Because the last prediction I wrote last week was such a success, I thought to myself, why don’t I blog a bit more about my predictions so, here it is.
I predict that 2011 may actually end up seeing the highest number of foreclosures in our nations recorded history.
Reason # 1: Lack of substantial job growth.
I do believe that with the extension of the Bush tax cuts the Federal Government passed a couple weeks ago, our Government instilled some…….just some…..confidence in the business community to spur a very modest growth. You have to keep in mind, the extension of the Bush tax cuts was a tax hike prevention or, in other words, the business community is at a wash, one way or another. To elaborate a bit further, the business community had already been working under the cuts with no growth so, an extension of the cuts isn’t going to do much to grow the economy because, it really doesn’t change the underlying systemic fundamental problems. I am not saying that we should have allowed the tax cuts to expire because if that had happened, we would have made problems worse by raising taxes on everyone in a distressed, possibly depressed economy. I am for the cuts but, I don’t believe they are going to make that big of a difference because, the true problems are not addressed. The cuts were nothing more than a lesser of 2 evils.
Reason # 2: 5, 7 and 10 year ARMS (Adjustable Rate Mortgages) adjust in 2011.
During the height of the sub-prime mortgage bubble, we saw people getting 5, 7 and 10 year ARMS. Take 2011 and count back 5 years and you get 2006, the early days of the bubble build up, 7 years back you get 2004, when sub-prime lending was really breaking out of it’s shell and of course, 10 years back, 2001 when people hadn’t even heard of sub-prime lending. My point is, in 2011, 3 different types of very popular sub-prime, bubble building ARMS are going to reset, this is more resetting than we have every seen during this crisis. I can’t even imagine the carnage.
Reason # 3: Government Home Retentions Programs Prevent a Real Estate Bottom.
HAMP is the single greatest home retention failure of this Obama White House. 75% or more HAMP participants default out and end up in foreclosure however, what HAMP does do is buy these people time. In some cases a year or more. So, John Smith, homeowner is 3 months behind, applies for HAMP which takes an additional 2 months to get preliminary approval, John pays his preliminary discounted mortgage regularly for 5 months and then defaults off, 6 months for the bank to catch up with the default and file foreclosure paperwork and 3 months to foreclosure and evict, then 6 months before the home hits the market. Add it all up and you get 25 months or 2 years before a home hits the market from the time the homeowner defaults. So, look at it this way, Government has contributed 2 years worth of underlying inventory to an already 3-5 year inventory of distressed property simply because Government wants to save people’s homes in the name of reelection. This is bad no matter how you cut it.
Reason # 4: Energy Prices will Rise to un-precedent levels.
It was just 2 days ago that BP (British Petroleum) announced that they are re-working their 2011 budget with the premise that gas prices in the US will rise to $5.00 a gallon. Fuel cost effects every aspect of our daily lives. It’s not just how much you pay at the pump. It’s how much it cost the truck delivery man to deliver the goods to your local grocery store. Over 90% of the goods you buy at a grocery store get there from a truck and that truck can only get there when it fuels up its tanks. If that fuel increase goes up on that trucker we can expect to see prices for individual goods to increase as well. A absolute correlation between prices of goods and price of logistics is fact and this is a law of supply and demand that can’t be broken.
Reason # 5: Risk of inflation becomes a real concern in 2011.
Instead of speculating about inflation, 2011 will be the year we actually start talking about what percentage inflation will rise. Increased trade deficits, continual devaluing of the US Dollar, continual movement towards a green agenda and, high federal debt will move inflation up. This will be done in order to stem off a collapse of the dollar because of continual devaluation.
Reason # 6: Credit Tightening.
As a direct result of the foreclosure fall out that I predict will occur in 2011, we will see an increased credit tightening. Now, personally, I don’t see this as a bad thing, I am of the opinion, a home is not a right, it’s something you earn and if you can’t earn it, you don’t deserve it. None the less, since the Community Re-investment Act, this country has been on a drunken binge of “everyone deserves credit” and it had everything to do with our real estate bubble however, times are changing and banks are going to have no choice but to tighten credit standards so they can reduce their risk for losses. This will increase housing inventories and work towards a further across the board housing price drop but, it gets us closer to a bottom and the ability to rebuild.
Reason # 7: Unforeseen National Crisis.
It was once told to me that luck favors those who are prepared and bold. Unfortunately, this Country as a whole is not prepared and our threshold to make big bold global decisions has all but disappeared since the Obama administration has taken a apologetic, appeasement stance on the World stage. This has done nothing but embolden our enemies and provided safe havens in countries that are less than cooperative. I can’t predict an unforeseen national crisis but, I can imagine a “what if’ scenario and it’s not pretty. The best I can say here is that we should be preparing for the worse and hoping for the best but, that is most definitely not happening with most Americans, let along our Government.
In conclusion:
Any one of the above reason I listed is enough to truly hurt the housing industry. If you couple all of these things together in one hit, it stands to reason, can the housing recovery even take place in 2011. My opinion is no, a housing recover won’t take place in 2011 because if we were to resolve any one issue, we would still have 6 others threatening the recovery. In other words, the housing industry has too many uncertainties, Government influence and, was much more devastated by the Community Reinvestment Act and sub-prime lending than anyone wanted to really tell the American public. I hope for the best but, I have prepared for the worse.
Comments
This is a hard read but we know it is the truth. We have to be in the mindset as your last sentence... I hope for the best but, I have prepared for the worse.
I will add that I believe that 2011 is the year that we will know more about where this is all going. Now we may not like it but I think that more of where this is headed will be obvious. We just have to buckle down, grit and bear.
hi Seb,
I can't find the atricle on BP. I believe it was in the Londo paper but, I didn't write it down so, finding it is a bit of a nightmare. I will find it and site it when I do.
I don't care about Bush, Bush wasn't anymore better in many ways than Obama. Obama has the promise of Hope and Change and his version of Hope and Change hasn't really worke dout well.
The reality is, Obama is in office now, he has a policy of appeasement now and America is finally waking up to his Liberal, Progressive, Socialist agenda and is ready to move on.
I don't want this to turn into a political foreign policy comment thread so, I won't say anymore on that subject.
As for just more of the same old same old. Yeah, i guess you can look at it that way but, potetnially the highest gas prices on record in 2011 is more than just the same old same old, in my opinoin.
Reason #7: I think if we were to take a trip down memory lane and see how Bush "appeased" China, Russia (remember how he looked Putin in the eyes and got a sense of his soul as a trustworthy partner??), and North Korea, it would be clear that the Obama policy is in fact little changed from what's gone on for years. And as for Iran - I hardly think that Bush had a very successful strategy there as of course it was during the Bush years that Iran made such striking advances in its nuclear program (and North Korea, too, mind you). Alas, if only Bush hadn't been distracted by that huge blunder in Iraq, the world would probably be a much safer place today. But we just couldn't risk appeasing that mad man Saddam Hussein now could we? God knows what he might have done with all that WMD he had stockpiled.
Reason # 4:
Links from just today alone. Here is an article from the most liberal, left wing, hack job, The Huffington Post.
http://www.huffingtonpost.com/2011/01/01/gas-prices-rising-2011_n_8...
Here is another left wing hack job article from N.P.R.
http://www.npr.org/2011/01/01/132554893/in-2011-5-gas-tea-party-pow...
Here is the report fromt he EIA
http://www.eia.doe.gov/emeu/steo/pub/contents.html
Here is the article I respect the most.
http://www.ibtimes.com/articles/96738/20110102/oil-natural-gas-crud...
Reason # 7: Seriously?
Ok, let's start with Russia. Obama not placing missile defense systems in Poland and the Czech Republic was a huge appeasement for Russia. Let’s not forget why we wanted those systems in place. First off, the Polish and Czech’s asked for it because, if Iran goes rogue, they are likely going to be the first strategic target and secondly, they say what Russia did a couple years ago by attacking Georgia to control the countries energy policy. Having a strong American presence in their country would prevent that.
Iran, another example of Obama appeasement. The fact that Obama will not admit to the American public that in Iraq, we are fighting a ground war against Iran more than we are fighting insurgents is either appeasement or a complete lack of situational awareness. Lets all be very clear, Iran wants an atomic bomb, they are fighting us in Iraq, they have said they want to wipe Israel off the face of the planet, they have said they will shut down the Strait of Harmuz (which will effect gas prices) and finally they are supplying and training terrorist around the World, namely in Gaza and Lebanon but, Obama wants to have talks with them…..seriously? What would you call this diplomacy? Appeasement diplomacy maybe.
North Korea appeasement. Do I really need to say anything about this….really?
China appeasement. When in 2009 Obama declared that Tibet was a part of China…….what? I wonder if he cleared that with the Dalai Lama?
Now, I can go on and on with this but, I am sure it isn’t going to change the mind of any Obamaciple but, it really doesn’t matter because as we saw in November, Freedom will ring.
Sorry Seb, I forgot about Afghanistan.
Well, I am a bit conflicted here. I can't say i really have developed an opinoin yet on his specific performance with Afghanistan. Truth be told, it's a war he found himself inheriting and I can't imagine that is easy so, I will have a wait and see attitued on this one.
Jessie,
I think the biggest problem with the resetting of 5-7 year ARMS coming due is that many of these loans had interest only payment features. Even if the interest rate was fixed, the interest only payment is often half of what the fully amortized payment will be. Obviously many homeowners will have great difficulty making these payments. These loans were very popular in my area, the Silicon Valley, and I am seeing more of these higher end home owners having difficulty making their payments. While the last year saw less than 5% of home sales in the distressed catagory (short sales and reos) I expect that 2011 will see a larger percentage of this occuring. I think that short sales will be more common this year with the change in deficiency judgements in California on first loans, and the tax foregiveness on the forgiven debt of owner occupied homes. If those things change I suspect a wave of foreclosures on high end homes may be next.