Yeah, we’re saved! Many economists and more than a few politicians are assuring us that the U.S. is entering a recovery phase (again), with little chance for a double-dip recession. One reason is that claims for unemployment benefits dropped to their lowest level in seven months to a seasonally adjusted rate of 388,000 people. Never mind that the true unemployment and underemployment rates remain high, with little chance of them declining in the next several years. The Occupy Wall Street group isn’t complaining because they have too many job offers to choose from or don’t know where to spend all of their money, are they!?!
Apparently we are also supposed to celebrate that builders broke ground for 628,000 homes last month. Who cares if that amount is about half of what is considered normal for a healthy housing market. And really, with the thousands of vacant houses and millions more in various stages of foreclosure, building even more houses should not be a real high priority.
The real estate market is still an absolute mess. Housing prices are still falling and home sale remain abysmal. About one in four homeowners with a mortgage owe more than their house is worth. The U.S. government continually demonstrates it ineptness by wasting money on programs that don’t work.
A trust deed buyer like myself has difficult decisions to make on the type of investments to make. On the one hand , the trust deed buyer cannot just close up shop and wait until things improve, but also cannot make overly risky investments that could fall apart when the economy crashes.
Just this last week, the FHA (Federal Housing Administration) was authorized by Congress and the President to raise the conforming limit on mortgages to $729,750 in the most expensive neighborhoods. Thus, the Feds will insure loans up to that amount, with taxpayers paying for any losses on defaults. The FHA already offers programs with only a 3.5% down payment requirement, which is ridiculous on its face. Of the 282,000 mortgages modified by the FHA in 2010, 30% of them defaulted within a year (down from 39% of modifications in 2009). Just three days before the conforming debt limit was signed into law, a well-known think tank projected that the FHA will need $50-100 billion in bailouts in the very near future.
Congress and the President will keep pouring good money after bad for as long as they can. Maintaining and even increasing spending protects their favorite interest groups and enhances their chances of getting reelected. At some point – whether it be in a few months or a few years – this facade will come crashing down and major structural reforms will be forced upon us. Until that time, I foresee continuing problems in both real estate and the stock market, so am investing conservatively.