According to mass media outlets and some politicians, the Great Correction to the Great Recession is going, well … great. We all hear stories about unemployment going down, consumer confidence rising, and the housing market starting to rebound. Don’t believe it – any of it. Even if choice statistics show something to be off of the nadir doesn’t mean that it is improving or even good.
Unemployment, we are told, is only 8.5%, though any reasonable person looking at the data would see that the true figure is above 20%. Similarly, inflation is not hanging around 2%, as the Fed would have us believe. If we measure it as it was done in 1980, the inflation rate is above 10%.
Consumer confidence is still low and only showing improvement because so many people have become zombies in taking government statements as fact. Confidence can change day-to-day or even minute-to-minute, so take that data with a grain of salt.
The chattering about how real estate is improving is what really gets my goat. Only 302,000 homes were sold in 2011 – the lowest number since 1963, when the population was much lower. The year 2011 was the worst year on record for construction of new homes. Meanwhile, the median sales price in December declined to $210,330.
In the minds of economists, none of the above makes sense. After all, mortgage rates have reached historical lows, the Fed has engorged banks with cash that they could lend out, and banks have been pressured to loosen their lending standards. The Fed even promised this week to keep interest rates at rock bottom until the end of 2014 (continuing to punish savers, but that is another story).
Meanwhile, the Treasury Department just announced changes to HAMP, their ongoing effort to rescue the housing industry. Everything that they have tried so far has failed. Perhaps their slogan should be “if it fails miserably, then let’s do more of it.” Treasury’s latest changes to HAMP include extending enrollment until the end of 2013, allowing borrowers to get more assistance by changing the debt-to-income calculation, and paying investors up to 63 cents on the dollar to reduce principal amounts owed to them. While these ideas range from merely silly to outright stupid, they conveniently show that the administration is doing something.
Housing prices will continue to fall for several reasons. First, average potential home buyers have neither the income nor the savings to buy a house and then maintain it. Second, people perceive that real estate is still risky and the economic climate uncertain, so don’t want to make a bad decision on what is usually their biggest investment. Third, rock-bottom interest rates have done little to goose home sales. When rates kick up to more normal levels of 8-9%, home prices and the accompanying mortgage payments will become even more unaffordable. And finally, our government is broke, with trillions of dollars in unfunded liabilities to Medicare and Social Security. At some point, the government will not be able to get loans, and all hell will break loose. By the way, neither the current president nor his Republican challengers have stated any real plans to address the deficit.
Does this mean that real estate is a bad investment these days? Heck no, as long as good deals can be found and you know what you are doing. I am actively serving as a real estate note buyer but making sure that those notes are low risk. Even in a shattered economy like ours, there are always financial opportunities, whether in precious metals, stocks, or alternative investments like being a real estate note buyer.