Your economic forecast

 Recession is defined by many economists as at least two consecutive quarters of decline in a country’s  Gross Domestic Product (GDP).  GDP is the market value of goods and services produced by labor and property in a country.
 Depression is an economic condition characterized by falling prices, reduced purchasing power, an excess of supply over demand, rising unemployment, accumulating inventories, deflation, plant contraction, public fear and caution, and a general decrease in business activity.
 Inflation is a rise in the prices of goods and services, as happens when spending increases relative to the supply of goods on the market (too much money chasing too few goods).  Hyperinflation, with prices rising at 100% per year or more, causes people to lose confidence in the currency and put their assets in hard assets, like real estate or gold, which usually retain their value in inflationary times.
 Stagflation is a term coined by economists in the 1970s to describe the previously unprecedented combination of slow economic growth and high unemployment (stagnation) with rising prices (inflation).

 I have talked with people (especially in the mortgage lending business) who have said they have NEVER seen anything like what is happening now.  I believe that the world is getting smaller, and with the recent rise of China, Russia, India, and Brazil embracing private enterprise like never before, things are really going to start going wild.  Recent discussions on this forum have used these terms, but I would like to hear hard predictions with a rationale.


Be careful, you don’t want to get lumped in with guy’s like me here!!

You all know my position. But I must say I find it very interesting that more and more intelligent people here are REALLY seeing this for what it COULD be. I can’t predict the future, but I have to say…I too keep hearing “I’ve never seen anything like this.” It’s not a joke, and I’m afraid we’ll ALL come to that realization sooner rather than later.

I spoke with a commercial banker this weekend. He said that if people really knew how close this whole thing is to unravaling nobody would be sleeping at night. A close friend of his works at the Federal Reserve, they are in FULL BLOWN fallout mode RIGHT NOW. He uttered these EXACT words. “I’ve been doing this for 30 years, this is as bad as I’ve EVER seen it. What we have is basically a world wide cascading MARGIN call.” His words not mine.

This is one time in my life were I really wish I HAD been wrong.

Hyperinflation, with prices rising at 100% per year or more, causes people to lose confidence in the currency and put their assets in hard assets, like real estate or gold, which usually retain their value in inflationary times.


I like the sound of that! I’ve already got my money in real estate, but the question in my mind is what the effect of high unemployment in a severe downturn would have on rental properties. Will there be enough people with jobs to pay the rent? Would the government bail everyone out and pay their rent for them (like a giant Section 8 program)? How hard will it be to hold the real estate in a severe downturn?


I agree things are a mess, but I am not seeing anything happening quickly. Watching a real estate bust is like watching paint dry. It all happens in slow motion. For example, I thought the market would drop 500 points last Friday, but the Fed pumped some of their funny money into the equation and the market ended basically flat. Governments all over the world are doing the same thing. Since no-one wants to allow the correction to occur, they are all basically buying into the same fantasy and are pulling out all the stops to keep things from dipping. Personally, I think it’s a huge mistake by the government. The smallest correction would occur now, and postponing it by printing funny money will just make things worse.

It is obvious that the government is in panic mode. Why is President Bush “monitoring the economy” when the market is only a few hundred points below an all time high? It seems that the government has decided that the market is only going to be allowed to go one way - UP.



The reason real estate doesn’t implode is because homes and property are NOT LIQUID ASSETS. I know you’re fully aware of this. Wall st. operates in seconds, Real estate in weeks and months. As a result prices don’t drop like a rock. I’m not predicting that kind of blow up. Real estate prices will fall in a long drawn out decline, which my market is in now.

The thing I worry about is financing. The problem I see is things could get so bad that banks have NO CHOICE but to curtail lending on a huge scale. In my opinion we’re seeing that process RIGHT NOW. You’ll see people who usually would not have a problem getting loans having to pay BIG TIME for their financing. The banker I mentioned talking to this weekend warned me specifically of this. He said that the reason the FED is dropping money out of windows is because the assets that these banks hold are now valued as worthless. A recent computer model of CDO’s valued them at 3 cents on the dollar. This will cause these banks to increase their reserves and CUT their lending.
When these banks lose trillions of dollars the last thing they will do is loan money on the very assets that created that loss.

What some people aren’t seeing here is the LINK between these exotic derivatives and their local banks. The Investment banks that created these instruments are the MARKET for most mortagages now a days. If that local bank can not place that loan THEY CAN’T LEND THE MONEY. That is the reason politicians are asking the President to increase Freddie Mac loan limits. He’s not going to do it. He’s already said that the markets will have to deal with the situation.
You severely curtail FINANCING in Real Estate, and you’ve basically cut off it’s blood supply. Even guy’s like us Mike are going to feel this. I’ve got relationships with banks that go back 20 years, I’ve ALREADY been told NOT to expect ANYTHING even close to the terms I have now.
These local bank VP’s have a pretty decent amount of leeway when it comes to lending to good customers. My guy told me it’s OUT OF HIS HANDS, this stuff is coming down from Boston and New York (banks head quarters) I’m sort of lucky, I don’t have anything “in progress” right now. Some guy’s I know have some big time home developements at the road building/utility stages and they’re scared to death.


I deal with two small local banks. They don’t sell any of their loans. They only have a few branches and the corporate headquarters is here. They have tightened up on their lending standards as the result of having made stupid loans to newbie investors. One of the losses that I know of was about a million bucks on an apartment complex that was hugely overvalued by the appraiser. At any rate, they are now requiring money down regardless of the amount of equity in the deal. So, I agree with you that things have changed.

However, even if the banks have huge losses, it seems to me that they MUST lend money if they want to stay in business. Obviously, they will (and should) cut out the no-doc and negative amortization loans. However, if they cut off all their loans, they’ll be out of business (and that may happen to some banks).

I agree with you that things are a mess, but I’m still not that concerned about financing. As people get more desperate to sell, they will do anything to get out of their property, including sub-2, land contract, lease-option, and owner financing. I think that there are HUGE opportunities out there and will be more to come!


Although it appears that we are standing on top of Mt. Inflation, and the FED speak is inflation centric, I’m concerned with something not mentioned by the OP—namely deflation.

Deflation occurs when liquidity dries up. In rapid fashion, money disappears. Lenders stop lending—spenders stop spending and dispersement of money generally declines as everybody holds onto what they have (fearful of losing it).

If this should happen, there isn’t much anyone can do about it (including the FED)—they can always turn on the printing press (as seen this week) and try to disperse it by way of the credit markets, but when a deflationary trend takes hold of people, the last thing they want to do is borrow money.

What could happen if deflation takes a death grip—circa Japan 1989…stocks fell, followed by property, consumer prices and then a general collapse of all prices.

The problem is we are looking at apples and oranges—Japan could afford deflation—they are a country of savers (to the tune of 20-30% of gross income to be exact), the country enjoyed a large trade surplus and there was no subprime issue to mop up…

Will a country of consumers and spenders fare as well? I don’t know, but the FED might want to check to make sure that they have enough ink for the printing press just in case…


Scott Miller

I would like to take credit for a new term - right here and now. It’s called INDYFLATION, which is a combination of inflation and deflation with things going downhill so fast that you’ve think you were at the Indy 500. This would occur when the commies realize that they are holding worthless IOUs and flood the market with dollars (the inflation part). However, no one here is willing to sell since the dollar is worthless and everyone holds onto what they have. Wa La - INDYFLATION! Remember, you heard it here first!

When the commies come to buy my rentals, I want my money in GOLD!


Very interesting scenerio. Never thought of that, but it seems to have ALL the key ingrediants.

Mike, I know I’ll still be able to borrow money,but like you said your going to need a down payment and even equity in OTHER properties to put these deals over the top.

The thing I find interesting is, there are a lot of people out here who don’t realize that once upon a time, banks wanted equity in OTHER properties before they would loan you money on a new one. I remember having to put up a small retail store I owned to finance my first self storage building. The guy’s who are up to their eyeballs in property but no equity are gonna be sh*t outta luck here very soon,
and that will have lasting effects.

Let’s hope that I’m wrong, for everybody’s sake…

We are rapidly returning to circa 89 guidelines—this what it took to get a primary residence back in the day—10% down, impeccable credit scores/histories, FULL DOC or forget it…

Sensible lending guidelines are certainly one of the ingredients of a recovery recipe, but like you, I’m fearful for those caught between the past and the present…

If anyone was ever concerned about the shrinking middle class—this could be the ultimate leveler…


Scott Miller

      So do you think that American consumers will stop spending or just stop borrowing?  In the case of deflation, would interest rates rise, fall or would it even matter?  I like the insight of the prediction of deflation, I just don't understand all of the implications.  For example, if real estate suddenly got a 75% tummy tuck, it seems like everyone writing conventional paper would benefit.  When that happened in Japan, interest rates went to 0%, pretty much.  I could think of a whole lot of things to do to get rich if that happened.