Thus far, of course, Prechter’s forecast has not been realized as of today the current market rally has extended to above the 11,200 point level on the Dow. This move has taken the market averages to near the upper level of the rally range forecast by Prechter which is about Dow 11,300 to 11,600. He therefore has not modified his forecast and thinks that an over extended market rally is near a reversal point and that in time much lower prices will be realized as the bear market resumes.

This forecast differs markedly from that of most market analysts, investment advisory service news letters and talking head TV gurus who in general are talking about the resumption of a bull market that will make new all-time highs. In fact, the glowing bullish forecasts have reached the level and exuberance that prevailed immediately prior to the sharp fall from about the 14,000 Dow level. However, as any decent market technician can tell you the current market is overextended by any indicator. A good technician would have to tell you that at the very least a correction of 10 to 20% is most likely from current levels. Of note, the famous investor Jim Rogers is forecasting a sharp 20% correction, perhaps far more.

Robert Prechter takes a much more dismal view of market conditions. He feels that worldwide deflationary forces are taking hold which will completely overpower the governments of the world effort’s to reinflate markets. In his view, and mine, the deleveraging process still has far to go before a new bull market begans from much lower levels. Robert Prechter is sticking with his grand super cycle deflation forecast and in fact does not predict a bottom until 2016. Now that is a grim forecast.

His forecast seems possible when one considers the unfinished business of debt liquidation and delevering that the US, UK, Spanish, Portugal, Iceland, Dubai, Greece, Italian, and other economies face over coming months and years. While over the past few months Iceland, Dubai, and Greece have been at the forefront of the sovereign debt issue, those troubles pale compared to future problems that will be experienced by the UK, Spain, and the US as they struggle to finance and reduce their tremendous debt burdens. The current acceleration of bread and circuses to the restless masses who feel entitled to government benefits is sure to end badly.

The liquidation of debt, efforts to prevent default, and in some cases eventual default, is deflationary in nature. Greece is a good current example of deinflation forces at work as the Greek government has been forced to cut back on public sector spending, including cuts in pensions for government workers as well as reductions in salaries, as it struggles to reduce government expenditures. A large number of workers confronted with an immediate 10% to 20% reduction in income will quickly result in a hit to Greece’s GDP output. When people have less income they are forced to cut back on discretionary spending. They also become angry and difficult to control. Civil disorder becomes common. That is highly disruptive to business activity and is not good for any economy.

Deflationary forces are evident within the US economy as official unemployment rates remain at near 10%. When one considers those who have given up on finding any employment and part-time workers who desire to be working full-time the unemployment rate soars to over 20%. In addition, excessive debt at the state and local level is beginning to force cutbacks in public employment and services as in a weak economy revenues fall and interest paid on debt becomes prohibitive. In some states, budget considerations and constraints are so severe that even essential public services, such as police and fire protection and education are being sharply cut back which is contributing to further unemployment. Only the federal government, which has the ability to create what is called money from thin air, is still expanding the federal government payroll.

It would therefore seem, that while Robert Prechter is making his stock market forecast based upon his understanding of Elliott wave principles, there are powerful deflationary forces at work that would seem to make his grand super cycle deflation forecast one that should be taken seriously.

Perhaps I should mention that Robert Prechter was correct in 1987 in forecasting a sharp market correction when most forecasters could only see smooth sailing ahead. The track record of his company, Elliott wave International, has been far better than most over an extended period of time. Perhaps you should at least consider that the stock market is overextended and is due for a sharp correction, and perhaps the swift downside action and revenge of an awakened big bad bear market.

The spending excesses and additional debt taken on by the US government are only going to make matters worse. There is a danger that at some point there would be a sharp increase in interest rates as lenders demand additional compensation for lending to an irresponsible government. This has already occurred in Greece as their bond market has deteriorated sharply as the full extent of their indebtedness has become public. Any similar spike in US interest rates would drive a stake through the heart of the economy. The impact on the real estate market, both residential and commercial, would be severe.

The super cycle deflation forecast of Robert Prechter comes with the warning that in a dramatic deflation no asset classes would be safe from a loss of value. This, of course, would include residential real estate, for as far as values have fallen a severe deflationary period would likely take values much lower. In major cities of Japan, residential prices have fallen as much as 80% from their highs of the 1980s. The depression in Japan has already been underway for about 20 years with no end in sight.

Could the United States be entering such a deflationary period? Here comes the good news, at least sort of good news. Robert Prechter forecasts that the stock market will reach bottom sometime during 2016 and that a new bull market will resume shortly thereafter. So if proven true, while grim, Prechter’s forecast is for the American depression to not last nearly as long as the one that still grips Japan.

If you are interested in purchasing real estate for the long-term, and plan to live in the house that you are purchasing, the reduction in prices so far probably does give you a good entry point. However, if you are purchasing a house for speculative purposes, that is to flip the property in the hope of making a short-term profit, you should be aware that it is likely that deflationary forces have not completed their work and that real estate prices, along with prices in every other asset class, could fall for many more years once the stock market once again heads South.

Perhaps, given the economic uncertainty that the increased and still growing debt levels of the United States government brings, it is more prudent to defer the purchase of any property unless you can buy it at a steep discount from its asking price and would be happy to live in the property for an extended period of time.

Tweet This Post

A potential disaster is in the making with a growing inventory of zombie commercial real estate buildings. A rapidly rising tide of troubled loans for empty or almost vacant commercial real estate threatens the survival of hundreds of the nation’s small and medium-sized banks.

Recent financial reports from federal regulators and industry analysts outline a new cycle of defaults in commercial real estate that they fear could cripple the economic recovery. Billions of dollars in commercial debt will have to be paid back or refinanced at a time when property values have plummeted and huge projects are underwater. According to the Federal Reserve Bank about $500 billion of loans will come due in 2010 alone and an equal amount every year through at least 2012.

Many banks that escaped the residential mortgage crisis are facing huge numbers of possible defaults by builders who erected thousands of office towers, condominiums and shopping centers with the easy credit available five years ago. With few tenants and the prospect of finding tenants almost nil, those developments are turning into what industry insiders call zombie buildings.

Zombie commercial real estate projects funded by zombie banks is a potent combination for further disaster in an already weak economy. 2010 will likely be a year that will end any talk of a recovery back to the bubble days of pre 2008. Continued weakness in unemployment and the residential real estate market is likely to keep spilling over into the commercial real estate market. The demand for office real estate and retail space does not hold up well in a high unemployment rate economy.

Tweet This Post

You should be aware that a home loan modification will probably affect your credit score. How it will do that depends on several variables. The loan modification can affect your credit negatively or positively. It depends on what sort of home loan modification you are able to secure and how far behind your payments are at the time of such modification.

In theory a modification should not hurt your credit score as you are not borrowing any money. You will be paying less in interest and this should reduce your debt burden. In fact, most lenders look favorably at a reduction in interest. In this manner, this could improve your credit.

It could get even better if your lender decides to forgive part of the loan. However, this is not something you should count on. However, if the lender writes off any part of the loan, it will show up as a smaller loan, and that should work to improve your credit rating.

The way your lender reports your home loan modification to the credit reporting agencies affects your credit. Most lenders will consider your loan paid as less than the amount owed. That will impact your credit score negatively. If you are in foreclosure at the time of a modification that will all definitely count against you. Still as you will be saving your home as compared to a foreclosure or short sale a loan modification is better on your credit record.

Home loan modifications used to be taxable. This means that the Internal Revenue Service considered the amount of the forgiven sum to be income. That was terrible news to many homeowners. To address the problems this was causing taxpayers, the Internal Revenue Service made an announcement in 2007 prohibiting this practice. As a result of that taxable income reversal, loan modifications from January 2004 to July 2007 and those adjusting from January 2009 to July 2012 no longer carry taxes against the forgiven debt.

Again, if you are having problems paying your mortgage, it may be a good idea to contact a home loan modification professional. A professional can help you to reduce the interest on your mortgage, have the lender possibly drop late charges, and could perhaps go as far as to renegotiate the principal on your loan.

However, a word of warning. Take the time to investigate the person or company before signing any agreement for home loan modification services. So many American families are desperate for home loan services involving home loan modification that the field has been fertile ground for crooks and scam artists. Families who are in a great hurry and under tremendous financial and emotional stress are all too often easy prey for professional con men.

Tweet This Post

Perhaps part of the problem with the state of denial is that the peak oil theory is not well understood or not understood at all by the masses. There are those who believe that peak oil means that oil will soon not be available at any price. And since crude oil is still available and oil fields are still being developed around the world there is no danger of running out of oil so peak oil is only a theory that can be disregarded for the next 50 to 100 years.

Those people fail to understand that peak oil means the all of the low hanging fruit of new oil fields has already been discovered. In the future oil will be far more difficult and expensive to extract from deep water fields and oil fields located in remote regions of the world with no or poor infrastructure in place.

Future oil fields will require another shrinking resource, large amounts of capital, to develop the fields and to bring the oil to market. They will also require extensive use of high tech extraction and complicated transportation systems to bring the oil out of the earth and to transport it to refineries. While oil will be available fo a long time to come it is going to be very expensive to develop new sources and the oil is going to be extremely expensive.

It’s difficult for me to understand why people can’t or accept the fact that in a finite world resources, even crude oil resources, will eventually be depleted. The same people have no difficulty understanding that with a sugar bowl if you continue to take scoops out without replacing the contents from time to time eventually the bowl becomes empty. Yet, the same people are in denial about the finite nature of oil. They seem to think that a resource that took millions of years to form infinite amounts will always be in plentiful supply even though we are drawing down at a high rate an non-replaceable resource.

One time bomb that is rapidly ticking away that will forcefully get the peak oil concept across is the catastrophic decline in the rate of production of Mexico’s Cantarell oil field. Mexico is the third largest supplier of oil to the United States. Within two years it is highly likely that Mexico will not be able to export ANY oil to the US market. Whatever oil they produce will be needed for the Mexican domestic market.

Even the Peak Oil deniers will have to rethink their position on peak oil as the price skyrockets to $200 a barrel and beyond. That day may not be so far away. The impact that peak oil will have on the housing market be considerable. The cost of commuting from the suburbs to faraway places of employment will become for many people cost prohibitive. The value of homes in the suburbs will continue to decline as homeowners seek to find housing close to employment centers.

Condominium owners living in high-rise buildings may also find their dwellings out of favor as with peak oil the cost of heating and cooling such structures will soar. High rise living dwellers who depend upon elevators to access their apartments will likely experience problems as developers struggle to maintain operating systems and services that cost far more than the expenses in their initial budgets.

To maintain a reasonable standard of living communities will need to be built that provide employment centers and living quarters that are in close proximity. Neighborhoods will need to be developed that are once again friendly to pedestrian traffic. buildings will need to be built to a height of only 4 to 5 stories. No doubt that the housing market will be drastically impacted as the consequences of peak oil are felt throughout the economy. Over the long run, communities will likely be built on a much more human scale. However, we can expect a long transition period from the old economy and way of living to the new that will be difficult for many people to adjust to.

The time for the consequences of peak oil to kick in with a vengeance is near. We had best prepare ourselves now are the transition to a new way of living will be a difficult one.

Tweet This Post

The following is from an article posted on The New York Times by Roger Lowenstein, an outside director of the Sequoia Fund.
======================================

Voluntary mortgage defaults are a new phenomenon. Time was, Americans would do anything to pay their mortgage — forgo a new car or a vacation, even put a younger family member to work. But the housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible?

Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.” (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)

The moral suasion has continued under President Obama, who has urged that homeowners follow the “responsible” course. Indeed, HUD-approved housing counselors are supposed to counsel people against foreclosure. In many cases, this means counseling people to throw away money. Brent White, a University of Arizona law professor, notes that a family who bought a three-bedroom home in Salinas, Calif., at the market top in 2006, with no down payment (then a common-enough occurrence), could theoretically have to wait 60 years to recover their equity. On the other hand, if they walked, they could rent a similar house for a pittance of their monthly mortgage.

There are two reasons why so-called strategic defaults have been considered antisocial and perhaps amoral. One is that foreclosures depress the neighborhood and drive down prices. But in a market society, since when are people responsible for the economic effects of their actions? Every oil speculator helps to drive up gasoline prices. Every hedge fund that speculated against a bank by purchasing credit-default swaps on its bonds signaled skepticism about the bank’s creditworthiness and helped to make it more costly for the bank to borrow, and thus to issue loans. We are all economic pinballs, insensibly colliding for better or worse.
==================================
For the remainder of the article go to The New York Times. In these troubled times many homeowners are making business decisions as to what’s better for them right now rather than staying in a house with a mortgage balance far larger than the current value of the home.

Tweet This Post