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com

“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.”
William Arthur Ward

February 2010 Issue

In This Issue
Cartoons
I See Black Swans
Charleston Stats

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I apologize for the delay in getting this report out. February was a very hectic month for me due to work and my
father having bypass surgery. My dad is doing much better and is on the mend. If you ever need your “ticker”
checked out or surgery I highly recommend the cardiac unit at MUSC. I believe it is one of the best in the country.

I See Black Swans

The past couple of CMRs have been focused on the impact of many new industries setting up shop in Charleston now
and in the future. I have been bullish about the employment these new companies will bring to our battered economy
and have tried to forecast the impact it will have on the Charleston market. Many of you who have been reading the
CMR over the past couple of years know full and well that I am an optimist and a realist, while the optimist part of
the equation has been difficult since I started this website in 2006. Forecasting and risk management is very difficult
because you have to have the ability to look into the future and piece together complicated issues related to the
economy. Most people running around prognosticating locally and on TV simply got it wrong and missed calling the
credit meltdown and Great Recession.

In this issue of the CMR I am going to attempt to connect some complex dots and take a look at what could go very
wrong within the next four to five years and destroy every bit of bullishness that appears to be on the way in
Charleston. This February edition of the CMR may scare the crap out of many of you and if you do not want to hear
the truth and believe everything is “hunky dory” then I recommend you stop reading right here. The purpose of this
February CMR is not to put fear into your life but rather show a worse case scenario that could throw a monkey
wrench into the progress we have made or think we have made in the past year. I also want to make all of you think
about these various scenarios because the CMR has some very bright and successful people reading these reports. It
is way too easy for me just to publish local and national stats on real estate, the economy, etc. and say everything is
“contained” because it is simply not the truth. I am going to be hopping around various subjects directly impacting
the local, national and international economy and try to paint the “Black Swan” picture.

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What is a black swan?

Black Swan Events were described by Nassim Nicholas Taleb in his 2007 book, The Black Swan. Taleb regards
almost all major scientific discoveries, historical events, and artistic accomplishments as "black swans" — undirected
and unpredicted. He gives the rise of the Internet, the personal computer, World War I, and the September 11, 2001
attacks as examples of Black Swan Events.

Writing in the New York Times, Taleb asserted, "What we call here a Black Swan (and capitalize it) is an event with
the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because
nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its
outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable
and predictable. I stop and summarize the triplet: rarity, extreme impact, and retrospective (though not prospective)
predictability. A small number of Black Swans explain almost everything in our world, from the success of ideas and
religions, to the dynamics of historical events, to elements of our own personal lives." [4]
Source:Wikipedia

A Black Swan Event we all witnessed recently was the “Credit Meltdown” that occurred in September 2008 when we
should have truly lost most of the firms that still reside on Wall Street. None of us will ever forget the impact that
event had on the economy and our lives so it will always be etched in our minds. Instead of allowing banks and
companies to fail we had TARP, TALF, Stimulus, etc. in order to avoid another Great Depression. At the end of the
day or at least the last time I checked the world still runs on fundamental issues such as supply and demand along
with cause and effect.

The first major problem we have enhanced since 2008 is debt…LOTS OF DEBT.

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Debt Problem
Capitalism cannot function unless its constantly compounding debt is serviced and/or paid down. Today, the US, the
world’s largest debtor, can no longer pay what it owes except by rolling its debt forward and borrowing more, what
the late economist Hyman Minsky called ponzi-financing, financing common in the final stages of mature capital
systems.

The amount of outstanding US debt has now reached levels that can never be paid off:… the United States
government and its agencies have, by far, the largest pile-up of interest-bearing debts ($15.6 trillion), the largest
accumulation of unsecured obligations (over $60 trillion), the largest yearly deficit ($1.6 trillion), and the greatest
indebtedness to the rest of the world ($4.8 trillion).
Martin D. Weiss, www.moneyandmarkets.com

The un-payable levels of US debt are not just the problem of the US. Because the US dollar is the lynchpin of today’s
fiat money system, US debt is everyone’s problem. The US dollar is the world reserve currency and a default by the
US will have far-reaching consequences, especially in China, its largest creditor.

Not only does the US have ballooning deficits to contend with over the next few years but so do other developed
countries. A book titled “This Time is Different” by Reinhart and Rogoff speaks primarily to public debt that
balloons in response to financial crises. It states:

1. The true legacy of banking crises is greater public indebtedness, far beyond the direct headline costs of bailout
packages. On average a country’s outstanding debt nearly doubles within three years following the crisis.
2. The aftermath of banking crises is associated with an average increase of seven percentage points in the
unemployment rate, which remains elevated for five years.
3. Once a country’s public debt exceeds 90% of GDP, its economic growth rate slows by 1%.

Rogoff was also recently interviewed and says that debt to GDP is a problem at 90% to 100%.

The quick calculation is that the U.S. has $12.5 trillion gross debt growing at $2 trillion per year on GDP of $14.3
trillion.

Next year it will be 12.5 + 2 = 14.5trillion on 14.5 GDP or 100%. We're screwed!
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Rogoff’s assertion that, unlike the common perception, the U.S. government has in the past defaulted on its
obligations during the Great Depression when it went off the gold standard, then revalued gold upwards.

A study by the McKinsey Group analyzes current leverage in the total economy (household, corporate and
government debt) and looks to history, finding 32 examples of sustained deleveraging in the aftermath of a financial
crisis. It concludes:
1. Typically deleveraging begins two years after the beginning of the crisis (2008 in this case) and lasts for six to
seven years. (That would put deleveraging at September 2010).
2. In about 50% of the cases the deleveraging results in a prolonged period of belt-tightening exerting a
significant drag on GDP growth. In the remainder, deleveraging results in a base case of outright corporate
and sovereign defaults or accelerating inflation, all of which are anathema to an investor.
3. Initial conditions are important. Currently the gross level of public and private debt is shown in Chart 2.

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While the focus has been on Greece as well as some other European countries and their fiscal situation, make no
mistake that the next shoe to drop may not be across the pond but right here at home because there are a number of
States that are in at least as bad a shape financially. State governments, such as California and Illinois, are functioning
with a whole new currency, called the IOU, and there are a variety of other areas like Michigan, Pennsylvania,
Arizona, New York and New Jersey that are in true fiscal distress right now. The States collectively have to find $156
billion somewhere in order to plug their massive fiscal hole for 2010. The other problem the States have is they do
not have access to that machine called a printing press which is so heavily used in Washington DC. That is correct
the States actually have to try and balance their budget each year, which is difficult in an economy with falling tax
revenues and real estate prices.

Despite massive amount of stimulus courtesy of the printing press in DC out of control deficits and debt tend make
yields rise. Unfortunately, the credit markets are still broken which makes growth impossible in a credit based
economy like ours. The reason Greece is in deep “doo doo” and they have to cut their deficit is they do not have a
central bank to print money for themselves. They are really operating in the same manner as our States with no future
prospect of stimulus money.

The great economist Adam Smith did not intend for the invisible hand to be the hand of the government.
Unfortunately, instead of taking the bitter pill and allowing the economy to reset itself, banks to fail, and housing
prices to fall to their true market value, etc. the government feels it must intervene with the nationalization of the real
estate industry through financing, which interrupts the laws of supply/demand and cause/effect.

“If a big non-bank institution gets in trouble and threatens the whole system, there ought to be some authority that
can step in, take over that organization and liquidate it or merge it — not save it. It’s called euthanasia, not a
rescue.”
-Paul Volcker said on CNN.

The theory of the Invisible Hand states that if each consumer is allowed to choose freely what to buy and each
producer is allowed to choose freely what to sell and how to produce it, the market will settle on a product distribution
and prices that are beneficial to all the individual members of a community, and hence to the community as a whole.
The reason for this is that self-interest drives actors to beneficial behavior. Efficient methods of production are
adopted to maximize profits. Low prices are charged to maximize revenue through gain in market share by
undercutting competitors. Investors invest in those industries most urgently needed to maximize returns, and
withdraw capital from those less efficient in creating value. Students prepare for the most needed (and therefore most
remunerative) careers. All these effects take place dynamically and automatically.

It also works as a balancing mechanism. For example, the inhabitants of a poor country will be willing to work very
cheaply, so entrepreneurs can make great profits by building factories in poor countries. Because they increase the
demand for labor, they will increase its price; further, because the new producers also become consumers, local
businesses must hire more people to provide the things they want to consume. As this process continues, the labor
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prices eventually rise to the point where there is no advantage for the foreign countries doing business in the formerly
poor country. Overall, this mechanism causes the local economy to function on its own.

Source:Wikipedia

The theory of the Invisible Hand states nothing about government intervention because it screws up the free market
and balancing mechanisms.

What agitates and worries me is that our economy has morphed into Bernie Madoff over the past ten years. It is a
Ponzi scheme or a Shell Game when you strip away all the smoke and mirrors. All Ponzi Schemes eventually
collapse which is exactly what our economy tried to do in 2008 had it not been for the printing press.

Bill “The Bond Daddy” Gross says it best in his recent Investment Outlook when he states:

“What if – to put it simply – you couldn’t get out of a debt crisis by creating more debt?”
Seriously think about this simple statement. What would we do?????

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The U.S. economy ceased to function this week after unexpected existential remarks by Federal Reserve chairman
Ben Bernanke shocked Americans into realizing that money is, in fact, just a meaningless and intangible social
construct.

What began as a routine report before the Senate Finance Committee Tuesday ended with Bernanke passionately
disavowing the entire concept of currency, and negating in an instant the very foundation of the world’s largest
economy.

“Though raising interest rates is unlikely at the moment, the Fed will of course act appropriately if we…if we…” said
Bernanke, who then paused for a moment, looked down at his prepared statement, and shook his head in utter
disbelief. “You know what? It doesn’t matter. None of this—this so-called ‘money’—really matters at all.”

“It’s just an illusion,” a wide-eyed Bernanke added as he removed bills from his wallet and slowly spread them out
before him.

“Just look at it: Meaningless pieces of paper with numbers printed on them. Worthless.”

According to witnesses, Finance Committee members sat in thunderstruck silence for several moments until Sen.
Orrin Hatch (R-UT) finally shouted out, “Oh my God, he’s right. It’s all a mirage. All of it—the money, our whole
economy—it’s all a lie!

Source:
U.S. Economy Grinds To Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion
The Onion, February 16, 2010 | Issue 46•07
http://www.theonion.com/content/news/u_s_economy_grinds_to_halt_a
*** If you did not know any better you probably would not realize that the short article above is pure satire!***

The great economist Adam Smith did not intend for the invisible hand to be the hand of the government.
Unfortunately, instead of taking the bitter pill and allowing the economy to reset itself, banks to fail, and housing
prices to fall to their true market value, etc. the government feels it must intervene with the nationalization of the real
estate industry through ponzi style financing, which interrupts the laws of supply/demand and cause/effect.

Case in Point:
In a Treasury Bulletin that was published in December 2009 ownership data revealed that the United States increased
public debt $1.885 trillion dollars. After a new economic collapse how have we been able to sell Treasuries to
finance our growing appetite for debt? Who is buying all these new Treasuries? The first was “Foreign and
International Buyers” who purchased $697.5 billion, the second was the Fed who purchased $286 billion and the third
large buyer was “Other Investors” or the Household Sector. After purchasing $90 billion in 2008, this group
purchased $510.1 billion in the first three quarters of 2009, a seven fold increase. So the $510.1 billion question is
who the hell is the Household Sector? The answer is they do not exist and they are a PHANTOM group created to
balance the general ledger in the Federal Reserve’s Flow of Funds report.
Source: Sprott Asset Management

In January 2009, the Federal Reserve began its $1.25 trillion program to purchase mortgage-backed securities backed
by the federal housing agencies – Freddie Mac, Fannie Mae, and Ginnie Mae – in order to reduce the cost and
increase the availability of credit for the struggling housing market. As you can see in the chart below, the Fed’s
initial purchase of MBS coincided almost simultaneously with foreigners shifting from net buyers to net sellers of
agency debt.

Over the course of the program, foreign selling of agency debt is almost a mirror image of the Fed’s purchases. Was
this a crowding-out effect or did foreigners just seize the opportunity to diversify? If one of the United States’ largest

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creditors is any indication, then the trend is clear. In 2009, China was a net seller of nearly $25 billion of its agency-
backed debt.

With the MBS purchase program at least temporarily scheduled to wind down by the end of the quarter, the success of
the Fed’s intervention will soon be put to the test.

Will mortgage rates continue their pre-bailout upward trajectory, likely forcing the Fed to step back in? Or was the
Fed successful in reigniting the mortgage market?

There’s been plenty of speculation about what will happen to mortgage rates if and when the Federal Reserve wraps
up the last of its planned purchases under the $1.25 trillion Mortgage-Backed Security (MBS) purchase program, first
announced in November 2008.

While there have been some suggestions that the Fed may extend and expand the program beyond the end of next
month, nothing has been said officially. Assuming it ends on March 31st as planned, the laws of supply and demand
would seem to indicate that the MBS market is headed for a heap of trouble. Why? The Fed has been the biggest
buyer of residential mortgage-backed securities by far over the past year or so. The last time I checked residential real
estate prices according to the Case Shiller index were still declining.

That means yields and/or spreads on mortgage-related borrowings have only one way to go. As it happens, a quick
read of the chart of the 30-year fixed-rate mortgage yield less its government bond market counterpart lends further
weight to that view. That is, it looks rather bullish, which is bad for borrowers.

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In fact, based on what happened following the similar technical pattern that developed in the early 1990s, we may
well be on the cusp of a secular rise in the cost of mortgage-related financing costs. Another reason, perhaps, to bet
against near-term recovery in house prices.

TBTF – Too Big To Fail

At the end of 2007, the Big Four banks — Citigroup, JPMorgan Chase, Bank of America and Wells Fargo —
held 32 percent of all deposits in FDIC-insured institutions. As of June 30th, it was 39 percent. SAY WHAT? How
in the world does that help manage the risk in our battered economy to allow the TBTF banks get even bigger? This
is a national security issue and economic suicide. After all the problems these banks have caused the world the US
government has allowed them to get even bigger. It makes absolutely ZERO sense.

The big four have half of the market for mortgages and two-thirds of the market for credit cards. Five banks have over
95 percent of the market for over-the-counter derivatives. Three U.S. banks have over 40 percent of the global market
for stock underwriting.

Fifteen years ago, the combined assets of our six biggest banks totaled 17 percent of our GDP. By 2006, that number
was 55 percent. Right now, it stands at 63 percent.

Any way you skin these big four banks they have simply become so large that they can now hold a gun to everyone’s
head in the government that if they are threatened to go bankrupt they will decimate the economy.

Commercial Real Estate

Not only do the Big 4 banks hold a large portion of the commercial loans in the US but so do many of the smaller and
medium sized banks. I work very closely with banks of all sizes each day and have an inside view of what is going
on. The problem is that many of these banks were like developers back before the “Go Go Days” where real estate
and lending were easy due to the Fed artificially keeping interest rates low and creating a massive housing bubble.
You do not believe you have any risk if you actually believe real estate prices will go up forever. Unfortunately, this
has proven to be a myth instead of fact but 4-5 years ago I had arguments regarding this very subject.

The politicians and TV pundits want all the banks to lend. The problem is that banks can not lend as aggressively
because many businesses have poor financials and real estate values are still falling in most parts of the country. The
other problem is that the examiners from the FDIC are requiring banks to increase capital to assets. So if a bank has
$200 million in assets the FDIC may require them to have 8% “capital on hand” or $16 mil. Most banks can not keep
this amount of money on the books without selling off non performing assets and selling stock.

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A classic example of this happening in the low-country is with Tidelands Bank.
http://www.postandcourier.com/news/2010/mar/02/tidelands-told-boost-capital-cut-bad-loans/

I would not be surprised if Tidelands Bank gets a Cease and Desist order soon because their non performing real
estate loans will never come back to par. They are stuck in a vicious cycle like around 617 other banks on the Bank
Problem List who are just hanging on by a thread right now.
http://www.calculatedriskblog.com/2010/02/unofficial-problem-bank-list-increases_20.html

As margins on loans that are actually made shrink and the cost of doing business rises because of higher FDIC
insurance costs, increased appraisal orders, volatile portfolios and deteriorating asset levels many banks are feeling
the squeeze. Many banks are simply boxed in where they can not even sell off their non performing assets because of
the impact it will have on their weak financials. For many it is the equivalent of a slow death.

The FDIC and Treasury Dept. have made the decision than rather allow a couple thousand banks fail they are
allowing them to hold bad (non-performing) assets, which will eventually lead to a disaster. If a bank is allowed to sit
on bad assets for years it is not going to sell them. Their money is tied up in these bad loans which also incur higher
costs for holding these loans. The end result is a high number of banks not lending.

Over the past year, distressed assets increased reaching $172 billion at the end of 2009, a fourfold increase from 2008
levels according to Real Capital Analytics.

“Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly
half are at present “underwater” which means, the borrower owes more than the underlying property is currently
worth. Commercial property values have fallen more than 40 percent since the beginning of 2007. Increased vacancy
rates, which now range from eight percent for multifamily housing to 18 percent for office buildings, and falling
rents, which have declined 40 percent for office space and 33 percent for retail space, have exerted a powerful
downward pressure on the value of commercial properties.

“The largest commercial real estate loan losses are projected for 2011 and beyond; losses at banks alone could range
as high as $200-$300 billion. The stress tests conducted last year for 19 major financial institutions examined their
capital reserves only through the end of 2010. Even more significantly, small and mid-sized banks were never
subjected to any exercise comparable to the stress tests, despite the fact that small and mid-sized banks are
proportionately even more exposed than their larger counterparts to commercial real estate loan losses.”
Source: February 10, 2010, Congressional Oversight Panel’s Special Report entitled “Commercial Real Estate
Losses and the Risk to Financial Stability.”

Big losses are going to be reported on Commercial Real Estate (CRE) and many banks have another round of pain
ahead of them.

Housing
Standard & Poor’s just released a report titled “The Shadow Inventory of Troubled Mortgages Could Undo U.S.
Housing Price Gains” that we need to take into account.

If you aren’t keen on reading the entire report, here’s Standard & Poor’s conclusion:

The Supply of Homes on the Market Is Likely to Grow

The recent constriction in the supply of foreclosed homes on the market is a temporary one. Loan modifications and
the observed extension of time distressed loans remained as such may simply have delayed the inevitable, creating the
demonstrated shadow inventory of troubled loans. Ultimately, the majority of the properties these distressed loans
represent will likely have to be liquidated.

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Our estimate of $473.4 billion in loans that will eventually need to be liquidated corresponds to approximately 1.75
million individual properties. This number represents almost 50% of the existing homes available for sale as of
December 2009, and moreover, only accounts for expected defaults for mortgages outstanding in the private
securitization market which makes up less than a third of the total securitization market and less than 5% of the total
mortgage market. Do not expect all of these distressed properties to liquidate at the same time, the significant
percentage of the current supply that these distressed loans represent does reveal the potential future increase in
housing supply. An influx of liquidated properties is likely to prompt a decline in prices if unaccompanied by a
comparable increase in demand.

As the charts below indicate, there are plenty more foreclosures on the horizon.

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(Note: Seriously Delinquent indicates 90+ days delinquent or in foreclosure. REO indicates real estate owned – REO
loans represent homes in foreclosure, with ownership transferred from the borrower to the lender or securitization
trust.)

So, it looks like the housing market picture is not as rosy as some of the recently released statistics might lead you to
believe.

I mentioned last month how the housing market is nationalized because of all these credits and the fact that last
September over 95% of all new loans for homes in the US were made with federal assistance from Phoney Mae,
Fraudey Mac or FHA. Remember, Fannie Mae and Freddie Mac are still being operated under a federal
conservatorship.

I ask you if our government did not have induced “nationalized” financing how does anyone purchase a home unless
they have cash???

The trillion dollar question everyone wants to know is the US along with the rest of the industrialized world headed
for a complete collapse?

However we slice and dice the rise of the budget deficit and its impact on the U.S. dollar the fact remains we are not
gaining new jobs, tax revenues are down and spending at the federal level continues to escalate. Since fiscal
responsibility is completely out of control and the responses to the previous shock in 2008 were incorrect the next
shock to the economy may prove to be the “big one.” The printing press mentality driven by The Fed simply adds to
much supply to a currency with waning demand which results in the eventual destruction of the dollar.

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The inflationary pressures that come from a declining dollar include upside pressure on oil prices and typically gas. I
really believe the main sector of the economy that will continue to experience deflationary pressure is real estate,
especially on the commercial and high end residential markets because of the severe bubble created since early 2000
via the manipulation of low interest rates and structured finance that turned into Credit Default Swaps, NINJA Loans,
etc. etc. I also feel it is important to realize that Ben Bernanke has dedicated himself to fighting deflationary forces
that destroyed the markets during the Great Depression. The cause and effects of The Fed’s policies we have
witnessed since 2008 still appears to be heavily tilted towards more inflation except in certain segments of real estate.
The 15.02% of loans that were in foreclosure or behind at least one payment at the end of the fourth quarter
was the most since the Mortgage Bankers Association began keeping records in 1972. According to the National
Association of Realtors, the median price for single family home re-sales was up from a year earlier in 67 of 151 U.S.
metropolitan areas in the fourth quarter. The national median home price was $172,900, down 4.1% from the end of
2008, and the smallest decline in more than two years. Since peaking the second quarter of 2006, the Case/Shiller
Home Price Index had fallen 33.5% by April 2009, and was 30.0% lower through November 2009. The chart below
compares the severity of the Savings & Loan inspired home price decline from 1989 to 1997, and the current cycle. A
number of statistical factors have contributed to the modest price improvement between April and November.

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The Case/Shiller Index is not seasonally adjusted, so the normal pick-up in activity between May and September is
not accounted for. In 2009, this prime time period was further boosted by the first time home buyers tax credit, which
increased home buying of lower priced homes. In the fourth quarter, sales of homes in the foreclosure process
represented 32% of sales, down from 37% in the fourth quarter of 2008. Fewer sales of foreclosed homes would
mean less downward pressure on home prices. On the surface, this would appear to be a modest positive.
Unfortunately, it is the result of banks holding back on selling foreclosed properties. In California, the number of
homeowners delinquent on their mortgages has doubled over the last year, but the amount of foreclosures on the
market has declined. Of the 7.7 million households behind on their payments, about 5 million houses and
condominiums will eventually become foreclosure sales, according to a recent study by John Burns Real Estate
Consulting. Some of the homes that banks are sitting on are loans the banks are trying to modify. However, a recent
analysis by Standard & Poor’s Financial Services LLC suggests that 70% of modified loans will eventually re-
default.

Over the next eighteen months, the number of Alt-A-and option ARM mortgages that are due to reset will increase
significantly. This is likely to push another wave of homeowners into the foreclosure pipeline. Sooner or later, the
banks will be forced to unload their growing inventory of foreclosed homes. Counting the homeowners who are
currently behind on their mortgages, along with existing foreclosures for sale, it will take almost three years to sell all
the foreclosed homes at the current sales rate. At a minimum, foreclosure activity will continue to be a weight on
home prices, and likely cause prices in the mid and upper end to fall further. Of the $1.6 trillion in existing mortgages
that were packaged into mortgage-backed securities by the geniuses on Wall Street, roughly $425 billion are
extremely late on their payments. These figures do not include the likely surge in foreclosures from option ARM and
Alt-A mortgages. These losses will force banks to set aside more money for losses and curtail future lending.
As noted earlier, home values as measured by the Case/Shiller Home Price Index have plunged 30%, and are now
back down to 2003 price levels. This means that almost anyone who purchased a home after 2003 has seen the
value of their home fall below their purchase price. It is estimated that almost 25% of all homeowners are
underwater, meaning they owe more than their home is worth. Unless a homeowner is able and willing to make
another ‘down payment’ to eliminate the gap between the current value and their mortgage balance, they will not
qualify to have their mortgage modified. According to S&P Financial Services, LLC, loan servicers have “nearly
exhausted the supply of plausible candidates for loan modifications.” And if, as I expect, the coming wave of
foreclosures cause home values to drop further, more homeowners will find themselves desperately underwater, and
more will simply stop paying.

New research suggests that when a home’s value falls below 75% of the mortgage balance, owners begin to consider
walking away, even if they have the money. Oliver Wyman Consulting used Credit Bureau data to calculate how
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many borrowers went from being current on their mortgage to default. Their estimate was that 17%, or 588,000
owners chose to default. As of September 30, 2009 an estimated 4.5 million homes were below the 75% threshold,
according to First American Core Logic. It would cost $745 billion to restore homeowners to break even. In a further
sign of how this stress is affecting choices, a study by Tran Union found the percentage of Americans who were
current on their credit cards but behind on their mortgage, rose from 4.3% in the first quarter of 2008 to 6.6% in the
third quarter of 2009. This cultural shift is driven in part by practicality. Most people need a credit card to function in
our society. Miss a couple of credit card payments and the credit card company pulls the plug. Stop paying the
mortgage and the bank may take a year or more before they padlock ‘their’ home. In the meantime, the homeowner
has extra cash flow to pay down the credit card balances, and maybe take a nice vacation!
Source: Welsh Investment Letter

I am sorry if you think I am being too negative but I am not making these stats up. Maybe the proper correction
would clean out some of these bums in Washington DC and put our country on a better path from a fiscal perspective.
Continuously propping up industries via ponzi style financing eventually leads to a dead end.

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Charleston Stats

The following charts are provided by:

Doug Holmes
Carolina One Realtor
ABR, GRI, M.S. Mathematics
Cell: 843.475.1722
website: www.charlestonhoLmes.com
blog: www.charlestonholmes.blogspot.com
twitter: http://twitter.com/charlestonstats
email: dholmes@carolinaone.com

Doug makes some other good points which include:

Short sales and bank owned properties are driving about a quarter of the properties under contract according to
Doug’s chart above.

The majority of properties that are selling have their list price and $/sqft list price below the median for
their subdivision.
www.charlestonmarketreport.com

Well priced properties are flying off the market and some are seeing multiple offers.

Banks being given the latitude to “one off” distressed properties at their own pace in order to avoid write-downs
continues to put downside pressure on prices in certain areas not only locally but nationally as well. If you are buying
a home you have to make sure your realtor and the appraiser disclose these short sales and/or REO properties that are
similar to the home you are purchasing.

An important item to keep track of in the distressed real estate world is a future government program that will pay
homeowners to sell at a loss.
http://www.nytimes.com/2010/03/08/business/08short.html?source=patrick.net

It will take time for Boeing, the Wind Turbine Facility and other industries to bring jobs to Charleston. The important
and difficult question to answer is will the economy hold up by the time these jobs start to be filled? If it does not
hold up and we get a massive correction with very high inflation then all my previous bit of bullishness goes out the
window.

If you are reading this and heavily involved and banking on real estate all I can say is be very careful! The potential
collapse due to the ponzi run economy could occur when you least expect it just like what occurred in 2008. Do not
get lackadaisical and just listen to the typical cheerleaders, kool aid drinkers and BS artists out there who do not do
their homework. If you get caught in a real estate deal that is leveraged and another correction occurs you will get
crushed. In my opinion, most segments of real estate development are NOT the place to be until this market truly
corrects itself and the invisible hand of the government is cut off.

It is critical for all real estate agents, developers, builders, sellers, etc. realize the improvement in the market is due to
the government’s hand NOT the invisible hand we spoke about earlier. The real estate market has been nationalized
and propped up. How long it will last depends on a ton of factors out of our control.

My best advice to everyone is just get out of debt. That is the best way to tackle the potential arrival of a future black
swan.

At the end of the day I have faith in higher powers that something good comes out of the past, present and future
destruction created by financial luminaries, ego maniacs and morons across the world.

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Disclaimer
The research done to gather the data in The Charleston Market Report involves examining thousands of listings. With
this much data inaccuracies will occur. Care is taken in gathering and processing the data and information within this
report is deemed reliable. IT IS NOT GUARANTEED. The real estate market is cyclical and will have its ups and
downs. Past performance cannot determine future performance. The purpose of the Charleston Market Report is to
educate you on current and consistent market conditions by reporting leading market indicators with the support of
traditional real estate data.

This information is offered with the understanding that the author is not engaged in rendering legal, tax or other
professional services. If legal, tax or other expert assistance is required, the services of a competent professional are
recommended. This is a personal newsletter reflecting the opinions of its author. It is not a production of my
employer. Statements on this site do not represent the views or policies of anyone other than myself.

Investing in real estate is not a get-rich-quick scheme nor is there any guarantee you will make a profit. Every effort
has been made to make this report as complete and accurate as possible. However, there may be mistakes. Therefore,
this report should be used only as a general guide and not as the ultimate source for making money in real estate.

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