Tag Archives: Federal Reserve


August 1, 2019 – I was bombarded throughout the day with appraisers emailing me the ASB announcement that they are going to consider drafting standards for Evaluations.  Their announcement is full of blatant lies.  It is typical of what the Fake News Media puts out.  Therefore, I will list their lies and provide the actual truth below.  Too many people who have no to minimal experience with evaluations put out Fake News all of the time.  It is criminal.  I have ordered and performed evaluations since essentially the beginning of their existence in 1992.  The truth follows….

LIE #1 – “Currently, there are no uniform standards for appraisers to follow when conducting an evaluation, ” – THE TRUTH – Since October 1994, there have been uniform standards for appraisers to follow when conducting an evaluation.  These standards were updated in the December 2010 Interagency Appraisal and Evaluation Guidelines.  And get this, these requirements apply to not only appraisers, but NON-appraisers!!!  USPAP only applies to appraisers.

LIES #2 and #3 – “, which leads to greater risk to the safety and soundness of the real estate transaction and diminished protection for consumers….With the increased use of evaluations in the marketplace lenders and consumers are being exposed to an unnecessary level of risk not seen since the 1980s when national appraiser qualifications and appraisal standards had not yet been created….” – THE TRUTH FOR #2 – First, evaluations are only allowed in transactions that are lower risk than appraisals.  Therefore, they cannot possibly add risk to lending.  In my 27+ years of working for banks, I cannot recall a bad loan that originated with the use of an evaluation.  But, all the bad real estate loans I have seen did contain an appraisal.  Inflated appraised values alone do not make loans go bad.  That is not what I am insinuating.  But, I will confidently say that no bank has ever or will ever go under because of the use of evaluations.  However, many banks have gone and will go under with appraisals being a contributing factor.  THE TRUTH FOR #3 – ‘…diminished protection for consumers.’  Everyone loves to claim they are trying to help the consumer.  I guess we can call it using the ‘Consumer Card.’  The ‘consumer’ usually means the general public that buys houses.  The fact is FIRREA does not apply to 90%+ of residential loans.  Everything that Fannie Mae, Freddie Mac, the VA, HUD, and on and on are involved in is exempted from FIRREA.  (If you are honestly concerned about the consumer, it is Fannie Mae and Freddie Mac that must be stopped from loosening appraisals standards…and remember evaluations are not in their world, so don’t get the issues confused.)  The consumer BENEFITS from evaluations as they are cheaper and faster than appraisals.  It is a flat out, despicable lie to say that the ‘consumer’ is hurt by the use of evaluations.  Actual proof has been the real world since 1992.  Evaluation volume is estimated to be 4x-6x that of appraisals.  Has anyone ever said an evaluation caused a loan to go bad or a bank to go under?  NO!

LIE #4 – “This important development by the ASB shows how the Board has their ear to the ground, listening to the concerns of working appraisers in a rapidly evolving marketplace where there is an increasing demand for different valuation products,” said David Bunton, president of the Foundation.” – THE TRUTH – Ear to the ground?  What a ridiculous statement!  Evaluations were an option when the original FIRREA was placed into law in 1989.  30 YEARS AGO!!!  The ASB reminds me of the quote attributed to Mark Twain about one of my favorite cities, Cincinnati – “When the end of the world comes, I want to be in Cincinnati because it’s always twenty years behind the times.”  When it comes to evaluations, I want to be the ASB because they are 30 years behind the times:)  The demand for evaluations has existed mainly since 1992.  (Any of you remember BC-225:) )  Nothing has changed.  Except if The Appraisal Foundation will say the truth they are scared to death of a non-appraisal product.  They want to control their fiefdom.  Hey ASB, the first step is admitting what you are!

LIE #5 – “Currently, the Interagency Appraisal and Evaluation Guidelines for federally regulated financial institutions provide guidance on evaluations, but that guidance is directed at lenders, not appraisers.” – THE TRUTH – OMG, the misleading statements get more ridiculous.  This is like saying the 5 appraisal requirements in FIRREA are directed at lenders, but not appraisers.  Just not true.  Appraisers must provide Market Value ‘As Is’ per FIRREA, not USPAP.  That applies to both appraisals and evaluations, BTW.  Appraisals must be written per FIRREA, not per USPAP.  The IAEG requires the subject property be inspected for evaluations.  USPAP doesn’t even require an inspection for appraisals!  As a reminder, the IAEG requirements apply to BOTH appraisers and non-appraisers for evaluations.  Just imagine if USPAP applied to non-appraisers!  That idea is as ridiculous as the ASB trying to provide standards for evaluations.

LIE #6 – “Under federal regulations, evaluations may be performed by non-appraisers who have not demonstrated a level of expertise through education, training, and examination.” – THE TRUTH – Do you ever wonder why people tell a lie that can easily be proven wrong?  Here is what the IAEG says about who can complete an evaluation – “An institution should maintain documentation to demonstrate that the appraiser or person performing an evaluation is competent, independent, and has the relevant experience and knowledge for the market, location, and type of real property being valued. Further, the person who selects or oversees the selection of appraisers or persons providing evaluation services should be independent from the loan production area.”  The requirements are the exact same for appraisals and evaluations.  Shouldn’t the ASB be made to retract their lie?  Shouldn’t they have to issue a new announcement with truths, instead of lies?  How does a group of people look themselves in the mirror each morning knowing they published numerous lies to the public they love to claim they protect?  I have never understood how people live like that.

LIE #7 – “If appraisers are not completing an evaluation, there is no recourse for a lender or consumer to appeal a bad evaluation.” – THE TRUTH – Why not?  I have asked for evaluations to be revised.  I have rejected evaluations.  I have done both for appraisals, also.  There is no difference in how these products are treated in this regard.  Whoever did the evaluation can be sued as easily as one of us appraisers that did an appraisal.  And it is likely an evaluation doesn’t contain that funny limiting condition that many appraisers put in appraisals about their liability being limited to the appraisal fee:)  That one has always cracked me up.  I am sure lawyers have been stopped in their tracks when they see that clause, not!

Those are what I would label as bald-faced lies.  (I learn something every day….there are bald-faced and bold-faced lies and they are different….interesting.)  Below are just statements that are hyperbole or unsupported or such.

“Appraisers are valuation experts. When hiring a licensed or certified real property appraiser to develop and report market value, the client should expect the work to be performed in accordance with USPAP,” said Wayne Miller, chair of the Appraisal Standards Board” – COMMENT – No, they should not.  USPAP is not a law, as we all know.  USPAP has never been the only set of standards for valuation.  Many states do not require USPAP for all appraisals.  (Read my blog post of a few years ago where I contend that all ‘Mandatory’ laws are in violation of Federal Law.  I believe this issue was settled by a Federal Court ruling in 2004 in Pennsylvania.)   Many large clients do not either.  The Yellow Book (UASFLA as the word police are now wanting it to be referred to) is its own set of valuation standards.   USPAP says the following:

“USPAP does not establish who or which assignments must comply. Neither The Appraisal Foundation nor its Appraisal Standards Board is a government entity with the power to make, judge, or enforce law. An appraiser must comply with USPAP when either the service or the appraiser is required by law, regulation, or agreement with the client or intended user. Individuals may also choose to comply with USPAP any time that individual is performing the service as an appraiser.”

It is NOT needed for all assignments.  Appraisers do NOT need to comply if it is not necessary.  Clients do NOT need USPAP appraisals all of the time.

“The Board is eager to receive stakeholder feedback from the planned concept paper and public hearing on the impediments, if any, to appraisers completing evaluations in accordance with USPAP.” – COMMENT – This one is simple.  The lone impediment are the state laws that require licensed appraisers to meet USPAP for ALL appraisals, including those for financial institutions.  As I note above, I believe these laws are unconstitutional and have ignored them my whole career.  Federal law trumps state law.  My grass roots campaign since 1994 to get the Tennessee Law, as I refer to it, passed in all other states has gained traction in the past few years.  Numerous states now allow us licensed appraisers to perform non-USPAP Evaluations.  That is the solution.  Change the state laws, one by one.  And keep the ASB the heck out of the Evaluation world!  The banking agencies already set the standards for evaluations and they can enforce them.  Probably much better than the states have enforced USPAP!  People who violate FIRREA are subject to civil money penalties and jail time.  That applies not only to lenders or credit people or anyone else in a bank or credit union, but also to appraisers and evaluators!

In closing, let me point out the obvious….remember what the ‘A’ stands for in USPAP, TAF, ASB, et al.  Evaluations are NOT appraisals.  Appraisals are NOT evaluations.  They may coincidentally have some similarities, but they also have significant differences.  They each have more than adequate standards.

Some facts that I have had to share over and over for 25+ years….Evaluations have been around as long as appraisals in regard to FIRREA.  They are not something new.  They have not negatively affected the appraisal industry.  The volume of appraisal work has increased significantly over the past 25-30 years – evaluations have been done all along.  Mostly by non-appraisers.  Passing state laws like TN and GA and FL and LA and VA and others now have is all that is needed to open this world to appraisers.  Those who do not want to do them, don’t do them.  Your business decision.  But, don’t stop your peers from making a living that includes doing them.  That is selfish.

I am 100% positive that evaluations have not negatively affected the banking industry or our economy over the past 30 years.  They will not over the next 30 years.  If you understand the transactions they can be used on, you understand that almost always, if not always, evaluations are involved in lower risk loans than appraisals.  If you are concerned about the banking industry, the economy, the consumer, then figure out how to provide appraisals that are more accurate than the plus or minus 20% minimum range of accuracy that numerous studies have proven them to be!  How do you convince the public that a professional doing a valuation is adding something of value (no pun intended…or is it) when their appraisal on a $1,000,000 property is not more accurate than $800,000 to $1,200,000?  Do you not think that most of the public knows to a smaller range than that what their property is worth?

I am sworn to secrecy about a similar professional study on the accuracy of evaluations that showed the range to be plus or minus 5%.  Now, tell the world that there is more risk when using evaluations than appraisals.  See how that flies with people that know that plus or minus 5% is far superior to plus or minus 20%.

Folks, know what the facts are versus the Fake News about evaluations that is passed around by individuals and organizations with a bias.  I try not to have any bias as I have made my living off of both products in one way or another for 27+ years.  I have spent 25 of those years trying to help the appraisal industry see the light and get their state laws passed so they can access the non-USPAP Evaluation world.  That is what will help appraisers.

What will not help appraisers is the ASB putting out their own standards for evaluations.  Who is going to follow them anyway?  The banking/credit union world already have evaluation standards.  Why would they want to amend Federal Law to require that evaluations follow some new ASB standards?  Hopefully, the ABA, MBA, and others will be sure to squash that idea.  The Federal Agencies that have examined banks all along can factually say that although evaluation programs can be improved overall, they have not added any risk to banks or the economy or consumer.  They know the most.  If there was a concern, it would have been made public already.

What will not help appraisers is appraisers wanting to only provide the Black Model T Ford.  If you think evaluations will lower the quality of appraisals, you have been proven wrong for 30 years.  If you think evaluations will lower appraisal fees, you have been proven wrong for 30 years.  (The continuous decline in appraisal fees is due to many other factors, but I am certain it has nothing to do with evaluations.)  If you think evaluations will add risk to the financial industry, you have been wrong for 30 years.

If you think appraisers like yourself are the best people to provide non-USPAP Evaluations and have been missing out on a ton of revenue for 30 years and that clients would prefer to be using licensed appraiser to do non-USPAP evaluations, YOU ARE RIGHT…..

mic drop

The Mann

(Obviously feel free to share the above…it is out on the web, not like there is any taking it back lol  I will post something new if an error is pointed out or I hear lies about what I said or misinterpretations et al…so check back now and then….and be sure to let the ASB know what you think when they open this up to public comment.)


UPDATE August 23, 2019 – As I told a reader on Thursday, the odds have greatly increased that we are on the verge of a 3,000-4,000 point decline in the DOW 30.  Today’s 620 point decline helped those odds.  But, I still cannot rule out one more small rally before the decline of doom occurs.  However, we are oh so close the being able to say we are about to go over the Niagara Falls.  The news stories explaining why this is happening will be fun to laugh at.

Also, we are starting to see more of the Fake News Media say that a recession (obviously due to the stock market decline in their minds) is going to hurt Trump’s reelection chances.  Look down below at my original post predicting how the Fake News Media would do this.  So, so predictable.  And next year when the final leg of the Bull Market is roaring back to all-time new highs, the Fake News Media will just continue to harp on the recent bear market that occurred.  Knowing them, they will even say that Trump is rigging the stock market and economy to improve his chance of being reelected.  The 1st Amendment never said we should have to accept a Stupid and Fake News Media!  A total do-over of the press system is needed.

UPDATE August 5, 2019 – I hope I am not the only one enjoying the market carnage.  I live for bear markets.  Albeit, it is early in this one, and I still cannot quite 100% rule out one last rally to new highs.  But, those odds are very slim now.  As I suggested below, the Fake News Media would make up an excuse like the trade wars for the almost 2000 point decline in a week.  Too funny to know what will be said ahead of time and know how wrong the pundits are.

Gold is melting up like expected.  Finally we are seeing $20 and $40 moves.  That is what happens when gold forms a top.  Stocks get extreme at bottoms.  Gold gets extreme at tops.

No one has sent me any info on anyone else forecasting a 20%-25% decline.  I doubt there are any.  By the bottom everyone will be bearish.  Too bad I don’t get called by Fox Business to discuss my forecasts:)  But, at least, I know some friends followed my advice and are watching the carnage from the sidelines like me.

If the top is in place, the early range for the bottom can now be predicted – 20,300 to 21,400.  That will be tweaked as the move unfolds.  It is going to quite a scary time as we hit that range.  Things will look bleak.  And there is a chance that we will only be at the mid-point of a larger 50% bear market.  I will know a lot more at that time.  We have months and months to go with some nice countertrend rallies to deal with.  Patience my friends.

UPDATE July 13, 2019 – The Dow 30 hit 27,300 yesterday and thus entered the target range for a top to be put in place.  At this point the detonator has been activated and the clock is click down….we just can’t see the clock to know exactly what day the top will occur.  It appears that the stock market and gold will top out in the next month or so.  Then they will decline significantly in sync.  That should surprise the masses that believe the stock and gold markets move in opposite directions.  My belief is yesterday was not the final top.  As always, we shall see how this plays out…

The fun part for me is watching the Fake News Media come up with news stories that will be excused for the markets tanking.  The reality is the markets declining will cause the news stories!  I am sure the FNM will blame Trump’s trade wars (which obviously can’t be a reason as the market is at all-time highs after a few years of trade wars), something that Iran does (again we are at new highs after several Iran events recently), and other BS excuses.

Also, curious if any of you have seen anyone predicting a 20%+ Bear Market to occur.   Once we start to decline significantly, then all of a sudden all kinds of analysts will say they called for a top and 20%+ decline.  But, right now…today….is there anyone else out there calling for the Dow 30 to decline below 21,700?  Please email if you have seen such a forecast.  Thanks.  My email is GeorgeRMann@Aol.Com

UPDATE July 3, 2019 – The Dow 30 closed at an all-time high of 26,966.  A month has gone by since my original post below.  I can now update the range of the current top that is forming to be 27,200 to 28,300.  It is occurring sooner than I expected.  But, that is not an issue as long as the price range is met.  It can be met in a single day or may play out over several more weeks or months.  Once we get into the range, the downside target to look for to confirm that a 20%-25% bear market might be underway is 26,400 or such.  I will be updating this as the waves unfold.  So far, so good….

Most of the bad economic indicators for June have been reported.  Of course, everyone is worried that the economy is headed into a recession.  Based on the first six months being the biggest rally for some indices since 1938 or 1955, the economy should grow faster in the 3rd Quarter and even faster in the 4th Quarter.  The 2nd Quarter GDP growth should be the lowest of the year.

June 9, 2019 – As I mention now and then, I use Socionomics (not to be confused with Socio Economics) to do many things in my life.  All of my investments for the past almost 40 years have been based on this science – granted for the first 20 years it wasn’t an organized concept with that name).

Right now, the long-term picture has become clear.  This is a rarity.  But, when it happens, I take action.  And, I would like to put in writing what it is forecasting thru Inauguration Day 2021 (I don’t recall if a re-elected President has that again or not).

The Dow Jones Industrial Average (Dow 30) is the best reflection of social mood.  The current forecast is for it to move to new all-time highs this Summer or Fall.  The expected range is 27,000-28,000.  Depending on where we stand based on certain indicators in the theory, I will be liquidating all of my stock holdings and sitting on cash thru the forthcoming 20%-25% bear market.

What this upward move over the next 3-6 months is telling us is the public is expecting President Trump to be re-elected and the booming economy to continue.  That should be the mood at the end of the year and into the 1st Quarter of 2020.  Also, this suggests a very strong GDP in the 3rd and 4th Quarters of 2019 and 1st Quarter of 2020.  The growth should be significantly above the very slow rate we will see for the 2nd Quarter of 2019 that ends in 3 weeks (this was forecast by Socionomics when the Dow crumbled into its December 24th low).

Following the top this Summer/Fall, a bear market much larger than the one last Fall should occur.  As noted above, a 20%-25% decline to the 21,000 area on the Dow 30 is expected.  This should occur around the 1st Quarter/Spring of next year.  Obviously, the Presidential campaign will be officially underway at that time.  The mood should have totally changed and the public will now expect Trump to lose in November.  In fact, the Fake News Media, along with even some Republican strategists, will be talking constantly about how the Democrats will hold the House and even take over the Senate for complete control of the government.  Such an event would destroy our economy and the business world will be as pessimistic as it has been in probably 10+ years.

When examining the ‘waves’ that explain social mood, there is always an alternate scenario that is watched.  For the above, both the most likely and the alternate (i.e. less likely) wave patterns forecast the same events to occur.  However, it is at this junction next Spring that the two patterns provide polar opposite forecasts.

Most Likely Scenario – As of today, the expectation is that following a panic low around next Spring, the stock market will begin a large bull move back to all-time highs.  i.e. the Dow 30 should exceed the highs expected this Summer/Fall.  29,000 is an early target.

This bullish move means the public has determined who the likely Democratic Presidential Candidate is going to be and that person has no chance of defeating Trump.  So, for the remainder of 2020 and into early 2021, the stock market goes straight up (not literally) and Trump is re-elected and businesses are bullish on the economy going forward.

Alternate Scenario – Assuming the public thinks the Democratic Presidential Candidate is going to defeat Trump and the Democrats are going to control both parts of Congress, the stock market will be accelerating its downward spiral in Spring 2020 and drop thru the  20,000 level like a hot knife thru butter.  As this is the less likely scenario, I have not tried to determine how deep this bear market will be or how long it will last.  That will be easy to determine next Spring when this critical time juncture is occurring.

So, that is what Socionomics is forecasting for the next 20 or so months.  I am not giving my own opinion of the future.  The public does this for us.  It always has.  As time goes by and the waves unfold, it is possible to get more precise with price and time targets.

Since both scenarios above have the stock market topping this Summer/Fall, it only makes sense to me to get totally out of all stocks.  Whether or not I jump back in next Spring depends on how the waves unfold going into that timeframe.  One scenario (the most likely one) projects about a 35%-40% bull market.  The other scenario will be forecasting probably another 30%-40% bear market from the prices at that time.  Money is to be made either way.  In fact, the same amount of money can be made in either scenario.  I hope to be back here in about 9 months to explain what Socionomics is then projecting.  Do I go long….or do I go short.

I am sure almost no one makes a 2-year forecast of the future in some detail and puts it out in the public domain for all to see if it is accurate….or if they are wrong and a total fool for trying to predict the future..  But, I have spent my life doing this and not doing a bad job at it.  I put my savings and retirement on the line with the forecasts.  If I am wrong, I feel the pain.  If I am right (like I have been since Election Night 2016 re stocks and early 2000’s re gold), then it is very rewarding.

As an aside, I remember moving my wife’s retirement and my retirement to a new brokerage in 2004 when I took a new job.  We were 100% in gold investments.  Talk about ‘all in.’ :)  The new stock broker thought I was insane.  Where’s the diversification?  Gold was around $450.  We had got in below $300 a few years earlier.  By the time I left that job in 2008, gold had hit $1000.  He told me I had done better than anyone he knew.  You have to remember that by the Fall of 2008, Lehman Brothers went under and the stock market and real estate markets were crashing.  But, not gold.

In 2011, gold peaked near $1900.  I had gotten out a bit before the top admittedly.  But, was back in near the $1075 low in 2016.  Although, I think $1450 is the upside target, I just got back out last week as it hit new highs for the year.  I am not in the mood to wait around for the next $100 to the upside, as there is a good chance of a $100-$200 decline before this final top occurs.  I’ll sit and watch.  Can’t go broke sitting on the sidelines:)

Lastly, let me mention the Fed and interest rates.  Socionomics has shown that the Fed ALWAYS follows what the market tells it to do.  The public thinks the Fed raises rates and then the market reacts to it.  No!  That is the kind of junk the Fake News Media feeds people over and over.  Of course, the media is clueless about markets.

Factual data shows that when the Fed decides to raise or lower rates, the market has already made that move.  Right now, the markets are telling the Fed to lower rates 75bp thru the remainder of the year!  You don’t hear anyway talk about that, do you?  Some are calling for the Fed to lower rates (Trump included….like him or not, he reads what the markets are saying and thus knows the Fed should already be lowering rates.  He isn’t bullying them.  He isn’t trying to make some agenda come true.  He knows, like you now do, that the markets have already said the Fed needs to start lowering rates.), but most are just calling for 25bp.  That is how they will likely start.  But, if so, then it will take 3 of those reductions just to finally catch up with the market.

I’ll end it here.  As Paul Harvey would say, now you know the rest of the story…..



March 7, 2016 – For the first time since December, 2010, the Agencies have issued a statement on Evaluations.  I will include the FDIC link below, albeit the Federal Reserve and OCC have similar links.

My feeling is nothing new has been added.  There is a bit more talk about how to use tax assessments – hopefully, this will once again become more common now that The Great Depression II has run most of its course.   Also, they make it clear that market value must be of real property only.  FF&E in apartments and going concern properties must be valued separately, just like in appraisals.

Please pass the link below along to your bank contacts so everyone can stay informed.  Thanks.




February 1 – Following is my first guest post.  Bruce Cumming, Jr. is the author.  He can be reached at 941.926.0800 or bcumming@hettemasaba.com.

We would like to note that from an academic-business perspective real estate is viewed as a sub-discipline of finance, finance as a sub-discipline of economics and the classical economist such as Adam Smith and David Ricardo referred to their discipline as “political-economy” linking economies with the political mode of a country, state, county, or municipality.  The following is some economic theory and emerging issue that could impact real estate values.

According to the Austrian business cycle theory, central banks (such as the US Federal Reserve System and specifically its Federal Open Markets Committee) can set interest rates too low for too long, which can create an artificial boom and distort the accuracy of data on a trend line basis, often causing what is termed “malinvestment.”  According to an article by Mauldin Economics, based upon a graph of the US 10-Year Treasury Rates going back to 1790, 10-Year Treasury Rates over the long-term averaged just less than 6% and the average over the last 50 years was 6.58%.  The current 10-Year Treasury rate according to the US Department of the Treasury is 2.06%, or about 394 basis points below the 200-plus year average rate and 452 basis points below the 50-plus year average rate.  The Federal Open Markets Committee just increased its rate for the first time since December 16, 2008, on December 17, 2015.  The Federal Funds Rate has been between 0% and 0.25% for 7 years.  The Federal Funds Rate is now between 0.25% and 0.50%.  The US stock market has been in rapid decline so far in January of 2016.

The McKinsey Global Institute’s report, Debt and (Not Much) Deleveraging, dated February 2015, reports that between 2007:Q7 and 2014 worldwide debt have increased from $142 trillion to $199 trillion, an increase of $57 trillion, or 40.14%.  Debt has not been liquidated during the so called Great Recession, but has been increased, thereby potentially distorting asset values.

It should be noted that the Green Street CPPI:  All-Property Index (which was started in December of 1997) was 22.7% higher in December of 2015 than in December of 2007, its previous peak.  Green Street tends to focus on investment grade real estate and is tightly tied to the capital markets.  The Moody’s/RCA CPPI, which focuses on repeat sales of properties greater than $2,500,000 in value, saw its last peak in 2007:Q3 (165) and reached that same level in 2015:Q3 (165).  The trough reported by this index was in 2009:Q4/2010:Q1 (96), so the index has increased 71.88% from trough to peak.

Austrian economists theorize that the artificial monetary boom ends when bank credit expansion finally stops, which is when no further investments can be found which provide adequate returns for speculative, or “Ponzi” borrowers.  The Austrian business cycle theory asserts that the longer the artificial monetary boom goes on, the more speculative and “Ponzi” the borrowing occurs, the more errors and waste committed, the longer and more severe the workout period (e.g., bankruptcies, foreclosures, and short-sales) until equilibrium is achieved through market-based price discovery.

The Austrian business cycle theory is one of the precursors to the modern credit cycle theory, which is emphasized by Post-Keynesian economists at the Bank for International Settlements and by mainstream academic economists such as the late Hyman Minsky (PhD/economics, Harvard).  Post-Keynesian Minsky taught at Brown University and the University of California at Berkeley among others.  Minsky’s financial instability hypothesis is translated to real estate markets by borrower type.

Minsky theorized that a key mechanism that pushes an economy toward a financial crisis is debt accumulation by the private sector.  He identified three types of borrowers:  hedge borrowers, speculative borrowers, and “Ponzi” borrowers.

„      Hedge borrowers:  can pay both interest and principal loan payments from current cash flows (e.g., traditional mortgage).

„      Speculative borrowers: can pay interest only loan payments, but must regularly roll over the principal (e.g., interest-only loan).

„      “Ponzi” borrowers:  cannot pay interest or principal, and depend upon asset price appreciation sufficient to refinance the debt (e.g., negative-amortization loan), only asset price appreciation keeps the “Ponzi” borrower afloat.

If “Ponzi” borrowing is widespread enough during a credit boom when asset prices stop raising rapidly the “Ponzi” borrower can no longer operate profitably (or at all) and once asset prices start to decline the speculative borrower may not be able to roll over their loan principal and could face a technical, if not a real default.  The final financial domino is the hedge borrowers who are unable to find loans despite the apparent soundness of the underlying assets.  The market begins to unravel, that is to say, a “Minsky Moment” occurs.

Former PIMCO managing director Paul McCulley (MBA, Columbia) is credited with coining the phrase, “Minsky Moment,” when referring to the point in any credit cycle, or business cycle when investors begin having cash flow problems due to the spiraling debt incurred in financing speculative assets.  At this point, a major sell off begins because no counterparty can be found to bid at the high asking prices previously quoted, leading to a sudden and precipitous collapse in prices driving market clearing asset prices down as well as a sharp drop in market liquidity.  The “Minsky Moment” comes after a long period of prosperity and increasing asset values, which has encouraged increasing amounts of speculation using borrowed money.

Austrian economist Ludwig von Mises (PhD, University of Vienna) who taught at New York University theorized that a financial crisis emerges when consumers seek to reestablish their desired allocation of saving and consumption at the prevailing interest rate.  The ensuing recession or depression is the process by which the economy adjusts to the errors and wastes (malinvestment) of the boom, or bubble.

It remains too early in the current cycle to confirm that a “Minsky Moment” has occupied, or if the current stock market activity is a short-term correction that will rebound in a few weeks, or months.

It should also be noted that during that during the last downturn vacant land decreased in value at a far greater rate than improved properties that could be income generating.  A paired repeat sales analysis study that we conducted indicated that vacant land was declining at a rate of about 1.35% per month (rounded) versus improved sales that were declining at a rate of about 0.75% per month (rounded).  Land was declining in price at an 80% greater rate than improved property.

Generally, entitlements are only worth about what they cost during a normal market and are “usually worthless” during a downturn, such as we recently experienced.

The current macro-level economic activities have not yet impacted real estate values, they may and they may not.  Time will tell…