ECONOMIC OUTLOOK Over twenty years of proven expertise and trend analysis in evaluating residential property values. |
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To help our customers better understand current market conditions and projections, Local Market Monitor provides periodic analyses of national economic trends and their impact on real estate markets. This analysis, developed by Ingo Winzer, reflects his view on the current outlook for the national economy. National Economic OutlookSeptember 20, 2008 If a bunch of rich guys play high-stakes poker, and a few of them go broke, should the rest of us care? That, essentially, is what happened on Wall Street, where rich investment firms that DELIBERATELY created risky securities backed by mortgages ended up having to eat some of them. The vast majority of these securities were sold to hedge funds [more rich guys] and other investors who were not content with the relatively low returns they were getting from traditional investments. The firms, and the rating agencies that blessed their new securities, had no idea of the actual risk they had created, because their quantitative analysis methods relied on historical data, and there had been almost no losses from foreclosed mortgages during the last 30 years. But, during that time, there had been almost no lending to sub-prime borrowers, who were essential to the new securities because their mortgages carry high interest rates. We shouldn't have to care about the Wall Street panic, but we do, because banks and pension funds also bought those securities, and now will take some losses. The sub-prime mortgage debacle is only the most visible part of the housing bubble that has also ensnared more-conservative mortgage investors such as banks, Fannie Mae, and Freddie Mac. Rising home prices protect against a multitude of management sins because foreclosed properties can be resold, often at a profit. But flat or falling prices expose all the problems just under the surface. And here we get to a bigger problem than just rich Wall Street firms going bust: While home prices were going up, home owners used up and spent about all the credit they could get, to buy homes, to buy cars, to buy consumer goods. Now they are in debt up to the roots of their hair. And now their spending will be sharply lower for a while. Whether that technically puts the US in a recession or not is irrelevant. What matters is that there will be no quick fix to the problem: no quick recovery in home prices, no turn-around for Detroit from lower gas prices, no jump start to the economy from government stimulus. Consumer debt peaked in September 2007. In previous cycles the adjustment period was at least two years, and this time the problem is bigger. So don't look for renewed economic growth until mid-2010. ARCHIVED OUTLOOKS
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