Outlook on Bankruptcy For 2017

No one knows for sure what the future holds but sometimes it’s good to take a look at where we’ve been and where we’re at now to see if there are indications of what we can expect going forward. Not the least of these is the fact that we have a new administration in Washington that pledges to change things for the middle class. Agree or disagree with his methods, from all indications so far, if it doesn’t happen, it won’t be for lack of trying.

Heaven knows it’s needed. A recent report from the HUDSON INSTITUTE in Washington D. C. shows just how badly the middle class has fared these last few years. Titled, The Distribution of Wealth in America, and written by the former chief economist at HUD and the Office of Management and Budget, the report notes among other things, that in the three years 2007-2010 middle class incomes dropped 15%,and median household wealth dropped all the way back to 1983 levels with very little improvement since!

Hopefully, the new administration’s efforts will result in the further reduction of bankruptcy filings which fell another 6-8% from 2015 to 2016, depending on who you ask. This means bankruptcy filings would be off from their recent high from around 2010-11 by about 55-65%, almost back to 2006 levels (again, depending on who you ask).

These are hopeful signs for those who have “held on” to avoid filing bankruptcy in spite of reduced household income and less than robust economic growth. Yet everything is not as rosy as some would like us to believe, and therein lies the rub.

Foreclosures have continued to trend downward to where they are now to about 2006 levels. However, the Florida Supreme Court may have just changed that picture in its recent decision allowing lenders to re-institute foreclosure proceedings on home mortgages where defaults were previously considered to be beyond the statute of limitations. Before that, real estate prices had recovered about 40-60% of the value lost in the real estate collapse.

While home prices have been rising and builders are trumpeting a dramatic increase in new home sales, it seems to me they are overly enthusiastic because they are barely back to 50% of the production rates of 2005-06, just before the bottom dropped out. This alone could mean there is a lot of room to run in the current home building industry recovery, but other factors are at work as well.

Existing home sales have stalled due to lack of inventory according to Realtors. However, there is also a lack of capacity to buy, due to higher prices and lower income; not to mention the nationwide impact the student loan crisis is having on the next wave of first time home buyers.

Student loans now total more than auto and credit card loans combined, and the spill-over effect on parents and even grandparents whose income and even social security payments are being garnished by the IRS who has been charged with collecting government guaranteed loans. Private student loans are in an even more hopeless state because they do not qualify for repayment assistance or other relief.

Moreover, we have too many graduates chasing too few employment opportunities that afford salaries adequate to pay the higher prices required for housing; and without buying capacity at the lower end of the market, price increases have stalled on existing homes. This prevents equity conversion into higher priced new homes in the form of ‘move up” buyers.

Moreover, I keep getting reminded that we are approaching a peak in the aging of baby boomers (of which I am one). There are about to be more of us who are going to be leaving over the next few years, than there are going to be qualified buyers for the houses we leave behind. Rather telling of the impact that’s coming on supply and demand for housing.

While all of this is obviously not going to happen at one time, in a few cases, there are even tales of “bidding wars” again for some selective market offerings. This sounds familiar and could signal the potential for another bubble burst in real estate prices. Given that real estate drives many segments of the economy, it would be wise not to get over enthused about recovering home prices. At least not until we see strong improvements in employment and wage levels across the rest of the economy.

In the meantime, look for bankruptcy filings to level out more than they tend to continue to decline. This is because the factors that are responsible for most bankruptcies will remain.

  1. Family medical disasters. (The increase in premiums, deductibles and other problems with “Obamacare” will most likely increase bankruptcies until something more effective is brought to bear.)
  2. Divorce and other family problems such as loss of a wage earner. (Which result in reduced household incomes)
  3. Unemployment, under-employment, drug and other addiction related problems.
  4. The student loan crisis. (Unless someone changes the bankruptcy code to allow these loans to be discharged in bankruptcy [especially private student loans], they could become the largest single cause of bankruptcy in 2017 and beyond.)

The fact is, all the well-meaning legislation and social relief attempted so far has not been adequate to resolve these problems. Bankruptcy will continue to be the saving grace for those trapped in hopeless circumstances not of their own making, as well as for those caught in the trap of someone else’s making.


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