Mid-Year Update - 2009 Market and Economic Predictions

By
Services for Real Estate Pros with Timu Corp - CEO, ActiveRain - Co-founder

We are now officially half way through the year so it's time for me to do an update to my 2009 market and economic predictions, also known as, Matt is being a buzz-kill again.  The quick scorecard is, four have already occured, four I'm still predicting will happen, one I still think will occur but probably not this year and one is DOA.

The media has become fairly delirious from smoking few too many of those "green shoots" as of late along with 90% of economists calling for the recession to end shortly.  It should be noted that a similar number of economists were confident we'd avoid a recession in the first place. They are latching onto month to month fluctuations in data claiming the economic recovery is upon us, while almost all trending and forward looking data is continuing to paint a fairly pessimistic outlook. 

Another main factor in my continued pessimistic outlook is the attempt by those in charge to play confidence games instead of solving problems.  If we believe things are getting better, they will, right?  Confidence without the foundation to support it, is not a very good economic base to build from.

1. The "Credit Crisis" morphs into much wider economic crisis

Ok, I think this one is playing out as we've moved from people claiming we're just having financial system and housing issues to seeing dramatic drops in employment and even more dramatic drops in tax revenues (corporate, income, sales).  While the official government reported unemployment rate is now up to 9.6% the broader unemployment measure like U6 has now skyrocketed to 16.4% the highest since the 70's. 

The data shows job losses are actually accelerating, not decelerating.  With the unbelievably dramatic drops across the board in tax revenues, we are just beginning very extensive layoffs from the nations largest employer, the local, state and federal governments.  We also have not seen the layoffs happening in the automotive industry show up in the official numbers yet.

2. The recession gets an upgrade

While I didn't expect an official pronouncement this year my prediction is that we'd meet the criteria for a depression not just a recession, which is defined by more than a 10% total loss in GDP.  I still think this is going to happen, and in fact I think the forward looking data makes this almost a lock to happen.  Though, this quarters GDP coming in flat or even just slightly positive wouldn't surprise me.

For some great visuals on how bad the economic trends really are check out this post on Nate's Economic Blog.

http://economicedge.blogspot.com/2009/04/economic-cliff-diving-by-charts.html

3. Pension funds, the biggest non-story of 2008 becomes THE STORY of 2009

Ok, I'll give myself about 1/3 of a point for this one.  The story is huge, it's just getting almost no play in the main stream media.  Many of the largest pension funds in the country are in deep trouble shifting into riskier and riskier investment strategies to make up shortfalls.  For example CALPERS the largest pension fund in the country shifting large portions of their assets to real estate right at the top of the bubble and then stocks right at the top.  They are in a massive hole, and have stated they are relying on being able to borrow from the state of California to fill the massive hole.  Yes, the state who tomorrow will start issuing IOU's in lieu of checks to pay bills.

Not to be outdone by California, PBGC (Pension Benefit Guaranty Corporation) which insures pension funds including those at GM and Chrysler followed suit.  Why are the pension funds pursuing such a risky strategy that would once have been looked upon as insanity? 

He said the previous strategy of relying mostly on bonds would never garner enough money to eliminate the agency's deficit. "The prior policy virtually guaranteed that some day a multibillion-dollar bailout would be required from Congress,"  Boston Globe article on PBGC

As they say, when in a hole, keep digging, or something like that...

4. House prices continue to fall, but in most regions not as fast

Not much to add here, the Case-Schiller data showed a 19% year over year price drop first quarter, with declines in all 20 major markets they track.  Anecdotal the declines in many markets appear to be slowing but historically in housing downturns the steepest declines occur in the first 2 years, where the average overall length of price declines in 5-7 years.  There's also still a huge backlog of foreclosures sitting on bank balance sheets which have been held back from the market.  This will keep inventories in most markets elevated for some time and keep the downward pressure on prices.

Update: Just saw the updated Case Schiller data released today, basically shows what I expected.  Still declining across the board but at a much slower pace.

5. The stock market is far from seeing a long term bottom

My prediction was that we'd see the November lows of 738 on the S&P500 broken this year, and we saw that happen in the first quarter of this year ominously putting in a low at 666 on the S&P 500.  Despite a several month, 35% straight up rally since then I don't believe we've seen the lows for this bear market, and see a high probability of the S&P500 going under 500 later this year.  Simply put we are still in a deleveraging phase and we've seen a massive drop in corporate profits making the stock market extremely overvalued at it's current level by almost all metrics.  These profits by and large were driven by the credit bubble, particularly in financials and unless we are able to blow another massive bubble they are not returning, like some are placing bets on.

 

6. Where does the bailout money come from when it's time to pay up?

We'll have to see, they just started issuing the debt a couple weeks ago, and we're now issuing as much treasury debt per week as we were per year less than a decade ago.  This is at the same time the major foreign buyers are slowly inching their way to the door, buying shorter and shorter duration debt, as the FED tries to hold back the flames through quantitative easing.

7. A crash in the US Treasury market?

This was the prediction I said I was the most hazy on last year, and now I think it's inevitable due to the insane government spending we've seen coupled with the gigantic collapse in tax revenue.  The FED has been pulling every trick in the book trying to surpress rates and support the treasury market through quantative easing.  History shows these types of efforts are simply fingers in the proverbial dike that inevitably bursts.  If the treasury market does crash you'll see double digit interest rates on mortgages within a few months.

On a related note, the consensus of late seems to be for rising interest rates but due to (hyper)inflation.  I simply don't see the case, all of the data points to massive deflation.  Oh, the FED's monetizing debt and printing.  The problem is the deflationary pressures and wealth destruction is dozens of times larger.  Also, the FED pumping money is only inflationary if the money moves, as inflation really is the velocity of money not the size of the money supply.  A small amount of money moving very fast through an economy is more inflationary than a large amount of money that sits on a banks balance sheet plugging holes.  The fact it's being used to plug holes that are not magically going away, is exactly why I don't see it suddenly becoming inflationary.

8. GM files for bankruptcy despite the automaker bailout

My prediction was that both GM and Chrysler would file for Chapter 11 bankruptcy this year despite their bailout at the end of 2008 with the goverment providing massive DIP (debtor in possession financing).  Check...

9. Regional bank failures and consolidation accelerate

We're up about 50 regional bank failures this year compared to 25 all of last year.  Technically I guess this counts as acceleration but it's still well below the hundreds I was expecting.  It has nothing to do the increased stability in the banking system and more to do with the FDIC and OTS not doing their job to protect depositors and tax payers. 

A good example of this is Bank United a large regional bank in Florida that collapsed about two months ago, at an estimated cost of about $10 Billion.  This bank was on my list of dead men walking back in April of 2007, due to the how badly their loan portfolio had already depreciated.  Two years ago it was clear from their balance sheet without pulling accounting tricks they were insolvent.  Every Friday for nearly two years I was shocked when I didn't see an announcement his bank had been seized due to how far gone it was.  Had it been seized two years ago it's likely there would have been very little, if any cost to the FDIC and US taxpayers, instead it cost us $10 billion. 

Then two weeks ago the head of the OTS resigned after it turned out he had ordered the Bank United to falsify financial statements to cover up their insolvency.  Yes, the top banking regulator was ordering banks to fudge their financials so they would appear solvent and would not be seized.  Bank United is not an isolated case, not by a long shot.  In fact, 2 other high ups at the OTS resigned or were fired in the last year for pulling similar stunts with other banks.  There is a organized effort to avoid failures at all costs by covering up the problems and hoping they go away.  This just makes the ultimate failure many times worse.  

The government banking "stress tests" meant to prove to the public and investors how sound are banking system was a similar sham.  We're already well past the loan default rates used in their most stressful scenarios, banks were asked to provide the valuations for complex securities like CDO's, and provided values many times above current market prices.  Commercial real estate, who's impact on bank balance sheets is likely to be worse than residential mortgages, showed almost no losses in the stress test numbers.  

Suffice to say, I expect the next "unexpected" banking crisis to rear it's head this fall at the latest and this time I'm not sure if there's the will political will to throw a few hundred billion more at it.

10. A revolt against corruption

Grrrrrrrr...  Where's that change Mr. Obama...  Must stop writing here or I'll launch into a rant and this post will be 20 pages before I know it...

close

Re-Blogged 1 time:

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  1. Gene Riemenschneider 07/02/2009 04:16 PM

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Rainmaker
335,443
Matt Listro
National Credit Fixers - Matt Listro - Vernon, CT
Your Credit Repair Expert

HI Matt: I am sorry to say that I agree with most everything in there.  I wish I didn't.

:)

Jul 02, 2009 12:56 AM #23
Rainmaker
459,297
Alexander Harb
Knights Investing - Mesquite, TX
Dallas, Texas Real Estate Investing

The revolt is starting with the MEDIA saying..."where are all the changes Obama promised...." It has been floating around google news and yahoo news.... I am sure he does NOT want that kind of coverage to start.......

Jul 02, 2009 01:27 AM #24
Rainmaker
1,969,791
Gabe Sanders
the BlueWater Realty team specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

OK, now I'm depressed.  Not because of this post so much as I think you are spot on.

Jul 02, 2009 08:55 AM #25
Rainmaker
1,969,791
Gabe Sanders
the BlueWater Realty team specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

OK, now I'm depressed.  Not because of this post so much as I think you are spot on.

Jul 02, 2009 08:56 AM #26
Rainer
37,313
Jerry Gray
Allen Tate Realtors - Winston-Salem, NC

Thank you for the great post.

 

Jerry Gray CRB,CRS / Prudential Carolinas Realty/ Winston Salem, NC

Jul 02, 2009 09:01 AM #27
Rainmaker
185,134
Tanya Nouwens
RE/MAX Royal (Jordan)/Ready, Set...Sold! www.readysetsold.ca - Montreal West Island, QC
Montreal Real Estate Broker & Stager

Scary...and thought-provoking post.  Thanks for sharing, Matt.  I hope you're wrong but fear you're not.  There was a time when I was young enough to think, "Oh, the adults will figure out how to get outta this mess."  Alas, I'm too old for that now.  My bigger fear, though, is that the youngsters around us have already figured out that the emperor has no clothes, and if Emperor Obama also comes without a wardrobe, God help us all as the level of despair, including among the young (who traditionally are somewhat insulated from all of this), will wreak havoc in all aspects of our lives.  Everybody needs something/someone to believe in...

Jul 02, 2009 09:19 AM #28
Rainmaker
289,863
Kate Bourland
Marketing with Kate - Redding, CA
Onlilne Marketing Mobile Marketing

I've stopped reading economic news from the media, it's too overwhelming and there is nothing that I can do abou it.  Your update is sobering to say the least.

Jul 02, 2009 09:32 AM #29
Rainmaker
162,324
Karen Steed
Tallapoosa, Bremen, Waco, Buchanan, Temple, Carrollton - Tallapoosa, GA
Associate Broker Haralson Realty licensed in GA and AL

Thank you for the great post!

Jul 02, 2009 10:02 AM #30
Rainer
73,749
Dan Magstadt
CrossCountry Mortgage - Lake City, FL

Wow, you're good! Hopefully some of your more dire predictions don't come to pass!!

Dan

Jul 02, 2009 10:36 AM #31
Ambassador
651,473
Courtney Cooper
All Seattle Homes for Sale: CooperJacobs.com - Seattle, WA
206-850-8841

Matt, you are amazingly smart.  Thanks for the honest and down to earth post.  I would love to hear some of your ideas on what we can be doing to try to make things better since all the little things can possibly add up to even out or maybe even overcome all the huge things?

Jul 02, 2009 11:43 AM #32
Rainer
34,552
Kenneth Young
Uni International LLC - Virginia Beach, VA

Matt,

You're dead on.  Still have you noticed how no one is talking about the inflation rate?   We know that in order to spend the "trillions" that more money will have to be printed.  And yes the unemployment rate will go past 10%.  Looking to see how long the "Federal Reserve" (don't get me started on them, they are neither "Federal" nor do they have any "Reserves", they're a private instution that came up with "fractional banking"...)  will keep the interest rates low.

Those banks that took TARP money agreed in the fine print that they would not force anyone out of their homes after foreclosure, instead they can keep living there without paying anything...

And bank failures:   Mirae Bank is the 45th FDIC-insured institution to fail in the nation this year, and the sixth in California. The last FDIC-insured institution to be closed in the state was MetroPacific Bank, Irvine, earlier today.  June 26, 2009.

In 2008, you were correct, there were 25 bank failures.   

In 2007, there were only 7 bank failures.

Our company sells performing and non-performing loan notes from these bank failures, along with notes from Holding/Investment companies, most notes are going for 50 cents or less on the dollar.   We know that right now there are an additional 200-250 banks in trouble and ready to fail....   At least all of our clients are making money from this....  

Thanks for putting out this post, it helps keeping everyone informed.

Jul 02, 2009 12:12 PM #33
Rainer
34,307
Chad Boyers
The Danberry Co.- Toledo, Perrysburg, Sylvania, & NW OH - Toledo, OH

VERY good post, it's good for us to all try and digest this info from time to time.  It's nice seeing viewpoints that are different from the (administration loving) media. I just don't think that the government is understanding that they aren't helping anything, they are propelling much of this.

Your numbers 11 and 12 could be about the Cap & Trade legislation and national health care; that would get some responses, I'm sure...

Jul 02, 2009 12:24 PM #34
Rainmaker
153,569
Deborah Grimaldi
Re/Max 1st Choice - Cranston, RI
(401) 837-9633

Wow, I am impressed with all this data, good job Matt, it must of taken you a while to put all this informative information together.

Jul 02, 2009 01:58 PM #35
Rainmaker
1,281,101
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

I have pulled my head out of the sand long enough to look at your data.  Now I want to put it in an Oven.  My buyers ask me what will happen.  I tell them I have no crystal ball and might very well be wrong, but I think interest rates will climb and eventually we will hit inflation like in the 70's.  Now is a great time to buy and lock in low rates and get a good price.  Because eventually it will be high rates and a high price.

Jul 02, 2009 04:13 PM #36
Rainer
1,092,162
Matt Heaton
Timu Corp - CEO, ActiveRain - Co-founder - Bothell, WA

Wow, what timing.  We're up to 7 bank failures today (same number there were in all of 2007) and we haven't even got to announcing any west coast ones yet.  The FDIC and OTS appears to be busy over the holiday weekend.

Jul 02, 2009 06:44 PM #37
Rainer
6,665
allan bataiff
CoBa REMS - Montebello, CA

Great post Matt. I agree with everything you said with the exception of the downplay on inflation. I believe it will arrive in 3-5 years and it will be acute. As for the change Obama promised; it is coming in the form of cap and trade tax increases and government controlled healthcare.

Jul 02, 2009 08:23 PM #38
Rainer
28,569
Billy Jalbert
The Maui Real Estate Team, Inc. - Paia, HI

Matt,

Thank you for your honesty, sincerity and detailed analysis.  I tend to agree with most of your prognostications, however, I have learned that I am not wise enough to know what comes next...

I am tired of hearing about "Green Shoots" and other positives based on massaged and manipulated data.  NAR has proved to be one of the worst in that arena.

I fear we will hit the wall before we truly have the political will to truly fix anything.  Until then...Hang on tight.

Jul 02, 2009 09:02 PM #39
Anonymous
Lonnie Good

Matt

Great Post... Keep it up... Happy 4th and Let Freedom Ring, i.e., the freedom to call a spade a spade.  I though yoo may find something to laugh at by reading the following: 

We thought we would refinance so we called a couple different companies.  We are already with Countrywide were told that they could do it, "fast track" and we would save fees.

While talking to the Loan Specialist, June King, I asked if she could send a good faith estimate. The answer was No.  I pressed the issue and went up the chain to her VP, Sean Crone.  He agreed that June could send me the following email:

Hi Mr. Good,

I'm sending you a estimate of fees:

**********THESE ARE ONLY ESTIMATES*********

314.00    Application
930.00    Lender
440.00    Appraisal
550.00   closing/Escrow
60.00     Courier/Express Mail-Clsng
35.00    Credit Report
26.00    Flood Check
95.00    Recording
81.00    Tax Service
405.00  Title Insurance


I will be in the office until 5PM CST

Have a great day!

June King
Personal Loan Consultant
CMD3078-B2C POWERAmnCrtrTm5

That was it... that's my GFE.  When I asked for the interest rate and my payment I received the following response from June.

Mr. Good,

The instruction that my 1st VP gave me was I could not include rate or payment. I was only allowed to show fees. If you want to give me a call we can go over everything again.

Thanks

June King
Personal Loan Consultant
CMD3078-B2C POWERAmnCrtrTm5

 Are you starting to scratch your head yet?  Well I was.  I was determined to work through these issues so I continued on.  On December 26th I locked the loan in... or at least that is what I thought.  On January 16th I received I received my first legitimate GFE.  In the meantime I was checking my bank account on line and seen a $349.00 debit that I could not explain.

In the course of conversation I had given Ms. King my credit card number but at the end of the conversation I was told that they were NOT going to charge my card an application fee, that it would be rolled into the loan.  I guess they changed their minds but failed to tell me.

They have acknowledged what they told me but still have failed to return the money to my account. When I spoke with the VP Sean Crone, I was asked, "What's wrong, are you having trouble paying your bills?" 

The appraisal was ordered and I received a call.  The appraiser lived on the west side of the Cascade Mountain Range, we live on the east side.  I called them.  They agreed that they should use an appraiser who is familiar with the turf.  They canceled the first appraiser...... He showed up anyway and called me at my office and said he had driven by the house, taken pictures but I was a "No Show".  After a few words I asked him, "If you call this a no show do you get paid?"  silence............   well I get a trip fee.

Then I contacted the person who drafted the loan.  I was contacted by someone else who said, Janice is Not associated with this loan, I am and I do not need those papers signed nor do I need them back.  I can process it all without your signatures.

Yah..... No One Can Do It Like Countywide Can

The above actions resulted in this minimul cause and effect:

STATE OF WASHINGTON DEPARTMENT OF FINANCIAL INSTITUTIONS DIVISION OF CONSUMER SERVICES

 

 

IN THE MATTER OF INVESTIGATING

A COMPLAINT FILED UNDER THE

CONSUMER LOAN ACT:

 

BY:                  Lonnie Good

Complainant,

AGAINST:    Countrywide Home Loans Inc

                                                                              Respondent.

 COMPLAINT NO. 29715
 DOCUMENT CLIII
THE DEPARTMENT'S RESOLUTION
AND CLOSURE OF COMPLAINT

As you were previously informed, a complaint has been filed against Respondent under chapter 31.04 RCW, the Consumer Loan Act (the Act).  Complainant alleged Respondent debited his credit card after telling him they wouldn't, and Complainant did not receive a Good Faith Estimate within three days.

The Department of Financial Institutions Division of Consumer Services, under the authority of RCW 31.04.145, conducted a limited scope investigation into this matter.  Based on its investigation and the documentS and statements provided by the parties, the Department makes the following determination:

 •·         RCW 31.04.102(3):  Failed to provide borrower, within three days of receipt of a loan application, with an estimated APR and disclosure of whether there is a prepayment penalty.

•·         RCW 31.04.102(2):  Failed to make written disclosure within three days following receipt of a loan application.

 To Respondent:

 The Department has no further requirements.

 Respondent took Complainant's application for a residential mortgage loan on or about December 26, 2008.  Respondent transferred the application to its processing staff on January 9, 2009, and provided the required initial disclosures on that date.

 RCW 31.04.102 provides:

 (2) For all loans made by a licensee that are secured by a lien on real property, the licensee shall provide to each borrower within three business days following receipt of a loan application a written disclosure containing an itemized estimation and explanation of all fees and costs that the borrower is required to pay in connection with obtaining a loan from the licensee. A good faith estimate of a fee or cost shall be provided if the exact amount of the fee or cost is not available when the disclosure is provided. Disclosure in a form which complies with the requirements of the truth in lending act, 15 U.S.C. Sec. 1601 and regulation Z, 12 C.F.R. Sec. [Part] 226, the real estate settlement procedures act and regulation X, 24 C.F.R. Sec. 3500, and all other applicable federal laws and regulations, as now or hereafter amended, shall be deemed to constitute compliance with this disclosure requirement. Each licensee shall comply with all other applicable federal and state laws and regulations.

 (3) In addition, for all loans made by the licensee that are secured by a lien on real property, the licensee must provide to the borrower an estimate of the annual percentage rate on the loan and a disclosure of whether or not the loan contains a prepayment penalty within three days of receipt of a loan application. The annual percentage rate must be calculated in compliance with the truth in lending act, 15 U.S.C. Sec. 1601 and regulation Z, 12 C.F.R. Sec. [Part] 226. If a licensee provides the borrower with a disclosure in compliance with the requirements of the truth in lending act within three business days of receipt of a loan application, then the licensee has complied with this subsection. If the director determines that the federal government has required a disclosure that substantially meets the objectives of this subsection, then the director may make a determination by rule that compliance with this federal disclosure requirement constitutes compliance with this subsection.

 Because Respondent failed to provide the required initial disclosures within three days of receipt of a loan application, Respondent violated the Act.

 At the time of application, Respondent stated that Complainant's credit card would not be charged for the application fee.  However, in fact Complainant's credit card was charged.  RCW 31.04.027(7) states that it is a violation of the Act for a licensee to:

 Make, in any manner, any false or deceptive statement or representation with regard to the rates, points, or other financing terms or conditions for a residential mortgage loan or engage in bait and switch advertising.

 Respondent's conduct in this case is perilously close to a violation of the Act.

 Given the apparent violations noted above, the Department generally requests the refund to Complainant of any fees collected, however because Complainant has not yet paid any fees the Department is not requesting this action.

 To Complainant:
 Although you may be unhappy with Respondent's actions, the Department identifies only the violations noted above.  This determination does not preclude you from pursuing other remedies.  You may wish to consult with a private attorney.

 Respondent is expected to implement a system of controls designed to prevent future violations of the Act.  The Department will review Respondent's efforts during Respondent's next examination to ensure compliance with the Act.

 Accordingly, this Resolution and Closure of Complaint serves as notice that this complaint filed against Respondent is closed.  However, the Department of Financial Institutions Division of Consumer Services retains the authority to reopen this complaint in the event that subsequent information comes to our attention relevant to this matter.

 cc:           Lonnie Good

Dated: Tuesday, February 24, 2009

Robert E. Jones
Financial Legal Examiner

Jul 04, 2009 09:49 AM #40
Rainmaker
128,117
Mike Henderson
Your complete source for buying HUD homes - Littleton, CO
HUD Home Hub - 303-949-5848

Man I'm depressed now.  I'm in the Denver, CO market and I think that we have hit the bottom here.  This is from the street level perspective of what I'm seeing.  Denver is also getting a lot of good press from the national media.  If some of these macro trends hold true than what the hell can we do.

Jul 04, 2009 12:17 PM #41
Rainer
1,200
Bonnie Ramsey
AnotherME - Marietta, GA

When in the world will our government and businesses stop playing games and just shoot straight.  Nothing will get fixed until everyone starts getting honest!

Jul 06, 2009 06:37 PM #42
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