Economy: The Only Path to a
Meaningful, Lasting Recovery

What is the only path to a meaningful, lasting economic recovery? Michael lays it out for you.Throwing taxpayer money at conjured schemes to revive the economy needs to stop, but Washington does the exact opposite. They are spending their time on ideas that take money from peoples’ hard-earned taxes to help other people who made very bad decisions.

Here’s what I’m venting about…

Yesterday, it was reported that the U.S. Treasury Department is looking at a plan that could help one million homeowners avoid foreclosure. The proposal is about modifying delinquent and defaulted home mortgages, including write-down of principal. The report said that no government money is required. But we all know where there’s government involvement, there is expense.

According to California-based CoreLogic, 11 million American homeowners owe more on their homes today than what they are worth.

And the news for housing  just gets worse…

Sales of previously owned fell in June to a seven-month low. Homes are selling at a pace of 4.8 million units a year. In 2005, 7.1 million homes changes hands in theU.S.—realtors are working in business that has contracted by 33%, not to mention another one-third drop in the price of  homes selling in the marketplace.

Home purchases paid in cash account for about one-third of all transactions. The rate of canceled contracts to buy homes is jumping. The prices of homes keep falling (median price now $184,000) and a huge 3.77 million homes are on the market for sale right now.

According to Florida-based Lender Processing Services Inc., 6.35 million American homeowners are not current on their home loans.

Ben Bernanke has stated on several occasions that the depressed state of the housing market is keeping back consumer spending and affecting the economy. Bernanke is definitely right. We cannot have a meaningful economic recovery until the housing market recovers. The government realizes this and would like to do everything in its power to stabilize house prices and give life back to the market.

But is modifying home mortgages by reducing principal really the answer?

Let’s take your home. You bought it. You worked hard to pay the mortgage. Is it fair for your neighbor, who received a mortgage that he or she likely did not qualify for, to get a principal reduction in his/her outstanding mortgage? What does that do to the value of your home?

My readers know my position:  The less government interference there is in the marketplace, the better off the economy will be long-term.

The bottom line is that a great number of people (millions) bought houses they did not qualify for or they simply couldn’t afford. Somehow, they were able to get a mortgage because the government had very lax rules about qualifying.

Their actions, and those of Wall Street, brought the economy to its knees in 2008. Why do we continue to find ways to help those that made bad decisions, as opposed to just letting the market wash itself out?

With continued government interference, we are simply prolonging the inevitable deleveraging of the economy, which is so desperately needed to wash out the excesses created by the housing and mortgage boom. Until we let the economy hit bottom on its own, a meaningful and lasting recovery cannot happen.

Michael’s Personal Notes:

Who’s this fellow, Shaun Donovan?

Apparently, he’s the U.S.Secretary of Housing and Urban Development. Why do I care?

Donovan said last week that he believesU.S.home prices will climb as soon as the third quarter, as the number of foreclosures falls.

I totally disagree with Donovan. Rising long-term interest rates, 1.7 million homes in the U.S. in the foreclosure process, banks that will not loosen their lending requirements, about one-quarter of U.S. homes underwater (their mortgages are more than the value of the homes)…housing will not recover for years to come.

Yes, if you are lucky enough to have cash and pay cash for a foreclosed-upon home you buy from a bank, you will get a good deal. But how many people are in that position? And how long will you need to wait before you can flip that property to another buyer who will pay more than you did and qualify for a loan to buy the property?

I like to buy investments when they are rising, not when they are dead in the water and I need to wait years for them to recover…not a good use of investment capital.

Where the Market Stands: Where it’s Headed:

Is 428 points on the Dow Jones Industrial Average a lot of ground to cover? Not really. The Dow Jones is 428 points south of the 13,000 mark—an attainable and physiologically important milestone I believe the market can achieve.

I see that stock advisor sentiment is starting to turn bullish again, but there’s nothing to be overly concerned about yet. The government will spend more, the Fed will loosen more, corporate profits will continue. The immediate term looks good…the bear market rally plows along.

Short- to long-term, the risks of increasing national debt, the debasing of the greenback, and rapid inflation will be too overwhelming for the stock market. Enjoy profits in the market while they last, because they won’t.

What He Said:

“I’ve been writing to my readers for the past two years claiming the decline in the U.S. property market would not be the soft landing most analysts were expecting, but rather a hard landing. My view remains unchanged. The U.S. housing bust will be cut deeper and harder than most can realize today.” Michael Lombardi in PROFIT CONFIDENTIAL, June 13, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for worse times ahead.