The threat to America
- and why Panama
may make sense

This issue of YourPanama Nuggets will be quite different from the usual fare. I want to talk about a country other than Panama and, in particular, certain regions of that country, but my thinking links back to Panama in the end. I want to talk about the U.S. and the coming impact an implosion in that country will have on the rest of the world.

You are getting a preview of a story that is not yet on the website, but will be in some form in the near future.

Most Americans will not want to believe what I have to say…and they might be right. No one can predict any portion of the future with 100% confidence. But what follows are some very strongly held opinions. I believe that those who are able to follow my suggestions will wind up in five years or less very much better off than those who don't. But as I say, these are my opinions and I cannot be responsible for your decisions. Those are up to you, but you should at least start thinking very carefully and consulting wise heads.

My background

Before I retired, I was a successful stockbroker and investment advisor in Canada. I have had a lifelong interest in the ways in which economies work, and in 1987, I wrote a book on technical analysis of stocks which became a best seller. Those credentials do not mean that I know more about what may happen than you do. But they are at least a basis for forming educated guesses.

Last year, I wrote for a client a report on the coming depression, 1930s style. I will e-mail a copy to anyone who would like to read it for background.

That's the intro. Now for the substance.

Small $1-million homes

I read in the past couple of weeks that a "modest three-bedroom home" on a postage-stamp lot in Dade County, Florida, several blocks away from the water, goes for a cool $1 million these days, and that the county's tax base has increased by double percentage figures for the past several years.

Modest homes on both the east and the west coasts are selling at these prices. I gather a "modest home" is a detached bungalow of around 1,000 square feet on a small lot.

Come on, people! This is insane! Those million dollar homes are probably fairly priced at $100,000 anywhere else. Think about it.

Not palaces

These are not palaces. They are comfortable, and keep the weather out. (But will they even be there after the next big hurricane or earthquake?) Typically, because the Fed has been stimulating the economy for so long with cheap interest rates, the families' credit cards are maxed out, and there is heavy secondary financing against the increased equity in these homes.

But people feel rich because they now live in a million dollar home, and even at the top of the market there is probably a buyer for it at that price, ergo it really is worth a million.

But what happens when the U.S. enters the next recession? When the economy contracts and people start to lose jobs? When buying dries up and homeowners can't meet their mortgage payments, not to mention the higher insurance rates that are forecast? When the bankruptcy level rises to historic proportions, putting more companies out of business?

It feels so good

Much of the wealth of private America is in its homes, not in investments or cash. High real estate values have led to a feeling of wellbeing and, to some extent, of complacency. With inflated-value assets behind them, increased credit has been easy to obtain, and that borrowed money has mostly gone into consumables.

When the economy contracts (and it will, as history shows it always does from time to time), spending dries up. Factories cut production. People are laid off, put on reduced hours, overtime disappears, and the average person has less money to spend. Some of the early ones may be lucky enough to sell their homes without too much of a discount. But the real estate bubble will burst. Large numbers of people will simply walk away empty-handed from a lifetime effort to keep a good roof over their heads. And they will still owe money.

No guessing

There's no guessing about that. History shows a pattern of this, too. Each time there is a bubble there is a high degree of speculation, and houses are frequently sold again before the most recent buyer has moved in. Hey, this is easy money…unless you're the last guy in line or you bought your house to live in. Let's do it again. Let's borrow some more money and buy two or three to flip.

This is insanity. You know it. You can work out roughly what the price of materials should be in a 1,000 square foot house. If that's $100,000 including labor, is the plain postage stamp lot truly worth $900,000? (Construction costs in Panama can be as low as about $20 a square foot, depending on location and labor costs, but are generally in the $40 to $60 range, depending on quality of finish and fittings.)

Not so many years ago, much of Florida was swampland, and purchasers of cheap mail order lots were considered to have been duped by smart operators.

Small fluctuations unimportant

In normal circumstances, house prices have flat spots or even decline a little in value. It doesn't matter. If this is our home and we have no reason to sell, we just sit it out and prices go back up again. Price has little meaning, it's the home that is important. The neighborhood and friends.

But when a $100,000 home can be sold for $1 million, especially in a region prone to hurricanes that are forecast to increase in intensity over the next few years, some people may want to consider their financial options very carefully.

Yes, but if we sell our $1 million home, we'll just have to turn around and spend $1 million or more to replace it.

Think out of the box

Not necessarily. Think out of the box. Let's suppose you have a modest three-bedroom home on either coast, and you believe we are in the midst of a housing bubble in your area. Waiting the bubble out will cost you a great deal of money. Modestly priced housing will eventually recover its value. Bubble prices will have to wait way beyond your lifetime and that of your children to have the slightest chance of full recovery.

Suppose you agree with this line of thinking. Suppose, also, you do not yet have all the money you would like to live your dream retirement lifestyle. If you could take early retirement, you could sell your home, pay off debt, if any, and move to a less expensive area in keeping with that dream retirement lifestyle. The new location could be within or outside the U.S., just so long as real estate values are considerably more realistic and the climate and infrastructure are agreeable.

Not a time for stocks

If you plan to rent for a while, tuck the proceeds from your house sale into something safe. This is not the time to speculate in the stock market. If you want to do that, wait until after the crash.

But suppose you are tied by your work to one of the bubble states for several more years. What then?

You will not find the answer pleasing, perhaps, but it's a lot better than enduring a 1930s-style economic depression and all its hardships and debt. The solution: rent. (And rent prices will decline along with housing prices when the bubble bursts.) There are many other solutions, perhaps, but find other accommodation that you do no have to own at inflated prices. In a depression, he with the dollar is king.

If you want to remain in your old neighborhood, you can with the right strategy. After the housing market crash, one in which prices will tumble like dominoes as people all scramble for the exit at the same time, you might even buy back your original home for 20 cents on the dollar. And the bank will be relieved to let you have it at that price.

Mortgage lenders are as greedy as speculators, and they will be in significant trouble – in fact, the entire banking system will be in trouble – when the real estate bubble bursts. This is not rocket science. A certain growth level is normal. Beyond that, a price has to be paid by someone (the person who last holds the property), and the price is in proportion to the degree to which costs rose above the norm, not to what they originally paid.

What will be the trigger?

What will be the trigger for the collapse? No one ever knows the answer to that question, so when it comes it is always a surprise. In Holland, I think it was in the 1600s, a sailor from another country asked why tulip bulbs were so outrageously priced. There had been speculation in them that bore no relation to their true intrinsic value. The market crashed overnight.

Will it be oil prices? Crushing government and personal debt? Jobs exports? Overseas competition? Probably not. It's usually something far less obvious, and then the more obvious reasons feed the hysteria and prices go into freefall.

It's my turn to ask: why is a modest three-bedroom house worth $1 million?

Prices compared

That same house with the same degree of comfort and convenience can be had in the $50,000 to $90,000 range in Panama. It will be constructed in concrete, not wood, in a country that is modern, democratic, safe, and where there are no hurricanes. (In the urbanization projects on the outskirts of Panama City, on postage stamp lots, you can find new houses for less than $30,000, but that's not where most ex-pats want to live.) Some fine new homes in an area popular with ex-pats in the highlands of Chiriqui, or even along the Pacific coast in a gated community, will set you back less than $200,000.

One development, adjacent to the most popular beach resort in Panama, will build you a fine three bedroom, two-storey duplex or detached home for that price. And you have all the privileges that go with it: private beach club with pool, golf on a PGA championship course, free gas for appliances, 24/7 security, property maintenance, and the most sunshine in Panama. Oh, and if you are interested, the resort will look after the two upstairs bedrooms (with separate keyed entrances) and rent them from you for overnight guests when you don't need to use the rooms yourself. Some people pay off their mortgage that way.

Speedy way to retirement savings

Just imagine this: You sell your home for $1 million, and move to a benign climate (you can choose your year-round temperature here according to the elevation of the land). You buy a better property than the one you now own, and you still have $800,000 to add to your retirement savings. On top of that, there's no tax on foreign income in Panama, and the U.S. does not tax the first $80,000 of U.S. income (or $160,000 per couple). The IRS even lets you deduct your mortgage payments here.

Small wonder so many Americans are turning to Panama in increasing numbers, and that land prices in many areas are on the rise and predicted to continue that way for some time to come.

Depression in Panama?

Will Panama be hit in a global depression? Of course it will, though the result may feel more like a recession. Fewer people, having lost value in their existing U.S. homes, may then be able to afford to buy here, and real estate prices will decline here, too, if my guess is right. But they will decline briefly from prices that are already vastly lower than those in the U.S. Then they will move to even higher levels.

Panama is an attractive place in which to live in any economic climate. Panama's economy is not an industrial one, and that will shield it from the worst of a global depression, although one important source of revenue, the Panama Canal, can be expected to see declining revenues.

Depending on the timing of the proposed Panama Canal expansion, it is feasible that the country could even experience boom times while the rest of the world suffers economic depression. The widening of the Canal promises to be a massive undertaking.

Recessions mean little to some

If you are retired and your money is not in speculative investments, recessions or depressions will make very little difference to you, once you are out of the housing bubble. You may make your home here, but coincidentally you will make an excellent investment decision, too.

Teleseminar update

Though small in numbers attending, a successful trial teleseminar, the first ever for potential ex-pats, was held on Wednesday, June 22.

It is planned to hold these now on a regular basis and to announce at least three dates in advance, so people have choices. The next one is scheduled for late in July. The date will be announced soon.

Work is going on behind the scenes to bring more automation to the process and to make the service and its administration more efficient.

More people are being added to the list of potential panelists, and someone has been hired on a part-time basis to look after servicing would-be attendees. From time to time, you may see emails from Kathi MacNaughton.
Until next month, happy reading.

Sydney


New this month

More from Boquete There's a mixture of content this month at http://www.yourpanama.com, including an article from a resident of Boquete, hot with ex-pats and investors alike.

Housewarming gifts have now been announced, though it may be a little while before we can get all the photographs and details I want you to have of properties that are for sale. The realtors have been rushed off their feet. The July 4 weekend added to the normal rush.

Professional help If you're going to buy property, or to move here, you cannot avoid the need for professional help This list is some of the cream. Names, email addresses and comments.

It is a work in progress, and may always be. But the basics are here and if you need a specialty not on the list, just let me know and I will go hunting.

Bringing pets Depending on how good or bad the kids have been, you wouldn't dream of leaving some family members behind when you move. Bringing pets to Panama is straightforward...if you follow the rules. There is no quarantine, just house arrest.


I hope you enjoyed this issue of Your Panama Nuggets. Watch for the next issue on the first Saturday in August at 10 a.m. EST. There are some interesting stories in the works.