Why People Who Think Real Estate Mess Will Soon Improve Are Wrong

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How is this for a blunt statement: If you are one of those who believes this subprime real estate debacle is going to turn around anytime soon, you are wrong! I’m not saying you are probably wrong. I’m not saying you may be wrong. I’m not even saying that more than likely you are wrong. I am saying…you are wrong! This is NOT going to get better soon and here is why:

What we are witnessesing is so far beyond a real estate/mortgage issue that it isn’t funny…and no one is laughing anyway.

This is about a lack of confidence in our financial institutions that have let us down; in our regulators who failed to regulate; in our politicial system that failed to act; in our collective greed which apparently knows no limit; in ourselves for being stupid enough to actually believe there is such a thing as a free lunch when, in reality, there isn’t even such a thing as a free cookie.

And now, we are all paying for it and will be for some time to come.

Look at the evidence and stop being dumb

I know I am sounding harsh. But, let’s face it folks, we’ve been pretty much living with our heads in the sand and the sand’s value is declining each year.

When one compares pending home sales to February of 2007, according to a real estate trade group, sales are down 21.4 percent. Let me repeat this number so it sinks in–21.4 percent–written out that would look something like this: twenty one point four percent.

One measure of the public’s economic optimism—generated by Investor’s Business Daily and TechnoMetrica Market Intelligence–shows a drop from 42.4 percent in March to 39.2 percent this month.

Retail Sales Weak

Because Easter came early this year, or at least that is the excuse, retail sales are hurting.

J.C. Penney Co says earnings for its first quarter could miss forecasts by as much as 38 percent, reports Reuters.

Wall Street is bracing for Thursday when other major stores are expected to report their Easter non-sales figures.

WaMu To Ax 3,000 jobs!

Seatle based Washington Mutual is (was??) the largest savings and loans bank in the United States. This week, it had to go begging for a $7 billion capital injection from a private equity firm and others because the mortgage crisis is expected to amount to a $1.1 billion quarterly loss for the thrift which will eliminate 3,000 jobs and shut down its 186 home loan offices.

Just since January, more than a dozen commercial and investment banks had to get cash bailouts after write downs of more than $200 billion mostly because of the housing and credit crisis.

Not since the Great Depression

What happened with Bear Stearns was the closest we have come to a run on the bank since the Great Depression…The 1929 market crash, contrary to what many believe, did not cause the depression–a run on banks over a protracted period of time did.

As we find ourselves in the middle of what has to be the world’s longest political campaign, there are those who foolishly believe that John McCain or Hillary Clinton or Barack Obama or Mickey Mouse will turn the world’s economy around.

Grow up people. Better still, take a course in American history. Or, economics. Or, both.

F.D.R did NOT get the U.S. out of the Great Depression–World War Two did. Wars force government to spend and print and spend and print money to keep them going. This causes inflation, to be sure, but, in the short run, wars actually help the economy. World War Two did, the Korean War did, the Vietnam War did and the Iraq war is doing!

I know, you’re saying, wait a minute! The Iraq war! Helping the economy?? It is sucking billions of dollars away from other causes.

Well, the problem with that thinking is, it is not the way the real world–or the Obama world–works. In fact, there has never been any evidence..not one ounce..that wars actually drain money from social programs or anything else for that matter. In other words, if we didn’t have the Iraq war, all that money being spent on it would not all of a sudden be freed up for education and housing and health care and whatever. It just wouldn’t exist!

The biggest dirty little secret

There are many reasons why the Iraq war is now in its fifth year…and one of them is, it is producing plenty of jobs in the so-called military-industrial-complex and enriching companies that are basically in the business of war and war support. Without the Iraq war, our economy would not be better, it would be worse! And, that is the dirty little secret that Washington understands and most people do not.

When will the economy turn around?

All this brings me back to where we began. The current subprime, mortgage, housing, credit, banking crisis is not going to end anytime soon. Some experts say maybe a year or two, some say maybe longer.

Will some people benefit from this? Of course. Some people will have the money to buy up those foreclosed houses at cheap prices and they will make the nightly news and we will read stories about how this is proof that people can take the bull by the horns. But, you know what? That is just bull. The reason why these people make the news in the first place is because their stories are unusual…they are not the norm.

If you don’t realize that, then you are probably one of those people who actually think a “Tall” at Starbucks is large, when it really is what used to be called—–small.

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About Author

Charles is currently reporting for KNX Radio in Los Angeles, is the co-author of the book No Time To Think, and can be found commenting about the news on his blog, The Feldman Blog, as well as on The Huffington Post.

19 Comments

  1. Great post Charles.
    People will not face reality, yet they will look back years later and see what really happened. Everyone screams for the Fed to lower rates thinking that everything will magically be fixed and things will go back to they way they were. The truth is that things will never be the way they were. People need to adjust to the new reality, those that do will find tremendous opportunity. Most people will just sit back and whine about how ________ (fill in the blank: the government, banks, big oil, speculators) screwed everything up. There is opportunity in this chaos for those who are open to finding it.

  2. Interesting opinion. You sounds like you know what you are talking about. I don’t on this subject. I like what you said about the money just not existing. I think that that is true. that principle is manifest in everyday people that don’t put money aside for savings. Its not like they have huge pockets. That money just kind of dissappears unless there is a constant force trying to save it.

    Thanks for the different perspective.
    PS. My economy in Utah isn’t too bad when it comes to buying real estate. There are those who are buying, it is just those who have money.

  3. Great post, Charles. As you well know, I’ve been calling for a real estate bubble pop since 2003. This situation is absolutely not going to magically get any better, and it seems like everything the government does just makes it worse.

    Now they’re talking about tightening lending requirements once again . . . it is difficult enough to get a loan under the current restrictions. If it gets any tighter, we’re going to see a housing collapse far worse than we think it is now.

    (Note to all – I’ve been trying to close on several deals that I’m selling since January, and thanks to these “precautions” and lending restrictions, NOTHING is happening. The interesting thing is that the buyers in these deals are the most qualified people imaginable. If they can’t get a loan, I fear that this is going to get WAY WORSE)

  4. Gregory Bain on

    Mr. Feldman there is just so much wrong with your analysis of our economy that at first glance I was not even going to bother with a comment. However, I see you have several supporting opinions that I feel I would be doing an injustice not to give you my two cents.
    First, I will agree that we have a fire. But, Chicago is not burning down and we don’t need to go looking for a cow to blame. I give you this analogy because your view of history seems limited and tainted at best.
    No one would try to offer a one person or one event as a cure all to end all or save all. And, if I may, there was much that was done during the Great Depression by Hoover that FDR got the credit.
    WAR is not the catalysis that is keeping our country going and it has never provided the economic stimulus that you have indicated. As a matter of fact, it is WAR that has run many empires to their knees in world history.
    Second, not everyone has been running around with our heads in the sand. At the height of all the “free” spending many were saving and holding off major purchases. The cure all of individual investment of their SSI into the stock market never materialized. If it had the current fire would most likely burn down the entire western world.
    You are correct to be angry about “a lack of confidence in our financial institutions that have let us down; in our regulators who failed to regulate; in our political system that failed to act; in our collective greed which apparently knows no limit; in ourselves for being stupid”.
    But, life goes on. Will more people suffer? Will it get worse before it gets better? When will the sun shine again?
    I don’t have the answer to any of those questions. But, life goes on. I don’t think anyone will be jumping out the windows on Wall Street. Things are bad. But, it is not as bad as you have painted it.
    I am told they make pills for people suffering depression.
    Good Luck to you.

  5. you’re incorrect about the economic stimulas war brings about—as I mentioned, war does cause inflation, but it has historically been a good thing , in the short run, for the economy. Not an opinion….fact. Oh, and, I would buy the pills, but medical care has gotten too expensive

  6. Gregory Bain on

    O.K., Charles.
    In eighth grade, war was presented to the class as an economic stimulus to our economy. The words of Eisenhower warning or the great military complex are ingrained in many Americans. And, it is true that there have been many spin off household goods and improvements made from inventions of WAR.
    Same is true about our Space Program.
    However, as one progresses through the education system they learn that there is much more waste in human and natural resources in WAR than in other programs that builds the infrastructure that knits society as one.
    World History will show that the acts of WAR were more often the down fall of the powerful controlling and ruling party than any other event. WAR what is it good for? Absolutely NOTHING.
    The cost of medical care got you down? Wait til they make it a mandatory insurance nightmare. Sleep tight.

  7. Charles,
    Great post and I am impressed with how you were able to simplify a very complex subject.
    What struck me the most was your opinion that wars help the economy.
    While I am not in favor of wars in general, I do agree with your reasoning and in the end, I think the Iraq war will prove your point.

  8. You said it right when wars do help the economy! I read a few books in college (Infectious Greed and Outsourcing America) and spoke about wars fueling jobs and the economy. It was not the main content of either readings, but it is pertinent in this post. Well said and I just think everyone forgot what a “normal” real estate cycle is like…considering it was so good for so long. Plus, the media doesn’t help…meaning they keep fueling the fire. But that is another discussion..

    Thanks!

  9. Hi Denton–yes, it is sad, but true that wars tend to help the economy, at least in the short run. There is a reason why wars have remained “popular” for thousands of years and among almost all cultures. My guess is, we will still be having them a thousand years from now–if we are still around, that is?

  10. What the mess has caused is lower home prices, substantial inventory, historical low interest rates, favorable seller expectations, and a larger pool on renters. It is and will continue to be a good time to invest in real estate. Caution! Due Diligence and Cash Flow is the secret.

    Best of luck. Investors

  11. Yes, Troy, and after World War Two was concluded, pretty much the same conditions existed in Berlin! So, yeah, I guess there will always be opportunities for some; but this is a foolish time to invest for any but the most seasoned players. This is NOT a good time to learn.

  12. Given that nothing is going to change in the near future- what do you suggest people do ? Do you have any ideas on what could make things turn around? I am in Canada and we don;t have sub-prime mortgages here, however I find the mess tragic and wonder what the outcome will be.

  13. I tend to think that people do get it. I believe there are many who will say otherwise, but for sanity and a positive attitudes sake.

    The real unfortunate thing that is going on right now is the fact that at the same time as this mortgage/ housing mess, we are seeing a jump in fuel, food… everything, yet wages aren’t keeping up and layoffs are happening everywhere. To me this sounds more and more like the great depression. If you don’t believe me, try watching Cinderella Man. Lets hope that people are saving their pennies.

  14. Agreed, the subprime market is a mess and will take some time to correct.
    To put a positive spin on it I would suggest we have a growing population and these folks need homes. Builders have scaled back on construction big time. Current inventories has a chance to finally start being reduced which is happening each day. As this over abundance of inventory gets reduced prices will stop falling, compettion will drive prices back up and the mortgage industry will adapt to the needs.

    While this is happening we as investors have a steller opportunity to position ourselves for massive opportunities. People with decent credit have a great opportunity to size up their homes now and gain great on the purchase of a more expenseive home making the hit on the sale of their smaller home less intrusive.

    With all the bad press in the housing market, their is still great news to be made of it.

  15. Even though most people don’t want to admit it, the war going on in Iraq right now has more to do with the economy then it has to do with creating a democracy. It’s sad that we have to be involved in a war to try and boost our economy and create jobs.

    Amanda <3

  16. Interesting opinion. You sounds like you know what you are talking about. I don’t on this subject. I like what you said about the money just not existing.

  17. Mr. Feldman there is just so much wrong with your analysis of our economy that at first glance I was not even going to bother with a comment. However, I see you have several supporting opinions that I feel I would be doing an injustice not to give you my two cents.
    First, I will agree that we have a fire. But, Chicago is not burning down and we don’t need to go looking for a cow to blame. I give you this analogy because your view of history seems limited and tainted at best.
    No one would try to offer a one person or one event as a cure all to end all or save all. And, if I may, there was much that was done during the Great Depression by Hoover that FDR got the credit.
    WAR is not the catalysis that is keeping our country going and it has never provided the economic stimulus that you have indicated. As a matter of fact, it is WAR that has run many empires to their knees in world history.

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