Housing Market in “Freefall,”
But How Low Can it Go?

Today’s comment is by Mike Burnick, our Senior Editor, Global Markets Analyst and editor of Market Shock Trader.

Dear A-Letter Reader,

In yesterday’s A-Letter, I warned you that, contrary to popular Wall Street opinion, the housing induced sub-prime market shock is far from over.

The reason is simple: The U.S. housing market appears to still be in “freefall.” This tells me (and should tell those geniuses on Wall Street) that home prices can still drop lower. This continued deterioration in household wealth, is occurring at the same time when hundreds of billions in adjustable rate loans must reset to higher monthly payments. This deadly combination has the potential to send home prices spiraling even lower. But the key question is: Just how low can they go from here?

Wall Street’s cheerleaders would have you believe that the worst is over. They say it’s back to business as usual. The big banks and brokers are booking billions in loan losses as they report dismal third-quarter results. But they’re still saying, “Don’t worry, markets are getting back to ‘normal’” – whatever that is.

The Fed’s half-point cut in interest rates is widely viewed as a panacea that will cure all ills in credit markets, and the housing sector alike. Shares of struggling homebuilders are jumping higher again. Bankrupt mortgage lenders are actually getting buyout bids from private equity firms – so all’s well that ends well, right? Wrong!

Housing Bubble Deflation Still
Has a Long Way to Go

The ugly fact is that we’re nowhere near the end of the line in this housing debacle. In fact, both Wall Street and Main Street are going to be dealing with the aftershocks for years to come. Let’s look at some of the numbers I’m seeing.

The U.S. housing market has been deflating for more than 18 months now, but according to comments from BCA Research, “prices are still very high relative to rents and wages.” In other words, in spite of sliding home values in 75% of major U.S.-metro housing markets, housing affordability remains very close to 20-year lows.

This graph (from BCA Research) shows the fall in existing home prices from a peak growth rate of 15% year over year in 2005, to a low single-digit decline currently.

Now take a closer look at the bottom panel of this graph and you’ll see that the National Association of Realtors Housing Affordability Index has barely budged from the record lows reached last year.

In fact, home prices in the U.S. are still very close to the most unaffordable levels since the mid-1980s. And it’s bound to get worse before it gets better.

Expect Fresh Shocks to the Economy
from Falling Home Prices

A few weeks ago, Congress convened special hearings in Washington D.C. to do a post-mortem on the housing crisis. Politicians love to do that after the fact and when the damage is already done.

Robert Shiller, is the Yale economist who correctly warned about “irrational exuberance” before the tech-bubble burst in 2000. He has recently been sounding the alarm about a similar steep correction in housing. In fact Shiller, in conjunction with Standard & Poor’s, created his own home price indexes (see graph) – to better track the unfolding carnage in the housing sector.

So far, the Case-Shiller house price index shows roughly a 4% year-over-year decline in average home prices across the United States. Shiller warned Congress that “the decline in house prices stands to create future dislocations like the credit crisis we have just seen.”

Former Fed Chief Alan Greenspan has said that it would not be surprising to see double-digit declines in home prices from their peak. That means we aren’t even half-way through with this housing bear market.

The US$3 Trillion Question:
Where’s the Bottom?

Congress heard from other experts on housing who predicted a 15% fall in home prices would wipe out US$3 trillion of household wealth. If true, that means we are less than one-third of the way through the current housing recession. The trigger for such a steeper slide in home prices is sitting right on the horizon.

According to various research estimates I’ve seen, there are about US$650 billion worth of sub-prime adjustable rate loans that are scheduled to reset to much higher rates (meaning sharply higher monthly payments) over the next 15 months. In fact, we won’t even reach the peak in resets until sometime in the spring of 2008 and the amount of mortgages resetting to higher rates may not subside significantly until 2009!

Bottom line: The housing market may have much further to go on the downside, taking a very large chunk of America’s net-worth down with it.

MIKE BURNICK
Senior Editor & Global Markets Analyst

How Smart Investors Bank Offshore

The offshore private banking business is in the midst of a big boom since 2002. Over the last five years, an influx of foreign capital coupled with soaring markets has flooded cash into private banks in Europe and Asia.

Switzerland, of course, continues to lead the asset parade with an estimated one-third of all global deposits. Most of this Swiss wealth is based in Zurich, Geneva and Lugano. Other popular centers include Austria, Liechtenstein, Monaco, Luxembourg, Gibraltar and increasingly, Singapore.

What about the Caribbean? Although the Caribbean is a wonderful place to vacation, it’s not a good place to deposit your money. The region harbors poor or ineffective banking and securities laws, offers no deposit protection schemes and personal service is virtually nonexistent or horribly slow.

If you’re considering opening an offshore account, my first choice remains Europe.

Remember, you must report an offshore account (or any foreign account) to the tax authorities where you’re domiciled. That applies to Americans and Canadians with assets on deposits greater than US$10,000. Failure to report an offshore account is deemed a federal crime.

I know what you’re thinking…why bother opening an account if the world knows it exists? The reason is you should prudently diversify their assets away from their home domicile, especially if they’re in a high-risk profession. It’s also simply a smart asset protection strategy.

Leaving all of your assets under the legal auspices of one government, under the influence and control of a single monetary authority, is a bad idea. Many investors forget or don’t realize that in the early 1970s, Great Britain imposed foreign exchange controls. Britain, a modern democracy, only permitted its citizens to move a maximum £50 pounds out of the country. In this world, anything is possible.

Since 9/11, many prospective offshore investors have grown increasingly confused by the new rules imposed by banks, the IRS and how investments are taxed. For Americans, my advice is to avoid buying any U.S. domestic securities from your offshore account and instead, use British investment trusts or German-listed index funds to track American shares.

Offshore funds are off-limits to U.S. investors because of potentially onerous tax implications, so the best way to avoid that deficient regime is to tuck offshore funds in your IRA or invest in these funds with your offshore variable annuity.

Fees are not cheap offshore. European private banks don’t come at a bargain and that’s why they continue to earn big profits. Consider becoming a long-term investor offshore. Be sure to select your investments carefully and buy quality securities that don’t require you to trade frequently.

Private banks charge at least 1% to buy and sell securities, including stocks and mutual funds. Some banks can charge an investor as much as 5% to purchase funds – highway robbery, in my opinion.

If your goal is to trade stocks from your offshore bank account, then fees will eventually cut deeply into your total return. Instead, use domestic discount brokers at home where trading commissions are cheap. Offshore, stick to a long-term investment plan and keep your trading costs to a minimum.

Private banking is a smart way to diversify and shield your assets from potential creditors. It’s also a great way to tap into superb investment products, gain currency diversification and most of all, gain peace of mind if you structure your account properly.

ERIC ROSEMAN
Investment Director

P.S. Like anything worth having, an offshore bank account just takes a little due diligence and the right information. On November 7 - 10, our offshore professionals from around the globe will give you the ins and outs of private offshore banking at our Offshore Advantage Academy. Join us at Atlantis Resort in The Bahamas, to learn how to set up your own offshore account, avoid the large fees and get maximum asset protection – all in under four days. Interested? Click here for full details on our Offshore Advantage Academy event.

Privacy & Rights

Would You Pay 25 Cents to Protect Your Privacy?

Information has value, so it's not surprising that there’s a trade in personal information.  Technology has made organizing personal information much easier and more thorough. But it also makes invasions into your privacy possible that we wouldn’t have even dreamed of just a few years ago.

If you live in the United States, just about every piece of information you might want to keep private is for sale. This includes your telephone records, your medical records, your financial records, your home’s location and worth, and, much, much more. 

You might wring your hands and despair at this loss of privacy. But, most Americans won't spend even 25 cents to keep their data private. A recent study from researchers at Carnegie-Mellon University and the University of California found that most individuals aren't willing to spend anything – even 25 cents – to prevent companies from selling sensitive information about them.

There are a number of reasons Americans aren't willing to trade their depreciating greenbacks for greater privacy. I'm not a social scientist, but I believe most individuals have no idea how their personal information is sold, data mined and otherwise used for purposes ranging from deciding if they're good marketing prospects to purchase aluminum siding to identifying them as potential terrorists. 

On the other hand, when privacy invasion is more visible – telemarketing calls come to mind –Americans will spend a little time (if not money) to avoid it. Perhaps that's why nearly 150 million Americans have put their names on the Federal Trade Commission's "'Do Not Call" list.  There's no charge to have your name placed on this list. 

In addition, younger Americans have a much higher tolerance for privacy invasion than older Americans. Recently, I warned the college-age daughter of a friend about how U.S. intelligence agencies were data-mining information on social networking websites such as MySpace to identify the next generation of terrorists or other malcontents.  She was surprised, but when I saw her two weeks later, she told me she didn't plan to take down her MySpace page. "That's how I meet all my friends," she told me. I don't have anything to hide, so why should I worry?" 

The truth is, though, that all of us have things to hide. The "nothing to hide" argument is specious on its face: Would you give a stranger the combination to your safety deposit box?  Would you knowingly give your credit card number to a known identity thief?

Those who say they have "nothing to hide" also fail to appreciate the fact that data-mining may reveal – perhaps falsely – an association with a group labeled as threatening. Indeed, that's the precise reason why the Homeland Security Administration's terrorist watch list contains hundreds of thousands of names. In reality, only a tiny handful of these individuals have seriously considered, much less tried to carry out, a terrorist attack.

However, so long as data-mining occurs behind the scenes, and the "average American" doesn't seem affected by it, the “nothing to hide argument” will continue to have legs. And that's a shame, because all of us have something to hide, even if we don't know it.

What do YOU have to hide? Click here to learn specific strategies to shield your privacy and your assets from a slew of invasions.

MARK NESTMANN
Privacy Expert & President
The Nestmann Group
www.nestmann.com