Investor's Real Estate Weblog

FOOD CRISIS; RICE CRISIS

It is the blog’s policy to discuss international issues with serious US impact:

Rice has doubled in the past few months and may triple in cost.  Asia is panicking.  Widespread food riots across the Asian subcontinent are occurring. Many Asian countries such as India, Cambodia and Vietnam have stopped rice exports. Pakistan has deployed troops to guard truckloads of rice and wheat and flour.

Food shortages and escalating food prices have led to riots in the Philippines and Egypt. The Prime Minister of Haiti was just overthrown over the food crisis. Starvation, rising infant mortality, and malnutrition loom on the horizon.

In developing countries people already spend up to 75% of their income on food.

Why the sudden increase in cost and decrease in supply of this food staple?

Fertilizer and seed  are much more expensive..

Escalating transportation costs due to high energy prices are being passed on to the consumer.

The demand for biofuels encourages farmers to look for greater profit by replacing rice stocks with corn and wheat

Uncontrolled population growth is rapidly increasing demand for hard-to-find food.

The co-opting of agricultural land for housing,and to a lesser degree for ethanol production adn bio-diesel has created crop shortages.

Climate change is decreasing food production.

Farmers are hoarding and waiting for higher prices and hedge fund speculation has put upward pressure on prices.

There is less land, less water and less labor available for rice growing across Asia. Agricultural labor in countries like Thailand is increasingly shifting to industrial sectors. Rice is a labor- and water-intensive crop.

Water shortages and a sharp cold spell in China, floods in Bangladesh, India, Indonesia and Vietnam, excessive rainfall in North and South Korea, a typhoon in the Philippines and severe drought in Australia have all drastically reduced rice harvests.

The United Nations world food program is running out of money and is appealing for a $500 million dollar infusion from member countries to subsidize food purchases and sponsor agricultural planning.

What can be done about this? 

Food patterns may have to change. Staples such as bread, which is made from wheat, can be substitutes. This is already happening in Japan.

Increased agricultural efficiency will produce more food.  China produces three times as much rice per acre as many of its neighbors.

Genetically modified  crops increase yield per acre.

Countries remove export tarrifs on crops which are presently artificially elevating prices.

Previous rice growing lands such as coastal South Carolina now lying fallow can be put back into use.

Population control is an option with presently strained resources.

The next war may not be about territory, it may well be about food and water.

CALIFORNIA HOME PRICES;CALIFORNIA HOME AFFORDABILITY

Calif. median home price $409,240

Calif. highest median home price by C.A.R.        Santa Barbara So. Coast $1,295,000

Calif. lowest median home price by C.A.R.         High Desert $220,380

Calif. First-time Buyer Affordability Index -       Third Quarter 07: 33 percent (As of February 8, 2008 from C.A.R. C.A.R. is California Association Realtors)

PLANNING FOR A RECESSSION

Try to build up your savings so you have three to six months income in reserve.

Cut down on all nonessential spending.  Place yourself on a budget, stop buying luxuries. 

If you place yourself on a budget now, it could build up your cash reserves, and won't be so hard if and when there is decreased income.

In other words, don't add to your debts. If you can't pay  cash, don't buy it.

Cut down on 401(k) contributions, particularly if they're not matched by your employer.

Pay off debt if you can - at least you won't have that payment obligation.

Look for part-time positions to generate more cash. Particularly in grocery stores that give employees a discount on purchases. Look for paid overtime in your existing job.

Creativity and Innovation:The Square Watermelon.

Japanese grocery stores had a problem. They are much smaller than their US counterparts and therefore don't have room to waste. Watermelons, big and round, wasted a lot of space. Most people would simply tell the grocery stores that watermelons grow round and there is nothing that can be done about it. That is how I would assume the vast majority of people would respond. But some Japanese farmers took a different approach. If the supermarkets wanted a square watermelon, they asked themselves, "How can we provide one?" It wasn't long before they invented the square watermelon.

The solution to the problem of round watermelons wasn't nearly as difficult to solve for those who didn't assume the problem was impossible to begin with and simply asked how it could be done. It turns out that all you need to do is place them into a square box when they are growing and the watermelon will take on the shape of the box.

This made the grocery stores happy and had the added benefit that it was much easier and cost effective to ship the watermelons. Consumers also loved them because they took less space in their refrigerators which are much smaller than those in the US meaning that the growers could charge a premium price for them.

What does this have do with anything besides square watermelons? There are a few lessons that can you can take away from this story which help you in all parts of your life. Here are a few of them:

Don't Assume: The major problem was that most people had always seen round watermelons so they automatically assumed that square watermelons were impossible before even thinking about the question. Things that you have been doing a certain way your entire life have taken on the aura of the round watermelon and you likely don't even take the time to consider if there is another way to do it. Breaking yourself from assuming this way can greatly improve your overall life as you are constantly looking for new and better ways to do things. This was one of the most difficult things for me to do because most of the assumptions I make, I don't even realize that I'm making them. They seem perfectly logical on the surface, so I have to constantly make an effort to question them.

Question habits: The best way to tackle these assumptions is to question your habits. If you can make an effort to question the way you do things on a consistent basis, you will find that you can continually improve the way that you live your life. Forming habits when they have been well thought out is usually a positive thing, but most of us have adopted our habits from various people and places without even thinking about them. I have changed a large number of habits that I have had after taking the time to question them and continue to do so. Some of them I have know idea where they came from while others I can trace to certain people or instances in my life. It's a never ending process, but by doing this, you can consistently strive toward making all aspects of your life more enjoyable instead of defaulting to what you have now.

Be creative: When faced with a problem, be creative in looking for a solution. This often requires thinking outside the box. Most people who viewed this question likely thought they were being asked how they could genetically alter water melons to grow square which would be a much more difficult process to accomplish. By looking at the question from an alternative perspective, however, the solution was quite simple. Being creative and looking at things in different ways in all portions of your live will help you find solutions to many problems where others can't see them. I am not a creative person, but I've found that the more that you look at things from different perspectives, the more creative I have become. It's a learned art and builds upon itself.

Look for a better way: The square watermelon question was simply seeking a better and more convenient way to do something. The stores had flagged a problem they were having and asked if a solution was possible. It's impossible to find a better way if you are never asking the question in the first place. I try to ask if there is a better way of doing the things that I do and I constantly write down the things I wish I could do (but currently can't) since these are usually hints about steps I need to change. Get into the habit of asking yourself, "Is there a better way I could be doing this?" and you will find there often is.

Impossibilities often aren't: If you begin with the notion that something is impossible, then it obviously will be for you. If, on the other hand, you decide to see if something is possible or not, you will find out through trial and error.

Take away the lessons from the square watermelons and apply them to all areas in your life (work, finances, relationships, etc) and you will find that by consistently applying them, you will constantly be improving all aspects of your life. 

China Investing

   

I attended the Woo (named after Wilbur Woo founder of Cathay Bank) China Conference this past week at UCLA.

One very interesting panel was on doing business in China.

Here is a summary:

Find out who can make the deal but also find out who can break it, both inside and outside the company.

Learn everything you can about the company in advance - do extensive good diligence which may take a long time -- particularly because of lack of management experience on many levels. Management turnover is high. Vet all the people you hire well.

One panelist on the real estate panel did 10 years of due diligence before doing his first investment.

Consider a China 2 step investment.  First a small investment and then later a larger one.

Do due diligence on the market you want to be in as well as the company you are thinking of investing in.

Secure a firm mandate from your top management including clear go/no decision points so you can make decisions in the field.

Building lasting relationships and trust should be an important part of your negotiations.

Long-term relationships are crucial to doing business in China.

Be creative. Sometimes acting American helps.  Don't just act like Chinese (one panelist commented they may eat you alive if try to act Chinese).

It is better to do too much communication than too little. 

Find a translator you can trust.

Signing a contract is just the beginning.  You must use your relationships to protect your China value.

Loyalty is more important to individuals than to companies.  The best way to retain key employees, customers and suppliers is to retain key leaders.

Don't ‘give up face’ - ask your manager to do it

Due diligence is everything.  Don't assume anything.  Look at all originals, make sure they are date stamped if they had to be filed,

There was general consensus that China is still a developing economy with little regulation.  Beijing is weak, the provinces are strong. Regulations can change in the provinces rapidly. You will have to make a lot of decisions that depend on local factors. One panelist described China as ‘Capitalism run Amok’.

You need to have a long-term vision.  Your first project may not work and things are constantly changing sometimes month-to-month.

Although there is legal recourse in China the panelists stated only half the legal judgments obtained are enforced .

Foreign investors can not directly buy projects for investment purposes.  They need to either set up a China company or joint venture with a China company and they are restricted to certain areas.

Two books that were recommended are:

Tomorrow’s Gold by Marc Faber

One Billion Customers: Lessons from the Front Lines of Doing Business in China by James Mcgregor

HIGHER LOAN LIMITS - QUALIFICATION AND GUIDELINES

The target of release on the limit per state is the beginning of April. The maximum loan limit will be increased to 125% of the HUD Median House

Price based on Metropolitan Statistical Area (MSA) up to 175% of the current conforming limit. This is not to exceed $729,750 for a single – family

property which indicates multi units will not be included. HUD is required to publish revised median house prices implementing the change

within the  next 30 days.

Product parameters will be more restrictive than conforming products, meaning the following:

Full Income documentation and Full Appraisals are required

660 minimum score

90% LTV maximum for primary residence purchases and rate and term refi’s ( lower LTV limits for investment, 2^nd homes, and cash out

refi’s)

No Mortgage lates allowed

12 months seasoning for cash out refinances since previous refinance

Full project review on condo’s

Declining markets policy of 5% reduction of LTV in declining market areas

Product types will be limited to 5 year ARMs (Interest Only and P&I), and fully indexed (P&I) 15 and 30 year fixed loans

Also Noted there will be special pricing and delivery requirements.

PRICING WILL NOT BE THE SAME AS CURRENT CONFORMING PRODUCTS

(They will price somewhere between current conforming and

jumbo rates)

Also we anticipate Jumbo pricing to improve to remain competitive.

Please remember these are preliminary and the reason for the restriction is the higher risk to Fanny/Freddie to purchase these loans.

This summary was issued by First Capital, a lender,  using information from Fanny May and Freddie Mac.

HIGHER LOAN LIMITS (UPDATE)

The US Senate passed an expanded version of HR 5140 – an economic stimulus package that includes a temporary increase in the conforming loan limits from $417,000 to as high as $729,750 in high cost areas and the House passed the expanded version today and it goes to the President (probably on February 13) for signing.  The two things you must know in order to determine if you are in a high cost area:

1.  You must know the formula.  If 125% of the local area median home price exceeds $417,000, the temporary loan limit would be that 125% of the median home price with a cap of $729,750. 

2.  You must know the median home price in your area.  According to HR 5140, the Secretary of Housing and Urban Development will publish the median house prices within 30 days.  We contacted the Public Affairs office of HUD directly to ask if there is anything definitive to reference in the interim, and they said, "no."  The Wall Street Journal published median house prices recently, and you may want to reference this information to get an idea of which areas will exceed the $417,000 limit.  The median housing prices can be found in the second graphic on this web page.  In order to see the median housing price in descending order, click on Price ($) in the chart.

How will this benefit you? The lower new conforming interest rates will replace the higher Jumbo rates up to the above loan limits.

We will see a year of cheaper loans to people buying or refinancing their homes. The increase is temporary and is scheduled to expire on December 31, 2008. It should provide much-needed liquidity and give homeowners and home buyers access to safe sustainable loans. It may provide some stability to the housing market.

Summary:

Los Angeles County should be in the $700,000 range, possibly as high as $729,750 in certain areas and it will probably take 2-3 weeks before we see this change adopted by all lenders.

OBAMA CULT

Obama supporter Kathleen Geier writes that she's "getting increasingly weirded out by some of Obama's supporters. On listservs I'm on, some people who should know better – hard-bitten, not-so-young cynics, even – are gushing about Barack:

Describing various encounters with Obama supporters, she writes, "Excuse me, but this sounds more like a cult than a political campaign. The language used here is the language of evangelical Christianity – the Obama volunteers speak of 'coming to Obama' in the same way born-again Christians talk about 'coming to Jesus.'

James Wolcott: " Perhaps it's my atheism at work but I found myself increasingly wary of and resistant to the salvational fervor of the Obama campaign, the idealistic zeal divorced from any particular policy or cause and chariot-driven by pure euphoria

Barack Obama is a first term Senator running for President. As with all candidates, a speechwriter writes his major addresses. His words aren't gospel and even if they were, gospel has no place in politics. This race should be about politics and governance.

I hope the hype stops soon.

Joe Klein:And yet there was something just a wee bit creepy about the mass messianism — "We are the ones we've been waiting for" — of the Super Tuesday speech and the recent turn of the Obama campaign. "This time can be different because this campaign for the presidency of the United States of America is different. It's different not because of me. It's different because of you." That is not just maddeningly vague but also disingenuous: the campaign is entirely about Obama and his ability to inspire. Rather than focusing on any specific issue or cause — other than an amorphous desire for change — the message is becoming dangerously self-referential. The Obama campaign all too often is about how wonderful the Obama campaign is. ...

The Myth of Jack Kennedy and Young Presidents

Jack Kenendy was not a very successful president. He is never included in the list of Roosevelt, Wilson, Washigton, yes even Reagan. He was inspiring -Yes, but effective - No.

Very few of John Kennedy major programs  were passed during his three years as president. I clearly recall thinking, in the summer of 1963, that he had done nothing legislatively and wondered if he will be reelected.  Most of his legislation was passed by a much more experienced lawmaker, Lyndon Johnson, after he became president.

Positives:

Kennedy's major executive act was in ending segregation in public schools in the South. 

He successfully defused the Cuban missile crisis.

He started the space program which eventually led to men on the moon.

He began the Peace Corps.

Negatives:

He perpetuated an expanded the use of special forces in Vietnam, beginning the escalation of the Vietnam crisis.

He totally botched the Bay of Pigs invasion leading to the capture of 1500 people on the beaches of Cuba who he finally ransomed for $53 million

He led to the forming of the Baath party and the subsequent rule of Saddam Hussein in Iraq

He failed to get many of his major programs enacted into law.

Kennedy’s myth has been created by martyrdom. There is no proof throughout American history that young moderately experienced politicians make more successful presidents. Let's beware!

HIGHER LOAN LIMITS

AFTER YOU READ THIS SEE FEBRUARY 11, 2008 AND FEB 18, 2008 BLOGS FOR ADDITIONAL INFORMATION AND UPDATES!

Higher loan limits inching towards reality!

Yesterday, the US House of Representatives overwhelmingly passed HR 5140 – an economic stimulus package that includes a temporary increase in the conforming loan limit and the upper threshold for FHA loan programs to as much as $729,750 in high-cost areas.  The temporary increase would last only until the end of 2008.  The bill would also restrict Fannie Mae, Freddie Mac and the Federal Housing Administration from guaranteeing or purchasing loans above 125 percent of the median home price for a given area.  That means that the existing $417,000 conforming loan limit for mortgages eligible for purchase by Fannie and Freddie would not increase in areas where the median home price is $333,600 or less.  The problem of course, is that as of right now, no one knows what the median home price is in different markets because this data has never been published by HUD!

Therefore, it would be up to the Secretary of Housing and Urban Development to determine the median home price for different housing markets "as soon as practicable," but no later than 30 days after passage of the bill, relying on existing commercial data where needed.  In other words, if median home prices in your marketplace are $336,000 or less, this bill won't really affect you; and there's no way to tell if median home prices in your area are higher than $336,000 until HUD publishes this data.  Nevertheless, jumbo relief is certainly on the way for places like California where median home prices are certain to be above $336,000.

Currently, the loan limit for FHA loan programs is between $200,160 and $362,790, depending on the county where the property is located.  The proposed higher limits for FHA loan guarantees are also set to expire at the end of this year, unless Congress passes other legislation intended to modernize FHA programs by introducing risk-based pricing and lowering down-payment requirements.

While House leaders thought they had reached an agreement with the Bush administration to include FHA modernization as part of the stimulus package, they agreed to continue working on that issue separately at the administration's request, the Associated Press reported.

In order to make higher limits a reality, the next step is for the Senate to pass the bill and for the President to sign it into law.  The target date for final passage set by the White House and Congressional leaders is February 15, so let’s hope for the best and we’ll be sure to keep you posted as we have more information.

Sources and helpful links:

·          Inman News

·         HR 5140

·         FHA Loan Limit Search – (Current Limits)

Thanks to Al Hermann of American California Financial in Torrance California

for this excellent summary.