Pundits, economists and the news all have one thing in common- they are awaiting a statement from the Federal Reserve that will come tomorrow afternoon. One of the big questions is whether or not we are slipping back into recession- a “double dip.” Unemployment figures released late last week were worse than expected. Combine that with some otherwise poor economic indicators and many are debating just how well the recovery is coming along. Personally, I am not fearful of a double dip but there are some factors that have me wondering. First and foremost, if this is a recovery, it certainly does not feel like one. We have been told for some time that this will be a jobless recovery- that it will take some time before employment numbers come back. That said, it is going to be really tough to sustain any positive momentum without some sort of improvement on that front.
As I stated, if this is a recovery, not many people are feeling good about it. In addition to unemployment and other indicators, business owners and the public seem generally concerned by the trends. A July survey conducted by Rasmussen Reports said that 58% of small business owners rated the economy as poor. A Harvard study from last month on home improvement activities indicates no return to positive growth until early to mid 2011. All of these issues are leading many to believe that not only will the Fed keep rates steady but also will make moves to increase liquidity in the market. The Fed could decide to make moves to encourage lending as well as increase its’ own balance sheet. In short, many are counting on the Federal Reserve to make a statement that shows it acknowledges the issues at hand and will commit its’ resources to helping. The Federal Reserve held $855 billion on its’ balance sheet in 2007- now it holds $2.3 trillion.
On another topic, we are about to see a real storm in the realm of property taxes. Unlike the Federal government, local and state governments must balance their budgets and can’t simply print more money. Tax collections are down again and will continue to decrease in the coming future. Issues like rising costs for insurance and the class size amendment are going to put unbelievable pressure on already strapped governments. While we can all agree that there is a great deal of waste in government, they can only cut so far. Layoffs and furloughs are going to start hitting many middle class public employees. The losses in jobs and income are going to hurt our economy even further. It won’t be popular, but you will start to see local government raising taxes, fees and mileage rates and taking more money from the public. Combine that with the phasing out of Bush-era tax cuts (costing the average family $200-300 per month) and it will be another issue making the recovery more difficult.
There was some news on the FHA front last week. The FHA program aimed at borrowers who are underwater in the homes that was announced in March, will start on September 7, 2010. The program is aimed at allowing refinances for borrowers who have negative equity but have any ability to repay their mortgage and are current on their loan. Lenders are not very excited by the program so we will see if pricing and guidelines will even allow this to work for anyone. FHA also made clear that on applications taken on or after September 1, 2010, the upfront mortgage insurance premium would decrease but the monthly payment would increase. The change will add about $30 per month for every $100k borrowed and will slightly decrease buying power for buyers.
Rates remained steady last week, bouncing along near record lows. The language in the Federal Reserve announcement tomorrow will be a big indicator of how the market and rates will react- hold your breath.
