The U.S. Credit Rating – Slip Sliding Away …

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Western economies have experienced more problems and received more attention since the beginning of 2011 than at just about any time in history (excluding world wars).  The debts of Greece and Ireland came to the forefront months ago, and Spain, Italy, and other European countries are now big news.  The European Central Bank has tried loans and now buying of sovereign government bonds, all of which are only pushing out the problem into the future.

Meanwhile, the ‘ol US of A had a long overdue credit downgrade last Friday from S&P.  Some say that the downgrade was undeserved because the U.S. will never default on its debts.  The most prominent of those speaking out were Treasury Secretary Timothy Geithner who said that S&P “has shown really terrible judgment”, and Warren Buffett, who just happens to own part of competing rating agency and whose own Berkshire Hathaway was stripped of its own AAA rating last year by the same S&P.  I would tend to not give either one much of a listen because of potential conflicts of interest.

The downgrade was long overdue, with S&P also saying that they have given Uncle Sam a negative outlook, and may downgrade us again.  The fiscal problems and political polarization have removed the last vestiges of confidence in our problems getting solved.  As with the sub-prime mortgage fiasco, S&P is coming to realize the scope of the problem years too late.  The U.S. has had serious debt problems for years, and the debt ceiling debate only publicized the problem for all to see.  While the U.S. is still highly unlikely to default, it is no longer an impossibility.  The AA+ rating reflects that.

The debt ceiling resolution was a joke.  First, the $2.4 trillion “savings” doesn’t really hit until after the 2012 elections and may not even happen then.  Even if they do successfully implement that, the total debt still increases, just not so much as it otherwise would have – hardly a reason to celebrate.  Realistically, there is no chance of paying off the debt, so the U.S. will be left inflating its way out of the problem.  Truly, Congress and current and past administrations are the ones who have “shown really terrible judgment” and will most assuredly continue that trend into the future.

The long-term impact of these goings-on for the real estate market is unknown, but almost certainly not good.  Interest rates are at rock bottom, yet home sales are anemic and property values continue to decline.  Banks are still hesitant to lend to all but the most credit worthy customers, and with good reason.

For note buyers and investors like me, this is an anxious time.  Property buyers are more likely to lose their jobs and stop making payments on a mortgage note.  With values going down, this is not a good combination for a mortgage buyer.  For each mortgage note that I review, I make conservative assumptions and more than ever am cognizant of worst case scenarios. 

My advice to property investors and note buyers are the same as they have been for the last five years – if you find a great deal, then grab it; otherwise, tread carefully.  The recession that we are now in – and yes, we’re in a recession whether government statistics show that or not – is different from anything that this country has ever experienced.  We are not likely to break in to a recovery anytime soon, so invest accordingly.

About Author

Alan Noblitt

Alan Noblitt is a nationwide note buyer and a licensed real estate broker in California. His business, Seascape Capital Inc., started in 2002.

8 Comments

  1. While I agree with you that the U.S. deserved to have its credit rating downgraded the S&P doesn’t know everything. They had Lehman Brothers rated AAA 30 days before they went belly up. And while I don’t always agree with Warren Buffett’s politics he is a pretty smart guy. The last time I checked he was the third wealthiest person in the world – and that’s after giving away more than half of his money to the Bill and Melinda Gates Foundation.

    I prefer to take a “glass is half full” approach to real estate investing. While 9% unemployment is high, 91% of America is still working. They need to live somewhere. If you have a long-term approach (buy and hold) or very short term (fix and flip) there’s money to be made. Like you said, if you can find a great deal (and there are lots of them out there) then jump on it.

    • Certainly, there is room for lots of opinions. Nobody knows how this will all shake out.

      I will offer a couple of comments back to you. Yes, Warrent Buffett is a very wealthy and intelligent guy. No doubt about that. However, he is in a high position where he may have to say the politically correct thing rather than what he really thinks.

      Also, the 9% unemployment rate is not accurate. If you count all of those who are long-term unemployed, underemployed, and part-timers wanting to work full-time, the percentage of the work force that is fully employed is less than 80%.

      Thanks for sharing. It would be interesting to visit again in a couple of years to see how things real turn out.

      • Also a real problem on the horizon is not the unemployment or employment numbers of the work force but rather the employment rate of Americans over 16 which is around 57% that leaves so much excess capacity. That would be a much larger task but one that no one in the world has solved as we have come to an age where people regularly live past traditional retirement age. We need to rejuvinate our 65+ crowd and have them not just retire and coast but promote a third productive phase of life. To be true benefits to society utilizing a lifetime of knowledge and skills and leveraging that into productive uses on the economy.

  2. Alan, can you source your statement on the closer to 80% work force being employed. It would be interesting to see the study.

    I agree with mostly what you said. I even understand and have a similar outlook on it as Marty did. Great article either way, regardless of personal opinions. Thanks for the great read.

    • Nick,
      That came from Agora Financial, whose statistics came from the government, and I saw something similar on Dr. Housing Bubble (a great real estate blog, if you’re interested). If you count up all of the groups that I mentioned, the total unemployment rate came in at just over 22%. Even if you just calculate the rate the way that they did during the Reagan years, the rate is something like 16.6%. This data is 2-3 months old and I am doing this from memory, so the figures could be off by a few tenths of a percent either way.

      Thank you for your kind words.
      Alan

  3. Remember Alan, those European countries mentioned are not at all like the US in that they gave up their monetary sovereignty when the joined the Eurozone. This has and will continue to give them great trouble until they dissolve or unite into a US of Europe setup ( highly unlikely).

    The US would not mathmatically be able to pay off their federal debt either, eberytime in US history when the federal government ran a surplus their was either a depression or recession that directly followed.

    Our default is not operationally possible only politically possible since the debt ceiling limit is a self imposed limit not functionally. One good this is with FOMC announcing that it will keep target rates near zero til mid 2013, it affects the CBO’s long term forecast, which forecast interest hikes. That alone saves $350 billion in projected interest expense. This means that we could do a full FICA payroll tax holiday for the employee portion for one year and it will barely change the long term debt projections. Except that, you are right that we in the US have not been in a balance sheet recession this deep before and getting funds targeted to the middle class will speed the deleveraging necessary for our economy to foster organic growth. Your insight to the uniqueness of our current situation is astute. Notice that since the 70’s as we came off the gold standard and consumer credit started to spread to the masses we have had a violent series of booms and busts with the private sector taking on more debt each time…. Aomething needs to change….

  4. With the federal interest rate as the benchmark of whether there will be significant purchase activity by property buyers, it was wife for the FED to maintain and keep the rate artifically low. The economy is at a point where we can no longer afford to let it get worst.

    I am sure many of you can recall the good old days in the late 90’s where the market was heating up. Perhaps we won’t see that for a few years, but a slow and steady progress is much better than the volatile market situation we are going through now. I wish for a better tomorrow.

    • Francisco,
      Yes, we all hope for a better tomorrow. The Fed keeping rates low was meant to reassure the market and also has the effect of keeping the debt repayments low for U.S. government. Of course, this low rate continues to punish savers, as the Fed is trying to pump up consumption.

      Personally, I would prefer to see Congress and the Fed actually address the problem rather than use artificial means to keep us sustained in the short term. That would mean real spending cuts and revising the tax code, which politicians do not want to do because of the political heat that they would get.

      Alan

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