What's Unfolding in 2008

Mike Larson takes a look at the different sectors of the U.S. economy and how each of them has declined in 2007. In this issue of Money and Markets, Mr. Larson examines the downturns in the economy and determines what 2008 will bring.

Jupiter, FL (PRWEB) December 30, 2007 -- Mike Larson takes a look at the different sectors of the U.S. economy and how each of them has declined in 2007. Mr. Larson examines the downturns in the economy and determines what 2008 will bring.

Sales and construction activity have collapsed: Existing home sales have plunged 31% from their 2005 peak. New home sales are down around 48%. Meanwhile, single family housing construction activity has tanked 55%. The outlook has worsened as empty homes have piled up. An index that measures home builder optimism, buyer traffic, and expected sales has plunged from the 70s during the boom to 19, a record low. And the nationwide home vacancy rate has surged to a near-record 2.7%, a testament to the dramatic glut of empty, depreciating homes sitting on the market.

Mortgage performance has suffered: An alarming 5.6% of the nation's homeowners have fallen behind on their mortgage payments, up from roughly 4.7% a year earlier and the most since 1986. The percentage of homes in any stage of foreclosure has jumped to 1.7%, the highest since the Mortgage Bankers Association began tracking it in 1972.

Longer-term, the downturn in construction activity could eventually cut housing inventory to a more manageable level, while lower prices will entice more buyers to step up to the plate.

But it'll take a good long while to get housing supply and housing demand into better alignment. Larson doesn't expect the overall market to start a gradual recovery until late 2008 at the earliest. More than likely, it will take until 2009.

Commercial lenders are now attempting to get their arms around the problems. But they waited too long. Third-quarter delinquency rates on commercial real estate loans surged to a nine-year high of 1.94%, up from 1.11% a year earlier, and they're poised to rise even higher in 2008.

The result: Commercial property values will likely deteriorate in 2008, and commercial foreclosures will escalate. The process is already underway as the Wall Street Journal reported on December 26:

"For the past few months, the commercial real estate sector has been in a state of near-paralysis, as financing has nearly dried up. The number of major properties sold is down by half, and many worry that the market will continue to deteriorate as property sales remain slow, prices continue to drop and deals keep falling apart."

Earnings prospects for a wide variety of Real Estate Investment Trusts, or REITs, will likely weaken as well, prompting even more REIT investors to jump overboard. After all, office, industrial, and retail vacancies are starting to rise, and rental growth is never going to live up to the extremely optimistic projections promulgated during the boom.

The finance industry generated hundreds of billions of dollars in profit in the past few years. Originating, bundling, buying, selling, and trading residential mortgages, corporate debt, leveraged buyout loans and more was a humongous cash cow and the packaging and trading of complex, hard-to-understand derivatives.

Suffice it to say that the notional, or face value, of global over-the-counter derivatives soared to a stunning $516.4 trillion in the first half of 2007. That was up 40% in a year and up almost six-fold since the turn of the century, according to the Bank for International Settlements.

Unfortunately for many financial firms, that business model is now shot. Complex debt securities are blowing up. The risk of parties to derivatives transactions actually failing to meet their obligations is rising fast. And the origination and packaging of all kinds of debt is grinding to a halt.

The 2008 election process is starting to kick into high gear. This will be one of the most pivotal presidential election years in decades, not only because no incumbent is running but also because the hottest days of the campaign are likely to coincide with some of the worst shocks of the housing bust.

The race is on among democratic presidential hopefuls to bailout homeowners in 2008.

Result: Unprecedented pressure on Washington officials and politicians to keep voters happy and the government bailout machine in overdrive.

Meanwhile, on the monetary policy front, the Fed is jumping into the game with both feet. Late in 2007, it cut the federal funds rate, slashed the discount rate, and made other sweeping changes to the way it channels funds to the banking system.

It can be expected for policymakers to continue competing for bailout supremacy on the monetary policy and legislative fronts. While these efforts will help some marginal borrowers and banks, they won't be enough to offset the economic forces aligned against residential and commercial real estate. Never forget that lenders provide the lifeblood of an economic expansion.

Companies borrow money to build factories. Developers take out loans to put up apartment complexes and strip malls. Consumers use credit cards and home equity loans to finance their spending. But now, that flow of credit is being squeezed everywhere.

"It's clear that the federal government and the Federal Reserve will do everything they can to fight the recession threat. But they will likely fail, with the economy shrinking for at least part of 2008," Mr. Larson says.

To read this issue online, please visit:
http://www.moneyandmarkets.com/Issues.aspx?NewsletterEntryId=1317

About Mike Larson and Money and Markets

Mike Larson joined the company in 2001, and has more than 10 years of experience researching and writing about personal finance, investing, and the housing and mortgage industry. In 2003, Mr. Larson was named associate editor of the company's monthly Safe Money Report. In this role, he is responsible for writing and editing as well as analyzing trading opportunities for clients. Mr. Larson is also a regular contributor to the company's daily e-letter, Money and Markets.

Before joining Weiss Research, Mr. Larson was a personal finance reporter for Bankrate.com, where he wrote extensively on mortgage lending, banking, residential real estate, and Federal Reserve Board policy. His responsibilities included analyzing economic data and interest rate trends for a weekly column and developing rate forecasts for a regular index feature. Previously, Mr. Larson held positions at Bloomberg News and the Boston Herald.

Recognized as an interest rate and mortgage market expert, Mr. Larson's views have been quoted in the Washington Post, Chicago Tribune, Dow Jones Newswires, Reuters, Sun-Sentinel and the Palm Beach Post. He has also appeared as an investment expert to discuss the housing market on CNBC, CNN, and Bloomberg Television. His writing has been acknowledged by both the National Association of Real Estate Editors and the Massachusetts Press Association.

Among the first analysts to call the housing slide, Mr. Larson's new policy paper, "How Federal Regulators, Lenders and Wall Street Created America's Housing Crisis: Nine Proposals for a Long-Term Recovery" has received broad media coverage following its July 2007 submission to the Federal Reserve and FDIC. Mr. Larson holds B.A. and B.S. degrees from Boston University.

Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.

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