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.