From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for May 2012

Wither goeth the Euro?

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Observations on Greece, the Euro, and the implications for real estate finance —

First, there is extraordinary confusion over the causes of the Euro crisis, and thus confusion over the effects, particularly here in the U.S.  A few observations, to set the stage:

1.  Europe is in a massive demographic decline.  “Native” Europeans have a birth rate which does not support the population, and as such their “native populations are getting older and smaller.  Up to a point, this has positive effects on the economy, because small children cost money and a population actually gets more productive as the “bubble” in its age demographic approaches middle age (middle-agers are more productive than young folks or old folks).  The REAL problem begins when that bubble starts approaching retirement, and there aren’t any younger cohorts to replace them.  This is part and parcel of what happened in Japan not to long ago, and the reason why the Japanese economy seems to be in permanent doldrums.

2.  As an aside, I focus entirely on Europe’s “native” population.  Unlike the U.S., Europe has a terrible problem integrating immigrants into its productive society.  That’s a topic for others to expound on.

3.  The Euro was formed in a very different way from the dollar.  When the U.S. dollar was adopted as a currency, the Federal government took on all of the state’s “operational” debts (the “Alexander Hamilton Solution”) which resulted from the American Revolution, and the states were prohibited from running operational deficits going forward.  States can issue debt to pay for capital items (highways, schools) but not for operational items.  Hence, a state can’t borrow money to pay interest on money it already borrowed.  The Hamilton Solution means that the U.S. has a highly integrated economy, unlike Europe’s, which is more artificially integrated.  (One might argue that the U.S. also benefits from a common language.  Anyone who has ever traveled from Seattle to New Orleans may debate this issue.)

4.  Soooo…… if the U.S. borrows money to cover its operational deficit, it can “print” money to cover those debts.  (OK — a bit of advanced Econ for ya’ll — “print” is an analogy.  Technically, the Fed expands or contracts bank credit to increase or decrease the money supply.  “Print” is just a handy shorthand for the more complex methods.)  On the other hand, Greece can’t “print” Euros — they all come from European central banks.

One might notice that the debt/GDP ratios in Greece and the other troubled countries are no where NEAR where we’d historically see countries in dire straights (Given the dampening influence of the World Bank, IMF, the G-20, and such, we really don’t see hyper-inflation any more in emerging markets like we did a generation ago.)  The big problem is that Greece can’t “inflate” itself out of debt by printing Euros.  If they could, the banks would gladly loan them money so as to “kick the can” down the road a bit.  If Greece had a growing, productive economy, then they could grow their way out of debt, but no-one buys into THAT fairy tale, either.

If, on the other hand, they withdraw from the Euro zone, they’ll be able to print all the Drachmas they want, albeit at terrible inflation rates.  If the Greek citizenry thinks that current austerity plans are potentially painful, they should re-read some history of the German Weimar Republic (you know — that period in history when the Germans were so distraught, they elected Adolf Hitler because he promised to “fix things”.)

What does this have to do with real estate?  At the core, the Greek problem (and by extension, the entire Euro problem) is a BANKING issue, not a debt/GDP problem.  Admittedly, some countries within the Euro zone borrowed money that they had not idea how they would pay back.  That’s a structural failure dating from the creation of the Euro, and it’s highly doubtful, particularly at this stage in Europe’s economy, that the Eurozone nations would be willing to accept such a level of fiscal unity and central governance.  (Not to mention the European Union countries which are NOT members of the Eurozone — such as the UK).

Currently, in the U.S., we just came out of a banking-induced housing bubble.  We’re currently IN a banking-induced housing depression.  In the worst-hit states (for example, Florida and Nevada), the lending market, particularly for retirement or second homes, has nearly stopped.  The Greek problem is, at its heart, a banking problem, since European sovereign debt relies much more heavily on commercial banks than in the US.  Relatedly, banking is global today (Note how many HSBC Bank offices are scattered through the US?)  At the back-office level, banking is almost completely global, with liquidity flowing across oceans as rapidly as phone calls and e-mails.  (Recall:  central bankers don’t “print” money anymore, they just fine-tune liquidity.)

With that in mind, an already damaged US banking system, with credit severely curtailed to one of the most important sectors of the economy, will be increasingly damaged if and as the Greek/Euro crisis continues to escalate.  On the other hand, if the Greek citizenry recognizes that austerity under the Euro is preferable to ultra-austerity under the Drachma, then a huge sigh of relief will permeate the world’s banking customers.

Written by johnkilpatrick

May 29, 2012 at 8:47 am

Posted in Economy, Finance, Real Estate

Tagged with , ,

State of Alaska v Wold, take 2

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I’ve received an amazing amount of response on this post!  Several of you have requested copies of the ruling, and others have asked that it be posted here on the blog.  So, here ’tis:

In re Wold sp-6673

Enjoy!

Written by johnkilpatrick

May 24, 2012 at 11:06 am

State of Alaska v. Wold

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On Friday, the Alaska State Supreme Court issued a ruling on an appraisal standards case which is already having national — even international — implications.  (I’ve already received e-mails from as far away as Australia about this!).

To synopsize, I was the testifying expert on appraisal standards for Wold’s attorneys.  For a couple of decades, Wold has been a successful and highly respected appraiser, real estate expert, and investor in Ketchikan, Alaska.  Back in the 1990’s, he testified on a pair of court cases, and the opposing expert in one of the cases was a member of the Alaska Appraisal Licensing Board.  (You can see where this is going, right?)  The Board filed a number of charges against Wold, and as is usual in such matters, the charges went before an Administrative Law Judge.  The Board did not accept the Judge’s findings, and decided to adjudicate the case themselves.  (You CAN see where this is going, right?).  The Board found against Wold on all 8 charges and Wold naturally appealed to the District Court.  That Court not only overturned 7 of the 8 charges, but ordered the Board to reimburse half of Wold’s fairly significant legal fees.  Wold appealed the 8th charge to the State Supreme Court, which not only handed Wold a decisive victory (in the only USPAP case ever heard by that Court) but also remanded the case to the lower court for consideration of reimbursement of the REST of Wold’s legal fees.

As the testifying expert who advised Wold’s attorneys, I’m naturally pleased at the outcome.  That having been said, I’m concerned about the bigger picture.  Appraisal licensing boards around the country have a record number of complaints filed against appraisers today, and in many of these matters, sifting through the truth as opposed to the fiction is an increasing challenge.  Clearly, some appraisal mistakes were made in the recent housing finance debacle, not to mention appraisal review and underwriting.  The job now is understanding when and how those mistakes were made, and approaching these matters objectively, credibly, and in an unbiased fashion.

Written by johnkilpatrick

May 22, 2012 at 9:54 am