With each passing month, housing continues to sink deeper into the mud. All indicators of housing are heading in the same direction: down. Despite interest rates reaching historic lows, this is despite the government (meaning you, the taxpayers), underwriting or assuming credit risk for nearly every new mortgage, and being responsible to $6 trillion of the $10 trillion mortgage market (Reuters, 3/30/12).
Clients often ask me why I don’t want to pay more for a California mortgage note. The main reason I think the housing market will continue to decline is because of my belief that it will, regardless of what the government does. According to the Case-Shiller index home prices have fallen to their lowest level since 2003. I believe they will continue to fall to levels comparable to 2000 and even 1995. California’s annual home sales have fallen 45% from 2005, and 41% spend at least 35% on housing.
The federal government continues to sink deeper into hock, spending and spending to (unsuccessfully), try to save real estate and the economy. The U.S. is more dependent upon short-term debt than the financial baskets of Spain, Portugal, and Greece (Bloomberg, 3/28/12).
The U.S. thinks they can borrow unlimited money from other countries at 2% for ever. The Federal Reserve purchased 61% of net Treasury debt issuance last year, masking the fall in demand from all other countries. Although we all know that interest rates are going to rise at some point, nobody knows when. One percentage point of increase in the average interest rates would result in $88 billion more interest payments for the Feds this year.
They cannot print money at the local and state government levels like the Feds. They can’t raise taxes and upset the electorate, nor will they cut costs that impact certain interest groups. So what are they going to do? They can also be very sneaky when it comes to taxes. Agora Financial reports that New Jersey requires gift card sellers to obtain customers’ zip codes in order for the state to claim any remaining value after two years. New York City yoga studios discovered that they must pay sales taxes as they are “weight loss and/or health salons.” Connecticut also introduced the “Priceline Tax,” which requires that travel agents pay a hotel occupancy fee to facilitate hotel bookings. There are many other taxes that can be added to the list for states and cities across the country. The revenue between the states dropped $50 billion in 2008-09, which means that the list of funky new taxes will only grow. Because they know they cannot raise taxes on everyone, politicians will only target those with limited voting power but lots of money. Keep your money close to your chest, because the next few years will be even scarier!
Adam Mcbrian, a California mortgage buyer, resides in San Diego.