The capital structure of US real estate assets has been in a long process of change. By subsidizing real estate and making mortgage debt artificially cheaper than equity capital, the US government has been effectively transferring real estate ownership from individuals to lending institutions and the Federal Reserve. Here’s how this game has been unfolding, and a warning to Americans that they will one day wake up in a country where most people live as feudalistic peasants, beholden to their banking and political overlords.

As recent as 1945, homeowners owned 84% of their homes, meaning they had 84% equity in their properties with only 16% mortgage debt financing. Fast forward 65 years to 2010, and we now live in a country where the average homeowner has only a 38% equity stake in his property. How did this happen, and what does it mean for real estate markets?

They say that a picture is worth a thousand words (Data Source: Federal Reserve Flow Of Funds):

You can click on the picture to enlarge it, but even from this vantage point we can see the general trends of declining equity ownership. The blue line represents the rate of change in equity positions, which highlights the problem periods. From 1945 to 2006 the homeowner equity rate declined by an annual average -0.4%. The Housing Bubble crash accelerated that rate to an insane -7.2% in 2007 and -11.4% in 2008, as property markets across the country collapsed.

We can explain the rapid declines in homeowner wealth with the real estate bubble bursting in 2007, but how can we explain the general shifting in real estate capital structures going from 84% equity in 1945 to a mere 38% in 2010?

The answer is that the federal government has aggressively promoted mortgage debt over equity investment starting in the 1930’s with the creation of the Homeowners’ Loan Corporation (HOLC), Federal National Mortgage Association (Fannie Mae), and the Federal Housing Administration (FHA). These institutions were created and perpetuated for the sole purpose of reducing the cost of debt capital for financing real estate purchases.

Since then you can add mortgage interest tax write-off legislation that lowers the cost of real estate debt capital through preferential tax treatment, Ginnie Mae, Freddie Mac, the Federal Housing Finance Agency, and the Department of Housing And Urban Development (HUD).

All of these entities serve to reduce the cost of mortgage capital relative to equity by transferring risks from lenders to taxpayers. Not all of these institutions are public, but they have been created, supported, and perpetuated beyond economic sanity by deliberate public policies.

This is how the federal government has methodically transferred ownership of real estate assets from individuals to lending institutions, publicly sponsored intermediaries, and ultimately, to itself (or rather, the Federal Reserve, which is not even formally part of the government). A finer conspiracy could not have been dreamed up!

The ultimate consequences for real estate are markets bereft of the stability provided by individual stake in losses. When people have little to lose by walking from their homes, you can bet many will. The people living in America’s homes are increasingly disenfranchised from the financial outcomes of their values. Delinquency rates will remain high, if not methodically creep higher.

Banks and mortgage lending institutions have a 62% stake in national real estate assets, the downside risk being shifted to taxpayers through federal guarantee and insurance programs, and to US dollar users through Federal Reserve secondary mortgage market purchasing programs.

Sadly, it looks like America has long been marching down the road to serfdom.

This article was originally featured in our Manhattan Beach Real Estate site here.

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The White House is urging Congress to limit, or cut, the once untouchable tax break for mortgage interest. In traditional class warfare parlance, the White House cap on mortgage interest deductions will fall only upon the “wealthy.” Let’s not drink the Obama Kool-Aid – the effects of this legislative move will impact everyone.

The Obama administration is proposing reducing deductions for homeowners who earn more than $250,000 pear year. Since I’m a southern California Realtor®, I’ll bring up an example from my local market – the South Bay; in particular, Manhattan Beach, CA.

Chart from LA Times Local Neighborhoods.

Manhattan Beach is a wealthy southern California city, nestled along a prime beach-front location. With 38% of Manhattan Beach residents earning over $125,000 per year, we expect this legislative change will materially impact our local market.

When many home buyers calculate the amount of home they can afford, mortgage interest deductions on income factor heavily into capital service capacity, i.e. how much mortgage they can comfortably afford to pay every month. If a high income earner is in the 34% income tax bracket and has a $5,000 per month mortgage, of which, say, roughly $4,000 is comprised of interest payments, the net annual benefit of the tax break is $16,320, or $1,360 per month.

with a simple 5% mortgage rate, the effect of removing the tax break amounts to reducing home values by $326,400, or 34%, the marginal tax rate. These are very simple assumptions; the reality of this legislative change will likely not be as severe. Higher end properties will likely be impacted the most, with falling price levels manifesting in some way throughout the entire housing market.

President Bush attempted to eliminate the mortgage tax break in 2005, but was stopped by Congress. The Obama administration tried this same legislative change with last year’s budget, but met similar obstacles. Given that the real estate market is in such turmoil, and that so many people gain advantage from perpetuating this tax break, it is unlikely the White House proposal will be accepted by Congress.

What Does The Mortgage Tax Break Mean For The Economy?

There is no free lunch in economics – we’ve all heard that term, right? The same is true for tax breaks, or any legislative market manipulation. Enabling borrowers to write off interest payments from their income tax liability increases incentives to borrow money to buy real estate. This ultimately skews capital structures in that less equity investment is made with purchases relative to debt assumption. Increasing debt levels simultaneously increases prices and risk. In essence, the mortgage tax break causes housing to be “over-capitalized,” siphoning disproportionate capital resources from other parts of the economy.

Eliminating the tax break makes good economic sense; however, the result will inevitably be a deflation in housing prices. The magnitude of the deflation is uncertain. Given that real estate markets are already on shaky grounds, reducing, or eliminating, policies that support home prices can potentially lead to a market route.

All things considered, it is too bad President Bush was not able to repeal this tax break in 2005. That was probably the best time to moderate an over-heated market, and realign national capital resources in a relatively stable environment. We may have missed that opportunity for some time.

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These are especially popular now, as Japan is trying to encourage it’s females to have babies. You see, the once booming Japan is suffering dire economic consequences because their population is at an all time low, with a birthrate at 1.37%. Compare that to 2.12% in the US. Put simply, people are not having babies. This is causing severe economic problems for the country, which doesn’t allow immigrants.

They are especially feeling the pinch in the 15-65 age group.  These are the producers, the earners. They are losing the money-makers, while the more dependent elders seem to be on the rise.

According to a ministry of labour and welfare report, Japan expects over a quarter of its citizens expected to be aged over 65 by 2015.

So in an effort to encourage procreation, and ultimately, industry, the students of the Graduate School of Comprehensive Human Sciences at The University of Tsukuba, created a robo-baby last year, called Yotara.

Yotara is very lifelike. He actually has facial features which are projected onto  his little warm silicon balloon face.

He has very lifelike baby reactions. He actually giggles and “wakes up” when a rattle is shaken. He sulks and dozes off like a real baby and smiles when his stomach is rubbed. He can also sneeze and have a runny nose, thanks to a heated water pump system.

Project leader Hiroki Kunimura, says,

“Through this experience, it would be great if some people started feeling that they wanted to have their own baby, if they started feeling that working is not everything.”

Japan’s population is expected to shrink by a third within 50 years if the birth rate does not increase. I guess if worse came to worse, they could always repopulate with the baby robots.

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One ancient practice of bartering of note is the Old Testament account of Jacob and Esau. For those not familiar, Jacob tricked Esau into selling his birthright for a bowl of soup. [Gen. 25].

While that one didn’t work out so well, there have been many successful, profitable ones since.

One way of bartering our ancestors used to practice was a method called dumb bartering. The name refers to the silence that is kept whilst trading, not the intelligence of the people participating in it. The two traders would meet at a designated location, and lay down their wares for inspection, which were either accepted, or turned down in hopes of a better offer.

Several thousand years later, we are still bartering.

We usually start fairly early in life. Bartering snacks or lunches. Twinkies for Doritos. Remember Sticker Books? Trading stickers was common amongst my elementary school friends.

As we’ve aged, our methods have become more sophisticated.

Today the internet makes trading much more convenient. Jessica Hardwick, bartering site, SwapThing’s founder and CEO said,

“I think a few years ago it was more for fun. But we’ve seen a real shift in the last year, and especially an increase in the last few months, where I think people are really doing it to get by.”

There is direct bartering and indirect bartering. The direct form is a non-monetary trade of goods and services. The indirect form is a credit system. Participants accumulate credits, or barter dollars by providing specific services such as teaching a yoga class to building a shed. Those barter dollars can be used to buy the services of anyone in that network. This eliminates the search for an agreeable barter.

Bartering for medical services has become an alternative to people without insurance.

Kaiser Health News tells us that

“With doctors, dentists, psychiatrists, chiropractors and even cosmetic surgeons offering their services, bartering is providing a temporary safety net of sorts for some workers who have lost their jobs and health coverage. And in some cases, people who have inadequate insurance are using barter to get critical services, such as dental and vision benefits.”

The Colorado Gazette tells us of Hillsborough, N.J.-resident Robert Josefs trading his Web site designing skills for nearly $1,000 in dental work last year when he had no insurance.

Psychotherapist, Dr Zur tells us of a painter who was strapped for cash and offered to barter a painting in exchange for therapy sessions. The painting was valued at $900. The doctor’s fee at the time was $90, and the client contracted him for ten sessions. Having the painting hanging in the counseling office deepened their connection and enhanced the therapy.

Bartering also works in your personal life. Let’s say, you are good at yard work and your neighbor is a hairstylist, you could come to an arrangement that would benefit both of you. One haircut would get a lawn mowed. A cut and color would get you two mows, or some such arrangement.

But if you enter into a bartering relationship thinking you might be exempt from taxes, well, you would be wrong.  Barter dollars are equal to real dollars, as far as the government is concerned. You must report it on your taxes as if it was paid for monetarily.

Twenty-first century bartering is becoming almost as popular as pre-historic bartering. Many people are finding it to be a viable choice of currency in our economic tumult. Many are finding it better just to swap.

Here are a few barter networks to check out:

BarterQuest

SwapTree

SwapThing

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The Federal Reserve is creating tens of trillions of new dollars, debasing our currency, and silently taxing us all through inflation. With tens of trillions in federal budget deficits on the horizon there is nowhere for the US dollar to go, but down.

Refuse to be a victim of this flawed financial system, buy gold and silver NOW!

With hyperinflation and risk of economic disaster increasing with each dollar Congress recklessly spends, it pays to be prepared: Consider stocking up on Emergency Supplies:

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In “U.S. Economy ‘De-Evolving’: An Industrialist’s Plan To Revive American Manufacturing“, Lynn Tilton, CEO of industrial firm Patriarch Partners,  makes the case that reviving America’s industrial base is imperative for the long term health of our country:

The reality is, in recent times, every great empire has been built on a manufacturing economy. The fall of every empire has been the failure to remember that one fundamental fact.

Tilton points out that manufacturing has dropped from 28% to 12% of the US economy since WWII and that “some people are better at building and making things than working on spreadsheets in a cubicle.”

A few things are clear, however, that support Tilton’s believe in a manufacturing revival:

• The US dollar (USD) is in for troubled times in the near future
• Declining USD means increased demand for domestic goods relative to foreign
• Sustained high unemployment reduces labor costs and makes domestic goods less expensive

In a free economy those factors would work to bring our trade and current account balances into equilibrium through increased manufacturing and industrial production; however, there is no telling how badly politicians can mess things up!

—–SPECIAL OFFERS—–

The Federal Reserve is creating tens of trillions of new dollars, debasing our currency, and silently taxing us all through inflation. With tens of trillions in federal budget deficits on the horizon there is nowhere for the US dollar to go, but down.

Refuse to be a victim of this flawed financial system, buy gold and silver NOW!

With hyperinflation and risk of economic disaster increasing with each dollar Congress recklessly spends, it pays to be prepared: Consider stocking up on Emergency Supplies:

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It was a pretty harmless post and so I posted a question, “can you tell me what he did because I really don’t know & didn’t he just deploy troops to Afghanistan?” She agrees with me and then proceeds to write that he (Obama) could’ve done more in nine months and that he has so much to clean up after Bush destroyed the US in eight years. Then she proceeds to ask me if I am a conservative.

I proudly stated in my next post that I am a Libertarian and a Capitalist and that is the foundation of what everything in this country is built on so that she can enjoy the freedom and luxury that she enjoys today. I said that Obamanator, my nickname for Obama, is trying to make this country no better than Canada or Europe and I asked her if she thinks those countries are free. Then another post came in from another friend defending the notion that Canadians and Europeans are the happiest and the freest people he has met and that Capitalism and America don’t go hand in hand. I then posted a question asking why people all over the world would kill to come to the US if Canada & Europe is so great. No comment came after that.

****************************************SPECIAL OFFER***********************************

Government policy drives markets. With trillions of dollars being spent by Congress and doled out by the Federal Reserve in one bailout plan after another, we all need to think about how these programs will affect our financial positions.

Will we experience hyperinflation, the kind that can wipe out our life savings? Or will these targeted bailouts stimulate tremendous growth in certain industries?

In one of my favorite movies, Rounders, Matt Damon relates that in poker “if you can’t spot the sucker in the first half hour at the table…you are the sucker.“  Read my book, Obamanomics: How To Invest Over the Next Administration to make sure government policies don’t make you the sucker!

*******************************************************************************************

Please join our cause and subscribe via e-mail if you want to continue following these updates and fight to preserve our Constitutionally protected freedoms

Then a post from a different person came in defending two concrete things that Obamanator has done:

1. Banning torture via executive order right after taking office
2. Opening up direct talks with Iran

If those are the only concrete reasons why Obama got the Nobel Prize then it really undermines what past Nobel winners have done. No comments after that.

Another post came in from another friend, “Wow I didn’t know this about you.” I then wrote, “Yeah I enjoy the freedom our country offers me… the ability to pursue whatever I want to do, not what the Government tells me to do.” Then she proceeds to ask, “Are you open minded at all?” I couldn’t comment because a big “WOW” was the only thing I can think of saying. But I mustered enough to write, “I believe that the Government was in place to protect the people of this country not to run healthcare, create “jobs” funded by taxpayer money or punish anyone even if they make more money than you.”

After five more miscellaneous posts from multiple people of her network of friends she writes this (note this is unscripted and my commentaries and thoughts are in (brackets)):

“FYI – the Government doesn’t run this country, Lobbyists from Capitalist America do! (OMG) AIG, BofA, your friends on Wall Street. They also own mainstream media. So, just because you watch CNN every night – don’t think for a second you’re getting all the facts. Corporate America brought his country down – we may just go down in history like the Romans, if we keep allowing money and greed run this country.

Do you have credit cards? Then, they got you where they want you! You’re not FREE! You don’t own your car or your house – it’s all built on credit. The banks own you! Our grandparents bought their house and cars with cold hard cash. You don’t hear that anymore… The America we once knew is gone!

And healthcare? The insurance industry is a total scam! Freedom for all = healthcare for all! If the powers that run America are smart – they would allow socialized healthcare – you need to keep our slaves healthy, right? Keeping your people healthy and alive is what will keep this country strive! But no, they only see profit from sick people. Your employer can claim millions through their insurance company if you were to drop dead tomorrow. You’re worth more dead than alive. This is Capital America folks. Capitalism FTW!” (WoW!)

After the deliberating awe I wrote:

“You know what’s funny I own my car I have a debt of $150 from the Jason Mraz concert tickets that I just bought which I will pay off today. My debt is my student loan and because I have a degree and I am in a certain tax bracket I have to pay more taxes than most people. I worked hard for my money what gives the Government the right to take it from me?

Yeah I will pay my fair share so that I can feel safe in this country, but to bail businesses out using tax money … come on! People have a choice to put themselves in debt or not. You don’t have to buy a BMW and then blame the banks for screwing you because you can’t afford it. This country is great because each person is entitled to their choice.

You take choices away from people this country will become just like any other country.”

Then she writes back (note this is unscripted and my commentaries and thoughts are in (brackets)):

“Did you pay for your car in cash? How many American’s these days buy a car or home with cash? Student loans are just as bad.

And your student loan, is this through a bank (through private lenders)? Does it have an interest rate? A loan is another line of credit.

You can thank the Capitalists of this country for your tax increases. The lobbyists who give tax breaks to the biggest corporations of America and the CEO’s and board of directors. They have their own tax people to help them find ways through the system to pay less taxes than the middle class. There’s Capitalism for you!

The Capitalists on Capitol Hill bailed out their friends on Wall Street. There’s Capitalism for you!

The banks screw us = sub prime loans. Remember those? Going out to the poorest parts of the country and scamming these poor people into thinking they can afford a house with a 20% APR?! There’s Capitalism for you!

Choices are great to have. I agree. I don’t agree however to have an insurance company call me and tell me that they won’t insure me because I’m at risk (i.e. heart disease or diabetes). I don’t agree with the insurance company that tells me they will only cover 85% of my hospital bill – when I’ve been paying $200/per paycheck to BE COVERED.

Hmm…and then there was cancer. Did you know that Europe’s food laws and regulations are more strict compared to America? Did you know that Europeans are healthier? Why? Did you know that you can prevent and heal cancer by simply changing your diet? Of course not. Did you know that the FDA and American Cancer Society are ran by the big Pharmaceutical Companies? They don’t want to find a cure. That won’t make a profit for them. Instead, they’ll just treat your conditions and call it a pill.

That’s what Insurance wants you to do — pay anything (out of pocket) to see any doctor you wish to see. Less expenses for them…but at the same time you’re still obligated to pay your insurance premiums. Where’s the freedom or the choice in that?

Seeing a Physician in Spain is simple. They come to your home, to your bedside and check your vitals. America once had that. But the insurance companies thought that was NOT good profit practice. There’s Capitalism for you!

I love this country. I loved it even more before Capitalism came into play.” (Double WOW!)

After getting over the initial shock of the comment I posted:

“You know Universal Health care is not 100% free. So if we have Universal Healthcare we have to pay for that and also pay for medicare, medicaid and social security which we will probably not be able to take advantage of since this country is in so much debt.

I think you need to remember that the Government instilled this notion that the American dream is to buy a home (put yourself in debt) so the government gave you subsidies to do it and demanded that these “bad” banks give out loans to certain population that probably could not afford a mortgage.

So tell me what do you suggest we do? Get rid of corporations that you probably work for and any profit that the company makes should be split evenly from the janitors to the CEO? Put a cap in how much people can make per year? If you have your own business you would see things in a different light.

Oh FYI the FDA is a government entity that’s why it’s harder for pharmaceutical companies to send drugs out in public. I am a contractor to the Government and I see everyday how it is operated. If our country is operated like that we should just sit around put our palms up and hopefully Uncle Sam will “save” us.

Oh and one more thing the President bailed out the guys in Wall Street.

Oh and one more, sorry… If you really dislike how America is today everyone is at their liberty to leave. ”

No other intellectual comments came after that.

.

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The shackles of serfdom are being silently fastened to America. Every dollar Congress spends beyond its budget, every Federal Reserve Note printed, every tax, regulation, and government intrusion into our lives renders us less free. Ever wonder why it feels like it’s increasingly difficult to make ends meet? Remember the days when one spouse could work, the other raise the kids, and still save for a comfortable retirement? Those days are gone, but why? What’s next? The 5 Steps to Freedom: How To Cut Your Dependence On Institutions And Escape Financial Slavery, by Jeff Nabers explains what happened to our once prosperous society and how we can all take definite steps to escape what is to come.

Jeff Nabers begins the book with an overview of why Americans’ standard of living has been on the decline, and why it has much further to go:

• Erosion of the Constitution, property rights, and individual freedoms
• Growth of massive government with increasingly lavish taxation requirements
• Stifling of U.S. business by over-regulating & levying ridiculously high rates of taxation
• Perpetual inflation caused by Federal Reserve currency debasement

In America’s Effective Tax Burden: A Nation of Serfs, I showed how effective cumulative taxation has reached as high as 57% for middle class Americans. That equates to working 7 months of the year just to pay Big Brother! In the meantime, since 1987, when Alan Greenspan, assumed the role of Chairman of the Federal Reserve, the purchasing power of the U.S. dollar (USD) has been cut in half. The Federal Reserve has pursued a relentless policy of currency debasement since it came into existence, inflating away 98% of the dollar’s value since 1913.

When you consider that the typical housing payment is ~ 30% of income it is no wonder that the 57% net effective tax burden crushes most Americans. That leaves just over 10% of income for personal use, the tragedy being that most, if not all (or more), of this typically goes towards interest payments on debt! As Nabers argues, this is akin to financial slavery.

Fortunately, Naber’s offers a set of definite actions we can take in 5 Steps To Freedom that can break the shackles before they clamp too tightly. First, we need to regain orientation in our financial lives. Measuring our wealth against a perpetually debased USD obscures the real picture, often leading us to feel more secure in our financial lives than reality warrants. Naber’s shows how to create your own currency measure by analyzing your own consumption requirements.

Once you can measure your own net worth in an honest fashion, Naber’s shows how to preserve your savings and use excess capital to earn income. He dispels common misconceptions about investing, exposing various Wall Street products, like stocks and bonds, as shams designed to make money for Investment Bankers who peddle them. Rather, Naber’s advocates self-directed IRA’s and Solo 401(K)’s and creative direct investment in partnerships, royalty financing (revenue participation), small businesses, your own business, and a variety of real estate concepts.

If you have a nagging suspicion that something is wrong with our financial system, that your standard of living continues to drop as you work more hours-if you can’t shake the stress of working more than one job, while still falling behind on credit card payments-do yourself a favor and read the 5 Steps To Freedom. This book will not help you get-rich-quick, or magically change your life; rather, it will help explain what’s wrong with our system and how you can slowly extract yourself from its negative consequences.

—–SPECIAL OFFERS—–

The Federal Reserve is creating tens of trillions of new dollars, debasing our currency, and silently taxing us all through inflation. With tens of trillions in federal budget deficits on the horizon there is nowhere for the US dollar to go, but down.

Refuse to be a victim of this flawed financial system, buy gold and silver NOW!

With hyperinflation and risk of economic disaster increasing with each dollar Congress recklessly spends, it pays to be prepared: Consider stocking up on Emergency Supplies:

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