It seems that a wave of bankruptcies and foreclosures is increasing
Economists and professionals in the business and real estate restructuring sector have been forecasting a faltering economy for the past 18 months. So far they were wrong.
The audience is just confused. Many people today do not trust their politicians, their news sources and, surprisingly, not even their health care providers and professionals. This lack of trust, combined with the obligatory pandemic-driven way in which many employees are working remotely, has caused many people to re-evaluate their lives and the location from which they wish to provide their services.
Many employees who hold mid- to high-level jobs will permanently choose to work remotely and never return to the office. This shift in the way people will work in the future will have a profound impact on many aspects of our economy, including the ability of landlords to keep commercial space rented.
Factors affecting the current economy
The COVID-19, Delta, Omicron and now highly contagious BA.2 variants have left millions of workers unavailable to work, whether remotely or otherwise. This has led to a serious disruption in the supply and distribution chain. This problem is caused in part by the inability of manufacturers to supply component products due to worker disruptions in factories. Add to this shortage of supply the fact that personnel are disrupting the transportation and delivery of products due to COVID (i.e. shortage of truck drivers) and we can clearly see the full picture of disruption in the supply chain.
The threat of a major new round of tariffs, embargoes, and other economic sanctions based on the political climate creates more risks that the United States will become a faltering economy. In addition, there is an imminent threat of high inflation. On the positive side, the stock market and the economy in general have until recently been progressing at a strong and positive pace. The stock market doesn’t always accurately represent what’s really going on in the economy, but recent market volatility could be a harbinger of troubled times ahead.
Will the accumulation of these factors eventually lead to the expected faltering economy? Nobody knows for sure, but when analyzing the situation, it may be useful to consider the problems that prevented the expected downturn.
Banks and banks
Since the pandemic began, regulators have not pressured banks to take action regarding bad loans. Historically, banks have been willing to “give the road” in respect of non-performing loans if they can do so without significantly compromising the accounting value of the loans in relation to the capital requirements of the banks. The current positions of regulators have allowed banks to do just that.
While the “laissez-faire” attitude of regulators has had a clear positive short-term effect on the economy, the regulators know at some point that the effect of their actions will cause banks to have misleading financial statements.
Regulators’ behavior is unlikely to change before the midterm elections later this year. However, at some point, they will have to stop allowing banks to avoid rating loans. Otherwise, they risk allowing the banking system to continue to misrepresent the value of its loan assets, with all the risks of this situation affecting the credibility and stability of the banking system.
In my opinion, when bank regulators change their stance regarding their treatment of non-performing loans, a predictable tsunami of foreclosures and bankruptcies will be upon us..
Additional factors to watch
Historically, interest rates have had a significant impact on the economy, especially the real estate sector.
The Federal Reserve kept interest rates at nearly zero to support the economy. Now, however, the specter of high inflation will put an end to near-zero interest rates. The annual inflation rate during 2022 is expected to approach 7%. The Fed has already announced its intention to fight inflation by raising interest rates as early as March. The issue is not whether interest rates will rise. It is a matter and time.
High interest rates hurt individuals in many ways:
- What’s most obvious is that they make housing less expensive. With higher interest rates, fewer and fewer people will be eligible to buy their homes. Existing homeowners with variable mortgages will also be negatively affected by an increase in interest rates.
- Higher interest rates also negatively affect corporate profits. This will affect the stock market, and thus the value of the shares in individual IRAs and 401(k)s.
- Major shifts in the way people work will lead to winners and losers. Time will tell how it will turn out, but it certainly looks like the economy will crash.
Companies are piling pressure
The re-emergence of COVID in the form of current variables has destroyed the timeline for society’s return to normalcy. There is no reliable way to predict the effect of the resurgence on the psyche of the country. However, it is expected that this re-emergence will negatively affect the economy, and will also delay the return to normal life.
In fact, it is likely that normal life, as it existed before the pandemic, will never fully return. Trends such as shifting consumers who primarily shop online will have a negative impact on physical retail sales. The need for retail space appears set to continue declining further than it already has. The pandemic has accelerated this problem.
Owners of shopping centers and commercial premises are preparing for a series of vacancies that are surely looming. Individuals are advised to assume that inflation and higher interest rates are on the near horizon and should act in any way possible to mitigate the damage to them from the looming double threat. It is uncertain how federal, state and local governments will react to the situation.
Uncertainty is the enemy of business, and we are obviously faced with unexpected and unpredictable times. The public’s public perception of all this is not yet clear. There is a lot of mistrust on the part of the people of our nation. These factors will combine to create a perfect storm for companies and real estate investors to experience increasingly troubled financial times.
Steps to consider
The best advice we can give is that entities deal with their distressed assets early on.
- home owners, Interest rates will almost certainly rise in the near future. If a homeowner can refinance their mortgage to take advantage of the current low interest rates, this course of action should be considered.
- For consumers, Speeding up the timing of any big purchases would make sense because looming inflation would make the dollar value lower and lower and make the commodity’s actual cost more expensive over time.
- Individuals must Also consider exiting the stock market or reducing stock portfolios as quickly as possible. Converting inventory to cash is not a good strategy at a time when the value of the dollar is steadily declining. Conventional wisdom dictates that investing in precious metals, such as gold and silver, is a safe haven. Thus, selling stocks and buying gold and silver makes sense.
- business owners They should analyze their business based on the assumption that the near future will bring high inflation, high interest rates and continued supply chain disruption. It is prudent to take steps to restructure the business in a way that will mitigate the damages if these future assumptions come true.
The general public will look at inflation and higher interest rates and react accordingly. The earlier individuals and companies agree to and respond to these changes, and react appropriately, the more likely they are to avoid Chapter 11 bankruptcies. Not only does this increase the chances that companies will be able to solve their financial problems without resorting to bankruptcy, but it often reduces the The need to lay off employees.
Founder and President, Distressed Capital Resources LLP
William N. Solve the financial problems of this borrower.