RISMEDIA, December 29, 2009—This is the time of year when columnists either write about the major events of the past year or make predictions about the coming year. If you don’t know, I’ll let someone else tell you about 2009.
I’m far more interested in getting a jump on next year’s opportunities and discoveries. And, just as important, I want everyone to embrace 2010 feeling upbeat, confident and charged with energy. Things have been down so long that they just naturally have to be heading up. Absolutely!
So, I set out to make a list of all of those things that will be heading up next year. I was hoping to predict a rebound in both the economy and the real estate industry.
It looks like more of the same piled higher and deeper. I really hope I’m wrong. My temperament is upbeat by nature. Just from the standpoint of logic, I believe that it is more productive to be optimistic than pessimistic, that the taste of life is sweeter if we choose to embrace the experience with wonder, curiosity, and hope.
But, when the canary in the mineshaft topples off of his perch, even Pollyanna will be looking around for the exit sign.
In 1971, macabre cartoonist Gahan Wilson published a collection of his work titled, I Paint What I See. Both E. B. White and Diego Rivera used the line.
I ask questions and I go where the answers take me. Then I write about not just what I find but what it likely means. I’ve been writing about real estate for more than 30 years and it has always been a struggle for the industry to admit how things really are. I write what I see, but it doesn’t always get published.
As much as I wish I could say that better times are right around the corner, the facts tend to suggest otherwise.
Here are the influences that argue against short-term job growth or a sustainable economy.
1. Interest rates will rise
If it isn’t one thing it’s another. Just as it looks as though things might be starting to reach equilibrium, yet another obstacle to recovery looms. This isn’t complicated conjecture; the more competition there is for money, including federal, state, and municipal governments, the more it will cost to borrow, and the less that will be available to create new jobs. Ironic that now more than 30 states are being forced to borrow the money to pay unemployment benefits.
Juggling two wars and bailing out Wall Street requires massive Federal borrowing.
In December of 1980, the prime rate peaked at 21.5% and the cause was massive government borrowing. Just saying…….
2. Energy prices will rise
Energy includes more than gasoline, of course, but using just our experience at the pump, it’s pretty obvious that despite how gas prices seem to bounce up and down on a daily basis, they just keep on going up. In the end, the price never quite returns to its lowest point and, on the other end, constantly pushes up the higher price. If you check your gasoline bills for a few months, you will certainly see that, while a month or two might be lower, the annual cost just keeps going up.
The recent storms, low levels of reserves, and price manipulation for maximum company profits will push gas prices higher and drag other energy sources up with it.
3. Food prices will rise
If interest rates rise, the money needed by agribusiness to fund long production cycles will cost more. As always, that cost must be born by the consumer. If energy prices rise, production, transportation, and distribution costs will increase.
4. Inflation will rise
Inflation almost sounds positive, but what it really means is shrinkage. Inflation increases when the currency loses buying power. I’m no John Maynard Keynes but I know this: increases in the cost of money, energy, and food, will result in a dollar buying less.
5. Taxes will rise
Not only do we need to keep picking up the tab for the annual cost of operating our grossly inefficient and misdirected governments, but we will need to pay back all of the money we have and continue to borrow to cover the massive shortfall between what we spend and what we can afford.
I have heard it said that the improving economy will mean greater corporate profits which, in turn, will result in greater tax revenues and everything will be just fine.
I am not reassured by that argument. We are seeing record corporate profits in oil, banking, insurance and health care. Their lobbyists have made certain that the taxes on the profits of these entities are minimal.
Poor, old Leona Helmsley. She never would have gotten jail time except that she said the unmentionable and offended the wrong people. Her remark, “Only the little people pay taxes,” is quite accurate. The rich pay accountants instead of taxes and so do corporations.
6. Litigation will rise
Oh, to be a lawyer in times like these. Here is my short list for potential litigant categories:
• The Securities and Exchange Commission has thousands of cases in progress and has only scratched the surface in its investigation of everyone from senior hedge fund managers to street gangs.
• Investors, such as pension funds and hedge funds, will no doubt sue the lenders and the rating agencies for fraud because they bundled 2/28 loans and paid to have them rated Triple A.
• Sellers of credit default swaps, protection sellers, will sue buyers of credit default swaps who knew for a certainty that defaults would occur. They will also sue insiders who knew the loans would fail and bought multiples of the underlying value, such that a default on a $300,000 loan could earn $5 million to $10 million for the owner of the default swaps.
• Lenders in judicial foreclosure states will sue borrowers to foreclose and, in certain instances, for deficiencies.
• Borrowers in all states, encouraged by a wave of recent court decisions favoring homeowners, will come forward to challenge the right of the foreclosing entity and assert their predatory lending claims.
• Buyers of foreclosures and short sales will be suing real estate agents, title companies, and the pretender lenders who are unable to provide clear title to the property because the loan was securitized.
• In at least one state, homeowners who lost their homes to foreclosure dating back to 1989 now have standing to sue for compensation.
• States’ Attorneys General will be filing complaints against all major lenders on behalf of their residents.
• Parties to a bankruptcy discharge will sue their BK attorneys for not challenging the bank’s relief from stay motions for not being a true party in interest.
7. Compensation for CEOs will rise
For many years, Business Week has been comparing average CEO annual pay to average factory worker pay. The ratio of CEO pay to factory worker pay rose from 42:1 in 1960 to as high as 531:1 in 2000, at the height of the stock market bubble, when CEOs were cashing in big stock options. It was at 411:1 in 2005.
It’s even more revealing to compare the actual rates of increase of the salaries of CEOs and ordinary workers; from 1990 to 2005, CEOs’ pay increased almost 300% (adjusted for inflation), while production workers gained a scant 4.3%. The purchasing power of the federal minimum wage actually declined by 9.3%, when inflation is taken into account.
8. Commercial defaults and bankruptcies will rise
All of the focus on securitized home mortgages has drawn attention away from the securitized debt used to acquire huge companies that were stripped of their assets and abandoned. Well-known examples include, Mervyns and Chrysler, both taken over by Cerberus Management with borrowed money and then bled of their cash and assets.
Of course, there are many other dramatic examples of this looting, but this year will reveal that many other companies are targeted for the same treatment.
It’s a formula that works: borrow money to buy a valuable asset, issue securities secured by the company, buy credit default swaps betting the company will fail, loot the company and its pension fund, and walk away. Never has failure paid better.
9. Social media usage will rise until you hit the ‘unfriend’ button.
There are about 350 million world wide users of Facebook alone, and some experts are predicting that this is only the beginning. But now that those Tanna tribesmen from Meet the Natives are into it, I’m not sure this isn’t about tapped out.
By analyzing the growth rate of social media and projecting growth based on recent performance, by March 11, everyone will have said everything there is to say and there will be way too many photos of cute pets and sunsets to bother with.
Responding to the inane blather of 3,000 “friends” will seem more like a chore and less like excitement, and people will move on to the next big thing in the arena of self-aggrandizement.
A lucrative industry will grow in the area of removing unflattering images from the Internet. Think of the Internet as a cyber tattoo; once it’s there, you need a professional to remove it.
For a variety of reasons, both usage and expansion will level off. Life marches on, and so do relationships. So, the next time someone “unfriends” you, you may already have blocked them. Feels good, doesn’t it? So, at least there is that to look forward to.
“May you live in interesting times.” The phrase is attributed to the Chinese, but there has long raged a debate about whether the expression is intended as a blessing or a curse.
The way events are shaping up, 2010 has the potential to be recalled for historical events. Those events will no doubt include numerous examples of Americans rising to meet the challenges of a dramatically changing world.
George W. Mantor is known as “The Real Estate Professor” for his consumer education efforts including a long-running radio program, monthly workshop series, public appearances, and frequent articles.
During a career dating back to 1978, he has amassed experience in new home and resale residential real estate, resort marketing and commercial and investment property.
Prior to starting his own real estate and mortgage brokerage in 1992, he had been Director of Training and Customer Service for Great Western Real Estate. In addition, he has served on virtually every real estate committee, including a term as a Director of the California Association of REALTORS.
About the Author: George is a nationally respected authority on all areas of real estate and is frequently quoted in a wide range of publications. He is an oft invited guest of Fox Business Network and for many years, he was the host of “Keepin’ It Real…Real talk about the real thing, real estate” on KCEO radio.
The Real Estate Professional includes him in “a directory of the Nation’s outstanding authors, columnists, and speakers. His articles have also recently appeared in Real Estate Finance, The Real Estate Professional, National Real Estate Investor, Broker Agent News, and Realty Times. His blog is http://www.realtown.com/gwmantor/blog.