While I could write for a LONG time about it, I’m going to limit it to what I feel are the top 6 things that I think could very well happen. Keep in mind, this is being written after watching President Obama’s press conference but before anything gets passed.
1. The market is expecting that both the Stimulus Plan and TARP II will provide “the answer” to the problems that are currently plaguing our economy. With that being said, I believe the markets will be disappointed because the problems facing the economy are way more complex and urgent than what one or two bills can solve. The disappointment will put downward pressure on stocks and upward pressure on rates.
2. The $15,000 tax credit for home buyers will pass but rather than jumpstarting the housing market, it will instead cause a few people to buy homes, mainly first time home buyers, and will extend the inventory problems that we have because prices won’t adjust as they should. We won’t get nearly the “bang” for the $Billions that will be spent on the tax credits. I’m sorry but I really think the main beneficiaries of the $15K tax credit will be mortgage lenders, real estate people and the relatively few people who were already thinking of buying. Will it reduce inventories? No, other than taking some bank owned inventory (for first time buyers) off the banks, the rest of the people will be “shuffling” inventory because they all have a house to sell.
3. Between the Stimulus Plan and the TARP II funds, we’ll (yes, it’s you and me) will be spending close to $1.2 Trillion. Do we have the money? No, we don’t, so we’re going to borrow it. What will that mean to the market? A couple of things are going to happen (obviously in my opinion): 1) The government is going to flood the market with debt in order to finance this spending. That’s going to push the supply demand equilibruim off base and that is going to put upward pressure on mortgage rates.
4. What about that 4.5% mortgage rate? Is it possible for the government to “mandate” a certain rate on long term debt? Technically it is. They could create a new type of debt that would automatically be at that rate. Is it possible for it do be done using market forces and buying the debt to force rates down. I think they’ll try but I don’t believe they’ll succeed.
5. Inflation – What? I’m talking about inflation? Yeah, I am because it’s going to come back to haunt us. All of this borrowing that the government(s) are doing will eventually boomerang, get us through the downturn and then spring back up as inflation due to all of this debt is going to spring out of control. So what does that mean? It means we’re going to see low rates for quite some time (I’d say 12 to 18 months) and then we’re going to see rates on all kinds of debts jump way up. That’s why I’m recommending that using variable rate equity lines to save money now is only a good thing if you plan on paying it off within 2 to 3 years.
6. Banks – what’s it going to take to save the banking industry? Is the banking industry in trouble? Yes, I believe it is. Is it going to take more than “buying assets from the banks” as the original TARP program wanted to do? Yes it will. But it will also take a realization that we were drunk on an easy credit binge and we don’t want to and can’t go back to that. Even when the banks do lend, it’s going to be a more conservative, careful and thoughtful lending that requires verifiable cash flow, a downpayment, and good collateral. Are the days of easy credit over? Yes, for the foreseeable (translated – long time!) future. Am i concerned that FHA is going to run into problems down the road because they are the only ones taking mortgages with less than spotless credit and minimal downpayments? Yes I am. I don’t expect that we’ll see FHA in 2010 being as lenient as they are now.
Well, there you have it. My top 6 things that I see coming at us. Is it going to be easy? Nope. But I firmly believe that those who understand what’s happening, understand the markets and where they are going will have many opportunities to navigate the “maze” and take advantage of what this market offers.
Is it a scary market? Yes. Is it a market that I’m scared of? Nope. The scary parts offer opportunities……
Land Development Company says:
Good post Tom, I have to agree with you on most points.
1. The stimulus plan will be a disappointment for those expecting a savior. Of course the issues are far too complex for this to solve our woes.
2. The 15,000 tax credit will not inspire average joe to buy a new home. I think you’re right, those already considering buying in a down market will benefit, as well as lenders.
3. You don’t have to be a genius to know that borrowing $1.2 Trillion is not a fantastic idea!
February 9, 2009 — 9:08 pm
Doug Quance says:
>Tom: I don’t expect this porkulous bill to stimulate the economy, as the spending is not stimulative. I do expect the $15K to be helpful to nudge those on the fence to take the plunge.
Ultimately, we are witnessing the inmates running the asylum – and I fear the prescription will kill the patient.
February 9, 2009 — 10:14 pm
Michael Cook says:
Tom,
An important question that comes out of your analysis, is a buying question. If in your opinion we are in the golden age of interest rates, shouldn’t you be recommending people buy now? Particularly if you expect rates to jump significantly in 12-18 months, it would seem that could outweigh the slump in housing prices, correct?
If housing prices have declined 20%+ in your area and inventory is high, but perhaps not growing, now might be a good time to buy. Weighing a 10% drop in property values vs. a 2% increase in interest rates over the next 12-18 months would dictate most long-term homebuyers accelerating their buying decision. Plus with the $15,000 tax credit, you can off set your downpayment.
Additionally, as many people like to point out here, most people have significant equity in their homes. For those people it would be an excellent time to upgrade, rather than refinance, take the tax credit, get a low fixed mortgage and wait out the storm while living in a much nicer place. Anyone see a flaw in that logic?
February 10, 2009 — 8:28 am
David Shafer says:
Gotta sell the old house to move to the next one, right. With record inventories (although starting to come down) selling the old house might take a while!
February 10, 2009 — 9:54 am
Thomas A B Johnson says:
I don’t expect that we’ll see FHA in 2010 being as lenient as they are now.
This is why now is a great time to buy.
February 10, 2009 — 10:59 am
Michael says:
There is no way that the stimulus package is going to solve the problem we have with the current economy much less the housing market. Throwing good money after bad has never solved any real problem with the exception of a short term boost. We need to get government out of the market and let the private sector work it through as we always have in the past when left to our own means
February 10, 2009 — 12:05 pm
Todd Covington says:
Doesn’t everyone find it ironic that every single comment on this board is against this stimulus package and yet our government will still pass it?
I find it to be almost insanity that that our leaders cannot see this is a dumb idea. History has shown us time and time again that throwing money at the problem won’t work.
Only tough love will fix the problems we have today. I say let the strongest survive and it the long run we will all be better off. Stimulating the economy, even if it works, will be a short term fix with larger problems down the road.
February 10, 2009 — 11:28 pm
Tom Vanderwell says:
Update – it appears that the $15,000 tax credit didn’t make it past the compromise committee.
Michael – Your “numbers” in regards to buying right now, in some ways, make sense. There are some people who look at it and think, “It’s not going to be cheaper.” I got interviewed by the New York Times back in July for a piece I wrote called “The 7 Year Plan.” I think for those who are buying primary residence, the time that they are going to stay in the property matters more now than it ever did. Looking at where things are now compared to then, I’d say that in some areas, the time frame is at least 7 years if not more.
The big “flaws” that I see in your logic, at least based on the people I’m talking to are:
1. A lot of people don’t want to sell their house now because they are “locking in a loss” when in reality they might still be selling for more than they bought. But they are selling for less than they could have 3 years ago.
2. Jobs – in areas that have gotten hit hard by job losses (Seattle, Detroit, Michigan, Ohio…..) there is a growing sense of “hunker down and make do.” That’s why I think the most important thing we need to do is not get more credit flowing, it’s to make jobs more secure.
Tom
February 11, 2009 — 6:32 pm
Doug Quance says:
Of course they didn’t leave the $15K home buyer tax credit in. That might actually work… and they have no interest in the misery ending until they expand government much more than this measly trillion dollar bill can possibly provide.
Watch out for Porkulus II coming soon!
February 11, 2009 — 7:49 pm
Sean Purcell says:
@Michael Cook,
You are dead on with the purchase scenario. Most people worry too much about home prices and not nearly enough about rates. Rising interest rates will kill affordability much faster than rising values. It will even kill affordability of falling values.
Also, I think Tom is underestimating the degree of inflation and overestimating our time to it. Buying a home is a pretty good hedge against what’s coming. The investors understand market opportunity and they’re very, very busy out here. Regular people don’t always see it or can’t act on it. Politicians can’t even spell market (or common sense – something tells me they can spell “venal, self-serving liars” alright though).
February 11, 2009 — 10:59 pm
Brian Brady says:
Let me point out why Michael’s “upgrade” advice is brilliant; percentage losses and gains. If San Diego declined 30% and recovers that 30%, over the next ten years, upgrading makes a helluva lot of sense.
EG: The $350,000 home, expected to recover to $500,000, offers less profit that the $700,000 home going to seven figures.
Of course, they have to be able to afford a larger mortgage.
February 11, 2009 — 11:20 pm
Tom Vanderwell says:
Sean,
It sounds like it would be a topic for another conversation on why you think I’m being too optimistic (how’s that for a switch – you think I’m optimistic!). I think part of the difference has to do with our geographic locations. I look at what Michigan and places like us have to go through yet and see it being a substantial length of time before things turn around to the point that inflation becomes an issue. On the other hand, parts of CA (also known as Bawld Guy’s town) are a lot closer to that turn around point. Does that make sense?
By pointing out “flaws” in Michael’s logic, I wasn’t saying I didn’t agree with him. IF, as Brian says, you have the equity and can afford the larger mortgage and your job/income is secure enough that you feel comfortable, it does make sense. I was pointing out the reasons that the people I’m talking with aren’t saying yes to that proposition. Does that make sense?
Tom
February 12, 2009 — 5:24 am
David Shafer says:
You guys are not taking into consideration the “affordability issue.” Prices have now come down to the point of affordability again. Especially with real underwriting going on, I think it is unlikely that housing goes on another appreciation binge until wages start moving up. Wages have been flat for a decade now. With high unemployment wages will not move up anytime soon. Still don’t buy the hyper-inflation around the corner thesis because of this. When we reach bottom on prices, I see several years of marginal increases at best.
February 12, 2009 — 6:18 am
David Shafer says:
Another slightly off topic item that interests me is what you folks think about the rental markets. To me this is a great time to buy rental property in many areas because there is an additional group of folks who have been foreclosed on that will need rental housing for the next 4-5 years before they can get a loan. Home ownership has dropped back down a few percentage points and I don’t expect it to go back higher any time soon. Many people that are borderline to qualifying for a home are scared to take the plunge, especially in a recession when job security is so questionable. I think this all adds up to an extra group of people looking to rent that we haven’t seen over the last 5-6 years. Any other ideas about the rental markets?
February 12, 2009 — 6:28 am