Tuesday, September 29, 2009

Experts: More Rough Times Ahead for U.S. Economy

According to this RISMEDIA article, More Rough Times Ahead for U.S. Economy, despite Recent Improvements, several prominent experts in real estate and the economy who attended a recent forum at the Nixon Presidential Library said that despite recent signs of improvement more rough times are ahead for the U.S. economy. The event was organized and moderated by real estate analyst and investor Bruce Norris of The Norris Group in Riverside CA. the event included experts from the California Building Industry Association, the National Association of Realtors, the Mortgage Bankers Association, RealtyTrac, The Appraisal Institute and the National Auctioneers Association.

The RISMEDIA article quotes Christopher Thornberg of Beacon Economics regarding increases in durable goods orders, exports and auto sales as saying "You look at the numbers and everything points to the fact that we not only have bottomed, but things seem to be improving. When you think about the problems we’ve been through and what government has done, in many ways, they have, in fact, stabilized the economy. But you know what? They haven’t actually solved the underlying problems in the economy. The second half of 2010 will be very weak. 2011 will be very grim." According to the article, Thornberg cited real estate as a case in point. The article states that while home sales are up in some areas of the country, 6-7% of residential mortgages across the US are now 60 to 90 days delinquent. According to the aritcle, in California 250,000 mortgages are 60 to 90 days late. Thornberg believed that more economic trouble is coming soon due to rising unemployment and additional waves of foreclosures. If you remember my past blog posts I have been saying this for months (i.s. the coming foreclosures of Option ARM's).

The article noted the following thoughts and comments of the forum panelists:
  • All of the panelists agreed that the economy will turn the corner in 2-3 years, but several panelists thought that things would get worse before improving.
  • John Young, vice president of the California Building Industry Association, noted that new housing construction starts are at their lowest levels since the early 1950s and that new home sales are being hurt by appraisals coming in lower than the contract sale prices.
  • Rick Sharga, senior vice president of RealtyTrac, a leading online marketplaces for foreclosures, noted the nation has had 43 consecutive months of foreclosures.  He said "We’re dealing with foreclosure activity that is six times what it would be in a normal market."  He also said that the legal and legislative efforts aimed at helping consumers modify the terms of their loans “merely delay the inevitable" given that modified loan terms will not help people who lose their jobs.  Sharga said he sees another big wave of foreclosures hitting the market next year as a result of rising unemployment rates, which are expected to peak during the first quarter of 2010, and the resetting of adjustable rate mortgages to higher rates.  Sharga also said that the real estate market is being hurt by a "shadow inventory" of 400,000 to 500,000 homes, which have been taken foreclosed and taken back by lenders, but have not been put back on the market for resale.  I have been saying that the number of REO's far exceeds the number being offered for sale for a while now.  When the Option ARM's start to reset this is going to break the proverbial flood gates wide open.
Of course there was the normal refrain of from a former president of the National Association of REALTORS who wants Congress to expand the home purchase tax credit to $15,000 for all home buyers.  Per my previous blog posts I think this is a bad idea because it will artificially inflate home prices resulting in more bubble bursting when the tax credits are finally stopped.

The forum organizer, Bruce Norris, recommended that Congress take the following actions to help the real estate market:
  1. "Increase the number of loans made available to well capitalized investors: Expand Fannie and Freddie loan programs from a maximum of 10 loans per investor to an unlimited number of loans for qualified investors."
  2. "Make the 203K FHA loan program available to investors: A 203K loan allows a property needing work to be purchased “as is,” but included in the loan amount is money for repairs. The loan funds both the purchase and rehab of the property. Investors need this loan now, but this loan is currently only available to owner occupants. FHA previously made this loan available to investors, but stopped the practice in 1996 when HUD ran out of lender owned, fixer uppers. Banks could solve the vacant house problem by giving investors back the 203K loan program."
  3. "Eliminate the 90-day waiting period before a repaired property can be sold to a buyer using an FHA loan: Investors who purchase fixer uppers can often completely repair the property in a matter of weeks. But the current law prohibits investors from reselling the property within 90 days. The assumption is that fraud must be taking place if a property is resold within 90 days. It’s ridiculous to assume that every investor who purchases a property, improves and resells it is committing fraud. All this policy does is increase investors’ costs of purchasing and rehabbing vacant homes.
  4. Allow loans to be taken over by credit-qualified new buyers with no down payment. Through this process, which was successfully used in the 1980s, new buyers simply step in and take over the loan payments. The only stipulation is that the loan has to be made current at the close of escrow. The U.S. currently has about one million owners who will not be capable of keeping their homes without a huge discount on the principle balance. Many of these properties have fixed rates at very favorable rates. Allowing willing and capable buyers to come in and take over these loans would help contain the spread of foreclosures across the country.
I agree with Mr. Norris' first 3 points, but I fail to see how allowing delinquent loans to be "taken over by credit-qualified new buyers with no down payment" will help the market when the real problem is that the loan balances exceed property values.

Thornberg, thought that it is "not realistic to assume that our nation’s economic problems will be solved by increased regulation or by presidential action. The economy simply needs some time to heal itself.  I have tremendous faith in the U.S. economy rebounding again in the future.  When we come out of this in two or three years, we’re going to have cheap housing and a weak dollar, which will be good for exports."

I agree with Mr. Thornberg in that cheap housing is good for the economy. The problem is that the Obama Administration is doing so much to artificially prop up housing values.  Why would they do this?  The answer is that the Obama Administration and their Democrat friends are bailing out their Wall Street and banking buddies such as Fannie Mae, Freddie Mac, AIG and Goldman Sachs.  Don't believe me?  Go find out who the largest campaign contribution recipients from Fannie Mae, Freddie Mac and AIG (hint: Barney Frank, Christopher Dodd and Barack Hussein Obama).

In my market in Middle Tennessee (Rutherford Couny TN in particular) I believe that the effect of all this will be worse than average due to higher than average unemployment rates and foreclosures.  Housing prices in Middle Tennessee will continue to fall well into 2012.