Free Subscription to Leading Edge                                                       Newsletter! Click Here

Volume 18, Issue 19, May 9, 2008

Wild Cards

Are we headed for a recession or have we bottomed out?

Maybe you caught the Wall Street Journal article a couple of weeks ago that said we hit bottom in April and the real estate market has turned around. The writer postulated that a big reason for the credit crisis was the fall of housing values and their subsequent ability to collateralize loans. The writer continues, stating that the write-downs have largely occurred and that prices have stabilized, inventories are shrinking fast and all is much rosier.

We can agree with some of what she says. Yes, inventories are shrinking and with our perspec-tive that includes commercial we can see that confidence in that sector continues to be steady, though not spectacular by any measure. There are several wild cards that we see that can move things one direction or the other. Here’s our rouges list:

• Mortgage underwriting standards
• Private Mortgage Insurance
• Government Spending
• The Election
• Energy Costs
• Stock Market/Consumer Confidence

There has been a sea change in how conforming loans will be purchased going forward. There are a great many rules that have been put in place that will have the cumulative effect of making it much more difficult to qualify for a loan. Down payments, cash on hand, verified income and other factors that were completely overlooked or worse, faked in the past are now being rigidly enforced and examined. One pundit I spoke with said that more than 75% of loans made in 2005 and 2006 could not have been made with the new standards in place.

PMI—there are two major players in the PMI market. They have new rules as well. Investors, second-home buyers and many others will find getting PMI insurance difficult if not impossible. There are very few buyers over the last couple of years who put down the 20% required to avoid PMI.

Government spending at the Federal, State and local levels cumulatively is likely to fall. Tax receipts, especially at the local and state levels will reflect a weakening economy and devalued property values. Yes, I foresee some deficit spending by the Federal government to stimulate the economy, but frequently that spending comes after the need has passed. Governments do very little quickly as you probably already realize. The double whammy of less money to spend and higher project costs as a result of requirement creep and higher costs will limit the ability of government to be a port of last recourse for many.

Look for several possible side effects of the Presidential election. As I write this, Senator Obama appears to be closing in on the nomination. Hillary may have been more electable than Obama according to some and that’s the interesting diametric that we will zero in on. A match up between Obama and McCain might be very close. With the Democrats in control of both Houses, look for them to help Obama by trying very hard to push large amounts of money into programs to further their candidates’ electability. This is a kind of reverse coattails approach. Most of this will be smoke & mirrors as most spending won’t happen this year or at all. However, both sides will demagogue to suit and support their individual positions. This could help or hurt our market.

Energy costs are incredibly important to individual people’s confidence. When they go to the pump and see those ever-climbing numbers, the blood begins to boil until feelings of helplessness set in. Poor consumer confidence translates into less construction and other business activity. Energy costs also affect us in two other critical ways. They make construction more expensive…read less affordable and consumer’s ability to save for down payments and to pay mortgages shrink even faster. Dis-cretionary spending will be constrained by more and more pinched consumers.

A lot of money has moved to the sidelines in recent months. The volatility of the stock market is very high with strong swings from one day to the other. This is evidence of a fragile economy that sees mixed signals. The relative strength of the markets this year reflects the reality that there is no where else to go, but at the same time there is a great deal of fear and concern. The market will reflect consumer confidence or lack thereof for the balance of the year.
ll of these factors will make the balance of 2008 interesting to the say the least. We ask our readers to be cautious and to hedge their bets as best they can. Good Selling! 
 
Archived Issues

Read past issues of Leading Facts Newsletter. Click HERE to view the entire archive.