What's Hot and What's Not
Volume 13 Issue 8
August 2008
By:
U.S. Senator John Seymour (ret.)
NATIONAL ECONOMY:
With high gas and food prices, coupled with falling home prices, rising foreclosures, and continuing job losses, it sure "feels" like a recession. However, the most basic measurement of economic health continues to grow and defies what we all feel. The first look at Gross Domestic Product (GDP) for the second quarter of this year shows that our economy grew at a 1.9% rate, according to the U.S. Department of Commerce. That's "up" from 0.6% in both the fourth quarter of 2007 and the first quarter of this year. The likelihood of a recession, two consecutive quarters of negative GDP, in this year, appears to be gone. Benefits from the $168 billion economic stimulus package will continue to be felt at retail store cash registers through the third quarter and the cheap dollar will continue to grow our manufacturing sector that feeds a strong export market. National unemployment is holding steady at 5.5%, despite the fact that we lost another 62,000 jobs in the month of June, and all signs indicate a less than promising new job outlook for the remainder of this year. The cost of oil, up 31% since the beginning of this year, accounts for most of the inflation in gas and food prices; however, recent indicators point to a moderate decrease in gas and food for the remainder of this year. The Consumer Price Index (CPI), including food and energy, was up 1.1% in June, but should recede in coming months.
PRESIDENTIAL ELECTIONS: With only 96 days before our national elections, the polls indicate a too close to call outcome between Obama and McCain. As I reported in last months newsletter, the Democrats should pickup a substantial number of seats in both the House and the Senate. However, Obama has not yet been able to capitalize on this anti-incumbent, anti-Republican, rotate the rascals, voter sentiment. Under normal circumstances, Obama should be leading McCain by 15% to 20% at this point, but as indicated, today, the presidential outcome is too close to call. Why? The voters have not yet gotten comfortable with an Obama presidency. Although voters fawn over his electrifying speech making and charisma, they don't trust his character, his short record, nor his policy positions beyond his broad promise of "change." His campaign missteps, from his long term association with Pastor Wright, to his numerous flip-flop changes in positions have created a lot of doubts in voters minds. Additionally, there exists a "closet" voter racial discrimination that most polls haven't been able to reveal. This last factor showed its ugly head during the Democratic primaries when "blue collar" voters, from a number of voter rich states, went for Hillary Clinton by over a surprising 20% plurality. Despite all of these negatives, this does not mean Obama won't win on November 4th. What it does explain, is why Obama doesn't have a 15% to 20% lead over McCain with 96 days to go. McCain, on the other hand, has made his own mistakes and has been slow to capitalize on Obama's missteps. McCain has also been weak on defining the "changes" that he would bring to the current Bush White House. The voters are anti-incumbent, anti-Republican and are demanding "CHANGE." McCain, in order to win, must demonstrate that he is a different kind of Republican and that his proposed changes are better for America than the Obama promised changes. One such opportunity for McCain lies in the issue of high gas prices and energy policy. Obama, at the moment, offers nothing new other than to tax the greedy oil companies. His most recent recommendation to increase fuel efficiency was to pump up the inflation in your automobile tires and get a tune up for your engine. Obama will find few votes for such a simplistic and naïve notion. McCain can win "big" on this issue and with it, perhaps the election. McCain, in order to maximize the benefit on this issue, must repeatedly and forcefully promise America's independence from foreign oil and in so doing create millions of new jobs and a strong economy. His energy independence palate should include the full spectrum of America's tremendous natural resources, from offshore drilling, to the exploration of the Alaskan Wild Life Refuge (ANWR), to the development of our coal and oil shale resources, to the development of nuclear energy production plants, to the "fast track" development of wind, solar, and bio-fuels, to supporting Detroit and the American auto manufacturers in the production of the world's most fuel efficient automobiles. Just as FDR promised an end to our national depression, Kennedy promised the exploration of the moon, and Reagan promised an end to the cold war with the USSR, McCain must promise an historic effort to once again make our country energy independent and therefore economically prosperous. The public opinion polls show that the American people are ready to embrace a bold, ambitious, and aggressive energy plan. The voters hunger for a candidate that they can believe will do their best to deliver such a vision. Next on the political calendar, are first the Democrat Convention followed by the Republican Convention. Beyond the temporary excitement of the VP selections, expect Obama to get a 10% to 15% positive bounce in the polls as he departs from his convention. McCain should do similarly and then it will be all about the Presidential debates. Not in recent history, at least since the famous Nixon vs. Kennedy debates of 1960, will there be so much riding on the outcome of these one on one encounters.
FEDERAL SUPPORT FOR HOUSING & THE ECONOMY: Not since the great depression and FDR's creation of the Federal Housing Administration has the Federal Government done so much to support homeownership, the housing industry, the financial industry, and the economy. Since January 1 of this year, President Bush and the Congress have spent and/or committed to spend over $512 BILLION.
Following is a breakdown of the over half a TRILLON dollar economic and housing bailout:
| Economic Stimulus Package of Tax Rebate & Credits |
$168 Billion |
| FNMA & FHLMC Financial Guarantees |
$25 Billion |
| FHA Refinance Loan Guarantees |
$300 Billion |
| First Time Homebuyer Tax Credits |
$15 Billion |
| City & County Home Foreclosure Support |
$4 Billion |
These historic and unprecedented expenditures required the President and Congress to increase the federal debt limit from $9.8 trillion to $10.6 trillion. In addition to the expenditures, a new federal agency, the Federal Housing Finance Agency, was created to oversee the troubled FNMA and FHLMC. Importantly, for high housing cost areas like California, FNMA and FHLMC loan limits were permanently raised to $625,500. In order to insure more liquidity in the home mortgage markets beyond FNMA & FHLMC, the federal banking regulators endorsed a new concept for U.S. financial institutions known as "Covered Bonds." The Covered Bond is intended to replace and/or augment the traditional mortgage securities, wherein pools of mortgages have been sold to Wall Street. The difference in the Covered Bond is that the pooled mortgages will remain on the balance sheets of the lenders, and the mortgage payments will be used to repay the bonds. The Covered Bond concept should provide liquidity and an outlet for Jumbo Mortgages as well as other mortgage loans that are not eligible for purchase by FNMA and FHLMC. This Covered Bond financial instrument has been long used, with success, by European financial institutions. Bank of America, Citigroup, JPMorgan Chase and Wells Fargo all hailed the new debt instrument and said that they will utilize it in order to leverage their mortgage loan production. I believe that this Covered Bond will make a big difference in mortgage availability and lower mortgage rates for homeowners in California. There is no "silver bullet" to solve our current housing crisis; however, this bandolier of bullets is sure to provide real positive results within the next six months.
THE FED WATCH & MORTGAGE RATES: Bold Ben Bernanke and his Federal Open Markets Committee (FOMC) next meet on August 5th. Although there is a growing desire to raise interest rates from the current 2%, the uncertainty of the economy and financial markets continue to haunt the FEDs and therefore I expect the FOMC will take "no action" at their next meeting nor over the next couple of months. However, once the housing markets have bottomed, I believe that Bernanke and the boys will be quick to start raising rates in order to hold off inflation. One encouraging sign that "bottom" may have been reached was Merrill Lynch's recent sale of once valued $30.6 billion in sub-prime loans for 22 cents on the dollar. This was the largest sale of sub-prime loans since the crisis began in early 2007 and may well establish a "market price" for troubled loans. In addition to taking a 78% haircut on the loans, Merrill had to loan 75% of the transaction to the buyer, Lone Star Capital, a "vulture" fund. Sooner, rather than later, we can expect other large financial institutions to take similar huge write downs before the sub-prime mess is behind us.
NATIONAL REAL ESTATE: Home sales and unsold housing inventories "bumped" along during the month of June. Existing home sales in June were down 2.6% compared to the previous month of May and down15.5% compared to June of 2007. Unsold inventories of existing homes for sale rose 0.2% in June compared to the previous month. At the current sales pace the unsold inventory stands at a 11.1 months supply compared to a 10.8 months supply in May. Short sales and foreclosure sales represented 30% of the total sales and caused the median price to slip 6.1% to $215,100 compared to June of 2007. According to the S&P/Case-Schiller Composite Home Price Indices, home prices nationally have dropped 15.1% compared to one year ago. The Case-Shiller Index is considered more accurate as it measures individual home sales compared to NAR's "median price" sales. According to the U.S. Department of Commerce, new home sales declined 0.6% during June compared to the previous month and unsold inventories of new homes continued to improve with a 5.3% decrease for June. This represents a 10.0 months supply compared to a 10.4 months supply in May. New housing starts for June also declined 5.3% and are down 64.5% from their peak in January of 2006. This is the lowest number of new housing starts recorded in the past 17 years. As I have reported in previous newsletters, housing price declines will end when unsold inventories reach an 8 months supply. Continued rising foreclosures are holding unsold inventories at their current levels. However, a published and credible mortgage loan delinquency index, The ABX Index, casts a positive light on the foreclosure situation. The ABX Index measures early mortgage loan delinquencies, 31 - 60 day delinquencies. This index which is an early forecaster of foreclosures, has shown falling delinquency rates in the 31 to 60 day category for the last six months. With this trend, we can expect the rate foreclosures to falloff within the next 60 to 90 days. Once foreclosures have bottomed out, unsold inventories will quickly reduce and home price stabilization will occur. I continue to believe that, absent a recession, home prices will "flatten" out by the end of the third or fourth quarter of this year.
CALIFORNIA ECONOMY & GOVERNMENT: June's new employment numbers continued in the negative territory. The Golden State's unemployment rate rose to 6.9% compared to May's unemployment rate of 6.8%, and lost a total of 12,800 jobs. Year to date, job losses total 38,700. That compares to 15,132,300 Californians who are gainfully employed. Job losses in the housing and finance sector appear to have bottomed out at a 10.4% decrease compared to the peak employment in January of 2006. According to Kiplinger, by year end California will have shown a 0% increase in jobs for the year. They project a 0.8% increase in jobs for 2009 and a 1% increase in 2010. Now 31days and counting, Governor Schwarzenegger continues to wait for the State Legislature to pass a State Budget for the 2008 - 2009 fiscal year that began on July 1st. The Legislature and Governor, faced with a $17 Billion deficit, have, once again, been unable to pass a budget by the Constitutional deadline of June 30th. The frustrated Governor has now decided to layoff 22,000 part-time workers and contractors and further reduce all state employees compensation to "minimum wage" in order that the state doesn't run out of cash before a budget is approved. As I reported in last month's newsletter, we can expect an increase in the State Sales Tax combined with some creative accounting and tax moves before the budget "ballet" concludes. Meanwhile, former Governor, former Mayor of Oakland, and now California's State Attorney General, Jerry Brown, has made the news by threatening to sue California Cities who have, in his mind, created environmental damage by approving suburban housing developments. Jerry Brown, known as "Governor Moonbeam" for wanting to start a California Space Program when he was Governor, now wants no more suburban housing developments and wants future homeowner "wannabees" to move back to the urban centers where they will drive less and offer the rest of us a "greener" environment. All this despite a Public Policy Institute poll that showed 80% of Californians prefer living in single-family homes as compared to a high-rise condo. Rumor has it that Jerry Brown wants another term as Governor and would like to start in 2010. You gotta be kidding me!
CALIFORNIA REAL ESTATE: Existing home sales for June were off 0.7% compared to the previous month but up 17.5% compared to June of 2007. In very positive news, the California Association of Realtors (CAR) reported that their unsold inventory of existing homes dropped again in June to a 7.7 months supply. In May, their unsold inventory stood at a 8.4 months supply. These are very low inventory numbers compared to the national comparative numbers and I wonder whether CAR's numbers include all of the foreclosures. I don't think so; however, it is clear that the large unsold inventories have begun to fall. Interestingly, CAR reports that homes sold under the $500,000 price range in June 2007 represented 40% of the sales. In June of 2008, they represent 67% of the sales. From $500,000 to $1,000,000 in June of 2007, they represented 45% of the sales. In June 2008, they represent 24% of the sales. Over $1,000,000 home sales represented 15% of total sales in June of 2007, and in June of 2008, they represent just 9% of total sales. New housing construction permits were down 10.8% in May from the previous month and down 43.9% from June of 2007. The California Industry Research Board reports that total new housing starts for 2008 will be 77,600. That's hard on the industry, but will soak up most of the new home unsold inventories and make way for a much improved 2009.
If you would like a regular copy of this newsletter, ask your Title representative, and while you're at it, give them your next title order…Their superior "Whatever It Takes" service will make you glad that you did.
DISCLAIMER: This newsletter is published
by Orange Coast Title for the benefit of its customers and those of
its affiliates, California Title, and Equity Title.
The opinions expressed herein are solely those of the author and,
are not in any way to be attributed to the employees or management
of Orange Coast Title or their affiliates. Comments, criticism, or
opposing views are always welcome at jfseymour@verizon.net.
SOURCES: LA Times, Wall Street Journal, Desert Sun, DQ News, OC Register, San Diego Tribune, Inland Valley Bulletin, Barron's, Kiplinger California Letter, CAR, NAR, NAHB, CBIA.
