The Economic Outlook: 2009
Succeeding Despite S di i Challenging Circumstances
Dr. Mark G. Dotzour
Chief Economist Real Estate Center Texas A&M University dotzour@tamu.edu
The O tl k f H Th Outlook for Home Sales S l Job Growth Interest Rates Home Price Appreciation
Composition of the US Economy
71.2% 13.9% 20.1% - 5 2% 5.2% Consumer Spending Business Investment Government Spending Net Exports
Feb-08
Consumer Confidence Index
Aug-07 Feb-07 Aug-06 Feb-06 Aug-05 Feb-05 Aug-04 Feb-04 Aug-03 Feb-03 Aug-02 Feb-02 Aug-01 Feb-01 Aug-00 145 125 105 85 65 45
Source: The Conference Board
Jan-08 8 Jan-06 6 Jan-04 4
as a Percent of Disposable Personal Income
Debt Service Payments
Jan-02 2 Jan-00 0 Jan-98 8 Jan-96 6 Jan-94 4 Jan-92 2 Jan-90 0 Jan-88 8 Jan-86 6 Jan-84 4 Jan-82 2 Jan-80 0 15 14 13 12 10 11
Source: Federal Reserve Board
Percent
Small Business Outlook
“Now Is A Good Time To Expand”
30 % of Respo ondents 25 20 15 10 5 0 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
National Federation of Independent Business
Corporate Hiring Plans: Next Months N 6M h
Q3-08 Q2-08 Q1-08 Q4-07
More Jobs
29%
28%
30%
33%
Less Jobs
32%
31%
22%
22%
Source: Business Roundtable
Corporate Profits
(With ( i h Inventory Valuation Adjustment & Capital Consumption Adjustment) l i dj i l i dj )
$1,300 $1,200 $1 200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 Jan-9 90 Jan-9 92 Jan-9 94 Jan-9 96 Jan-9 98 Jan-0 00 Jan-0 02 Jan-0 04 Jan-0 06 Jan-0 08
Billions s
Source: Department of Commerce
Recessions and Employment
In 2001 recession, employment fell by 2.0% over 30 months. In 1991 recession recession, employment fell by 1.5% over 11 months. In I 1981 recession, i employment fell by 3.1% over 17 months. In 1974 recession, employment fell by 2.7% over 11 months.
Source: Total Non-Farm Employment, St. Louis Fed
Recessions and Employment
In the past four recessions (on average) the employment level decreased for 17 months from peak to trough. The Th employment level in the US hit a peak of 138,078,000 in l t l l i th k f 138 078 000 i December, 2007.
So the decline in employment should come to an end around May, 2009.
Source: St. Louis Federal Reserve
Texas Index of Leading Indicators
130
125
120
115
110 Jun n-99 Jun n-00 Jun n-01 Jun n-02 Jun n-03 Jun n-04 Jun n-05 Jun n-06 Jun n-07 Jun n-08
Source: Federal Reserve Bank of Dallas
House Price Appreciation in US
Percentage Change from Previous Quarter
3 2.5 2 1.5 1 0.5 0 -0.5 -1 15 -1.5 -2 1Q Q95 4Q Q95 3Q Q96 2Q Q97 1Q Q98 4Q Q98 3Q Q99 2Q Q00 1Q Q01 4Q Q01 3Q Q02 2Q Q03 1Q Q04 4Q Q04 3Q Q05 2Q Q06 1Q Q07 4Q Q07
Source: OFHEO-HPI
House Price Appreciation
Price Change from Year Earlier San Antonio
12 10 8 6 4 2 0 -2 -4 -2 -4 10 8 6 4 2 0
Houston
Dallas/Ft. W h D ll /F Worth
8 7 6 5 4 3 2 1 0 -1 -2 -3 16 14 12 10 8 6 4 2 0 -2
Austin
Source: OFHEO
Issues on the Radar Screen
• • • • The Mortgage Market g g The Banking System y Political Uncertainty Capital Gains Tax Rate
Banks Short on Capital
Net Free or Borrowed Reserves
Shoes to Fall on the Banking System
• • • • • Sub-prime Sub prime loans Alt-A loans Payment option ARMs Home equity loans q y Commercial real estate loans (circa 2006-07)
Shoes to Fall on the Banking System
• Credit card loans • Auto loans • Credit default swaps
Investors “Waiting to See”
Increase in capital gains and p g dividend taxes from 15% to 24% decreases the value of stocks and real estate by g 11% overnight.
Investors will return, when:
• • • • • You can believe bond ratings agencies again You can believe corporate accounting again You think the recession is nearing an end g You think that house prices are stabilizing Your regain confidence in value of a contract
Investors will return, when:
• You get clarity of the new tax regimes • You have time to sort out all of the massive government intervention and determine the unintended consequences of their actions • The return on cash gets so low that dividends g look attractive again.
9/1/2008 8
30 Yr M t Y Mortgage R t minus 10 Yr Treasury Rate Rate i Y T R t
3/1/2008 8 9/1/2007 7 3/1/2007 7 9/1/2006 6 3/1/2006 6
Source: Federal Reserve Board
Mortgage Rate Spread
9/1/2005 5 3/1/2005 5 9/1/2004 4 4 3/1/2004 9/1/2003 3/1/2003 9/1/2002 2 3/1/2002 2 9/1/2001 3/1/2001 9/1/2000 0 3/1/2000 0 3.00 2.50 2.00 1.50 1.00 1 00
Interes Rate st
Currently the interest rate on the 10-year treasury is 3.5% 3 5% If the spread was “average”, a 30-year mortgage should be 5%. 30 year 5%
Why the Mortgage Spread is High?
• Lack of confidence in the financial integrity g y of Fannie Mae and Freddie Mac • Lack of confidence in the mortgage insurance industry • Threats by Congress to freeze interest rates • Threats by Congress to “cram down” principal i i l • Concern that falling prices will lead to higher foreclosure rates
The Housing Act of 2008 is C i Completely Inadequate l l I d
• “Tax credit” has to be repaid every year for 15 years. • The conforming loan rate was not increased at all for most cities in America. • Jumbo loan rates are way too high • 30 year mortgage rates are way to high 30-year • Eliminating Nehemiah loans could reduce demand for new homes even further d df h f h
Looking for a Turn in the Economy
Spring, Spring 2009
Favorable corporate profits comparison Oil prices will have leveled out Mortgage foreclosure pressure will peak Federal government will act to open the g p mortgage market • Political uncertainty will be resolved
• • • •
Looking for a Turn in the Economy
Spring, Spring 2009
Favorable corporate profits comparison Oil prices will have leveled out Mortgage foreclosure pressure will peak Federal government will act to open the g p mortgage market • Political uncertainty will be resolved
• • • •
Looking Ahead to Next Spring
2009 • Could see a surprising uptick in business activity p g p y once the election uncertainty is resolved. • Gas prices above $3.00 is still a heavy burden on US consumers. • Home building likely to hit bottom next summer. • Prices should start to firm up nationally. • The foreclosure rate should peak by next Fall. • Texas home sales should be at 2003 levels, which was a “red hot” year that we all celebrated.
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