Use a 6 month gift from a relative to buy a home, thanks to the Tax Credit

January 12th, 2009 3:42 PM

Use a 6 month gift from a relative to buy a home, thanks to the Tax Credit

Via Jeff Belonger -- The FHA Expert.com -- FHA Loans -- FHA mortgages - USDA loans (Infinity Home Mortgage Company, Inc):

 

 

The government is handing out money as a long term loan.  Take advantage of this!!!

 

The Housing and Economic Recovery Act of 2008 produced the tax credit for First Time Homebuyers. In this case, to be eligible for the tax credit, a first time homebuyer is defined as : someone who had not owned a home from July 2, 2005, through July 1, 2008. In order to become eligible, you have to buy your home after April 8, 2008, and before July 1, 2009. I will go over some of the other guidelines later.

 

 

When it comes to buying a home, you can't borrower money to use as a down payment or for closing costs. And you can get county or state assistance under certain programs or grants, to use for your new home purchase. But when it comes to FHA loans, you can actually get 100% gift monies from a relative. It's called a gift because HUD doesn't want the burden of you having to pay back a loan after buying a new home. Hence why this tax credit is still a great way to help you get into a new home prior to July 1, 2009.  And you can still get up to 6% seller help even if you were to get a 100% gift from a family member.

 

 

So, how does this tax credit work?  Please read below for some details :

 

• The maximum tax credit is $7,500 for either a single taxpayer or a married couple filing jointly. It is 10% of the purchase price. So in order to get the maximum credit, the purchase price must be $75,000 or more.

• This credit is an interest free loan and the credit must be repaid over a 15 year period. This loan must be paid back by including one-fifteenth of the amount credited, or $500, as an additional tax on their 2010 return.

• There are income restrictions which can range from $150,000 to $170,000 for a joint return or from $75,000 to $95,000 for a single return. There are other factors involved when determining the actual income restrictions.

• This credit can't be used if you are buying a home from a close relative, which is to include a spouse, a grandparent, child, or even a grandchild.

• You can only use this tax credit for your primary home, not for a second home or an investment property.

 

There are some other restrictions, examples, and explanations to how this tax credit can work. For more information, please read : Tax Credit for First Time Homebuyers

 

 

An example of how this tax credit could work :

If you were to receive a $2,000 refund when filing your return, and you were eligible for an additional $7,500 if you choose to receive this credit, this means that your refund will now be $9,500 instead. On the flip side of things, if you were to owe $2,000, you would actually get back $5,500 instead of owing money.

 

 

One thing to keep in mind.... you can use this money for anything. How could you use this money?

• You could use it to repay other loans or debts.

• To invest in the market or CD's.

• To buy another property such as an investment property. But you would need to understand the seasoning requirements when putting this kind of money into your bank account.

• Use the money to fix up your new home that you just bought.

• To start a business.... to help a business grow.

• And as mentioned, FHA loans allow for 100% gift monies from a relative. Maybe you could thank them later on and give them the money back down the road. I know I wouldn't want this hanging over my head. As of January 1st, 2009, when buying a home with a FHA mortgage, you now need 3 1/2 percent down of your own money (gift monies allowed).

 

 

Lastly, talk to your tax accountant when it comes to the specifics of this tax credit and in regards to gifts and what is allowed before being taxed.

 

 

Happy house hunting. For a creative way to help you finance your new home, please don't hesitate to contact me. There are so many options out there and you need a creative loan officer that knows more than just the basics.

 

 

 

- FHA Loans - USDA Loans - Conventional Loans - VA Loans -

Experience & Knowledge at its BEST !!!

 

________________________________________________________________________________________

For more information on FHA loans, please go to this link. : The FHA Expert

For more information on how you can obtain your dream home, please click here : Mortgage Financing Options

For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags

 

Copyright © 2008 by Jeff Belonger

House Passes Stimulus Bill 01/28/2009

January 29th, 2009 10:43 AM

House Passes Stimulus Bill 01/28/2009

With Trends Like These, Who Needs Enemas?

January 23rd, 2009 7:59 PM

With Trends like These, Who Needs Enemas?

Via STANLEY FOSHA - The JD Samuelson Group (John Hall & Associates):

 The Chicago Tribune recently featured an article titled "8 Real Estate Trends for 2009". We did a news segment today with ABC15, part of our ongoing "Home Smart" series, outlining how that article's "Trends" related to our own market here in Phoenix.

  It struck me mid-production that the Real Estate insights from a Chicago paper have about as much to do with Phoenix Real Estate as a Chicago weather report has in common with....(hold on, I need to crank up the air conditioning)....with a warm 70 degree Phoenix in January afternoon. I'm guessing the Tribune picked the number "8" because it resembles the snowman in their driveway, or perhaps their knuckles froze solid at the keyboard on their way to a Top Ten List. Regardless, I decided to issue my own trendy list:

 "8 Real Estate Trends for 2009...the Phoenix Metropolitan Edition!"

  8. Income Producing Properties will Overshadow Owner Occupied Purchases

  The Great Price Plunge of 2008 has scarred the psyche of the average Valley home buyer. For the average consumer, awash in a daily sponge bath of negative Real Estate news, buying a house right now is like going on a tandem parachute jump with Helen Keller manning the rip cord. "When will we stop droppppiiinnnggggg?!?"

 Meanwhile, those nasty investor types that GOT RICH selling their wares back in the 2005-2006 Bubble Popping Contest, are clamoring back into the market. Why? Because we have thousands...not tens, not hundreds...yes, THOUSANDS of homes available for purchase today that will "CASH FLOW" immediately. Prices have burrowed into the $20 per foot range in some areas, with more to follow. Seeing as how a large chunk of Valley residents are now "former homeowners", thanks to foreclosure, the pool of future renters has more members than Richard Simmon's hot tub at Spring Break.

 If it makes money, it makes sense. Investors will mark 2009 as the year they struck gold.

  7. Fees Will Create Unease

  Recession 101: When the lump in your throat is bigger than the lump in your wallet, price tags become essential reading material. HOA Fees, Land Lease Fees, and Property Taxes will become deal killers in 2009. A penny shaved is a penny earned. Consumers will finally be asking the oft ignored question, "What DOES the HOA do for me?". Uh oh.

 Valley cities would be wise to begin comparing their own property tax rates to those of their neighboring municipalities. The bad news is that property taxes will likely rise regardless of common sense. Tis the way of government after all! The good news is that you can now list your town as a "dependant".

6. East Valley Will Stabilize. West Side Needs a Defibrillator

 The dirty little secret in Valley Real Estate is that Newton's Law doesn't apply to Real Estate. All things do not fall at equal speed. While certain communities are declining, many pockets of stabilization have already taken place. There are communities in South Scottsdale for instance that stabilized mid-2008, and are now poised for modest value gains.

 Meanwhile back at the paved over ranch...the west Valley continues to dominate the new to market listings, the under $100k club, and the bank owned list of deeds. Were West Valley loan officers issued invisible ink? You mean signatures made in spray paint aren't valid? For every foreclosed home, you have one more opportunity to rent out an investment property. We see 2009 as being the year of the investor in the West Valley.

5. Outlying Communities will Face "Shrinkage"

  "I was in the pool!"...won't be a good enough excuse for the condemned outlying areas to explain their cooling off, and their population growth shrinkage. Buckeye, Maricopa, Queen Creek, Surprise grew with the motto of "If you build it they will come." Well, they will come until gas hits $4 per gallon, construction jobs disappear, and 20,000 homes become available for sale between your town and the job corridor.

  The banks are swinging a wrecking ball at home values in these towns as they struggle to escape their own house of cards. As the banks diminish the property values, the few homeowners left in town are going to take a hard look around and think to themselves, " Why am I paying these banks MY $250k mortgage payment...when the banks are selling the identical house for $90K?". When I get to the bottom I go back to the top of the slide.

4. New Home Builders Go the Way of the Doh!-Doh!

  With costs between $60-$80 per foot to build a basic Xerox-Attack-of-the-Clones type home on a blank stretch of once pristine desert, new home builders simply can't compete with the bank repos. Show me a new home community near Phoenix and I will point out the hundreds of foreclosed homes surrounding it, all priced at less than half the cost to build new homes.

  I suspect new home builders can only survive if they post a profit. Even Bernie Madoff couldn't make the current books look good on paper. The valley is overbuilt. Having more homes than people only works if your last name is McCain. We don't need a wave of job growth. We need a tsunami. The question is not "How many builders will go under?", but rather, "How many will go under without completing the communities they are now building?". Buying a new home right now is like pogo sticking through a minefield. When the sales trailer is hooked to a running vehicle, buyer beware.

3. Proximity, Thy Name Conquers All

  Theoretically, gasoline never should have approached the $4 per gallon heights that it achieved. It was an artificial commodity price increase...but that doesn't really matter. American consumers haven't been this emotionally scarred since "The Crying Game". Not everyone is converting to a horse drawn Prius, but virtually everyone checks the gas gauge before the rear view mirror these days. The fear of a return to $4 gas is here, it is real, it will have a dramatic effect on the 2009 consumer.

Where there are jobs, there will be real estate purchases.

2. New Home Starts...Will Stop

   In a perfect world we could hit a magic button on the new home builder and covert him into a repo-home remodeler. It's a strange paradox that builders are going under faster than Oprah in an undertow, yet we have thousands of repossessed homes that could use a guy with hammerin, nailin, and sawin skills. Did I mention we are overbuilt?

   Many builders will continue to build, holding onto their employees, hoping to wait out the storm. They remind me of Yul Brenner, taking a long drag off a Marlboro through the hole in his trachea, gurgling "I'm gonna beat this"....thulump.

1. Price is King.

Your co-worker tells you he just bought a new home this past weekend. Your first question is:

 a. "Does it have granite countertops?"

b. "Did it come with a landscaping allowance?"

c. "How MUCH did you pay?"

   If you answered "c.", congratulations...you greedy money worshipper! Gordon Gecko would be so proud. As frightened as the masses are of real estate, they are equally as interested. Unlike stocks, bonds, or derivatives, Real Estate is a tangible asset. People ‘see' it everyday as they drive to work, look out their window, stand on a floor. The Valley news story of 2009 will be the crash landing of the Real Estate market. It won't be pretty, there will be casualties, but the descent will be over with! Disembark.

  The drumbeat of recession should place "price" as the favorite focus group for consumers. If they are paying attention to the price of milk, you can bet your food stamps they'll be line iteming the cost of their next home. "Honey, do we really need faceplates on the outlets?". We track the market daily in my office. We are seeing feeding frenzies in certain areas where the prices have finally hit their sweet spot. These are but flickers of light in a sea of darkness, but after twenty years of watching this market go up, down, sideways...those flickers appear to be the end of the tunnel. Or, more like the reflection off the bottom of the well. How the Valley climbs out of the well is a story for a different year. In 2009 we just need to find the bottom.

Freddie/Fannie Suspend Foreclosures Until 1-31-09 (Reminder)

January 22nd, 2009 1:20 PM

Freddie/Fannie Suspend Foreclosures Until 1-31-09 (REMINDER)

Via Pederson Properties, Inc. (Coldwell Banker Residential Brokerage):

Freddie Mac is extending its suspension of all foreclosure sales and evictions involving occupied single family and 2-4 unit properties with Freddie Mac-owned mortgages through January 31, 2009. The suspension does not apply to vacant single family properties.

The extension will also provide servicers with more time to help troubled borrowers find an alternative to foreclosure and implement the Streamlined Modification Program that went into operation on December 15, 2008. Developed by Freddie Mac, Fannie Mae, the Federal Housing Finance Agency (FHFA), HOPE Now and 27 mortgage servicers, the Streamlined Modification Program was designed to expedite loan modifications for eligible borrowers who have missed three or more mortgage payments.

For additional information on the Freddie Mac program, click here.

Fannie Mae is extending the suspension of foreclosure sales and evictions from single-family properties through January 31, 2009.

This action will enable the company to work with mortgage servicers to further implement the Streamlined Modification Program (SMP) announced on November 11, 2008 and initiated on December 15, 2008. The extension will also provide additional time for the company to operationalize its new National REO Rental Policy, which will allow renters in company-owned foreclosed properties to stay in their homes. Details of the new policy are expected to be announced shortly.

For additional information about the Fannie Mae program, click here.

26th Annual Lowcountry Oyster Festival at Boone Hall Plantation

January 19th, 2009 11:03 PM

26th Annual Lowcountry Oyster Festival ~ Boone Hall Plantation 

Via Jim & Maria Hart ~ Charleston, SC Real Estate (Agent Owned Realty):

Just imagine this..... more than 65,000 pounds of oysters!

Two tractor-trailers full of oysters will roll onto the grounds at Boone Hall Plantation on Sunday, January 25, 2009 to kick off the 26th Annual Lowcountry Oyster Festival.  This event has been named in the "top 20 events in the southeast" by the Southeastern Tourism Society!

Held by the Greater Charleston Restaurant Association, the "Oyster Fest" gates open at 10:30 am with free parking available. Besides having plenty of oysters, other food will also be available.  The "Food Court" will feature food from some of the area's most popular restaurants, so everyone will be able to find something great to eat.

Activities on the main stage include the Oyster Shucking Contest, the Oyster Eating Contest and local live entertainment.  Also, the winner of the Oyster Recipe Contest will be announced and the kids will love the Children's Area designed to keep them happy and having fun.

Oysters are sold by the bucket (approximately 3-4 dozen) for market value and served with cocktail sauce and crackers.  You can either BYO knife and glove or you can purchase them at the event. Beer, soft drinks and other beverages will be sold.

Proceeds benefit the Ronald McDonald House, Hollings Cancer Center, Travel Council and Charleston County Science Materials Resource Center.

Advance tickets for the 26th Annual Oyster Festival will sell for $10.00 and will be available at all Charleston area Applebee's Restaurants and through the Association Office.  Tickets can also be purchased at the event for $12.00 (kids 10 and younger are admitted free when accompanied with an adult). 

 

So make sure you clear your calendar for Sunday, January 25th, because you won't want to miss this!

 

Homes for Sale at The Grande Dunes in Myrtle Beach - January 2009 Report

January 18th, 2009 2:51 AM

Homes for Sale at The Grande Dunes in Myrtle Beach - January 2009 Report

How Company Logos Will Look Like When The Crisis is Finally Over...

January 15th, 2009 1:14 PM

USDA Rural Housing Loans... The Most Under-Utilized Mortgage Program In America

January 13th, 2009 12:11 PM

USDA Rural Housing Loans.....The Most Under-Utilized Mortgage Program In America 

Via Ron Withers - Mortgage Professional (Sr. Loan Officer, LMB) (Town & Country Mortgage Services, Inc.):

 This post is for consumers/homebuyers, Real Estate Professionals and Mortgage Professionals that may not have a good working knowledge of the features and benefits of the US Department of Agriculture's  Guaranteed Rural Housing program. Over the years I have done a number of these loans and have come to believe that it is one of the most under-utilized mortgage loan programs in the United States. It has many flexible features not found in Conventional and FHA loans.

For those real estate and mortgage professionals that have been around for a while, this program is not to be confused with their 502 program (direct or subsidized). See Postscript #3 below. When I speak with Real Estate professionals, quite  often they have the impression that this program is a so-called "red tape" program. Not the case!  Particularly with an experienced or seasoned loan officer. As you read the following information on the advantages of using the USDA Guaranteed Rural Housing program and some of its' salient features I am certain that you would see some great opportunity in directing some of your clients toward this mortgage program.  Some of the information below does pertain to these loans in the State of Florida and is provided for information/illustration and information is available on the USDA website for your geographic location. Likewise these loans are subject to the property being located in an eligible area. A link is provided to determine if a specific property address may be eligible for USDA-GRH financing.

Advantages:

• No down payment required.

• No Mortgage Insurance.

• No cash reserves required.

• No seller contribution limit.

• No Prepayment Penalty

• Loan up to 102%* of appraised value allowed...not the lesser of Sale Price or Appraisal

• Loan amount can include closing costs and prepaids up to appraised value.

• No stated maximum loan amount; maximum loan based on repayment ability

•No First Time Homebuyer Requirement

• New and existing homes OK

• Fully amortized 30-year fixed rate loan

• No minimum credit score required...common sense underwriting allowed.

• No minimum cash contribution required from borrower.

• No limit on CLTV when soft second financing such as SHIP or HOME is used for closing costs and prepaids.

• No limitation on source of funds for closing costs. No seasoning requirement.

• 100% gifted closing cost or down payment assistance is permitted.

• Non-traditional credit may substitute for lack of traditional credit history.

• No derogatory credit explanations required when credit score is 620 or above.

•Rent is not verified with FICO of 620 or more.

• Qualifying ratios of 29%/41%...29% PITI to Income and 41% Total Debt to Income, however standard ratios may be exceeded with documented compensating factors.

• Automatic ratios waiver of 31%/43% for homes built after January 1, 2000.

• Conventional type loan packaging with only 1 extra form required.

• Competitive rates (set by underwriting lenders)

*Appraisal may be exceeded by amount of Guarantee Fee

Determining if property is in a Rural Development designated rural area:

 http://eligibility.sc.egov.usda.gov/   

Determining if applicant(s) have an acceptable credit history:

• Credit history must indicate a reasonable willingness to meet obligations when due.

• Streamlined credit approval when primary applicant has a middle credit score at 620 or above.

• No minimum credit scores.

• Lack of credit is not derogatory. Alternative credit verifications are allowed, typically 3 lines.

• Lenders make the credit decision.

Income eligibility:

Project the cumulative gross income of all adults in the household.

THE GROSS INCOME LIMITS CAN BE MUCH HIGHER THAN THE ADJUSTED INCOME LIMITS SHOWN IN THIS TABLE

If the projected dependable income exceeds the limits, certain adjustments can be made, such as childcare expenses for children age 12 or younger and paid to someone outside the family. You also can deduct one $480 annual deduction for anyone under 18 or a student who is not one of the applicants. Other deductions may be available (see FL/VI Handbook or RD Instruction 1980-D, www.rurdev.usda.gov/regs

Example: Clay County 4-person family (2 adults, 2 children) has a gross income of $80,310. Child care for the two children age 12 or less is $10,000 annually. Is the threshold income at or below the limit? YES. $80,310 less $10,000 child care less $480 for each child = $69,350.

Counties	1-person	2-person	3-person	4-person	5-person	6-person	7-person	8-person
All Florida & Virgin Island Counties EXCEPT those listed below.	48,000	54,850	61,700	68,550	74,050	79,000	85,000	90,500
Clay, Duval, Nassau, St. Johns	48,550	55,500	62,400	69,350	74,900	80,450	86,000	91,550
Collier	56,200	64,250	72,250	80,300	86,700	93,150	99,950	106,000
Palm Beach	51,850	59,250	66,650	74,050	79,950	85,900	91,800	97,750
Broward, Pinellas, Monroe are NOT eligible

 

See the easy to use calculator at: http://eligibility.sc.egov.usda.gov/eligibility  Click on "Single Family Housing" under "Income Eligibility"

Applicant(s) repayment ability:

Ratio limits are 29 front (housing, PITI), 41 back (total debt, MOTI). Rural Development generally allows expanded repayment ratios if recommended by the lender's underwriter. 31%/43% automatic for dwelling built after 1/1/2000.

Other eligibility criteria:

• Do not own a suitable dwelling.

• Insufficient resources to secure conventional 80% loan without the guarantee.

• U.S. citizen or permanent resident or qualified alien.

• Financed dwelling will be primary residence.

Loan-To-Value (LTV) and Loan Limit:

• 102% LTV for the guaranteed first mortgage loan when including the guarantee fee, 100% LTV without the fee included.

• Loan amount can exceed appraised value by the amount of the guarantee fee.

• There is no loan limit

P.S. #1

This post script has been added to this blog as I received a very nice "thank you" email from an USDA Rural Housing official  in Florida thanking me for posting this blog regarding their USDA GRH program. I thought it was very nice of them to take the time to express their appreciation. They did provide a comment about a correction in the program information which I have done. It's great that information posted here on ActiveRain does get noticed or picked up by consumers/officials and they provide feedback accordingly. The text of this email is as follows:

Hi Ron

THANKS so much for your blog on the web. One of employees in Ohio saw it and pointed it out to me. You may know, but I work out of our Gainesville headquarters. I write the materials about the guaranteed residential loan product.

I'm sorry I had a typo on the Quick Guide. I gave info on streamlined documentation with FICO of 620 or above. BUT then forgot to change the section "Determining if applicant(s) have an acceptable credit history" in reference to "660" that should have said "620".

We trying to make this product more lender friendly and family friendly. I've been a part of writing a number of significant changes over the past 16 years, since the program inception.

You've probably already done this but you may want to consider inviting our local staff to assist with any seminars you present to your realtors, builders, or applicants.

You are correct that this product is the best one for families meeting four simple guidelines: Do they have less than 20% down payment; is the property in an eligible area; is their adjusted household income within the limits; and do they have a reasonable credit history.

Again, thanks so much. We appreciate it.

P.S. #2  6/21/2008

I have been modestly surprised by the amount of  interest that this post has generated.  In addition to the comments posted here I have received calls and emails from consumers, realtors and loan officers from all over the United States.

Given the current climate of the real estate market as well as the mortgage marketplace this is the only competitive and true 100% financing program left in the mortgage industry....and guess what?   It's still Under-utilized!

P.S. #3 -- 6/26/2008

Since my original posting date numerous people have inquired/commented about the 502 Direct Program that is briefly mentioned above. Below is more specific information for USDA's Direct program so a contrast may be drawn in respect to the Guaranteed Rural Housing Program.

Unlike, USDA Guraranteed Rural Housing loans originated by most of us, Rural Housing Direct Loans are loans that are directly funded by the Government.   These loans are available for low- and very low-income households to obtain homeownership.  Applicants may obtain 100% financing to purchase an existing dwelling, purchase a site and construct a dwelling, or purchase newly constructed dwellings located in rural areas.  Mortgage payments are based on the household's adjusted income.  These loans are commonly referred to as Section 502 Direct Loans.

Purpose:  Section 502 loans are primarily used to help low-income individuals or households purchase homes in rural areas. Funds can be used to build, repair, renovate or relocate a home, or to purchase and prepare sites, including providing water and sewage facilities.

Eligibility:  Applicants for direct loans from HCFP must have very low or low incomes.   Very low income is defined as below 50 percent of the area median income (AMI); low income is between 50 and 80 percent of AMI; moderate income is 80 to 100 percent of AMI.  Click here to review area income limits for this program.  Families must be without adequate housing, but be able to afford the mortgage payments, including taxes and insurance, which are typically within 22 to 26 percent of an applicant's income.  However, payment subsidy is available to applicants to enhance repayment ability.  Applicants must be unable to obtain credit elsewhere, yet have reasonable credit histories. .

Terms:  Loans are for up to 33 years (38 for those with incomes below 60 percent of AMI and who cannot afford 33-year terms). The term is 30 years for manufactured homes. The promissory note interest rate is set by HCFP based on the Government's cost of money.  However, that interest rate is modified by payment assistance subsidy.

Standards:  Under the Section 502 program, housing must be modest in size, design, and cost. Modest housing is property that is considered modest for the area, does not have market value in excess of the applicable area loan limit, and does not have certain prohibited features. Houses constructed, purchased, or rehabilitated must meet the voluntary national model building code adopted by the state and HCFP thermal and site standards. Manufactured housing must be permanently installed and meet the HUD Manufactured Housing Construction and Safety Standards and HCFP thermal and site standards.

Approval:  Rural Development officials should make a decision within 30 days of the Rural Development office's receipt of the application.

2009 Market and Economic Predictions

January 11th, 2009 12:06 AM

2009 Market and Economic Predictions

Via Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder):

As promised I put together my list of market and economic predictions for the New Year.  I somewhat unfortunately managed to go 10 for 10 in last years predictions (Recap).  Admittedly my crystal ball is a bit hazier this year, and the law of averages should give people hope.  Sorry, if my predictions this year aren't any more optimistic, but I'm not going to pull a David Lereah and will just call them like I see them.

1. The "Credit Crisis" morphs into much wider economic crisis

During 2008 we saw what was first labeled as the sub-prime crisis morph into a mortgage crisis then a credit crisis as problems spread to every type of debt security.  This year we are going to see the issues spread much deeper into the wider economy.  Job losses, particularly during the last quarter of 2008 were horrific using the reported government numbers, but downright terrifying when you factor out their number fudging.  In much the same way as government inflation numbers showed almost low inflation over the past several years when it was fairly high, there's several artifacts of the BLS's job reports that make them look much better than they really are.  Things such as the Birth/Death model and the fact that 637,000 left the job force last month because they couldn't find work (so they obviously don't count).  Using broader measures without these fudge factors, unemployment is the worst since 1983, running closer to 12% at the same time job losses are accelerating.

2. The recession gets an upgrade

Ok, I'm getting a little ahead of myself here, after all it was just officially declared we were in a recession about a month ago (backdated to last Dec) but almost everybody crunching the number on their own could have pretty much declared a recession over a year ago.  While we almost certainly won't get an official declaration this year, I think it will become apparent to independent number crunchers we will be closing in on depression territory by years end.  A depression is defined as a GDP loss of over 10%  Almost across the board economic numbers are coming in as some of the worst on record and in many cases the plunges are worse than they were in the 1930 time frame. 

3. Pension funds, the biggest non-story of 2008 becomes THE STORY of 2009

This maybe one of the biggest stories of this last year and not next to no major press.  Simply put many of the largest public pension funds were trying to be hedge funds and were decimated.  These pension funds everybody expects to be invested in nice safe things found themselves already underfunded and decided to pile money into riskier and riskier things, CDO's, risky MBS's, huge positions in financial stocks, even the historically volatile commodity market. 

Take for example CalPERS, California's massive pension fund, they lost 103% on their residential morgage investments.  Yes, you read that right 103%, because like a hedge fund, leveraged up and used borrowed money.  CalPERS lost 25% of all assets just since July 1st ($70 Billion), and while I can't find the number to reference, I saw it calculated they lost 47% of assets in the last year.  Of course learning their lessons from Bear Sterns and Lehman Brothers, they continue to claim, nothing to see here, we're well capitalized. 

Unfortunately, CalPERS is far from alone, this same type of risk taking was par for the course among many of the large pension fund and so far the losses have been kept surprisingly quiet.  Baring the most amazing economic recovery in history, many are toast and the damage is trillions.

4. House prices continue to fall, but in most regions not as fast

I'm basing this mainly on historical price trends in when regional real estate markets have collapsed.  The price declines typically last 5-7 years before bottoming out, but the steepest of the price declines typically occur within the first 2 years before leveling off somewhat. 

5. The stock market is far from seeing a long term bottom

Back in Oct. when we hit an intermediate bottom on the equity markets, about 738 on the S&P500, I started telling people I thought there was a good chance we were about to start a multi-month rally, mainly due to the massively negative sentiment I was seeing.  As a side note it's interesting that in almost all markets, sentiment is the most negative near bottoms and most positive right at tops.  So far we've managed to rally for a month and a half and it may continue for some time, but we are far from the overall bottom.

For example during the great depression we saw more than half a dozen multi-month stock market rallies taking the market up over 40% in short periods of time, yet despite this the total loss from peak to trough was nearly 93%.  Based on many types of analysis that people have done and some of my own looking at technical patterns, historical trends and economic impacts and valuations, I think a very likely bottom could be in the 300-500 range on the S&P500 within the next couple years.  That would equate to a 68-81% loss off of the peak or 45-68% loss of where we currently are after all the nastyness in the fall. 

People subscribing the buy and hold philosophy maybe in for a shock.  The whole stock market comes back and gains 8% of year over time that people like to spout is actually predicating on picking some very "convenient" date ranges.  There's been some rather lengthy (15-20 year) periods in the last century where annual stock market returns were closer to 2% and well below that of bonds.

6. Where does the bailout money come from when it's time to pay up?

When you add up all the bailout money that's been committed to in the last several months it adds up to over $8 Trillion.  Yes, $8 Trillion, to put that in perspective the total tax revenues of the US government last year was $2.7 trillion.  While that much money has been committed to, that is not the same as actually spent or handed over, similar to social security.  Most of it is in the form of backing various debt securities, which are likely to go bad in the future.  It's basically a giant credit default swap written by the government, and we've all seen what happens to those.  So, what happens when it comes time to pay up?  Who knows?  Truthfully I don't think they have a plan, I think they're just trying to kick the can down the road a little bit longer hoping for a miracle, and a new person to be in their position.  This maybe related to the next prediction.

7. A crash in the US Treasury market?

This is probably the prediction I am feeling the haziest about, particularly since I thought we were on the verge of a crash in the treasury market late last year and instead it rallied.  But the US treasury market is beginning to look like just another giant asset bubble, and asset bubbles have a tendency to continue longer than anyone expects before collapsing.  Right now prices of long term US treasuries are the highest, thus yields the lowest they've been in, well as long I can find historical data.  This is mainly due to a flight to safety from all other asset classes, particularly other types of debt, mortgages, corporate corporate bonds, etc.

Now the problem, is this is depressing long term US treasury yields to a range of 2.5% at the same time the US is taking on a unsustainable debt load plus massive future bailout commitments (see #6).  So, either the market for US treasuries is pricing in a very, very lengthy period of deflation/depression or the market is just setting up for a spectacular crash very similar to the situation in 1931 that sends interest rates soaring.  Neither is good but given the US debt load now, a treasury crash this would bankrupt the US, giving the US two choices of either hyper-inflation or flat out defaulting on debt, both which have some terrifying consequences.  Interestingly enough, guess what's the best performing asset in hyper-inflation, yes real estate.

 

8. GM files for bankruptcy despite the automaker bailout

They just got billions in low cost government loans, but that isn't going to tide them over for very long.  Given how fast they are burning cash, (you couldn't burn it faster with a forklift and a blast furnace) along with a continued economic decline they'll need continuous giant cash infusions.  There's a good chance the next cash infusion this spring comes in the form of DIP (debtor in possession) financing for a pre-packaged bankruptcy.  Really, a bankruptcy is the best thing that could happen to GM as it's the only legal way it's going to be able to restructure in a way that allows for long term survival.  Chrysler is in the same boat, but Ford is in substantially better financial shape and will probably avoid bankruptcy.  If the government really wanted to help Detroit it would be better off using part of that money to supply seed funding to several new car companies but unbordened by past liabilities and being smaller and more agile could be more innovative.

9. Regional bank failures and consolidation accelerate

I was somewhat shocked to only see 25 bank failures on the FDIC's Failed Bank List at the end of the year.  Though you could realistically add several others like Wachovia that when through FDIC forced/assisted mergers.  To me not proof that the banking system is in better shape than I thought, but rather that the FDIC and OTS are even more incompetent than I thought.  There are dozens, probably more like hundreds of regional banks that appear better capitalized than they really are, due to um, creative accounting. As far as the biggest of the banks go, keep an eye on Wells Fargo, who've continued to profess they are clean, just don't look to far into their books.

Allowing them to continue to operate while realistically very under-capitalized is putting more and more depositor and tax payer money at risk.  These bank failures and mergers mean that the banking system will continue to consolidate into a few super banks, clearly including the likes of Citigroup, Bank of America, JP Morgan/Chase, etc.  The problem is these are some of the worst offenders out there, they simply get to survive because they happened to be the biggest thus are getting the direct government assistance.  Is this really good for America?  I think you know the answer to that one.

10. A revolt against corruption

The last 10 years ago has probably been some of the most corrupt years this country has seen at all levels both government and corporate.  Much of this corruption still has yet to get the exposure it rightfully deserves.  What was once frowned upon became the status quo.

Maybe this is more of a hope than a prediction, but 2009 may mark a turning point in this cycle.  Maybe it'll be a new incoming president (for the record I think both parties are equally as corrupt) or maybe the spreading economic problems will finally cause people not to be able to afford their cable bill, thus interrupt their stream of American Idol and Dancing With The Stars.  I don't know but hopefully people not only wake up but start to display the outrage needed to actually change things.

Things to Remember That Changed for 2009:

January 9th, 2009 2:47 PM

Things to remember that changed for 2009

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