I am excited to hear the presenters this morning at the Real Estate Forecast breakfast in our wonderful little town of Bend, OR. Forecasting is always tough but this year with the unknown impacts of the American Recovery and Reinvestment Act of 2009, the Homeowners Affordability and Stability Plan, TARP I, II and III and TALF it is hard to make a call. During the week I got input about forecasting from 3 sharp students of the economy that I want to share with you too.
The first insight comes from a very experienced commercial broker who will appreciate being recognized as wise but may not appreciate being called a gray-hair oracle. He reminds us that while the timing of the recovery’s beginning is still very uncertain, the order in which parts will recover is likely to follow long-held patterns. Looking at these 5 elements and we should expect to see them turn in this order:
- the stock market (buyers purchase the future performance of companies),
- leading economic indicators in money supply, lending, and eventually jobs,
- broader economic performance as seen in corporate results,
- residential real estate and finally
- commercial real estate.
It will be very interesting to see if the homeowner initiatives might move the residential real estate recovery ahead of its traditional position. While we shudder at the dollars that are pouring into these identified initiatives AND the trillion dollar deficit spending targeted for this year and the next, there are sound economists indicating that these steps are the right actions, but not nearly enough dollars. I tend to be on the side that this is too much but only time will tell. BTW – remember the Economic Stimulus Act of 2008? That was now 12 months ago and led to checks arriving at the door (and very quickly into the banks) of most taxpayers. Do you realize that while it seemed so large at the time, at $152B it was less than 18% of what was passed and proposed this past week? And those dollars are nothing compared to the trillions being expanded on the balance sheet of the Federal Reserve.
The second forecasting prediction came through one of our commercial lender resources who spent the week in Washington, D.C. at the summit for improving Small Business lending (great timing.) He reports that in this public forum, the Chair of President Obama’s Council of Economic Advisors, Dr. Christina Romer said that she “stakes (her) reputation that the economy will turn around in the fourth quarter of 2009.” Tying that into the previous list, I can see at least 2 or 3 and maybe the first 4 showing moves to the upside by the 4th quarter. I think she was probably referring to either #2 or #3. This week will be very telling for #1, the stock market. While the Dow broke through its November 2008 low and kept going last week, the S&P is still above but moving towards 740, its 2008 low also reached in November. Many are holding their collective breath to see if 740 can be the barrier that turns the market back around and starts it on its way upward. The impact on real estate interest rates is going to have an initial opposite reaction to stocks. We have enjoyed a week of improving rates as stocks continued to tumble. When they turn around, money will flow out of Treasury and to a lesser degree MBS causing a slight negative to mortgage rates.
This brings us to the third wise prognosticator. These friends are Chinese and they pointed out to me while we were talking about it now being the Year of the Ox, that many Mandarin speakers are quite hopeful of the Ox being a good omen. You see the mandarin pronunciation of “Ox” is very similar to the pronunciation of the concept of “turn-around” or “recovery”. So there we have it. With all that is going on around us, I am thinking this is as sound as any other logic I have heard. And I am predicting the Ox will help get the S&P to 740 this week and back up a bit.
While I was writing this, the Treasury, Fed, Comptroller of the Currency, OTS and FDIC issued their joint press release indicating the details of the Capital Assistance Plan, enabling further investment by the Fed into banks as preferred stock investments to maintain strong capital ratios where necessary. This press release is attached in full at the end of this email and spends much time insuring us that any such investment is temporary in nature and that the government does not intend to nationalize banks. At the same time, the WSJ is reporting (here) that the US may take a stake in CITI that could end up being a 40% ownership interest. This morning’s market reaction will largely be in response to the joint announcement.
Interest rates continue to be exceptional with conforming, principal residence loans being locked with normal closing costs at rates below 5.25% (and at 4.75% still with less than a point being paid to the lenders.) It is always good to hear from so many of you. Please call me anytime with questions. You, your friends and family deserve the professional advice and experience we at Signet Mortgage provide. And we’re happy to do so. Make it a great week! - Dave
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