About three years ago this summer I wrote my column begging attorneys and other financial advisors to stop putting their clients into real estate and forsaking the opportunity to purchase guaranteed income and lump sums via a structured settlements. ( Go do a search of my archive, it's there.) As market calls go, I'd say it was my best, but back in 2000 I have letters to my clients dated 2 days before the tech market peak begging them to get out of internet and tech stocks and buy government bonds instead.
I mention this not as a claim to be any great market savant as I gather my information from all the same news and business sources as everyone else. A lot of the big market calls are a result of reading PIMCO guru Bill Gross' column every month as well as keeping an eye on other big picture issues, but every now and then I see troubling signs of delusional or stupid behavior and thinking on the part of advisors, planners, lawyers and others and that's my biggest flashing red light.
It flashed in the late 1990's when you had to beg people to get into guaranteed structured settlement annuities instead of them pouring money into the tech markets they were positive would continue to yield 30% per year returns.
It flashed again when I had people taking their entire settlement proceeds and buying real estate positive once again that they would see 20% annual gains forever on these as well. Just the smallest amount of common sense and appreciation for history indicated we were in mania's or delusional periods of thinking and that a correction was coming.
Again, I wasn't the only one to see it, but with the vulnerable population I work with, personal injury victims, the magnitude of these faulty decisions and lousy advisors is magnified by the fact that this money was all the money some of these people will ever "earn" again in their lives.
As I live in the Southwest, in Scottsdale,AZ actually, and saw the most extreme elements of the real estate speculation happen right here in Arizona, Las Vegas and Southern California, I am also witness to what I believe is a growing realization that things are going to get worse before they get better, no matter what the cheerleaders in Washington, DC or the local real estate maven on Saturday morning radio might be telling you. I believe this for several reasons:
1. Job loss figures and unemployment are going to get a lot worse as the rate of new filings continues to increase. The job and employment picture is not going to suddenly get better. Ask yourself, where are the jobs and who is hiring now or for the rest of 2009?
2. Under employment and loss of jobs by previously secure positions in state and local governments is just starting to be felt. Read this story in the Sacramento Bee to get an idea of how bad California is getting now.
3. The trauma of the stock market collapse and the loss of IRA and 401K assets has depleted the cash people can draw on to bridge a recession. Most people's wealth is related to their home equity and retirement accounts. Take the retirement account down 40% and you got problems.
4. Consumer debt is decreasing at the same time defaults are increasing, knocking one of the historic engines to get us out of recession right out of the box.
5. Options for small to medium size businesses to obtain financing shrink by the day. See the looming Chapter 11 filing for CIT.
6. Commercial real estate has just started to collapse, with the sharp decline in retail, food, and other areas of consumption just now filtering through to landlords. Unlike the stockmarket and banking shock in 2009 that was driven by market issues and exotic financial products, the commercial real estate collapse is "Old School". No tennants, failed businesss, high vacancies and this will drag down the local and regional banks with it putting more pressure on the system and further delaying economic recovery.
7. New underwriting standards on mortgages make it almost impossible for self employed, sales, or new employed to purchase homes, particularly starter homes and condos, the historic entry level that puts the floor on a market. You can't have a new pool of buyers at the low end to put a floor on prices if they can't qualify under new stricter standards.
8. Moral hazard of people making strategic decisions to walk away from homes is much higher then people imagine. Read the story in the Seattle Times. The more people who make a decision to leave a home, the more it leads others to rationalize and do the same thing. Group dynamics at work.
9. No matter what Washington tells us, loans are NOT being reworked and the banks are in fact sitting on the TARP funds and bail out dollars. They have no interest in reworking loans, they want to hoard cash, pare debt and protect their margins. According to this barely reported Boston Fed study "they would have been better to just give the money directly to the home owners." Guess you missed that story while you were busy watching the Michael Jackson funeral.
10. Panic on the sell side when a market collapses can be as ugly and illogical as desperation to buy when the market is up.When people believe or feel that values are going to go even lower, those hanging on will start to sell at any price.
11. In past recessions there were always "places to go" where the jobs were good. Texas, Arizona, California, Oregon, Nevada, Utah, Colorado, Florida, Georgia. Ask yourself, where would you go to start over today and know there were jobs waiting to be had?
In short, I believe that the first wave of foreclosures were the foolish speculators, the hustlers, those duped into bad loans and others who are now symbolic of the excess of that mania. However, this next wave is a classic "job loss/no income" wave of problems from previously sound credits who are just now running out of time, money and ability to hang on, and who have seen the fallacy of the government loan reworking, the moral hazzard of people walking from homes and the fact that they have little or no prospect of their home appreciating back into positive territory again any time soon.
This ugly brew of social, job related, economic and psychological factors, when combined with government cluelessness about the impact of their decisions and their misplaced trust in the big banks and mortgage companies to work out loans, is about to lead to another round of losses in property values and a continued stream of homes into the already glutted market that is devoid of buyers in many markets.
I know this isn't going to make anyone comfortable, myself included. However, it drives home once again that those of us who work with and counsel people on what to do with their settlement or retirement dollars have to be extraordinarily passionate in explaining why more then ever guaranteed income, guaranteed lump sums, tax free money and exceptional safety are the most important elements when deciding what to do with your settlement dollars or retirement assets.
Guaranteed income in a recessionary market is worth it's weight in gold and structured settlement annuity income and lump sums are the ultimate safety net for these vulnerable people.