The Prudent Ox Economics and Financial Blog

Common-sense thoughts on the US and global economies, gold, silver, commodities, interest rates, the Federal Reserve, foreign currencies, and government policy decisions that affect the markets.

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Location: Denver, Colorado, United States

Monday, August 21, 2006

Why Real Estate Won't Bounce Back Quickly

Here in the Denver-metro area, the real estate bubble has officially popped. Foreclosures have steadily increased, and I've talked with real estate agents and a VP of a title company to confirm this fact. Spoke with a realtor a couple of weeks ago, he knew another realtor who had 265 listings, but not a single phone call for any of them.

The Vice-Prez of the title company said that closings have been "dead since the first of the year." By listening to all the mortgage ads on the radio, you'd never guess this was the case. They'd have you believe that the good times are still rolling, and you need to re-finance, extract equity from your home, and my favorite line: "Use your mortgage to pay off those credit cards, auto loans and other debt!"

Just like going out of the frying pan and into the fire. The low level of financial literacy in America simply amazes me. Not just with these dumb radio ads, but the underlying belief most folks have that the real estate market will "bounce back" in 6 months to a year, just like their favorite dot.com stock rebounded in the late 90s. I look at the current economic and financial situations in America and around the world, and I'm just not seeing a quick bounce-back in the works.

I try to be optimistic and balanced in my view on financial topics. As I analyze the situation, here are the main reasons why the real estate recovery could take longer than expected:

1) High levels of consumer and other debt in America. The motto for most Americans seems to be "It don't mean a thing if you ain't got that bling." During the last recession in 2001, it was a perfect opportunity for consumers to 're-trench' by spending less and saving more. When Greenpsan lowered interest rates to all-time lows, that gave consumers the green light to go on a spending spree. Until a good chunk of this debt is cleared out of the system through repayment or default, I don't see most Americans being able to borrow more money and buy even bigger McMansions.

2) Rising interest rates from the Federal Reserve. Ben Bernanke is in a tough situation - if he raises rates too far, he runs the risk of throwing a debt-dependent US economy into recession (if he hasn't already). If he doesn't raise them enough, he risks losing the confidence of foreign lenders to provide more credit to keep our economy going. Bernanke will probably be the 'fall guy' when the next recession hits, but history will show it was Alan Greenspan who sowed the seeds of economic destruction by providing plenty of easy money.

3) Outsourcing of blue and white-collar jobs to Asia and Latin America. Today most Americans depend on an employer for their income. Unfortunately, job security isn't what it used to be 20 or 30 years ago. This combined with global downward pressure on wages isn't a bullish factor for American's income levels - unless they learn how to make money other than working for someone else.

4) High inflation caused by the Federal Reserve. As inflation eats away at consumers' purchasing power, it'll make it more difficult for the average American to keep his high standard of living.

I hope I'm wrong on these facts, but my financial hunches have been fairly accurate over the past few years. I don't know when the real estate boom will come back, but based on my analysis, it'll probably be longer than most people think.

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