Economic Sea Change Could Launch
Tsunami of Foreclosures
By Alan Smith

Last month, we wrote about how economic growth is accelerating without
job growth. Now more data is emerging to suggest that there will be no
reduction in the current national unemployment rate of 6.2% until the end of
2004; and that a sea change has taken place in our economy. It will never
again be as it once was.

We're still trying to define what's happening and to figure out how to
respond. Here are some of the significant factors and influences:

ü The U.S. job market continues to shrink, with the number jobs that have
simply disappeared over the last 12 months now at 1.11 million. Whole
classes of product manufacturing have left the United States for good, and
increased efficiency in other sectors requires fewer workers.

ü The Congressional Budget Office recently released an update of their
March 2003 forecast that indicates not only continued unemployment, but
also a peak in the national deficit at $480 billion next year.

ü While the herd of contenders for the democratic presidential nomination
carry on the fine old American tradition of throwing rocks at the incumbent
president and blaming him for everything from the loss of jobs, the deficit,
the slow economic recovery, to the trouble they have programming their
DVD players -- most of us realize that a ten trillion dollar economy doesn't
care who's in the White House.

An economy that big is kind of like the proverbial 900 pound gorilla; it goes
wherever it wants to go. When it went down, so did federal revenues, and
the deficit grew.

There's a tricky way of looking at the deficit that makes it a little easier to
understand: In 2000, federal revenues were at 20.8% of the Gross
Domestic Product and outlays were at 19.5%, so we had a surplus. By
2003, income was down to 16.5% of the GDP but spending was up to
20.2%. For 2004, we're looking income down to 16.2%, and spending up
another tick or two to 20.5%.

And we'll be $480 billion in the hole. Believe it or not, there is good news
along with bad about this situation.

The good news is that there is light at the end of the tunnel. The deficit will
start to shrink in 2005. The bad news is that the tunnel, according to the
bean counters at the CBO, is ten years long. They say we won't see a
surplus again until 2011.

Remember, though, that the CBO is mandated by law to assume no
changes in current laws and policies, and we all know that isn't necessarily
so.

Meanwhile, back at the ranch, that $480 billion in 2004 as well as in
subsequent years will have to be dealt with. That means Uncle Sam will in
the credit markets big time and will be competing with Fannie Mae, Freddie
Mac and the banks for dollars.

Interest rates are still choppy now, but we're betting that things will smooth
out and that we'll see a steady upward creep for a long time to come.
Financing $480 billion will keep the pressure on. Even in a supply
constrained housing market we'll see downward pressure on home prices
as payments for a given amount of mortgage money rise.

The economy will keep on gaining strength, and real personal income will
continue to increase, keeping volume strong in housing markets, even as
the jobless rate stays stubbornly high and home prices stabilize.

Foreclosures will increase as more homeowners are forced to become
renters. An economist at Bank One in Chicago says that we can expect a
tidal wave of new foreclosures across the country in February and March of
2004. (See Related Links: "Chicago: A City of Contradictions, It
Simultaneously Thrives and Struggles".)

Last month, we reported that Doug Duncan, top economist at the Mortgage
Bankers' Association, said seriously delinquent loans had reached 4.62% of
all outstanding mortgages (See Related Links: Foreclosure News
Nationwide, Past Articles). Now the bank economist says that the
percentage of delinquent loans that actually go into foreclosure may jump
by 40% from 2.5% to 3.5% of all loans.

We strongly suspect that we may be seeing the effect of a factor we
haven't discussed before: chronic underemployment. This is a phantom
statistic because no one has figured out how to quantify it. The U.S. Bureau
of Labor Statistics doesn't even try. Nevertheless, we know that there are
an awful lot of $100,000 per year former product managers stocking
supermarket shelves for $12 per hour.

They can't afford the homes they live in, but the attachment issue is so
strong that they try to hang on anyway. It just takes a little longer for them
to reach the end of the rope. As nationally syndicated real estate columnist
and attorney Robert Bruss says, "One person's default can be another's
treasure."

Make sure that treasure is yours.
posted by Las Vegas at 10:47 AM