I keep hearing a lot of positive spin coming from the media about the state of the economy, the real estate market, consumer confidence, etc. Call me jaded, but I'm not convinced.
It seems to me that there's a lot of play in the system and engineered flaws in the way the information is presented to us, the public. What I mean is that I think the government is smart enough to be able to manipulate our impression of a system most of us don't understand (gasp!).
Although real estate indicators have been positive recently, there's still a lot of negative fundamentals. Foreclosures continue to be a huge problem and they're not slowing down. Unemployment continues to threaten to extend this problem. Commercial market defaults are on the horizon.
From what I read from Realtors' blogs here on ActiveRain, banks are not exactly being cooperative when it comes to negotiating short sales and acting on offers that actually make sense. One explanation for this is that if a lender agrees to a short sale, they actually have to report a mark down on that asset. They have to admit that the home isn't as valuable as they have it marked on their books. All banks are massively leveraged. Most have borrowed 25 to 30 times their actual net worth. Many are leveraged even higher. If these banks were forced to admit the real value of their assets according to market conditions on a massive scale, they might very well reveal themselves to be insolvent.
As an example lets run some dummy numbers. XYZ bank has liquid assets of 10 million dollars. XYZ has borrowed 250 million dollars against their liquid assets thereby leveraging themselves 25 to 1. Let's say XYZ bank took only 50% of the money they borrowed against their liquid assets and lent it out in the form of mortgages or more accurately invested in mortgage backed securities (that would be 125 million dollars worth of mortgages). For the sake of simplicity, if the value of that 125 million dropped by 10%, that would be a reduction of 12.5 million. That would leave XYZ bank in the red to the tune of 2.5 million dollars and XYZ would be shuttered by the FDIC.
Nationally how much has real estate declined? More than 10%. How much capacity does the FDIC have to protect depositors?
I figured I would share this video and see what you guys think of the market. Have we hit a bottom of fundamentals or a false bottom? I'm interested to see what your perspective is.
Jason Sanders @ValuePagesGroup
Business Networking Specialist
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