Opportunity comes in many forms. Sometimes it’s the result of competent leadership. Sometimes it’s the result of leadership being beaten over the head so many times that they finally succumb and accept the inevitable. That appears to be the case for America’s next socioeconomic change. It was the theme NetGain chose for October: The next socioeconomic change and its impact on income property values.

Considering the enormity of publicity and the dire predictions promulgated by Secretary of the Treasury Paulson and Federal Reserve Chairman Bernanke, NetGain decided to put what it believes is the next socioeconomic change on hold until next month and examine our economy this month.

Why does NetGain care about the economy when its overarching interest is to provide information that minimizes the risk and increases the value of income property? Because whatever direction the economy takes, so goes the job market. And NetGain believes that “jobs” are the single most important driving force behind determining the value of income property.

Now, let’s back up, and get a better understanding of where we are as a country economically.

Where we are has been rehashed by the media and the politicians over and over. Simply stated and without pointing a finger at anyone, greed, leverage and poor oversight (what’s new?) has created the biggest threat to the American financial system since the great depression.

In 1908 Henry Clew wrote a book describing the prior crashes of 1907, 1857, 1837, 1825, 1823, and 1812. He said “as in every preceding crisis, the main cause was far too large a mass of credits — for the amount of cash in which they were redeemable.” So what’s new?

This time the American home was used as collateral for millions of mortgages. The presumption was that its value would increase in a straight line, and the borrower would do everything to financially protect their home. On these assumptions mortgages were given to borrowers that didn’t qualify, and in many instances without a down payment. These mortgages were packaged, repackaged and combined with so many different credit risks that current accounting practices couldn’t find precedent for their value. These packages (mortgage backed securities) were then sold to entities and individuals throughout the world.

Then a strange thing happened. The housing market had a downturn. Banks, investment banks and a variety of other lenders holding these mortgage backed securities (who were leveraged between 20-1 and 50-1) watched their balance sheets disappear. Many of these companies disappeared or were devoured by other companies. The consequence was a breach in confidence and a screeching halt to credit being made available.

What do the two leading indicators or predictors of the economy tell us?

• The Consumer Confidence Index for September now stands at 59.8 (1985=100). The Consumer Confidence is a bellwether for future spending by consumers. During the past ten years, it has ranged from a low of 50 to a high of 140.
• During the past twelve months, the Standard & Poor’s 500-stock index has declined from approximately 1,550 to 1,000 (as of this moment). That’s a drop of approximately 35%.

The current credit crisis and the two leading indicators above point to a recession. NetGain has said in numerous past writings (Market Cycles and Income-producing Real Estate) that our economic system is unavoidably cyclical. Since 1900 America has experienced twenty-one recessions. This will be number twenty-two. Our recovery rate has been 100%. We will recover from this one. The two key questions are: How deep and how long?

The average recession since 1950 lasted for ten months. The shortest one lasted for six months, and the longest one lasted for 16 months. During this period, the highest unemployment rate was 9.7% (1982). If the federal government manages the current financial crisis correctly, that’s what we could look forward to.

The biggest fear is that this recession could turn into a 1930s depression (1929 - Can It Happen Again?). There we saw the unemployment rate increase from 3.2% in 1929 to 8.7%, 15.9%, 23.6%, and 24.9% in the four subsequent years. The stock market high in September 1929 wasn’t reached again until 1954. Why did that recession turn into a depression? Federal government mismanagement: The federal government passed legislation that disrupted trade and raised taxes.

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