The Silver Lining in the Double Dip Recession

Being faced with significant economic and political uncertainty the United States economy and its participants (that's us) have reacted like turtles, hiding in our shells, awaiting better times.

Clearly we are facing challenging times We have been facing low personal income growth, an increasing unemployment rate, uncertainty in the business climate, and a weak housing market.

In particular the weakness in the housing market is marked in six ways:

1. Record high home foreclosures that, according to Barclay's Bank, will not peak until 2011. These foreclosed properties will continue to flood the marketplace with inventory
2. A significant increase in strategic defaults, whereby home values have dropped so much that home owners send in the keys and move out, rather than keep owning an overvalued home.
3. One statistic claims that nearly 20% of all home mortgages are "underwater" because house values have dropped so significantly
4. Joblessness and economic uncertainty have reduced the demand for new housing
5. New home construction starts are at record lows. After a 15% drop in May, housing starts fell another 5% in June to a seasonally adjusted annual rate of 549,000. The Commerce Department estimated it to be the lowest level in eight months.
6. The oversupply of homes in the marketplace has reduced the value of homes in many states as sellers outnumber buyers.

Commercial Investments face major challenges On the commercial side of the ledger, we find that significant increase in business failures and restructuring is resulting in the loss in demand for commercial space nationwide. This has particularly affected:

• Retail centers,
• Office buildings
• Industrial buildings and flex parks This in turn is:
  • Reducing the demand for new buildings – now and for the immediate business cycle
  • Creating challenges for many commercial landlords
  • Reducing the value of commercial assets

Increasing commercial strategic defaults is making debt refinancing difficult. The loss in rental income and market valuation is creating challenges for refinancing of debt for the investors without enough equity or cash to increase their equity positions Highly leveraged purchases made in the real estate hey-days of 2006 – 2008 are the most at risk. At a recent economic symposium Allen Sinai, economist and founder of Decision Economics, voiced his concern: "The challenge is unique: poor and diminishing growth, a sticky unemployment rate, sky-high deficits, and a sovereign debt that makes us one of the most fiscally irresponsible countries in the world." Even more depressing is that more job losses are in front of us. Governors in many states will have to make tough decisions to cut staff as additional federal funds dry up and tax increases will not be warmly received by the electorate. (Note: Most States in the union are facing budget short falls. At Least 46 States have imposed cuts.)

As states have trouble raising revenues, this will in fact also have a trickle-down effect on counties and cities and other government supported organizations that rely on government funds. This in turn will force those agencies to trim staff.

In Oregon, the governor has already implemented a 9% budget decrease and will be implementing an additional 8% cut in order to help balance the budget. This is in addition to increased corporate taxes and use of reserve funds to balance the budget.

This sounds very foreboding but there is a silver lining for those that have a strong cash position.

The silver lining Many companies have right sized their businesses and are making a profit.

I recently had lunch with a business owner of a construction related firm, who cut half of his staff in order to stay in business. But he is now more optimistic and is looking to add staff to help his marketing efforts and re-grow his business. He expects a slow increase in growth moving forward as demand catches up with supply.

At this point, much of the business employment cutting has been accomplished (with the exception of government agencies). As of July 2010, Oregon's official unemployment rate was down to 10.6% from 11.4% in July of 2009. The Federal unemployment rate has been holding steady at 9.4%. Any cuts made by the government agencies may help the economy get stronger in the future.

Real Estate

Unprecedented low interest rates for home purchases:

• 30 Yr Fixed as low as 4.25%
• 15 Yr Fixed as low as 3.75%

These low interest rates will fuel demand to purchase homes as the prices drop to a place where average Oregonians can afford them.

Lower rates for apartment property purchases ( currently around 5% compared to the roughly 6.5% for commercial property purchases)

• Increased residential foreclosures mean lowered prices and opportunities for investors to buy homes as rentals
• Increased demographic demand for rentals is coming
• Significant reductions in Apartment vacancy rates are a reflection of the upcoming increased demand. In The Portland Metro area Vacancy rates dropped from 7% to 3.5% from January of 2010 to September of 2010.
• The "silver-lining" flipside to the unemployment picture is that 85 – 90% of Americans are either employed or in school.
• SBA financing is available ( at competitive interest rates and with low costs) to help small business owners buy a building for their business
• They only have to occupy 51% and can rent the rest of it to a tenant until they grow into it.

Other key market place indicators

• Banks are slowly recovering and have the cash they need to loan and generate income, albeit conservatively
• Many banks are ending their "pretend and extend" phase and are actively taking back properties and selling them as fast as they can to get them off of their books.
• Urban areas will recover faster than rural areas, so the risk is lower in urban areas.
• Oregon has the Urban Growth Boundary (UGB) for cities. This means that land values will come back as the recession winds down and the population increases.

If you have money, you have an excellent 6 – 12 month window to look for real estate opportunities in Oregon.

Residentially, we are one of the states with highest foreclosure rate (percentage wise), so there will be opportunities to buy your second home or a couple of investment homes. You can still buy a small home in Bend for $100,000 - $120,000 and many other rural areas around the state. (The Bend area unemployment rate is 17 – 20%, but rentals are showing lowered vacancy rates).

Commercially, there are buildings on the market but, with the exception of SBA loans that require only a 10% down, it is harder to finance commercial purchases unless you have lots of cash.

In my lifetime I have never seen prices this low for residential real estate. There is a market place adjustment occurring, which will reduce the value of residential homes in the near term, but values will go up as jobs and our population increases, especially in Oregon where the UGB limits the amount of land available for growth. Now is the time to invest… and for the turtles among us to start sticking our necks out.