Will the real estate market rebound soon?

No

1 of 20

by Rand E Oertle

• 

Write now Print Invite a writer™ Add to Favorites RSS Feed Contact this writer

A better question than "Will the real estate market rebound soon?" would be, "CAN the real estate market rebound soon?" The short answer is no. Investors talk about the fundamentals. A majority of housing fundamentals for the foreseeable future are not promising. The negatives are wide, deep and extend well into the future.

The American dream has been shattered. No longer is an owner-occupied home the foundation of our economic stability. In the late 1970s when Congress passed the Franks/Dobbs red-line laws, which forced banks to loan money for mortgages in high risk communities and then added penalties if the banks failed to ignore red-line warnings statistics, the stability of home loans had nowhere to go but down. Americans are paying that price today. A bumper sticker put it very succinctly: "Honk, if I'm paying your mortgage."

For the future, the eight-hundred pound gorilla in the room is hyper-inflation. Add to that the usurpation of power by the federal executive branch of government to dictate executive compensation, whether by way of company acceptance of TARP (Troubled Asset Relief Program) funds or by way of the presidential bully pulpit, it bodes ill and is a leading indicator of presidential efforts to control all wages. The same executive compensation control efforts are being applied to banking and brokerage firms and a number of other economic sectors that are becoming executive compensation targets as well.

The reason executive compensation is a critical factor in the housing market is that it is a leading edge factor in wages. When executive wages go down, employee wages are not far behind, and the domino effect reigns.

Consider when General Motors Chief Executive Officer, Rick Wagoner stepped down. He was pressured by the White House to resign his post despite assurances that once GM accepted government TARP funds, the company could move forward. There was a tacit commitment by the Barack Obama Administration that there would be no retaliation against executives. That commitment, obviously, was not kept. Now, that threat, like the sword of Damocles, hangs over all executives, whether they have accepted TARP funds or not.

Already the threat has filtered down to wage earners. Wages and benefits for auto workers in Michigan have plummeted as the result of actions taken by President Obama. The wage threat pressures are being applied in a different way against workers. It's through union worker concessions, despite the perception that Obama is union friendly.

By being forced into bankruptcy by Obama, GM has renegotiated contracts reducing further United Auto Workers wages and thus their ability to buy or build new homes or even buy existing homes.

Auto parts suppliers, by default, are the second tier of this wage plunge. When they are faced with order reductions, jobs are the first to go, followed closely by cuts in wages and benefits. The spreading cutbacks eat into a buyer's home purchasing options.

Some economists refer to a concept called primary jobs and the multiplier effect. They are fundamental jobs that create a need for satellite jobs or jobs that are required to serve the primary job. A UAW member or any basic manufacturing job worker needs mechanics, teachers for his children, doctors and dentists, grocers, and a host of other persons and companies to supply his personal and family needs. Although there are different ways to compute the multiplier effect and thus the number of satellite jobs, most calculate that a primary job generates five satellite jobs. When a primary job is lost, most of those five satellite jobs go with it. Once again, it has a devastating impact on the ability to buy a home.

The Midas Letter calculates that America, nationwide, is losing 23,000 jobs per day. Despite mammoth expenditure promises by the Obama administration, the job hemorrhage is not being stopped.

Without a stabilization of employment numbers and a bottoming in the economic decline, housing sales have nowhere to go but down. Yes there will some small ups and downs, but the consumer confidence levels will be bounced like Meadowlark Lemon dribbling a basketball for the Harlem Globe Trotters.

Housing inventories are still way too high. Many investors, who bought distressed and foreclosed homes, have had them repossessed by the bank for a second time because the expected economic rebound has not occurred, depressing their sale prices farther. The economic rebound is not likely to happen for another three to five years.

Unfortunately, just as the housing rebound is expected to begin, the massive infusion of the Obama hyper-inflated dollars will enter the economy. Instead of a couple of dollars chasing a Big Mac, it will be ten to fifteen. The most likely impact could well be hyper-inflated housing prices causing continued fear and instability.

Interest rates will also face a very bumpy ride as China takes steps to move out of the dollar, meaning they will no longer finance our debt because we will be printing money with no value base.

It is the same thing that happened in the Weimar Republic and Zimbabwe today. Both experienced hyper-inflation as they printed worthless money. Zimbabwe's hyper-inflation experience provides a graphic example of the problem. A cup of coffee there, rose to one-billion dollars, yes that's billion with a "B." The government simply said we are going to drop the zeros and kept printing money.

Despite the feel-good politics of hope, home buyers are scared by what could happen to interest rates, inflation, continued job losses, and a host of unstable economic indicators. It isn't so much the fact that there is a huge economic disruption; it's whether the policies being implemented by this administration will provide the long-term confidence necessary to see a fundamental stabilization. So far there are few if any signs that, that is happening.

Bankers were recently ordered to do an exhaustive report and examination of their loan procedures and policies. They were required to examine loans that were approved for the past several years. Aside from the cost of the accounting nightmare, the results were horribly counter-productive to the administration's orders for banks to increase the number and amount of loans.

A banker friend calls this phenomenon "front door examiners" and "backdoor examiners." The front door examiners are the political faces of the administration and its policies. These people demand that banks loan money as fast as possible to stimulate the economy. At the same time, the backdoor examiners are scrutinizing loan practices, finding them inadequate and requiring even more stringent regulations to allow loans with threats of fines and crimes if they don't comply.

A commercial building loan granted just two years ago, when construction was flourishing, would not be allowed under the new requirements of the "backdoor" examiners, because it would require a fifty-one percent owner-occupancy to qualify. That building could not be built today, even though it was fully rented before completion. Thus the "backdoor" examiners are negating the demands of the "front door" examiners and the resultant stagnation is cramping economic progress.

The problem translates directly to home sales. Jobs are being lost. Banks are more highly restricted. Wages are plunging. Inventories of houses are still way too high. Inflation circles like the great vulture that it is.

The value of a hundred-dollar bill in the next few years could possibly plunge by fifty-per cent. If you have money in the bank, upon which you are depending to help you over the bumpy road ahead , within three years it could be worth half what it is today.

With these flies in the ointment, it is somewhat obvious to infer, that the possibilities of the housing market climbing to stability in the near future is grim. Most likely, the economy will be like an anchor dragging along the bottom of the ocean, catching and breaking free for several more years. Just when we think we're anchored, the anchor will break free again.

Until, companies are set free of the confiscatory taxes being imposed on nearly every sector by taxes like cap and trade, more restrictive government regulations and an effort to eliminate America's energy dependence on governments who don't like us, and the socialistic implications of one-payer socialized medicine and higher taxes on everything, the likely hood of a turnaround in the housing market is slim indeed.

In addition to the massive government intrusion and monetary infusion already planned, a new and insidious tax is on the way. It is called the value-added-tax. I say insidious because it is a hidden tax that increases the cost of all manufactured goods. At each point along any product's manufacturing path, a tax is added. It is not listed in the sale price so you do not know how much it is. But you will notice it in the total cost of an item.

The next time you go to the store and buy a chicken, the cost of butchering it will be taxed. The cost of having the feathers plucked will add a tax. The cost of inserting it into a packaging bag will add a tax and getting it to the market will add yet another tax.

None of this adds to your value of the product. This new kind of tax is in the pipeline for our future. If all of the other costs, including energy, which is another eight-hundred pound gorilla waiting in the wings to skyrocket costs, the possibility of a rebounding housing market, is an American dream that won't be answered.

Learn more about this author, Rand E Oertle.
Click here to send this author comments or questions.