By TED LUX
The 401(k) plan many of us have should be renamed the “200.5(k)” plan.
Over the last month or so, the stock market has come crashing down leaving many stock retirement plans obliterated. In October 2007, the Dow Jones industrial average hit an all-time high of 14,279. Even with the 936-point one-day gain Oct. 13, the market is still down a whopping 41 percent from a year ago.
These are astonishing times. No doubt about it. Not since the Great Depression has so much wealth been destroyed for so many Americans and Angelenos as our stock, retirement plans and homes crumble in value. The depreciated assets coupled with the ongoing credit crunch have this country leaning toward a deep recession. Will we look back in history and call this period of time The Depression of 2009-2011?
Home values should continue to fall in the Los Angeles area in 2009. Families that were planning to buy now in all likelihood have much less money for a down payment with the smashing of stock portfolios. Now the ability to come up with a required 20 percent down payment becomes even tougher. Diminishing accounts will sideline buyers, causing even less demand for homes. Banks now have very stringent lending policies that make it very difficult for a buyer to obtain a mortgage loan.
This will not change any time soon. I should know I’ve been a real estate lending officer in the Los Angeles area for more than 20 years. Even if borrowers have great credit and high FICO scores and enough money in the bank they still might not obtain a loan because they don’t earn enough. Lenders have done away with “stated income” or “easy qualifier” loans that were so prevalent the last five years. This means a giant pool of available applicants ready and willing to buy have been diced away. The average income earner can’t justify to the bank on paper buying a $600,000 home in the Los Angeles area. The diced applicant means less demand for homes.
Further depreciation
I would not be surprised if homes recede in value another 25 percent to 30 percent in the ensuing two years in many Los Angeles markets. Current lending conditions and the implosion of personal capital will likely fuel the downward spiral.
The crushing blow the stock market has dealt us, the rising unemployment rate (now near 7 percent in Los Angeles), tight credit markets and lower home values mean many fewer dollars changing hands. And that portends a recession. Look for very poor December retail sales. Look for low foot traffic in the malls and shopping centers. Restaurants are likely to suffer, too.
You’ll be able to get your favorite corner booth table on Saturday nights. Watch for more foreclosures and for-sale signs, and if we see $4.60-a-gallon gasoline again we’ll be in even worse shape. Jobs will be lost, too, as the economy contracts further.
Hopefully, the government bailout plan will be meaningful and help correct the economic mess we’re in. It certainly won’t be a quick fix. We’re in for tough times in 2009-2011. We’re all paying for the excesses we’ve run up in this country. We’re paying for the easy credit and the bad loans and it’s showing up in our new 200.5(k) plans.
Ted Lux, who holds an M.B.A. in finance, has been involved in real estate lending in the Los Angeles area for more than 20 years. You can send comments to Ted at: [email protected]
