A Massive Financial Cliff-California mortgage buyer

On New Year’s Eve this coming December, there are extra reasons for you to imbibe heavily to escape reality.  Fed head honcho Bernanke tells us (correctly, for once) that the U.S. economy could fall over a “massive financial cliff” on January 1, 2013.  That day marks the end of the Bush-era tax cuts and the security payroll tax cuts, as well as the activation of the Congressionally-mandated $1.2 trillion in spending cuts and the kicking in of a whole new set of fees and taxes related to Obamacare.  A “perfect storm” has been a vastly overused term, but would apply in this case, as a number of markets could be hard hit.  Of course, since politicians are generally more interested in appeasing their constituents than in doing the right thing, it is almost a certainly that most or all of those policies will change (except the Obamacare fees).

I, like some others, have written at length about the need to accept some short-term pain to our economy and lifestyles in order to ensure long-term viability of the country, yet our problems only get worse as the government runs up the credit cards.  The public debt has doubled from $5 trillion to $10 trillion over the past few years, yet the government’s annual interest payments have hardly budged.  This is due to interest rates continually being manipulated down, as T-bill rates are less than half of what they were at the end of 2006 (source: 2/27/2012 New York Times).  When (not if) interest rates rise, the fiscal picture will get even uglier.

Of course, it could be worse, as we could be in Stockton, California.  The city of Stockton is on the verge of bankruptcy, as it spent like a drunken sailor in the glory days and has since been hit by some of the highest foreclosure and unemployment rates around.  An example of this excessive spending is that Stockton has twice as many retirees with annual pensions above $100,000 as do comparably sized cities in the state.  Employees who worked for the city for only a month could get city-paid retiree health care benefits for them and their spouse for life (source: 2/29/2012 Bloomberg).  I can’t even imagine what city leaders were thinking when they created those policies, but am guessing that they did not do well in basic math during their younger years.

Meanwhile, we are again being assured that the housing market has hit bottom and is now in recovery mode.  Some “experts” have called the housing market bottom every year for the past four years.  Someday they will be right and be lauded as geniuses!  In guru-land, you only have to be right once, and all of your past mistakes will be forgotten.

My local newspaper in San Diego proclaims a housing recovery nearly every week, and even Warren Buffett now loves real estate.  Buffett is brilliant when it comes to picking stocks but I think that he should be careful with real estate.  Despite superficial gains in the stock market and consumer confidence, the fundamentals of the economy and real estate remain weak.  FHA (Federal Housing Administration) loan delinquencies have gone up for nine months in a row.  Housing sales, permits, and construction are all in the basement, with little hope of recovering soon.  The recent bumps in housing have been more due to warmer weather across the country than anything else.  There are still millions of homes in some level of distress, wages and employment remain down, and a large percentage of states and municipalities have fiscal crises of their own.

At the same time, Obama is taking credit for an economic “recovery” and will carry that message into November, Republicans are attacking each other over issues, and Congress has never been more polarized.  Sounds like just the right formula for the getting the country back on track, right??

Alan Noblitt is a California mortgage buyer and licensed real estate broker in San Diego.  A California mortgage buyer buys mortgage notes and deed of trust notes across the U.S.