It’s not just tax time. It’s the time for false hopes and for the people who take advantage of those false hopes.
Stock market rally by the DJIA:
Beware of bear market rallies. There is little productive enterprise to support a bull market; this is a rally promoted by firms seeking to unload stock. That all companies aren’t going belly- up simultaneously does not constitute a bull market. Another DJIA rally:
A precedent; a proportionately large bear market rally in 1929 after the Great Crash. When that rally petered out, the Dow continued its measured retreat … all the way to 40.56 … from a high of 406! That’s a 90% decline. There were several bear market rallies along the way to the final low. Like now, there was nothing to propel business prospects during the early 1930’s. Like now, employment was cratering. Houses and farms were being foreclosed and businesses were failing. There were no ‘big ideas’ that could generate business activities downstream, only government bailouts.
Not much in the way of a big idea; a bailout …
It was the inventions of the late 1930’s to the early 50’s – the jet engine and transcontinental airliner, television and the widespread development of automobile transport, computers, copying machines, the ‘Green Revolution’ – that provided the framework for economic expansion. The expansion was sustained with ample energy and domestic resources, along with a sound currency and low inflation. Today we have Peak Oil and other resource constraints. Any inventions or technology able to leverage business activity would have to address these concerns, so that normal business wouldn’t price its feedstocks into unaffordability.
Such game- changing inventions are not on the horizon.
CHANDLER, Ariz. — The white notice taped to the front window of a luxury home in the Vasaro subdivision is a telltale sign.“Bank-owned,” says real estate agent John Groves, without skipping a beat.
There are other clues. Dirt where a lush lawn should be. Vacant lots on either side. And the sale price: $729,900 for a never-lived-in, 5,500-square-foot, five-bedroom, 3.5-bath custom home that about a year ago was listed for more than $1.2 million.
In a nearby subdivision of this community of 246,000, one of the largest suburbs in metropolitan Phoenix, a foreclosure sign in the front yard of a more modest house signals yet another financially troubled home needing a buyer.
Multiply that scenario hundreds of thousands of times. From Maine to Hawaii, millions of new McMansions, post-World War II bungalows, modern downtown lofts, exurban town homes and inner-city row houses sit empty. This unprecedented glut of vacant homes — one in nine homes across the USA, according to the Census Bureau — will change the real estate landscape for years.
The overall U.S. population, however, is still expected to grow by almost 100 million, to 400 million, by 2040 because of strong fertility rates and continued immigration. That will fuel demand for more housing.
Today, homes are still being built — about 700,000 this year, says Arthur C. Nelson, director of the University of Utah’s Metropolitan Research Center.
The U.S. will need all this housing at some point, says Robert Lang, head of the Metropolitan Institute at Virginia Tech. “Population is still growing, and sooner or later, you’ll want to move out of relatives’ basements.”
This is a very common remark; “The population is growing, look at all the immigrants!”
Where is the immigration of money? An increase in housing inventory can only be addressed with a corresponding increase in purchasing power. The reason for the ongoing real estate meltdown is the persistent, structural oversupply of houses relative to purchasing power. That more houses are being built is foolish. Besides the millions of foreclosures there are houses for sale by people who have been relocated by their companies, and houses for sale by people who who own more than one house and are cutting expenses. Property is being sold by unemployed boomers to pay living expenses:
Their savings in shambles from the economic downturn, jobless seniors are dusting off their briefcases and trying to head back to work. Many, like Jim Mitchell, a 63-year-old former sales executive, are finding a merciless job market where decades of experience aren’t necessarily an asset.
Property belonging to deceased ‘Greatest Generation’ is also being sold by heirs. There is no shortage of houses, rather a shortage of customers for houses with money in their pockets.
The onrush of unemployed, the flattening of immigration and the decline in consumer spending and accompanying decline in credit, translates to less purchasing power. Real estate is still very expensive relative to the incomes of those who are sought to pay for it.
Changes in the mortgage lending process and infrastructure will also tame prices … when they ever arrive.
Many of the recent foreclosures are being sold to speculators. These sales are misleading; they amount to a change in the custody of the property since the new owner often has no equity. This means the ‘owner’ is a tenant, the real owner is the note- holding GSE. Why no equity? Because many new mortgages that are written today demand no money down …
Many government programs also have no-down or low-down mortgage avenues as well. Congress had created these companies to make affordability of homes to more people. A couple of these programs are Fannie Mae and Freddie Mac. Fannie Mae has three available options: 3% down, zero-down, Flexible 100, and Flexible 97. Similarly, is Freddie Mac with Alt 97 and Flexible 100. It is worth a phone call to these government inspired programs to gather information and possibly find out if you are a candidate for the home loan programs.
Bring on the Liar Loans! The Option ARM’s!
Since the current lenders aren’t behaving any differently from those a couple of years ago, there is no incentive for the new owners to behave any differently, either! When the equity evaporates or he loan amount is greater than the home is worth the new owners will mail in the keys, just like the old owners. Ironically, this financing behavior – where the government and its agents are behaving similarly to Countrywide Financial – indicates the the real problem with the real estate industry is that it’s overbuilt. The problem in pre- crisis America wasn’t the wrong loans … or the wrong house … for the buyers, it was – and is – is a simple shortage of any cash- leavened customers relative to the inventory at hand.
Speculators at the lower, foreclosure prices are hopeful that they have timed the market. Others are transfixed by the miasma of real estate seller propaganda. Most must also hoping they won’t be fired or laid off from their jobs. False hope is better than no hope at all.
Bring on the bear market rallies.