Friday, February 24, 2006

It is January 1st, the year 2100. Patrick Jones sees the morning's dawn, the dawn of the new century. But he has no reason to view the sunrise with hope. For you see Patrick is a member of the R caste -- a renter. His father was a renter. His father's father was a renter. And as he looks over to his newborn son he realizes that little Timmy will be a renter too.

Once upon a time in the mists of history there existed a brief time when anyone could buy a home. Yes you read that correctly, anyone. Oh, does Patrick wish he lived back then. He tells himself he would give anything to have lived during that golden age. But he can't. He's trapped in the present with no hope.

For today a 2 bedroom, 1 bath home in California is worth over 1 billion dollars. With a median income of $50,000, members of the R caste have no hope of ever saving enough money to buy one of these desirable homes. The only ones who are able are the fortunate H caste members, the ones who are able to leverage their home equity (which at 20% appreciation is rising at 200 million a year!), to manage the cash flow necessary for home ownership.

Patrick's sad life was predetermined when his great grandfather heard some insane bubble preacher who claimed real estate was overvalued. Patrick's ancestor listened to this fool and sold his house, thinking he would jump back in when prices dropped. But as we all know, the economic law of 20% minimum appreciation continued to work it's magic. And once he realized he was wrong it was too late. He was priced out. Forever. Oh how bitter a pill that is for Patrick to swallow. He spits a curse at that long dead fool! Why did he destroy all of their lives by being so stupid? Patrick had no answer. For who could conceive of an answer to such irrational behavior.

Eventually society splintered into 2 groups: home owners and renters. As the wealth of the H caste increased, the R caste became poorer. They found their jobs being outsourced at a greater rate and with no home equity to tap, they could no longer live a middle class lifestyle. Their spiral into the consuming darkness of poverty and hopelessness has been unabated for over 100 years. Oh, these poor wretches still cling to the bubble notion. They tell themselves it can not last forever and someday they will be able to buy a house. Someday prices will drop. Someday. Someday. Someday. But, deep in their hearts they know that someday will never come.

"Enough wallowing in the past," Patrick tells himself. He has to get ready for work. His boss is always angry if he is late because time is money to Mr. Pierpont Tollson. Mr. Tollson is a Senior Mortgage Engineer and, more importantly, a home owner. Unlike poor Patrick, Pierpont has never had to spend 1 day in school. He's never really had to do much of anything in life except consume. His position at the company was inherited and involves little actual work. Like a prince or king of a bygone age, life is good for Pierpont Tollson because in early 2006 his great great grandmother bought a condo conversion in San Diego. Such a small action and yet what a large effect it had. For over the years that converted apartment was leveraged, upgraded, sold, and parlayed into a fortune of over 30 billion dollars. And Pierpont sits today as the recipient of her largess.

Patrick tries to avoid these bitter thoughts as he puts on his sweater. But he can't stop thinking about it. If only he could escape from this trap he finds himself in. If only he could give little Timmy the life he deserves, a life better than his. If only...and then it hits him. Yes! He can give Timmy a better life. He'll put him up for adoption on Ebay to the highest bidder. Since only H caste members can purchase humans on Ebay it'll guarantee he'll end up a happier person and eventually he'll inherit from his new parents a house. And with a single tear flowing down his cheek he posts little Timmy on Ebay knowing he's sending him to a better place. A happier place. A home; something which Patrick knows he could never give him.

Thursday, February 23, 2006

The advice I'm about to give is for the bold. Frightened little bunnies who are afraid of wealth should read no further.

1) There's a pot of gold at the end of every rainbow and we're all living on rainbow street. Buy as much house as you can. Don't settle for a $300,000 house when a bank will lend you a million. But the timid out there will say "but I can't afford to buy a house that expensive." Pal, you can't afford not to. Let's employ my favorite friend, the calculator. Let's say you buy a $300K house and I buy a $1 million house. Assuming the standard 20% yearly appreciation rule, after 5 years you'll have roughly $450K in profit (assuming you do not leverage this perpetual cash machine to produce even more wealth). However, I will have made roughly $1.5 million in profit. As even the most jaded, bitter renter can see, the $1 million dollar home has produced over 3 times as much wealth in only 5 years. Imagine how much better off I'll be in 10 years.

B - There are no "bad" neighborhoods in California. The so-called bad neighborhoods in California (places like Compton, Oakland, East Palo Alto) have been some of the most profitable homes in real estate history. Today you can not buy a home in these places for under $300,000 and often times these "violent palaces" run over half a million or more. Even today, after the large run up in prices, these homes are still profitable for the investor with foresight. Let's say you buy a home in the coveted neighborhood of Compton for $300,000. As the numbers above show after 5 years of 20% increases you'll have $450K in profit. Let's say you get robbed twice a year, average cost of $5K per robbery, and stabbed or shot every 2 1/2 years costing you $50K in lost wages/hospital bills. $450,000 - 2*5*5,000-2*50,000 = $300,000 PROFIT. I don't know about you but I will take the occasional shiv in the back for $300K every 5 years.

Note: I left out family members being murdered because with proper insurance there should be no net loss for this event. In fact, it could be an equity building opportunity if your loved one had large amounts of insurance.

And don't forget, in addition to that treasured Compton address you get the much sought after Compton schools, governance, and community. You can't put a price on that California lifestyle.

III. Don't worry, be happy. Don't worry about the terms of your home loan. Only focus in on the payment. We in the west are no longer squirreling away money like some deranged rodent. No my friend, we are in the cash flow management business (just like how we no longer produce anything in this country, we outsource it all and manage the world). Who cares if the loan is neg am, interest only, or fixed. If the payment works, bank it. You can use the guaranteed appreciation to take care of all the details of how you'll pay the money back. Still doubting? Ask yourself, does a raindrop worry about how to steer the river? No, it sits back and enjoys the ride. Well, there is a river of money flowing right now. You can either let it flow to you or sit by on the banks and watch it pass on by. The choice is yours.

Four: Become the master of your domain. Become one of the highly trained real estate professionals that are profiting mightily from this new paradigm. Like the previous example let's look at 2 different people. Both are recent high school graduates. One decided to attend an Ivy League school for 4 years to get a degree in one of those outdated majors like engineering or one of the sciences. After graduation they attend grad school for 5 years and get their Ph.D. And now after 9 years of hard, menial, drudgery, what do they get as their reward? A job paying $50-60,000, if they are lucky. By the time this "genius" pays off their student loans they'll be 40 years old. 22 years of eating ramen and riding your bike to work might make some drugged out hippy happy but for us real Americans we want $$$. Now let's look at his friend. He decides college is for suckers. He works as a mortgage broker and part time real estate agent. He earns $100-200K a year. By the time Harvard boy has graduated our wise mortgage broker will have a BMW, 2 houses, and a sail boat. And he did all this without wasting his time with books or filling his brain with useless knowledge. He is a producer of wealth while the self-absorbed academic is a parasite on society. What would you rather be, a producer or a parasite?

Tuesday, February 14, 2006

Debt is Wealth -- look at all the great societies the world has produced and you see one thing in common: debt. Debt builds wealth. Imagine if there was no debt and no ability to borrow. Want a $50K BMW? You have to pay cash. Want a plasma TV? You have to pay cash. Want a house? You have to pay cash. How long would most people be able to function in such a world? It would be a nightmarish place filled with poor, unhappy people. However by introducing debt into people's lives you gain the ability to procure wealth. People can leverage that debt to purchase homes, cars, needed consumer goods, etc. The debt allows people to create wealth for themselves and also for other people too. Everyone wins in a debt fueled society except perhaps the gold hoarding no debt renter who keeps expecting civilization to collapse. For them the debt fueled world is a nightmare in which they fill up their minds with imaginary gloom and rationalize why all this wealth will lead to disaster.

Slavery is Freedom -- I remember reading once someone saying that they did not want to become a slave to their home. They felt the seeming high prices of homes today means they are slaves to the house, spending weekends fixing up the house or working second jobs to make the mortgage payment. But what they don't realize is the freedom the home gives you. You see, every hour spent putting in granite countertops or fixing the yard is money in your pocket. You are using your time to create wealth. And every nickel you put into that mortgage from that second or third job comes back to you dressed up as a twenty dollar bill. This wealth creation gives you freedom. If you need $100K to give your child an Ivy League education you can use the wealth created by your home to fund it. Try doing that with your canceled rent checks and see how far that gets you. If you need Bruno Magli shoes and an Armani suit for a social function you can tap your home equity line of credit and the best part is you get to deduct it all from your taxes. Thank you Uncle Sam! This so called slavery leads to the greatest freedom a human can possess: the freedom to do anything.

Fear is Happiness -- one of the main reasons why people stay renters is fear of failure. They are afraid if they buy a house they might lose everything. They see isolated instances of this happening and assume that they will be one of these unlucky few. However, by embracing the fear and buying one or multiple homes you open the door the complete and joyous happiness. Every home owner is afraid the first time they buy a house. They have those lingering doubts that perhaps it is a mistake. But as time passes, and the massive equity builds, they realize that the fear of success has been supplanted by happiness at their wisdom of purchasing a home.

But enough sloganeering, let's talk some real world numbers for a bit. Let's say you do something wise, you purchase a home in California for $500,000. This beautiful and desirable home will appreciate by about 20% per year. Therefore after 30 years that home that the renter unwisely turned his nose up to will be worth a little over $100 million. Now let's say you are even wiser than this. Let's say you use the rapidly rising equity in this dream home to purchase another undervalued home every year. So you'll earn 30*$100 million or over 3 BILLION dollars. That's right, you'll become one of the richest people in the world and all you did was sit back and let debt work for you. Imagine all of the wondrous things you could do with $3 billion. You could buy a whole fleet of Hummers, a plasma TV for every room of your house. Perhaps lunch in Paris and dinner in Tokyo while you jet around in your private plane? Whatever your heart desired all brought about by the magic of home ownership.

Now, some of you embittered renters probably think this is some unrealistic fantasy. But let's try to understand what the future will hold (we are all interested in the future, for that is where you and I are going to spend the rest of our lives) by looking at the past. If you look at history there has never been any period of time where home prices declined. Never. Even if you go back to Ugh selling the first cave to Ooog for 3 rocks and a wooden club, I guarantee you Ooog made money. No matter when, where, or how you look at it, home prices always go up in the long term. Sure, you might find some isolated instances where home prices declined for a short period of time but even after that aberration prices returned to their normal higher trend.

So what will the future be like? It will be a lot like the middle ages. You will have a landed aristocracy (home owners) and you will have the poor, embittered, masses (renters). These few, these happy few, these home owners, will have everything their heart desires because either they or their parents/grandparents/etc were able to see the coming changes in society and intelligently using debt were able to buy mountains of wealth for themselves and their decedents. Since 70% of Americans now own their own home, we will be an amazingly wealthy nation. We will leverage this wealth to run the rest of the world. But, sadly, 30% of Americans will be left behind with no hope of a better life. And like the serf of the middle ages they will leave to their children nothing but ashes. Ashes of dreams. Ashes of hopes. Nothing but servitude to their landed betters. What a hopeless existence they will have.

Unfortunately, a lot of reckless people are throwing about words like "bubble" to try to ruin people's lives. They are trying to use fear and ignorance as a weapon to destroy the lives of this future aristocracy. I believe they have one of two motives. Either they are looking into the abyss and see that they will never own a home so like an angry two year old they want to destroy the hopes of everyone else. Or they are greedy and want to drive prices down temporarily so they can snatch up this wealth from those foolish enough to heed their advice. But remember friend, when a man looks into the abyss he finds his character. For most of us, it strengthens our resolve to do whatever it takes to become one of these rich, happy landowners. For the frightened renter/bubble advocate, it causes fear and resentment to want to ruin other people's lives. Don't become one of these pathetic wretches.

That is why I'm writing this blog, to educate the few redeemable renters out there. To let them know that if they take a chance and let debt, slavery, and fear into their lives they'll find wealth, freedom, and happiness.