Mike Norman, anchor, HardAssetsInvestor.com (Norman): Hello everybody, and welcome to HardAssetsInvestor.com. I’m Mike Norman, your host. Well, talk about a hard asset, what about real estate? Here to talk about that, and somebody who has a very, very intimate knowledge of the real estate market is Tom Adkins of Tom Adkins Homes. Tom, thanks a lot; it’s great to see you.

Now you and I, we go back … because we spoke about this several years ago. We talked about the real estate market as maybe facing some period of softness. But things obviously played out, at least in some of the bigger markets, far worse than the forecasts or the expectations. How do see you things now? Let’s talk about now, because it seems to me, when you look at some of the data … little glimmers of hope popping up, obviously prices have come down a lot; you see the foreclosure activity. How do you see it now?

Tom Adkins, president, Tom Adkins Homes (Adkins): Real estate prices depend on three things: net income growth, interest rates ...

Norman: Net income growth has been going down.

Norman: ... Of course, when GDP shrinks, net income growth follows. Interest rates and confidence. Let’s not forget, people talk about the three ways we got here in the first place, which is critical to understand. The first thing we had was Fannie Mae getting involved with subprime and committing massive fraud to hide the losses, which became pretty dramatic. The second thing was the Federal Reserve’s incredibly stupid mistake of raising interest rates 525% inside of three years – never happened before.

Norman: Yeah, and you’re one of the few people whom I’ve heard mention that. I’ve said it before: This goes back to the old inflation-targeting strategy of central banks – doesn’t work. Higher interest rates don’t bring about suddenly more oil production, and nobody was counting on the 500% increase in rates.

Adkins: Straight from the real estate perspective, here’s Alan Greenspan, who’s telling you to get out and get adjustable mortgages, and then he raises the No. 1 index used to adjust mortgages 525% and wonders how come all these foreclosures started happening?

Norman: Are you saying people who got into these mortgages when rates were down at 1%, they were affordable? They went in there … let’s not talk about the ones that actually were fraudulent … but for the most part, the majority of people who locked in or got into the adjustable when rates were at 1%, because nobody knew that, suddenly the Fed was going to reverse course and jack the rates up by 500%, as you said.?

Adkins: Right, and keep in mind, you look historically, the Fed had never done that. The greatest change we ever saw was 2% or 3% over four or five years, and at that point your income can usually outpace the adjustment. This is the first time in history that it was impossible to do. Keep in mind, this is at a time when net income growth was going up 10% per year and the interest rate changes way outpaced that.

The third thing was, let’s face it, the subprime losses were contained somewhere early- to mid-2007; it stabilized. So what happened between mid-2007, when the economy is doing fantastic, and today? What happened was the media seized upon this – whether for political reasons or because they like to create good stories – exaggerated the foreclosure situation, which was really contained to three markets for a long time, which were Florida, Southern California and the Nevada Las Vegas area.

Norman: But we see this media effect very often. The media could latch onto it, they create the news, it’s the proverbial tail that wags the dog. They get the story, and whereas maybe investors in general might not be inclined to think that way, when they hear this story pounded over and over again on the news, they start to follow that.

Adkins: We call it the “alar effect.” Back in 1989, “60 Minutes” did that big exposé on alar. They had this fake scientist who came on and told everyone this chemical alar is used on apples, and when children eat it, they’ll get cancer and die. It was a complete lie, but within 60 days, every apple grower in America was bankrupt. Same thing happened this time in 2008 and 2009, when the media completely exaggerated the foreclosure situation, which was caused primarily because builders simply overbuilt. It had nothing to do with George Bush’s policies or the Fed, nothing to do with it whatsoever.