The real estate blog.

Wow is the economy getting ugly. And no, it’s not just the national economy. Things are getting bad all over because the framework behind financing for consumer debt, commercial debt, mortgages and businesses seems to be collapsing.

Major financial institutions have announced their latest results and the numbers are staggering. $18 billion was written off by Citi. J.P. Morgan has written off 1.8 billion. Job losses are mounting, foreclosures are rising and we’re not paying our car loans or credit card bills either. We’re in a credit crisis and no amount of rate decreases by the Fed is going to help.

Don’t think Utah is immune. Already the outlook for 2008 has turned sour. Job creation has decreased and it looks like the slow down in residential employment is a key part of it.

“I’m getting a little more pessimistic about how far job growth is going to drop down into this year. I think now it’s going to drop down into the 2 percent range,” said Mark Knold, chief economist for the Department of Workforce Services. He had been predicting growth in the 3 percent range, which would be below the state’s long-term average of 3.3 percent.

I’ve been thinking long and hard about potential solutions to the problem. One scenario is an increase in wages, but that seems unlikely in the face of a recession. Publicly held companies made record profits in the past few years. With the first sign of trouble, they’ve turned immediately to layoffs.

The second scenario, one I believe is more likely to happen, is a restatement and reevaluation by many of the companies now reporting losses. I believe a great deal of the initial losses by mortgage lenders are the direct result of fraud. As such they’ve moved through the system. However, if the lenders plugged in the high amount of early payment defaults into their models, they may have grossly over estimated the amount of future losses. A decline in defaults could cause them to rethink lending standards and restate earnings.

Michael Sivy at Money Magazine wrote something very similar today -

But after audited fourth-quarter results are announced - which should happen over the next six weeks - most of the really bad news should be out. After that, there will actually be the possibility of positive surprises, if banks have written off too many loans and some prove to be recoverable.

If neither of these two scenarios plays out, it will be time for us to reach a hand out to our rich uncle. Uncle Sam that is. FHA will play a crucial role in providing financing to first time homeowners with low down payments and less than perfect credit. With the changes in prime lending from Freddie and Fannie, FHA will be an attractive alternative for even borrowers with decent credit. But FHA will be useless in high cost areas like California and New York City and this is where the handout is needed. FHA will have to raise loan limits. That will effectively force Freddie and Fannie to raise their conforming limit as well.

Unless one of the above mentioned scenarios takes place, housing will take down the economy for a long time to come. It’s getting ugly indeed.