So, how bad will the economic situation get?

How bad will the economy get? There are differing opinions on this, but the facts speak for themselves. The general consesus is that the downward economic spiral began with the subprime lending mess. In a nut shell, this was precipitated by groups such as ACORN, with the backing of some notable dimocrats (intentional spelling), Barney Frank et al, pressuring congress to get banks to lend money to anyone who could fog a mirror. This led to the development and widespread use of exotic loan products such as Option ARM loans, pick-a-pay loans, NINJA loans (No Job, No Income or Assets) and so on. These loans could be bundled and sold via products such as MBS/mortgage backed securities. Credit rating agencies were complicit in this as well by rating these junk mortgage products as AAA rated or somewhere thereabouts. Since this freed up lending institutions to sell their (bad) paper, there was ever greater incentive to fund more and more of these loans.

Having a real estate appraisal background I can tell you many appraisers saw this coming two years before most everyone else. One of the reasons for this was that mortgage brokers work on commission and banks were also eager to sell their paper. One recent survey indicated that 90% of appraisers felt pressured to "make the deal work." The actual number was more like 99.9%. If an appraiser refused to "hit the number" the broker or LO needed to make the deal work (i.e. appraise the house high enough to payoff the house, which had declined in value, the new SUV's, the flat screen TV's and other toys) then the appraiser was blacklisted and these blacklists were shared with other lenders, so the honest ethical appraiser was driven out of business while the number hitting scumbag was thriving. Many banks made use of AMC's which are Appraisal Management Companies. Until the law changed, AMC's were owned by the banks (there is still a tight relationship between the banks and AMC's since, if the AMC does not play ball with the appraisal values the bank can stop using them.) who would skim up to 75% of the appraisal fee. Driving down the price paid to the independent fee appraiser also helped put the honest appraisers out of work. The AMC's would only assign work to the appraisers who could hit the number. They would also lower the pay and demand faster turn times so the appraisals were decreasing in quality and the only appraisers who were "approved" to work for the AMC's were the unethical appraiser. The HVCC/Home Valuation Code of Conduct, which is pending, mandates use of AMC's which will ensure the housing crisis will continue in perpetuity. Many lenders are already mandating use of AMC's in anticipation of the HVCC passage.

Now, I have already mentioned that a big problem was the government mandating that banks loan to anyone with a pulse. What if you were an honest bank that did not want to do this? Then you engaged in Red Lining. Red Lining is illegal discrimination, so banks that did not want to lend to risky borrowers would flag certain zip codes/areas and instruct their underwriters to kill the appraisal so the deal would not fly. The result of this was that rehabbers and certain homeowners were not able to conduct legitimate revitalization in some inner city neighborhoods.

So, where is the housing situation at today? Currently banks are sitting on approximately 3 million foreclosed homes that have not been put on the market. While most people think the housing crisis is ending, keep in mind that the Alt-A (people with b,c,d, credit) defaults are just starting to hit and the conservative estimate is that there will be around 1.8 million Alt-A defaults. So 3 million homes plus 1.8 million homes = 4.8 million foreclosures that have yet to hit the market and further depress prices. Add to this 2 million unemployed in 2008 and 1.3 million unemployed so far in 2009 (which could end up being another 5 million unemployed by the end of 2009) and housing prices will not hit bottom for at least 3 years, or longer. Most people are not aware of just how bad the housing situation is due to the National Association of Realtor's propaganda division, which would make even Joseph Goebbels envious.

We also tend to localize the economy to our own borders and not think about the situation in the rest of the world. It's as bad in Europe and Asia as it is in America. We can't forget that all of the Obama bailouts WILL result in hyperinflation to equal Weimar Germany or Zimbabwe. Even before the bailouts, if everyone who held U.S. dollars cashed them in, they would only get 10 cents on the dollar in hard assets. Today it would be more like 3 cents on the dollar. I am expecting hyperinflation as early as 6 months and no later than 12 months. The stock market may be getting an upward bounce today, but I can see the DJIA at 5000 or 4000 shortly.

As to actual unemployment, currently 31 million people are on food stamps. This is a bit over 10% of the U.S. population. The latest government unemployment figures show 8% unemployment, but as 12% of mortgages are in default or late pay status, this would indicate a true unemployment rate of at least 10%-13%. This does not include underemployment where, say, an engineer gets terminated and can only find work at a fast food joint. Consider that a majority of job losses have been occurring in the financial sector, the construction sector, the real estate sector and the high paying manufacturing sector. Remember that the top 20% of income earners pay about 80% of the taxes. Now, it is not an even sliding scale, but with the top 10% of the top 20% of income earners out of work, the result is a loss of up to 30% or so of federal, state and local tax revenue. Obama's plan may call for tax increases, but there will be no one to pay them.

The retail sector will start losing more big retailers by mid-year and a 30% vacancy rate on commercial property is expected soon as well. The real estate trusts have been taking a hit. Worldwide freight shipments are down as is worldwide manufacturing. China is seeing a big increase in the number of unemployed (remember there are 1.3 billion Chinese, so a 10% unemployment rate over there puts 130 million out of work) as is much of Europe.

For the first time since the Civil War, we could see Americans starving to death. This is not an exaggeration or scare tactic. An objective look at the facts can lead to no other conclusion. Folks need to get into a survival frame of mind.