Dallas Flat Fee Broker Predicts Mortgage Conditions in 2009
There has been quite a bit of press given to the financial crisis and it seems clear to me that the solution being proposed is… Flood the Markets with Cash!
The Federal Reserve has already reduced rates to 1% and there is plenty of talk and expectation that there will be further rate cuts. It is likely that we will see a Fed Funds Rate of .5% by January and it could even go as low as 0% by February or March. The pressure on the Fed to use rate cuts to stimulate the economy will be even greater in the 1st quarter of 2009 due to the worsening unemployment situation and the continuing weakness in the housing markets.
What happened in the 2000 to 2002 time frame will likely happen again. Remember how Greenspan dramatically hiked rates to curb the ‘irrational exuberance’ of the stock markets during the dot.com era? He overreacted and the result was that by 2000 the markets were in a full bear market downturn. By the time 9-11 occurred we were already suffering dramatic declines in ‘wealth’ due to the downturn brought on by the hike in interest rates.
After 9-11 the Fed scrambled to reverse the market implosion and drastically lowered interest rates. The result was that 2003 through 2006 was saw the greatest growth in real estate speculation and prices ever experienced. This is a direct result of the Fed flooding the market with cheap rates and the U.S. Government encouraging the ‘A House For Everyone’ policy. Rates were low, credit easy to get, buyers flooded the market, and the bubble was in full swing.
Then in 2006 and 2007 the ARM adjustments began to kick in for loans generated in 2003 and 2004 and foreclosure rates began to soar. So many poor quality loans were made that without an ever increasing demand for homes and an ever increasing rise in home values many people were simply unable to keep up with their debt obligations and the house of cards began to collapse.
Now with the collapse of real estate prices causing a domino effect collapse of mortgage lenders, investment banks, and hedge funds there appears to be no end in sight. Consumer giants such as auto makers are suffering from the decline in consumer confidence and now they are hemoraging cash and on the verge of collapse. At a minimum the shock waves of the return to conservative lending practices will continue into early 2009 in the form of more layoffs and the failure of many retailers, auto dealerships, municipalities, etc.
OK… now for the good news… 2010 will be a BOOM YEAR!
Why? Because the continuing flood of cash and easy credit at the Fed level will take between 12 and 24 months to have the desired impact. The Fed began to take action in October of 2008 by the TARP program designed to buttress the major financial markets. That has succeeded but those markets will be slow to begin loosening credit. As we go into 2009 the Obama administration will pressure Congress for 1 – 2 Trillion in stimulus packages that will spread over a 4 – 10 year period with a front end load for quick impact. The stimulus packages will start having an impact in the summer of 2009 but the full impact will not be felt until 2010.
It takes time to gear up. There is talk of rebuilding the nations roads and bridges. Great. What does that mean? Building roads requires that engineering reports be performed. Same thing with Bridges. Engineers will have to be hired and plans prepared and reviewed and approved. That takes time. Then the Contractors will have to be hired after a Bid and Approval and Vetting process. More Time. Then equipment and materials ordered and people hired to run the equipment and manufacture the materials. More Time.
What does that mean? Well, lots of Engineering firms will be making money in 2009. Lots of orders for equipment will be placed in late 2009. Equipment manufacturing will halt layoffs and begin to hire in late 2009 or early 2010. When the equipment and construction materials are ready the contractors will begin to hire, probably in 2010.
As the cash starts to flow in late 2009 and 2010 the unemployment levels will begin to decline and this is when the magic will kick in. The Magic is that it will be late 2009 or early 2010 before the Media begins to report on an improving economy. It is only when the Media begins to report that things are improving that the consumer attitude will begin to change to become more positive. Consumer attitudes will not change overnight. Consumers will keep a tight rein on their purses through all of 2009 making the retail and consumer services segment of the economy the last to see improvement. Christmas of 2009 is likely to be as dismal for retailers as 2008 will likely be.
The foundation of the recovery this time, like in 2002 – 2005, will be the housing industry. As rates come down and as credit eases people will begin to purchase homes again. The mortgage industry will be more tightly monitored and the abuses of the past will not be possible. New abuses will crop up because the pressure to loan for home purchases will be increased since the housing market is the prime economic driver. The attempts to control abuses will cause new and creative financing vehicles to be developed and gradually the knowledge about how to create such financing instruments will permeate the market. I expect that the housing market will not figure out how to get easy credit until late 2009 or early 2010. Once the markets figure out how to channel the cash and credit being pumped into the economy by the stimulus packages the housting markets will enter another bubble period.
I predict that 2010 will be the beginning of the NEXT GREAT BUBBLE in HOUSING!
With all of the above in mind I invite you to provide your comments. I would love to hear what you think.
