According to politicians and mass media outlets, the Great Correction to Great Recession seems to be going well. Everybody hears stories about the unemployment rate falling, consumer confidence increasing, and the housing market rebounding. It doesn’t matter if you believe it. Even though some statistics indicate that something is not at its nadir, it doesn’t necessarily mean that it’s improving or even better.
We are told that unemployment is 8.5%. However, any rational person would be able to see that it is higher than 20%. The Fed also claims that inflation is not hovering around 2%. The inflation rate is higher than 10% if we take it in the same way it was measured in 1980.
The level of consumer confidence is still low. This is due to so many people becoming zombies and taking government statements as facts. Confidence can fluctuate day-today, or minute-to-minute. So take this data with a grain.
The chatter about how realty is improving really gets me mad. In 2011, only 302,000 homes were sold, which is the lowest total since 1963 when there was a much smaller population. 2011 was the worst year for new home construction. Nevertheless, December saw a decline in the median sale price to $210,330.
Economists don’t see the logic in any of this. The Fed has provided banks with unlimited cash to lend, and banks have been forced to lower their lending standards. Mortgage rates have fallen to historic lows. The Fed promised this week that interest rates would remain at their current low levels until 2014, continuing to punish savers. But that is another story.
The Treasury Department announced recent changes to HAMP as part of their ongoing efforts to save the housing industry. They have failed to succeed in everything they tried. Their slogan could be “if it fails miserably”, which would mean that they should extend enrollment to the end of 2013. This will allow borrowers to receive more assistance by changing their debt-to-income calculation and paying investors up 63 cents per dollar to reduce principal amounts. These ideas are not only absurd but also ridiculous, but they show that the administration is taking action.
There are many reasons why housing prices will continue falling. First, most potential home buyers don’t have the money or the savings necessary to purchase a house and maintain it. People perceive real estate as still risky and uncertain. They don’t want to make poor decisions on their largest investment. Rock-bottom interest rates are not helping to drive home sales. If rates rise to 8-9 percent, then home prices will increase and mortgage payments will be more expensive. Finally, the government is insolvent with unfunded liabilities totaling trillions of dollars to Medicare and Social Security. The government will eventually be unable to obtain loans and then all hell will break loose. Neither the Republican challengers to the president have made any plans to address the deficit.
Is this to say that real estate is not a good investment? No, not if you can find good deals and are knowledgeable about what you’re doing. While I am an active real-estate note buyer, I make sure those notes are low-risk. There are always financial opportunities in an economy that is in crisis, such as in stocks or precious metals.