Economic Realities, Real Estate, Etc.

There’s Economic News, And Then There’s Reality

Ok, the DOW is topping 10,000 and making new highs. Everything’s back to normal, right?

Our advice is, keep your expectations low; it may take ten years for Americans to recover from the consumer excesses of the past. If we look at the DOW and ignore everything else, we might come to the wrong conclusion about how rosy it is out there. Spinsters are hard at work trying to talk up the economy by reporting economic numbers that are “less bad” than economists predicted, or “decreasing slower“ than the previous month. The government has the ability to report highly reliable real time aggregate income and jobs numbers by tracking withholding, but choose not to. Instead, they report 5– to 7–month old data gathered from unemployment records and then even revise it later.

A deeper look at some key drivers of growth will tell a conflicting story. The “official” national unemployment rate just topped 10%. This is a very high number by historical standards indeed. However, when you take into account those people who stopped looking for work and those who have part–time jobs but want full–time jobs, you quickly get to 17% or higher. 30 million Americans are vying for as few as 2.4 million jobs. Without jobs, there’s no money. Without money, consumers don’t spend. Without spending, the economy doesn’t improve. So, it’s fair to say that we’re going to need a recovery in jobs before there can be a meaningful recovery overall. The bad news is, the job market is still contracting, not improving. Incomes are also down over last year. We haven’t seen trends like this in decades.

The other main driver of growth is the housing market. We won’t have hit bottom until foreclosures dry up. At that point, we’ll know that household wealth has stabilized and real estate has hit bottom. After that, we will need to work off the pent–up inventory of homes before growth begins anew. Predictions point to mid–2010 before the real estate market hits bottom. Prices are still declining.

Has Housing Bottomed?

Don’t bet on it. Not yet anyway. Homes are about to get a lot cheaper. Fiserv, a financial information and analysis firm, is projecting that the national median home price will drop another 11.3% through the middle of 2010 before rising modestly in 2011. Over the next year, home values are forecasted to drop in 342 of 381 markets.

Prices are still declining because the foreclosure crisis is far from over. Those areas heaviest in foreclosure sales will experience the steepest drops, with Miami plunging another 30% by next June after already having fallen 48% during the past three years. A new wave of foreclosures is expected from bubble areas that experienced the highest growth, such as California and Florida.

Even though the past few months of the Case–Shiller Home Price Index seems to suggest that housing markets may have already stabilized, gaining on average 3.6%. This jump was helped by the first–time home buyer credit, which served to support prices. With the Senate extending this program until mid 2010, some would argue that this trend will continue. However, the new law allows only 14% of first–time home buyers who had been ineligible for the credit to now take advantage of the program due to the higher income limits. The expanded coverage to current homeowners will also have a negligible effect on the market since homeowners need to sell their current residence to take advantage of it. So, don't unbuckle your seatbelt. It's not over yet.

What could drive the stock market back to 6,000 … or even lower?

Economic fundamentals: In addition to huge deficits, there's too much supply and not enough intrinsic demand in the “aging economies“ of Europe, Japan and the U.S. From 1999–2007 we encouraged people to borrow. American households and businesses are now $51 trillion in debt! Now we're going to gradually have to correct for that. Add to this the growing trend toward ‘anti–consumerism’, often referred to as ‘voluntary simplicity’. Americans are also changing their values, saving more and learning to live with less.

Geopolitics: The gathering threats from abroad are severe. Threats from Iran and difficulties in Afghanistan immediately come to mind, but there is also instability in Mexico as well as the potential for friendly rivals and determined enemies to try and take advantage of America’s weakened economic state and overextended military.