Jobs . Foreclosure, Healthcare and Recovery
The economy crashed mostly because there was a helluva lot of corruption in the system. One of the worst instrments of corruption were mortgage backed securities - these are things that in order to be transactable - require a somewhat stable real estate market. However, the back end of that market - where mortgages were actually issued - adopted, through the Bush Administration - a libertarian view towards who could qualify. There was a large spike upward in homebuying, and mortgage underwriting - and as a result the home prices spiked upward. Everyone thought they were rich , and so they took out more credit.
What ended up happening there was pretty straightforward - the bubble burst, and underwriting almost ceased. As a result, the mortgage backed securities became worthless paper. This is part of what caused almost all of the investment banks in the United States to completely disappear overnight. The crash of 2008 was monumental, and as I wrote a few years back we truly were on the brink of a great depression. Banks ceased to lend money to each other. The financial virus spread all over the world. Almost overnight entire industries crashed. Construction. Finance. Overnight one of the oldest banks in America disappeared, only to be followed by another - and then the Insurance companies lined up to crash.
Good policy decisions helped keep the demon at bay. The economy recovered under Obama's administration and there was talk of a full recovery. However, the instrument of the mortgage backed security is still on the balance books of many banks in the United States, and they are just barely hanging on. What has to happen in order for the recovery to be complete - is that we have to have the number of foreclosures slow down. Home sales are already up.
In order to do that, the economy needs Jobs. This loops back around to underwriting again - the underwriters are looking at stability of income, credit portfolio, and the market. Appraisers are going to strafe the value of your home for another couple of years, but if you're holding out or you're negotiating well at the table then you'll be able to get the better of it. But the loan that will go to underwriting and your desktop underwriter's approval that will come back - when you buy your new home - will be fairly rigid. They won't be able to go that far above what you have been qualified for.
And so one of the things that needs to happen for the housing market to recover (construction being stalled for nearly two years now, inventories should hold up) - is that the Jobs scene has to improve.
This graph shows whats going on. It's not a pretty picture. Some states, like California - are hitting 13 percent unemployment. What will likely be the reversal of this trend - would be the hiring and firing policies of small businesses like mine.
Speaking as a small business owner, I literally drop two or three positions off my hiring chart simply because I cannot afford the benefits package. At a certain company size, health insurance companies just rape you. I had one candidate who, after being up-rated by my provider - ended up being charged well over 1,200.00 a month premium for she and her family. That's a single employee, and one month. And then they can up-rate you once they sign you. In California, there are cases where the rate was increased nearly 39%.
In larger companies, the changes are more gradual and manageable. If I had an employee base of 100 employees, I could likely have hired the person I spoke of earlier. But this is not the case. Also, Insurance tends to give us the feeling that we're bulletproof. We shouldn't take more chances than we do - but if you were driving down the road - would you feel better knowing you were covered than if you were driving without Insurance? A few nights ago a car swerved out of its lane to turn into a Sonic and literally missed my new Volvo by six inches. But we had put the car on Insurance hours before. If I had been stressed about that, I might not have been able to as quickly have turned away. It was my driving that averted the crash.
I believe the Jobs picture will improve if real healthcare reform passes - those who are unemployed might be tempted to take on jobs that - even if they were at a lower pay grade - they might not have taken had they not coverage. And those who employ, especially small businesses - would likely add - at a certain employee number and company size (2M annual revenue) two employees straight off the bat. Really, the decision for a small business owner is pretty simple. If you have the money, hire the people because they will eventually make more money for you.
And the underwriters - who have calculated in the probability of bankruptcy into their risk assessment - will watch very carefully as the single cause of 62% of all bankruptcy in the middle class - will disappear overnight. Unexpected medical expenses and related costs are a big bugbear.
It won't happen immediately but the turnaround would be felt in the markets and thats where it counts. The markets are hungry to rally. I am hoping, as a Bear, that they will digest the latest news and start growling - obviously we've got a world government that wants to stabilize its financial sector. That was good to keep us out of a world depression. But the recovery will hinge entirely on whether or not the instruments those banks now hold will remain valid and the toxic assets they carry on their balance sheet will be liquid enough to avert the hit that will come from commercial real estate if and not when that sector of the real estate market reverses the gains on the other side of the balance sheet.
Its funny. A senior mortgage banker wanted to sell me a home he'd bought as an investment - just after I had sold mine. I opted to stay out of the market. But he was trying to tell me he'd written more loans in the past three months of last year than the whole year combined. I believed him.
But as we head up to April, and watch as the tax credit to buy a new home will expire - we're seeing less and less of the effect of that policy and more and more of the influence that widescale double digit unemployment is bringing.
And just as before, it will be the small business sector that will bring us up out of that. Sure, the big businesses will buy up the small businesses that really succeed - and later on we'll all believe they were the ones that turned the world around. But then again, thats why small business CEO's like me can afford to drive a car like this. My prediction is that everything will be working right at just about the time this crazy company begins production. If you're in LA. Believe me, they're hiring.
I think the markets will fade down a bit through the second quarter. However, if real reform passes in Washington - an energized economy may result in the Summer of 2010 and we'll see some real improvement in the overall economic picture out of August. Not bad for a years work, so far - so good. SFW