Regulations and Taxes Aren't What Is Killing Small Business

As members and demagogues of the GOP endeavor to turn back the clock to the days of the robber barons when regulations and unions were far and few between one of the mantra's is that taxes and government regulations are the principal obstacles to small business success. Like so much coming out of GOP demagogues like Eric Cantor, et. al, it's a lie. A new survey of small business owners underscores the disingenuousness of the GOP's story line. And not surprisingly, one of the biggest drains on small business after the depressed economy is the sky rocketing costs of insurance of all kinds (for my firm, malpractice insurance and health insurance are big ticket items). Here are highlights from McClatchy on the findings:

Politicians and business groups often blame excessive regulation and fear of higher taxes for tepid hiring in the economy. However, little evidence of that emerged when McClatchy canvassed a random sample of small business owners across the nation.

McClatchy reached out to owners of small businesses, many of them mom-and-pop operations, to find out whether they indeed were being choked by regulation, whether uncertainty over taxes affected their hiring plans and whether the health care overhaul was helping or hurting their business. Their response was surprising.

None of the business owners complained about regulation in their particular industries, and most seemed to welcome it. Some pointed to the lack of regulation in mortgage lending as a principal cause of the financial crisis that brought about the Great Recession of 2007-09 and its grim aftermath.

"Higher taxes are not good for business, but some of the loopholes and deductions should be looked at," he said. The answer from Rick Douglas — the owner of Minit Maids, a cleaning service with 17 employees in Charlotte, N.C. — was more blunt. "I think the rich have to be taxed, sorry," Douglas said. He added that he isn't facing a sea of new regulations but that he does struggle with an old issue, workers' compensation claims.

Then there's Rip Daniels. He owns four businesses in Gulfport, Miss.: real estate ventures, a radio station and a boutique hotel/bistro. He said his problem wasn't regulation. "Absolutely, positively not. What is choking my business is insurance. What's choking all business is insurance. You cannot go into business, any business — small business or large business — unless you can afford insurance," he told Biloxi's Sun Herald.

"I think the business climate is so shaky that I would not want to undergo any expansion or outlay capital," said Andy Weingarten, who owns Almar Auto Repair in Charlotte. He's thinking about hiring one more mechanic.

Added Barry Grant, the regional president of Meritage Homes Corp., in California, "It starts with jobs. ... There's an awful lot of people sitting on the fence; they're waiting for a sign." One reason hiring remains dampened is the prolonged slump in the housing sector, a driver of the pre-crisis economy.

Jobs - something that the GOP is doing NOTHING to foster is one key to recovery. To that I'd add a return to realistic mortgage and business loan approval procedures (currently, many good borrowers cannot get financing)and a stabilization of the housing market. The later, of course is not on the radar of the GOP.

A Last Chance to Stabilize the Housing Market?

Back in the summer of 2007 I began writing about the coming recession/depression that was being triggered by the collapse of the residential housing market. Alas, no one in Washington, D.C., seems to have paid any attention to the looming fiasco. The rest is history and the housing market - and the larger economy - have never recovered from the missed opportunity to create a real solution to the still unfolding problem. For anyone trying to assist distressed homeowners, the process is beyond maddening and despite alleged programs for methods to assist homeowners who have lost jobs or find themselves upside down on their mortgages because of collapsed home prices, typically NOTHING is done and the homes end up in foreclosure. Which only serves to drive prices lower still and add to the number of homes facing foreclosure. Here in the Hampton Roads area, 24% of mortgages are said to be upside down. Now, as Ezra Klein at the Washington Post is reporting there may be a last chance for a meaningful fix to the problem. Personally, I am not holding my breath. Here are highlights (the referenced draft settlement can be found here):
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My colleagues Brady Dennis and Dina El Boghdady got their hands on an early version of the settlement that the country's attorney generals and a few federal agencies are hammering out with the big banks. This is the endgame to the mortgage servicing mess that dominated the news some months ago: the banks, having repeatedly broken the law while handling mortgage paperwork and conducting foreclosures, need to strike some sort of deal with regulatory authorities so they're not nipped to death by thousands and thousands of lawsuits. That means the state AGs and regulators have some leverage: the banks need relief from them, and so the question is how much relief they can get for homeowners in turn.
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The hope is that they can get something capable of stabilizing the housing market. For all that the economy is improving, housing remains a huge drag, with legitimate estimates suggesting we've still got as many as 11 million foreclosures in the pipeline. "The number one reason for nervousness about the economy in the next six to nine months is the foreclosure crisis," Moody's economist Mark Zandi told me last week.
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With Congress no longer interested in acting to ease the foreclosure crisis -- or, it seems, the jobs crisis -- this settlement is perhaps our last shot at stabilizing the housing market. The big thing that advocates are looking for is "principal modification": a process in which borrowers who are underwater on their homes would see the amount they owe to the bank reduced.
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The proposals attempt to address wide-ranging complaints about the servicing process. One would require the servicers to provide a single point of contact for borrowers looking to modify their loans. Another would require them to develop a portal that would allow borrowers to submit and track documents electronically in real time.The document also spells out the conditions under which servicers should consider principal reductions for certain borrowers.
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Currently, if one contacts a lender, expect to be transferred countless times, be told to call other telephone numbers, and after hours of effort to have achieved absolutely nothing. It is a disaster and economically, we are all paying the price. Well, most of us - obviously, not the top income brackets which are getting richer while the rest of us stagnate or lose income.

Price of Single-Family Homes Drop for Sixth Straight Month

With all the media coverage of the BP oil spill, Afghanistan, DADT faux Repeal, and other things, a continued time bomb is ticking in the U.S. economy - the continued problems in the residential real estate market where prices have dropped six months in a row. As prices fall, more and more families find themselves "underwater" and unable to refinance high interest loans or even sell their homes if transferred for their jobs.

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As for the alleged programs to assist homeowners in trouble avoid foreclosure via a loan modification, etc., they are little more than a joke. From working with clients I can personally attest that the level of incompetence and total disorganization at mortgage companies defies belief. With some lenders, like Bank of America from my experience, the right hand has no clue what the left hand is doing and homes go to foreclosure sale even when loan modifications have supposedly been successfully negotiated. It is a circus. Wall Street got billons of dollars in bailouts, but rank and file Americans get tossed on the trash heap. And as more homes go to foreclosure, the downward pressure on prices continues and digs the hole even deeper. Here are some highlights from a Washington Post story:
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The Standard & Poor's/Case-Shiller home price index showed that prices of single-family homes were down 0.5 percent between February and March, the sixth consecutive month-over-month decline. On a seasonally adjusted basis, prices were flat, according to the index.
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Prices in 13 of the 20 cities tracked by the index fell in March, including the Washington region, where prices were down 0.7 percent. Detroit and Minneapolis saw the largest price declines, 4.1 percent and 2.7 percent, respectively.
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The recent weakness in prices is disappointing given record-low mortgage rates and a home buyer tax credit that helped boost sales through the first few months of this year, analysts said. The tax credit expired last month, and home sales are expected to decline in its absence.
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There is still an oversupply of homes on the market, particularly foreclosures, said Patrick Newport, U.S. economist for IHS Global Insight. Foreclosed properties typically sell at a discount, bringing down neighboring home values.
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The "housing glut and foreclosures" will drive the Case-Shiller index down another 6 to 8 percent before reaching bottom in 2011, Newport said. "Prices appeared to stabilize late last year, and they are now starting to edge down again," he said. "With the tax credit gone, sales are going to drop, and we're going to see that trend continue."
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Overall, home prices are likely to gradually fall an additional 5 percent through the end of 2011, said Paul Dales, an economist at Capital Economics. "I don't think we're going to get anything like the crash [in prices] we had before," he said. "It won't be a disaster, but it will undermine the wider economic recovery."

More Real Estate Distress Looms

While the residential real estate market continues to languish and there is little activity outside of lower priced first time buyer homes, a new disaster is in the offing: the collapse of the commercial real estate market. This next round of economic pain arises from a combination of overbuilding in some areas and the failure of banks to make loans even to credit worthy borrowers. As I have been arguing for over two years, unless and until real estate recovers, there will be no overall recovery of the economy. And a key to a recover is that the banks who have been bailed out, dolled out bonuses for themselves, and ceased lending start making loans again. Businesses cannot expand or take on new facilities when they are forced to operate solely out of cash flow and cannot secure financing for capital improvements - something I've had to do for years now. Otherwise, the downward spiral of values and foreclosures will continue. The Washington Post has a story that looks at this coming disaster. Here are some highlights:

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A mortgage crisis like the one that has devastated homeowners is enveloping the nation's office and retail buildings, and few places are likely to be hit as hard as Washington. The foreclosure wave is likely to swamp many smaller community banks across the country, and many well-known properties, including Washington's Mayflower Hotel and the Boulevard at the Capital Centre in Largo, are at risk, industry analysts say.
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The new round of financial pain, which some had anticipated but hoped to avoid, now seems all but certain. "There's been an enormous bubble in commercial real estate, and it has to come down," said Elizabeth Warren, chairman of the Congressional Oversight Panel, the watchdog created by Congress to monitor the financial bailout. "There will be significant bankruptcies among developers and significant failures among community banks."
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Unlike the largest banks, such as Citigroup and Wachovia, that got into so much trouble early on, the community banks in general fared better in the residential mortgage crisis. But their turn is coming: Not only did community banks issue a higher proportion of commercial loans, but they also have held on to them rather than sell them to other investors.

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Nearly 3,000 community banks -- 40 percent of the banking system -- have a high proportion of commercial real estate loans relative to their capital, said Warren, whose committee issued a report on commercial real estate last week. "Every dollar they lose in commercial real estate is a dollar they can't use for small businesses," she said.
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The threat is especially acute in the District, the firm said, where the catalogue of troubled commercial real estate properties has grown tenfold since April. Moreover, the region has $7.3 billion in commercial properties that are underwater -- worth less than the mortgages on them -- according to CoStar.
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Nationwide, at least $1.4 trillion in commercial real estate debt is expected to roll over during the next three years. Warren said that half of commercial real estate mortgages will be underwater by the beginning of 2011. A fifth of residential mortgages are underwater now, she said.
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Things do not bode well and meanwhile we have a Congress that cannot get anything done. The GOP obstructs everything and the Democrats lack the spine to act. It's not a cheerful picture.

Home Prices in Record Plunge

News on the housing front continues to be dire and based on the drops in home prices in many areas, the number of homeowners who owe more on their homes than they are now worth continues to grow thereby increasing the likelihood that more families will merely walk away from their homes. In some areas - e.g., Cape Coral, Florida - the prices have dropped 50%. If a home buyer put down 5-10% on their purchase (which is typical for first time buyers), it is easy to see that these folks are in serious trouble. Nationally, the average decline was 9.5% - the biggest decline in over 30 years - which still spells serious trouble for someone who put down 3-5%. Fortunately, in this region, the decline on average has only been 5.9%. As I have said many, many times, until the housing market stops falling, do not expect to see any sustained economic recovery. Here are some highlights from CNN Money (NOTE: the article contains a table for over one hundred markets):

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NEW YORK (CNNMoney.com) -- Home prices fell 12.4% during the fourth quarter of 2008, the largest year-over-year decline since the National Association of Realtors began keeping comprehensive records in 1979. . . . Prices fell by a record 9.5% in 2008, to $197,100, compared to $217,900 in 2007. In comparison, median home prices dipped a mere 1.6% between 2006 and 2007.

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Distressed properties, the foreclosures and short sales that have flooded the market, accounted for 45% of all deals. That has driven sales volume up in Nevada, California and other states hit hard by foreclosures, but these heavily discounted homes have also pushed median prices down.

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"Home markets are weak just about everywhere," said Pat Newport, an analyst with HIS Global Insight, "but in a few states, distressed sales are driving transactions." In Cape Coral-Ft. Myers, Fla., which has the third-highest rate of foreclosure filings in the nation, prices fell a devastating 50.8% for the year, to $110,900 from $225,300. That was the most precipitous plunge for any metro area. In Saginaw, Mich., prices fell 41.4%. In Riverside-San Bernardino, Calif., prices dropped 40.8% and in San Jose, Calif., prices declined 37.7%.

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Assuming housing provisions in the economic stimulus package are quickly enacted and provide enough encouragement for homebuyers, we could see a quick lift in home sales for the critical spring home-buying season," said Yun. On Thursday, it appeared that the final iteration of the homebuyer's tax credit, which had very different provisions in the House and Senate versions of the stimulus package, was shaping up to be closer to the House bill, according to Yun.

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That means a credit of $7,500, perhaps $8,000, or 10% of home price for first-time homebuyers. This windfall will not have to be repaid by homebuyers and can be taken off 2008 taxes. NAR estimates that could draw in an additional half-million buyers this year. "It could help reduce the high inventory of homes for sale," said Yun, "and get housing markets moving again. It's hard to get the economy back to growth until that happened."