A Revealing Look at our “Booming Economy”
So our economy is booming, Mr. Bush? I’m not sure what picture you’re looking at, but things are starting to look pretty bleak from where I’m sitting. The Sub-Prime Mortgage Mess has led to the Housing Bubble & Burst, which has led to the Credit Crunch, which looks to potentially lead to either a US recessions or possibly a global one. Both US and Global markets have been in a downward spiral of late. The S&P 500 is now in the red for the year, while the Dow is now down for the 5th day in a row, 8% off its all-time high set only last month (Note: a stock market “correction” is defined as a 10% drop from the market’s high). Global markets were down overnight on fears from the continuing US credit crunch, and both European and Asian Central Banks have been infusing cash into their banking systems in an attempt to assuage their local markets.3
For example, “the Bank of Japan announced Thursday (Today) an injection of 400 billion yen (3.4 billion dollars) into the banking system amid renewed turmoil in global financial markets. It was the first time in three days that the BoJ had pumped emergency funds into the financial system as part of a concerted action by global central banks to try to avert a credit squeeze caused by problems in US mortgages.”4
On top of it all, national foreclosure rates are up, with “the total number of properties either entering or moving through some stage of the foreclosure process was 131,574 or one foreclosure for every 879 households in the U.S.”1 The Nation’s largest mortgage lender, Countrywide, today “borrowed $11.5 billion from a group of 40 banks to fund loans, in a move that shows just how deep the lending crisis has become.”2 The stock is now down 15% year to date and Moody’s Investors Service “downgraded Countrywide’s senior debt rating to “Baa3” from “A3,” citing Countrywide’s funding problems.”2
Doubters may say that we’re close to full employment, interest rates are low, and everything else is rosey, but they are ignoring the mass of debt we’ve had to incur to “keep the economy rolling.” In addition, the true cost of almost all goods has risen dramatically, including gasoline, food, and other staples. The economy has been great for the rich, but the middle class and nation’s poor have continued to struggle.
Have you wondered why there is so much talk about China on the news lately? It is likely because they own us. Really! China owns so much US debt that we have lost most of our negotiating leverage with them. On top of all of that, they now manufacture 75% of our toys, and much of everything else we buy. The trade imbalance between our countries is astounding, as we import most of our goods from them and they don’t really need what we’ve got to sell, which these days isn’t very much other than weapons and military goods.
What Does All This Mean To You?
For starters, borrowing has become much harder – not only for individuals, but also for corporations. If you’ve got bad credit or nothing to put down on a property, you’re going to have a difficult time finding someone to lend to you. Sellers must be realistic about their pricing strategies, or they may be stuck losing out. If you’re looking to sell, be aggressive with your pricing. It is a buyer’s market, so the buyer is going to be at an advantage in most negotiations.
Tip: In a shaky market, invest in cash-flow positive properties and forget about appreciation!
Keep in mind that regardless of the economy, investing in real estate is always a smart move. The key is in buying a property that cash-flows. I’d avoid at all costs an investment property that “promises to appreciate”. Especially in this market, you’re just asking for trouble. You want to buy properties at a discount that have enough cash flow to bring in a profit. It is extremely important that you understand the basic tenets of cash flow investing, as most real estate agents and the average investor simply does not. We’ll certainly cover this topic in the future, but if you’re looking for a great book that takes a no-nonsense look at cash flow investing, I recommend Mike Wood’s (he’s one of our favorite forum contributors here on BiggerPockets) book, 1 Minute to Rental Property Riches.
What do you think of the current state of the US economy?
1 Building Online – One New Foreclosure Filing for Every 879 U.S. Households
2 Houston Chronicle – Countrywide borrows $11.5B from 40 banks
3 Orange County Register – Today’s editorial: No government cure for housing pain
4 The Raw Story – BoJ to inject 400 billion yen into banking system