Underwater homes, lousy economic outlook, and no jobs means no recovery
If you believed the rosy projections, a turnaround in the housing market was supposed to be just around the corner. Sales tipped up briefly in June, and hopeful souls announced that the worst was over. However, the latest reports show that instead of improving, home sales have dropped off a cliff, and RealtyTrac, Inc. reports that repossessions have increased for the ninth month in a row. Clearly, no immediate recovery is in the cards. From the economic policies being pushed by the Federal government to the continually grim jobs situation, those promising a housing recovery have a lot of harsh reality to overcome first.
The Illusion Of Economic Growth
A starting issue is the lack of substantial economic improvement. Despite government assurances that all is well and everything is under control, none of the current policies or initiatives is generating real change in economic conditions. Banks remain reluctant to lend, the American public remains deeply in debt, and the international community keeps a wary eye on the American markets.
Into the middle of this sea of pessimism the Federal government is trying to launch a raft of economic prosperity in the form of spending and stimulus initiatives. Unfortunately, at its core these initiatives are based on hollow economic premises. Though the current Fed Chairman, Ben Bernanke, was a serious student of the Great Depression, he seems unable to adequately control the Great Recession.
Part of the problem is that stimulus and quantitative easing create the illusion of economic growth without creating real economic change. Homeowners who have all of their wealth tied up in the roof over their heads are not simultaneously tied into the investment communities where the printing presses have the greatest effects. Instead, quantitative easing and other credit expansion activities cause inflation, which further decreases homeowners’ purchasing power.
This is true no matter what the official source of the new money in the economy. If the Fed wants to print money and drop it out of the sky or banks finally quit being terrified of lending, the net effect is to devalue the dollar and create inflation. The nation’s leading economists say this is okay, since official measures of core inflation are below the “target” inflation levels of three to four percent.
Homeowners and the average man in the street are less sure. Official measures of core inflation tend to exclude food and energy, which are eating up a greater percentage of household budgets. Additionally, inflationary bubble forces were behind the last set of housing price increases, and the 14 million Americans who currently have negative equity in their homes are all too painfully aware of how that process ended. The belief that housing prices will go up forever has been permanently destroyed, and no amount of inflation in prices or stimulus will restore that shattered illusion.
Even if economic maneuverings by the nation’s leaders could restore prices, it would still be a mirage of a recovery for most homeowners. So what if their homes could command their 2005, 2006, or even early 2008 prices? The price doesn’t matter in this market, because no one out there is buying property. Realtors, analysts, and economists are all bemoaning an ongoing “buyer’s strike” that doesn’t seem to have an end.
Who Pays With No Work?
The buyer’s strike is partially driven by the jobs problem – namely, there are no jobs. Despite the best efforts of Congress and the president, unemployment levels have barely budged below 10 percent, and the Labor Department has reported that at the peak of the recessionary wave earlier this year there were six job seekers for every open position. It’s not a formula that inspires spending or investment in a new home.
This is borne out in the numbers on the ground. The National Association of Realtors shared in the August 3rd edition of the Wall Street Journal that for all the government housing programs, there is nothing that has helped overcome the hurdle of high unemployment. Home sales have fallen off a cliff since the end of the $8,000 first-time homebuyers’ credit. With the 99 weeks of unemployment benefit extensions coming to an end for millions this month and in the months ahead, that high hurdle is only going to move higher.
After all, who pays for anything when there is no work to generate an income? Americans are cutting corners and trimming budgets everywhere they can. Instead of investing in a new home or taking on new consumer debt, they are in the middle of one of the largest credit de-leveraging efforts in history. Rather than an organized movement, millions of Americans took a long, hard look at their personal balance sheets and declared that enough was enough. The net effect of all those personal decisions is collective pullback on revolving credit lines and household debt allowances. Though savings rates are at historic lows, the rate at which personal debt is being eliminated is one the rise.
How can a true recovery in housing be expected to emerge in this environment? Americans won’t spend comfortably until a real, organic recovery is in the works and job loss rates slow down. Waving low interest rates and rebates in front of the public is akin to offering an overstuffed diner a free dessert. It’s a nice offer, but the answer is still “No!” since there is just no way to make room for anything new.
There isn’t room for many of the old things, either. Consumer spending is lackluster at best, and even essentials are being left on the shelves. Individuals are also paying more bills late and putting off paying property taxes in order to shore up their household liquidity levels. For many, these are end times in terms of their retirement dreams right along with their credit ratings.
Investment Opportunities In A Depressed Housing Market
Still, this doesn’t mean that the current economic situation is a cause for giving up on the idea of wealth and prosperity entirely. Instead of continuing to listen to the market analysts and brokers who are pushing the same poor investments as they did leading into the recession, Americans can explore opportunities outside the traditional paths. With government policies seemingly fixated on prolonging the problems with the housing market, thinking critically and investigating new opportunities is critical.
There is no doubt that a distress sale for one can be the start of a great investment for another, yet many people don’t want to take on more physical property in this market. They simply want income – and it is possible to find revenue streams in this economy. The key is finding a way to get back on the right side of the housing trade. If the economy worsens and housing prices drop even five percent, more than one in four Americans will owe more than their homes are worth, and there will be other bills piling up.
Debt at that level has implications for a number of areas of society. One piece of society that is almost in a state of public panic is local governments. City, county, and regional government systems are in a bind. Reliant on property valuations to set levies and fund budgets, they are facing serious budgetary problems if payments aren’t regularly received on schedule, and the public is getting lax about paying. Investors who can see a way to profit from this pain point can get themselves back on top of the housing game.
The crux of the opportunity is recognizing that tax revenue streams can be tangible assets, and that local governments are overburdened and overstretched. They don’t have time to chase after everyone who owes them money; they just need the money now. They are willing to trade future interest accumulation and late payment penalties on top of the amount owed in taxes to investors who can provide them with ready money today. This transfer of funds from public to private hands happens through the tax lien system, which is very simple to understand.
Essentially, tax liens represent property tax assessments that home and business owners need to pay. With the current tough economic climate, many of them are delaying payment, or waiting until their properties are under threat of seizure before coughing up the necessary cash to clear their liens. It’s a means of making their existing cash flow go further, but it throws a wrench in governmental gears that depend on regular oiling from tax inflows. To make up the short fall, government groups put their tax liens up for sale to the public to get hard money now.
Anyone can buy tax liens, and often for much less than their potential value. Ultimately backed by the property as collateral against the tax assessment, most tax liens are simply paid late with the balance due in full plus interest and fees to the new owner. It is much more straightforward than the volatile stock market, and backed by a much stronger set of assets than a broker’s empty promises.
Outlook For The Long Haul
Tapping into investment opportunities like those found in the tax lien system is one way to improve the outlook for the long haul, at least on a personal level. Societally, the outlook is likely to remain harsh for a long time. Being prepared with personal wealth is the best defense against what’s ahead. They say little is certain but death and taxes, but in the present economy one can add economic pain to the list!
Despite the shift in political leadership, the business climate remains decidedly uncertain. With no one clear on which way the political winds are going to blow, businesses are cautious. They already have the high cost of the ObamaCare plan to factor into their future operations, and there are potentially unpleasant tax changes ahead. Major investments, new ventures, and even new hires are going to be basically out of the question until the economic climate stabilizes enough to make business owners relax and loosen their purse strings.
Once businesses relax and open their wallets, consumers may relax and start spending again – but only a little. Watching household wealth turn into piles of pennies in the early stages of the housing crisis leaves behind a very understandable legacy of caution. This is especially true in households that have already been through the worst. Foreclosures and bankruptcies are necessary to clear out the overwhelming debt in the current economy, but that doesn’t mean that those who have been through these events will be bouncing back to their regular ways anytime soon.
In a future of coupon-clipping and caution, any economic uptick is going to have to prove itself over multiple quarters to be believed. As a result, the best bet for the future is to prepare to survive in a long period of marginal growth. The dollar will not be a reliable savings vehicle, especially as quantitative easing and other stimulus moves work their way through the global economy. Stocking up on tangibles – rare coins, gold, silver, tax liens – will help ensure emergency economic easement measures by the national government don’t wipe away what savings remain in the economy.
Real estate may eventually return as another smart tangible investment, but not anytime soon. Those looking for a housing recovery need to consider all of the other harsh realities that must be faced before a real housing bounce can occur. The solutions to deep unemployment, high debt levels, and a moribund national economy aren’t just around the corner – and a full housing recovery certainly isn’t either.