Donald Trump: A Poor Real Estate Examplar

May 29, 2016

Donald Trump got his start (with his dad’s help) in real estate. Everyone knows that.

And Trump lent his name and endorsement to Trump University. Most everyone knows that.

But unless you’re involved in real estate investing, you may not be aware of Trumps other ventures into real estate and his organization’s symbiotic relationship with real estate investor clubs and associations.

There are hundreds of real estate clubs (often called REIAs–real estate investor associations) around the country. Some are affiliated with national organizations; others are independent. Some have only a few dozen members; others have hundreds. But these aren’t just “clubs” in the traditional sense. Their members spend a lot of money. One REIA in the mid-Atlantic has members who spend about $45 million annually . . . just at The Home Depot. Imagine what they spend elsewhere. Then multiply that by . . . well, who knows? Point is: Real estate investor associations are a real force in real estate investing.

Trump and Ragland

Sherman Ragland, head of DCREIA, and Donald Trump.

It was these groups that Trump and his companions worked their ways into over the past 10-15 years. It was one reason why Trump University initially was so successful; Trump was already revered. He had created an image and became a role model for investors. But . . .

Most REIA leaders preach that investors are there to help, to find solutions, for people who are in financial trouble. Yes, those solutions can produce big profits for the investors. But the investors are offering solutions that the traditional real estate establishment (brokers, real estate agents, etc.) can’t. They help people buy homes with lease options. They help restore neighborhoods by buying run-down homes and rehabbing them. They help people sell homes quickly, even when the homes are in terrible condition or when the sale has to be completed in weeks, not months. The message investors hear, and most accept, is: You can get rich by helping people solve their problems.

The problem with Trump is that he’s not concerned about helping solve other people’s problems. In fact, Trump despises people with problems.

In 2006, nearly two years before the housing collapse, Trump said:

I sort of hope that happens because then people like me would go in and buy. If there is a bubble burst, as they call it, you know you can make a lot of money. If you’re in a good cash position—which I’m in a good cash position today—then people like me would go in and buy like crazy.

That was real estate. The problem is: Trump doesn’t have any sympathy or empathy for anyone in a tough situation.

Remember the John McCain statement:

He’s not a war hero. He was a war hero because he was captured. I like people who weren’t captured.

I’m writing blog this on Memorial Day weekend, and I wonder if Trump (who never served in the military) feels the same way about members of the armed services who died serving their country. Are they heroes only because they died? But does Trump only like people who didn’t die? Does he consider those who died, to use his term, “losers”? (Oh, heck. I don’t have to wonder. Of course he does.)

Then there’s this:

Ariana Huffington is unattractive, both inside and out. I fully understand why her former husband left her for a man. He made a good decision.

That’s consistent with “Kick ’em When They’re Down Donald.”

From the National Review on Trump and eminent domain:

“Most of the time, they just want money,” he said. “It’s very rarely they say, ‘I love my house, I love my house, it’s the greatest thing ever.’ Because these people could buy a house now, that’s five times bigger, in a better location.” Trump has firsthand experience with eminent domain fights. In 1993, he tried to purchase the home of Atlantic City resident Vera Coking to expand his hotel and casino. When she refused to sell, New Jersey attempted to condemn the property and have her evicted. . . .

Trump later said he offered Coking $4 million; her grandson said Trump’s top offer was $1.9 million. Whatever the sum, Coking refused. In July 2014, with Coking now in a San Francisco retirement home, her family sold the property for $530,000. Trump called that amount “peanuts.” “She saved me a fortune!” Trump said with amusement. “I didn’t build a hotel in Atlantic City, which is dying, okay? I should send her a letter [of thanks.] I mean, honestly!”

There are dozens of other examples. But the point is: Trump is not, nor has he ever been, a shining example for real estate investors to follow. In fact, The Donald typifies everything a real estate investor should not be.

And with that lack of empathy, you don’t have to wonder what Trump would be like as President.


What Are YOUR Myths About TARP (The Financial Bailout)?

October 11, 2010

Another myth: Flat EarthSunday’s [October 10] Washington Post (editorial section) has a piece “5 Myths about TARP.” Now, I generally like the Post’s “5 Myths . . . ” series. Except when there’s a clear ulterior motive and the mythbuster has an ax to grind. In this case, “5 Myths about TARP” is written by none other than Timothy Geithner, current Secretary of the Treasury and former president of the Federal Reserve Bank of New York. Not exactly an unbiased or critical source.

Geithner’s “5 Myths” are:

  1. The TARP cost taxpayers hundreds of billions of dollars.
  2. The TARP was a gift for Wall Street that did nothing for Main Street.
  3. The TARP was a quick fix for the market meltdown but left our financial system weak.
  4. The TARP worsened the concentration of the banking sector, leaving it more vulnerable to another crisis.
  5. The TARP was the centerpiece of a strategy by President Obama to assert more government control over the economy.

I won’t even critique Geithner’s article to cite its inconsistencies. (Well, OK, just one. He notes in Point 3 that “Of the 15 largest financial institutions before the crisis four are no longer independent entities” and in Point 4 that “It is true that the financial system is more concentrated today than it was before the crisis.” Yet Myth 4, inexplicably, is “The TARP worsened the concentration of the banking sector.”)

Most of us may not have the resume of Mr. Geithner. But I suspect we have some real-world experience and some up-close-and-personal knowledge that the Secretary of the Treasury/Former Federal Reserve Bank of New York president may not have. Plus the common sense to be able to separate myth from reality.

So, let’s add to the list of myths about TARP [Troubled Asset Relief Program]. Or–more appropriately–create our own “X Myths about TARP.” What myths did the honorable Mr. Geithner somehow overlook that really should have been included in a listing of myths about TARP?


Bankruptcies, Home Losses Tied To Failed Health Care System

June 4, 2009

More than half a million families who own homes will file for bankruptcy this year because of illness and medical bills, according to a new study by the Physicians for a National Health Program (PNHP). The study will be published in the August issue of the American Journal of Medicine. PNHP, a membership organization of over 16,000 physicians, supports a single-payer national health insurance program. 

Himmelstein D, Thorne D, Warren E, Woolhandler, S. National bankruptcy in the United States, 2007: results of a national study. American Journal of Medicine. [August: prepublication] Available online at http://www.pnhp.org/new_bankruptcy_study or through the American Journal of Medicine, aimmedia@elsevier.com (212) 633-3944. 

The PNHP study was a broader look at medical bankruptcy: Medical Bankruptcy in the United States, 2007: Results of a National Study. (But because we’re a real estate blog, we’re especially considering the real estate implications of the study.)

The study looked at bankruptcy data from 2007. It found that:

  • Illness and medical bills were a cause of at least 62.1% of all personal bankruptcies that year.
  • Based on the current bankruptcy rate (expected to reach 1.4 million in 2009), the study’s authors project that medical bankruptcies will total 866,000.
  • The proportion of bankruptcies attributable to medical problems rose by 49.6% between 2001 and 2007.

Surprisingly, most of those bankrupted by medical problems had health insurance. More than three-quarters (77.9%) were insured at the start of the bankrupting illness, including 60.3% who had private coverage. Most of the medically bankrupt were middle class before their financial problems. Two-thirds (66.4%) had owned a home.

Out-of-pocket medical costs averaged $17,943 for all medically bankrupt families ($26,971 for uninsured patients, $17,749 for those with private insurance at the outset, $14,633 for those with Medicaid, $12,021 for those with Medicare, and $6,545 for those with VA/military coverage).

Among common diagnoses, nonstroke neurologic illnesses such as multiple sclerosis were associated with the highest out-of-pocket expenditures (mean $34,167), followed by diabetes ($26,971), injuries ($25,096), stroke ($23,380), mental illness ($23,178), and heart disease ($21,955).

Bottom line (according to an accompanying Q&A paper): “It appears that health insurance offers only modest protection against medical bankruptcy.” And from the study itself: “Being uninsured at filing did not predict a medical cause of bankruptcy.”

Among the items that did predict the filing of medical bankruptcy: a gap in coverage, older age, marriage, being female, larger household, and lower income quartile.

The study concludes: “The US health care financing system is broken, and not only for the poor and uninsured. Middle-class families frequently collapse under the strain of a health care system that treats physical wounds, but often inflicts financial ones.”

While the study didn’t get into the real estate implications, other than to observe that 66.4% had owned a home, it would appear that a steady stream of foreclosures will continue–in fact, increase–regardless of what Congress or the Administration does if those actions only address lending practices or other specific real estate issues. What appears to be needed, from my reading of the implications of the report, is a multimodal approach that addresses the underlying causes of bankruptcies. And that includes . . . well, I was going to say a restructuring of the health care system, but maybe something more radical is needed. After all, to borrow a phrase from the last Presidential election, stopping at a so-called restructuring might be akin to putting lipstick on a pig.


Amazing Prediction By Ron Paul in 2003

March 18, 2009

I like quirky politicians. (Anyone remember John Anderson when he ran for President? Or Pete McCloskey? If you’re from Virginia, how about Henry Howell? Or even the original John McCain?) And for that reason, I like Ron Paul. I can’t say that I agree with too many of his policies, but I enjoy free thinkers and nonconformists.

Someone mentioned to me recently that Ron Paul had made a speech back in 2003 that predicted the housing and financial meltdown. (I’m sure that true Ron Paul followers have known about that for a long time, so this won’t be news to them.)

Still, he did make a statement before the House Financial Services Committee back on September 10, 2003, and you have to give the guy credit. Here are his entire remarks:

HON. RON PAUL OF TEXAS
IN THE HOUSE FINANCIAL SERVICES COMMITTEE

September 10, 2003

Fannie Mae and Freddie Mac Subsidies Distort the Housing Market

Mr. Chairman, thank you for holding this hearing on the Treasury Department’s views regarding government sponsored enterprises (GSEs). I would also like to thank Secretaries Snow and Martinez for taking time out of their busy schedules to appear before the committee.

I hope this committee spends some time examining the special privileges provided to GSEs by the federal government. According to the Congressional Budget Office, the housing-related GSEs received 13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone. Today, I will introduce the Free Housing Market Enhancement Act, which removes government subsidies from the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the National Home Loan Bank Board.

One of the major government privileges granted to GSEs is a line of credit with the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion dollars. This explicit promise by the Treasury to bail out GSEs in times of economic difficulty helps the GSEs attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a huge unconstitutional and immoral income transfer from working Americans to holders of GSE debt.

The Free Housing Market Enhancement Act also repeals the explicit grant of legal authority given to the Federal Reserve to purchase GSE debt.  GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetize their debt through the Federal Reserve. This provision gives the GSEs a source of liquidity unavailable to their competitors.

The connection between the GSEs and the government helps isolate the GSE management from market discipline. This isolation from market discipline is the root cause of the recent reports of mismanagement occurring at Fannie and Freddie. After all, if Fannie and Freddie were not underwritten by the federal government, investors would demand Fannie and Freddie provide assurance that they follow accepted management and accounting practices.

Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.

Despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policy of diverting capital to other uses creates a short-term boom in housing.  Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.

No less an authority than Federal Reserve Chairman Alan Greenspan has expressed concern that government subsidies provided to GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac.

Mr. Chairman, I would like to once again thank the Financial Services Committee for holding this hearing. I would also like to thank Secretaries Snow and Martinez for their presence here today. I hope today’s hearing sheds light on how special privileges granted to GSEs distort the housing market and endanger American taxpayers. Congress should act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market. I therefore hope this committee will soon stand up for American taxpayers and investors by acting on my Free Housing Market Enhancement Act.

Pretty much on target.

And for some reason the Ron Paul remarks reminded me of a song from a low-budget 1968 movie (Wild in the Streets) called “Nothing Can Change the Shape of Things to Come.” [Maybe it was low budget, but the cast included Shelly Winters, Richard PryorHal Holbrook, Ed Begley, Gary Busey, Dick Clark, Billy Mumy, Bobby Sherman, Peter Tork, and Barry Williams!]

Anyhow, just as restaurants will pair a wine with a course, I thought I’d pair “Nothing Can Change the Shape of Things to Come” with Ron Paul’s remarks. They just seem to go together.

 


Hear No Evil, See No Evil

March 13, 2009

A few days ago, I was attending a workshop for real estate agents and the speaker revealed something that absolutely stunned me. He’s a well-regarded and very in-demand real estate trainer and motivational speaker. And before that, he was an amaxingly successful Realtor. He’s an expert at selling properties and in showing others how to do the same.

He acknowledged that the real estate market is going through some stressful times. He admitted that some real estate agents are depressed when they listen to the latest news about bank failures, foreclosures, mounting unemployment, $50 billion Ponzi schemes, and stock market declines that have wiped away trillions of dollars in equity.

But here’s what shocked me.

He said he isn’t bothered by all that because he simply doesn’t watch or read the news. He said he hasn’t for at least 10 years. (I’m not sure how he knew about the problems with the economy, but that’s another story.) And he urged those in the audience not to watch or read the news, either. After all, he explained, a good agent can succeed in any market and there’s no point in exposing yourself to news that will only depress you.

I’ve also had other real estate agents tell me that they don’t bother with the news either. Their explanation: Newspapers and broadcasters search out the bad news but never report the good. Frankly, that criticism has been around for a long time. There’s even some basis for that criticism simply because of the definition of news. If a tornado strikes your home town, that’s news. If no tornado hits, that’s not news. No newspaper headline: “Fairfax Escapes Tornados for 1,200 Straight Days!”

Nevertheless, I wonder how well a real estate agent or any professional is able to serve his or her clients if he/she isn’t aware of what’s going on in the world, the country, and the neighborhood. In fact, I’d suggest that any profession who is unaware of–or ignores–financial and political developments and trends is at a distinct disadvantage when serving clients.

I’m sometimes asked for my advice on how a buyer or seller should choose an agent. There are a number of criteria that a buyer or seller can use. I won’t list them all here, but they include such factors as experience, knowledge of the neighborhood, responsiveness, and a “comfort level” of the client with the agent.

Based on that workshop I recently attended, I’d suggest that, as a buyer or seller, you include a question along the lines of: “What newspapers do you read? What news shows do you watch? And which web sites do you regularly visit?”

The specific answers–The Washington Post or the New York Times, MSNBC or Fox, the Drudge Report or Daily Kos–don’t really matter much. What does matter is whether he or she engages in any of those activities.


Beware of Economists Bearing Projections

February 5, 2009

In light of the significant difficulties affecting not just real estate but virtually all segments of the economy, does it makes sense to buy a home at all?

The fact is: People are buying. Perhaps not as many, and perhaps they’re spending less. But if someone needs a home, plans to live in it for a while, and has a stable income and likelihood of continued employment, buying certainly can be the right decision.

On the other hand, some of the recent run-up in prices in 2002-2005 was due to buyers speculating that prices would continue to go up not based on fundamental reasons—such as people needing housing or a growth in the area’s population—but rather due to misguided projections, questionable calculations, and an unjustified faith in so-called experts.

Earlier this year, someone gave me a series of quotes from years past to “prove” that dire real estate projections often are unfounded. The quotes were funny because they were wildly inaccurate. For example: “The prices of houses seem to have reached a plateau, and there is reasonable expectancy that prices will decline.” (Time, December 1, 1947).

Or this one: “Financial planners agree that houses will continue to be a poor investment.” (Kiplinger’s Personal Financial Magazine, November 1993)

Recently, I’ve been receiving a steady stream of “good news” projections that are proving to be just as wildly inaccurate, if not quite as funny. For example: “Economic Recovery Already Underway: The credit crisis is indeed mending….So what if there was some excess home building and home buying? So what if some stupid banks made some stupid loans, and some stupid home buyers took those stupid loans and now can’t pay them back? It’s a problem, I suppose. But in the end it’s a side show. The economy marches on.” (Donald Luskin, Trend Macrolytics. April 18, 2008)

 Or how about this one: “Don’t break out the champagne glasses quite yet, but there are more economic signs this week that the worst is over for the three year real estate correction cycle. One of the country’s most prestigious groups of marketing forecasters, the National Association of Business Economists, says housing and consumer credit conditions will stabilize and begin improving as the year moves on. Equally important, said Ellen Hughes-Cromwick, chief economist at Ford Motor and president of the association: The entire U.S. economy will ‘slowly return to health’ this year.” (Kenneth Harney in Realty Times. May 22, 2008)

Long-term, real estate historically has been a good investment. But whether it is right now, for you, is a decision that’s best made by you, based on your own situation. Don’t rely on broad estimates or projections by economists to make that decision. They’re proving to be just as inaccurate today as they were 50 years ago.

Since we’ve been focusing on economists, let’s end on this note:

Three economists went out hunting, and came across a large deer. The first economist fired, but missed, by a yard to the left. The second economist fired, but also missed, by a yard to the right. The third economist didn’t fire at all, but shouted in triumph, “We got it! We got it!”