Why isn't the economy recovering?

I have been saying for some time that California real estate isn't headed for a recovery, but another dip (barring government intervention like the tax credits, and no growth policies like in SF). It's widely acknowledged that small businesses provide 70% of the jobs in the US.

The current federal and state governments are ideologically opposed to freedom for the people. The lack of transparency and the desire to regulate practically everything is evidence of this.

If you haven't read anything by The Heritage Foundation you need to read this article. More taxes on investment and on earnings to fund "health care". Which is little more than direct payments to insurance companies and pharmaceutical companies. These new taxes when combined with the expiration of the Bush tax cuts will take capital from investors.

Less money for investors, means less jobs. Investors use jobs as a multiplier for their capital. As long as a business is profitable, it is reasonable to hire more employees to make more profit. When taxation and regulation cause a business to become unprofitable, it either adapts or closes, leaving employees struggling as they must  find new sources of income. Read this article about a jobless recovery--which to me is an oxymoron.

As our economy continues to worsen, people are spending less (read this article). I've seen empty commercial buildings all over Southern California. Commercial landlords are handing back keys to the bank, just as homeowners have. There won't be any commercial property bailout--as there is no sympathy from the current administrations for profit makers.

An aside: If you have seen a number of commercial building projects in the works and are thinking this is a sign of an improving economy, you need to think again. If builders do not complete currently approved plans, they will have to submit new plans. These new plans will have to comply with newer building codes, and the newest set of Energy Efficiency codes are much stricter, which will mean much more expensive buildings. I think the builders are hoping that the economy recovers by the time they are done building (and hopefully it is)

So, after all these small businesses go out of business (or don't open at all due to startup costs) we will continue to see more people unemployed. These people are also likely to fall behind on house payments and eventually lose them, adding even more foreclosures to the market.

Let's not forget, that there are lots of public employee unions that are investors. They have retirement accounts that are invested in stocks. So profits also help unionized employees, too. Though, as many of the public employee retirements are guaranteed, any shortfall in retirement accounts caused by a decrease in value of stocks will leave taxpayers (once again) footing the bill, further slowing the economy.

My Answer to Ben

Recently, Ben asked a question on Trulia. I tried to answer it there, but the guidelines against spam prevented me from linking a couple relevant articles, so I'm reposting it here.

From Ben:
I have a 10 year interest only loan with 7 years left and no equity. I am current on my payments but the home is about $150,000 up side down.

I make 3 figures a year and have a 7 plus fico. I was recently denied a loan for a second home because of the status of my current home, and they think I will " Buy & Bail " The bank also countered and said I need to sell my current home to qualify. I also contacted my bank for assistence/guidence but there was'nt one thing they can do or advise. We need a bigger home, Should I sell my home short sale status?
 
Ben,


This answer is going to go against the grain, but I'm in the area and know exactly what you're struggling with. I could rent a house that is new and twice the square footage for what my mortgage payment is in the High Desert.

The first thing to remember is that CA is a non-recourse state. The only thing the bank can do is hurt your credit and foreclose. They can not go against your other assets. If the loan on the house was not used to take money/equity out of the house, and is the purchase money loan, there is a form to fill out so that you do not pay taxes on the banks loss on the loan.

As you have not paid any principal down, I would advise you to think of all the money spent as rent (that has been an interest deduction--call it a rebate on the rent). I don't believe prices are going up in the next 3 years. In fact, the there are a lot of reasons to believe the government is propping up the housing market, and the Association of Realtors spent a lot of money keeping the tax credit going.

If you need a bigger house, and the above applies to you as far as your loan goes, WALK AWAY FROM YOUR HOUSE. Possibly ask your lend for a "cash for keys" deal, where you give them a "deed-in-lieu" of foreclosure and they pay you a small amount to move. It will help you get your credit back faster.

Read these two articles( refer to my blog, Trulia won't allow me to post the links here--The articles are HERE & HERE), and portions of my blog that refer to reasons why the housing market is going to be stale. Don't worry about your credit score. A credit score is good for acquiring debt.

There are a lot of larger houses in our area that you can rent for $1500/month. You also won't have to deal with maintenance. There are even some rent-to-owns, but most RTO's and lease-options require you to assume all duties of an owner.

In two or three years, you'll qualify for a loan again. And prices are likely to be at or near the same levels UNLESS our country's economic policies end up in currency devaluation ala Venezuela or Zimbabwe in which case we all have bigger problems than home ownership.

Ben, If you've come here, do some research on "recourse vs. non-recourse states" and talk to your accountant to see where your mortgage falls as far as tax liability.

More Good News for the High Desert

An article in the local newspaper:

International economist says High Desert can bounce back

Subsidized housing.

Over the last week, the subject of where prices for housing is going came up a lot. It was coupled with the increase in vacancies that I've seen in the rental market, both residential, and commercial.
Along with the conversations, I mentioned that the rental market is really competitive at the moment, and someone asked if I ever looked into subsidized housing, sometimes known as Section 8. I have looked into it, and decided not to get involved for several reasons. I'm going to tell you why.
Over the years, I had an opportunity to pick up some older duplexes in a low-income neighborhood. The units had few tenants, and some of the vacant units were emptied of the easily removable contents--doors, toilets, cabinet knobs, faucets, and compression plumbing under the sinks.
I started by renovating and renting the empty units. During this time, money was short, and I was working part-time and temp jobs during the day, and the units at night, and doing a variety of paperwork early in the morning. It wasn't unusual for me to be up at 5am and not in bed until somewhere between midnight and 2am. I would often get a nap at lunchtime, but I was doing a lot of 16 hour work days, 6 days a week, with a 'short' 8 to 12 hours on Sunday.
During this time I got a lot of people wandering by to ask when the unit would be ready. I had several ask me if I took Section 8. I was fairly new to the business, and told them I hadn't looked into it. When asked, I told them the rents were about $650 and nearly all of them told me that Section 8 would pay me $850 and that we could "split the difference" or something to that effect. That sort of dishonesty helped put me off. Well, I guess they were honest with me, but not with Section 8. I have an abiding antipathy to liars. However, I would give them an application if they wanted.
I  also was questioned as to why I was making the places 'so nice' by applicants. I replied, "If it looks like a sty, only pigs will want to live here." Those people never brought back the application I gave them. In the words of Dave Ramsey, broke is a condition, poor is an attitude.
Emotionally (I know I shouldn't get emotional about property--that's fodder for another article) I am a bit attached to these properties that I've spent so much time renovating. I've spent a lot of time and money, and literally blood, sweat and tears on these units. All of the landlords who do their own work that I've talked to, feel pretty much the same. All of them that have had Section 8 renters have had problems with damage to the units. The overall conclusion is that the extra money is eaten up in the repairs.
As it happens, the local paper had a trio of staff writers cover the subject. In my opinion, the comments section will give you better insight than the article itself.
Though Section 8 pays higher than average rates, there is a flipside with subsidized housing (brought up by one of the above commentators) in that it devalues real estate in the area. The people building subsidized housing  are able to charge rents that are lower than market rates (affordable). This brings down the rents of neighboring units, especially, or maybe because of, the added units cause a surplus of housing. This drives the rental housing prices down. So the government causes taxpayers to  subsidize a few large construction companies that are in competition with them.
The purpose of the subsidized low-income housing is to deflate housing prices. This unfortunately for investors, also deflates the value of their property. So it's likely, that in the near future, as bailout money gets used for subsidized housing, it will accelerate the decrease in your investment's value. Your property will become worth less faster. This is going to be especially true in larger cities.
If you drive around neighborhoods or down the freeway, you're likely to see a lot of commercial property vacancies. There are more coming. As rents go down, commercial properties are worth less. Unfortunately for small business owners, there is a lot of uncertainty as to what new taxes are in store for them and what existing taxes are going to be raised. That economic uncertainty is going to contribute to unemployment. So there are going to be less Americans compteting for housing in California.
All this makes me think housing hasn't bottomed out yet. This is especially true in outlying areas and suburbs. Though, prices are still at lows that I haven't seen since the 90's, and you can pick up housing for less than it costs to build, and less than it would cost to rent. It still might be good to buy, knowing that your purchase will lose value over the next few years, then increase after positive changes in the economy.

Some thoughts on housing, both buying and renting

Two articles from RISMedia this week have highlighted the fact that prices are at some of the lowest prices in nearly 20 years, and that the affordability index is 67%. This comes as no surprise. Here in the High Desert, in California, it is still possible to buy a house for less than the construction costs.

The good news, is there is continuing commercial and industrial development here, despite some problems caused by local government overextending themselves financially (like most levels of government during the tech and real estate bubbles). The City of Hesperia has just been named an enterprise zone.

Due to Governor Schwarzenneggar's moratorium on foreclosures, I've seen a slight upward trend in the prices in the Victor Valley, as supply of houses on the market is causing an increase in bidding on the houses. I think prices are likely to drop again as there is another wave of foreclosures on the horizon in California. This is going to be exacerbated by small business people deciding to leave this highly regulated and taxed state, even if they have to walk away from their homes.

The affordability of houses has caused quite a bit of competition. First time buyers are competing for houses, with small and large investors. My wife and I had a small house in escrow, but the house wouldn't appraise, so I'm sure an investor with cash will buy it. I could go look up the sales price at the county recorder or online, but I don't want to aggravate myself.

I have seen a trend toward lower rents. Many rental owners are advertising move-in specials. I see family members moving in with each other. I have seen people leaving the area, some to be nearer the larger metropolitan areas, some to leave the state, a few to leave the country.

There is a push for more government subsidized, low-income housing (projects), which will lower rents as landlords compete with the government subsidized landlords.

Some of these landlords are likely to find the competition too fierce and add more units to the market place through sale or foreclosure, which will reduce rents further. It is a question of where the market will bottom out on the government induced spiral. Look to the subsidized unit costs, and the features to set your prices. It may be more important to keep a good renter than make a profit. This is a typical of what happens when the government starts competing in the private sector.