seem to have totally overlooked the Mayan calendar crisis. Heck, we may not even have to worry about the fiscal cliff.

I’m not happy about the fact that I can’t be happy. I am generally happy but all these crises are bringing me down. It’s a bummer. But I think that come January of 2013, the sky may not fall, even if the stock market does. Does anyone remember Y2K? I spent 3 months filling-in the hole I had dug to hide in before we went over the digital cliff. The nation spent years getting ready for that one, and nothing happened. Nothing. Half the experts I polled agreed that there was never a real Y2K crisis to begin with, and the other half of experts from the tech sector said the cliff was averted by the billion-zillion dollars we spent to reprogram or replace our old computers. Doomsday narrowly avoided once again.

Here’s my suggestion to those who are “working tirelessly” to get this done: The federal government already uses accounting methods that are illegal in the private sector, to come up with numbers and budget projections that are designed to disguise or cover up reality. There’s no real accuracy in any federal method of accounting, estimating the size of our deficit or the real inflation rate or anything else that actually requires a real number.

So, just make something up. That’s all you have time to do. With 4 weeks left in the year, and only about 10 actual working days in there somewhere, all you can do is whip up a few spreadsheets and cryptic regulations with more of the standard government planning and accounting that always makes things look OK, even if it is total nonsense. So, in a nutshell, just fix it. You’ve been making up numbers and regulations for a very long time already. Just make up a few more and get a press release out on pressrelease.com or twitter – We know you aren’t capable of actually fixing the problem anyway, because you’ve all been creating one crisis after another for years now. Don’t expect me to spend my new years eve hiding in a bunker watching cable news. Enough already.

The bottom line is that if this is a real crisis, you’ve already blown numerous opportunities to work it out. You’ve already spent millions on commissions, planning sessions and studies, with absolutely nothing to show for it. The taxpayers have no reason to expect you to suddenly come up with a real solution now.

Or, when disaster is averted on new years eve with yet another grand, new plan that calls for lots more money, it may be more proof that this latest crisis and most others have been created by the “powers-that-be” in order to facilitate more power, along with more money for you and your buddies.

Any way you slice it, expecting the feds to fix any crisis that they’ve created themselves is like expecting that the arsonist who started the fire can be counted on to put it out, and that the folks who gave him the matches will be happy about it.
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Donna S. Robinson is a real estate investor, author and residential market analyst located in Atlanta, GA. Follow her on twitter at donnaconsults. Her latest book, Basics Of Real Estate Investing is now available on Amazon.

There has been a lot of speculation throughout 2012 about whether this law would be extended. It appeared in August that a deal might be in the works, as the senate had approved their version of a plan to extend debt forgiveness. But as far as I can tell the election has derailed this effort and I’ve seen no mention of any concrete plans to reach an agreement on an extension.

There is much talk about avoiding the fiscal cliff, but since housing news is, (erroneously), reporting that a “housing recovery” is underway, there is even less impetus on the congress to worry about this particular piece of legislation. And it seems that the government is much more efficient at removing tax breaks than they are at adding them.

In the present climate there are plenty of bigger “fish” to focus on, given the fact that we only have 7 weeks left in 2012. With the holiday season rapidly approaching, there is very little time for congress to move decisively on this particular issue. As a result, I think it’s becoming highly likely that the Mortgage Debt Relief Act will expire at years end, as scheduled.

Because foreclosure proceedings and short sales can be lengthy, drawn-out, agonizing affairs anyway, there are undoubtedly many thousands of distressed home owners who are desperately trying to complete a short sale or hoping to conclude a foreclosure before new years eve rolls around. If they don’t, they are risking a fat tax bill from Uncle Sam for the taxes owed on the debt that has been forgiven. The heat is on to get a deal done before years end.

For real estate investors this represents an unusual and brief window of time in which those who wish to sell a home quickly will be more highly motivated than ever. It’s going to be an unusual two months for those investors who focus on buying single family homes through creative means such as short sales.

And short sale investors take note – it also may mean your-days-are-numbered, at least in the short term. While I’d expect to see a huge uptick in short sales between now and the end of the year, they may also drop off to virtually zero for a month or two afterward, maybe longer, as sellers try to determine whether or not they can afford to sell and pay a hefty tax bill.

Real estate agents should be mindful that any active short sales have to be completed now, not later. This means you may need to be more flexible than usual and help your sellers get a deal done even if this means taking a commission cut, (the banks will hit you up anyway), and get the home sold to an investor who can pay cash and close quickly. We’re out of time for those 6 month affairs where you don’t hear from the bank for two months at a time. Something has gotta happen now. Don’t leave your clients owing a big tax bill just because you aren’t used to working with investors. It’s time to “give up the ghost” as we like to say in the south.

If you are a distressed seller, and your home is in danger of foreclosure, but you are not currently under contract to sell, and you have no offers on the table, it may be time to plan your exit strategy. Should you walk away before year’s end? Perhaps. It depends on your specific situation, and whether you would actually owe taxes if the MDR Act should expire with you still in a distressed situation. It’s a tough call, but the only thing worse than a foreclosure or short sale is owing taxes on a foreclosure or short sale. That will just add insult to injury.

So, unless congress suddenly puts all this to rest, I think this situation will force more distressed sellers to become highly motivated to sell to anyone at any price or terms that will get them out from under a looming tax bill. We’ll see more abandoned homes in the short term, more creative investment activity, then, on new years, it may all come to a grinding halt while all sides figure out what they’ll do next. In the meantime, it could be a very unusual and unique opportunity for real estate investors who specialize in single family homes.
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Donna S. Robinson is a real estate investor, author and residential market analyst located in Atlanta, GA. Follow her on twitter at donnaconsults. Her latest book, Basics Of Real Estate Investing is now available on Amazon.