Well as we all know by now the party is over. However, are all the economic indicators pointing to a horrific 2009 or is there a silver lining within the data? Will the housing and credit crunch continue to hammer the national economy? Most of all, how will the Houston economy fair in 2009?

Housing and Credit
Well the battle lines are now drawn in congress, and housing and credit should benefit in 2009. Congress has expressed an un-relentless resolve to combat home owners losing their homes. In addition, the fed has committed to using all means necessary to lower mortgage rates. So what does all this mean? More than likely we will see the bottoming out of the housing market toward the end of 2009. This means that stopping foreclosures and stimulating the buying with low mortgage rates will eventually draw down excess inventory within the housing market. This will begin to bring about price stability in many markets. With price stability, buyers will feel more confident in the market and will see an uptick in buying activity toward the end of 2009 or early 2010.

Silver Lining $850 Billion
For better or for worse, no matter what your opinion, $850 billion being pumped into our economy will definitely provide a much needed lift, its simple economics. Some people may want to argue about where the money should be spent, but that is a political matter and has no affect on the real economy. Once these funds hit our economy it will provide much needed jobs, tax breaks, etc.

For those of you who are worrying that the government is just printing money, I understand how you feel, but there is no need to worry. Typically what occurs is, during economic down turns the government runs a higher than normal deficit. Then once the economic prosperity returns the government will then pay down the deficit. A great example is by looking at taxes. In order to stimulate an economy in a downturn, the government will typically lower taxes and once economic prosperity returns, the government then raises taxes to pay down the deficit.

Houston Economy
Houston will finally experience a slow down in 2009. Many oil and gas projects have been shelved due to rapidly falling oil and gas prices. In addition, a key indicator for the oil and gas industry is rig counts and we are seeing a reduction in active rigs across Texas. The good news is that the medical center continues to expand and is doing well which should provide a cushion for the Houston economy in 2009. Overall housing sales in 2009 will be slightly positive or break even for the year. All the while, the rental markets will see a boost due to the credit crunch.

2009 will be a cautious year, but toward the end we should see the light at the end of the tunnel.

Cliff Pape

Home Buddies

Close of 2008

The national economy in 2008 began with an overall economic slowdown that we later discovered was already in a recession. Therefore, no one is sad to see 2008 come to an end. In addition, the recession could push the overall gross domestic product (GDP) down by more than 4%. It appears that there is little relief in the immediate future to the downward push on the national economy.

Federal Reserve
The Federal Reserve (the fed) continues to take aggressive action to help boost the national economy out of its current slump. The fed is still continuing to lower the federal funds rate in hopes of lowering the borrowing cost, so that home buying and business spending will pick up and spur on the economy.

Recession
It is possible that the recession could come to an end by mid-2009; however, it is more likely that the recession will continue well into the third quarter of 2009. Given this fact we probably will not see any GDP growth until early 2010.

Cliff Pape
Home Buddies

We have pointed out here that inflationary pressures seem to be in check. This is a great article that lays out the case that we may not be out of the woods yet when it comes to inflation.

“… But we will point out something that’s vitally important right now: There has not been a recession in history that wasn’t followed by inflationary pressure. And that, in turn, suggests that investors would be wise to shore up their defenses now while everybody is looking the other way … at deflation.

Why?

The U.S. Federal Reserve is expanding our monetary base by more than $11 billion a day since September to nearly $1.5 trillion, which represents an increase of 79.02% since October 2007.

What they are doing is unprecedented in recorded history. …”

(Read the full article…)

Home-Buddies

Part Two (Part One)

Last week we took a look at the recession and what it would take to get on the road to economic recovery.  In addition, we considered what risk could prevent the US economy from recovering sooner rather than later.  This week we will take a look at how long it could be before economic growth returns to our economy as well as talk about inflation and interest rates.

Economic Growth

As I discussed last week the economy slipped into a recession last year.  It is expected that the economy will continue to decline as we go into the first quarter of 2009.  It appears that economic growth more than likely will not enter back into the picture until late in 2009.

H.R.6867

Perhaps one of the biggest indicators that our government is concerned about our economy was the passing of H.R.6867 “The Emergency Unemployment Compensation Act of 2008” on November 21st.   This bill provides another seven weeks of unemployment benefits for those whose benefits have run out but they have yet to find a job.

Inflation

Many people were fearful that there were inflation pressures moving up within our economy.  However, as I discussed in previous articles, these assumptions were based on oil and food, which the Federal Reserve (the fed) does not figure into their “core inflation” calculation.  Now we understand why…because food and oil are too volatile to figure into the inflation picture.  This has been proven as inflationary pressures have all but disappeared.  Now the worry warts are talking about deflation (i.e. persistent decrease in the general price level) which I do not see any evidence of this type of scenario unfolding over the next year.

Interest Rates

Earlier this year many felt the fed would no longer cut interest rates; however, with the credit crisis and faltering financial institutions, the fed was forced to aggressively cut the target federal funds rate to 1.00%.  With the economy struggling and with the uncertainty in markets I feel there is still the possibility that the federal reserve will cut rates another half point later this year and/or early next year.

On Tap for Next Week

Next week I will take all of the current information and projections for next year’s economy and provide investors, and real estate professionals with some sound recommendations for the coming year.

Cliff Pape
Home Buddies

Part One

Over the next several weeks I will give you a three part analysis on what is happening within our economy.  My goal is to give you the straight “economic” implications on financial and real estate markets.  Today it is becoming even harder to discern what the true future holds with all of the negative media doom and gloom.   Gordon Appleby of The Wealth Club put it best when he said that CNN stands for “Constant Negative News!”  As always we want to avoid the media’s assertions and focus on the economic fundamentals when making our business, real estate and investment decisions.

Recession

As I stated several months ago we are now in a recession.  So it should come as no surprise to my readers that as of November 21st several key economic publications have stated that the recession started more than likely around a year ago.  That being said, what does that mean?  It means that the Obama Administration will likely champion a second economic stimulus package to help our country’s economy.

H.R. 1424

Signed into law on October 3rd, the “Emergency Economic Stabilization Act of 2008” has given some assistance to our ailing financial systems.  The Secretary of the Treasury has been busy supplying the financial system with some much needed liquidity.  However, many feel that these funds need to be directed toward helping home owners who are at risk of losing their homes.  It is safe to say that once the new Secretary of the Treasury takes office within the Obama Administration that these funds will begin to flow to home owners who are having trouble making mortgage payments.

Road to Recovery

More than likely the housing market will lead the way back to recovery for our economy.  This being said, the recovery will likely be slow and bumpy.  An indicator to watch for will be the inventory of unsold homes.  If foreclosures continue to tick up then inventories will swell and the recovery will be much slower than Americans would like.

There are several risks to the economic recovery, perhaps the greatest risk is a more severe worldwide recession.  In addition, if housing does not stabilize over the next 12 months we could be headed into an even deeper recession.

Next week we will shift to look at what is needed for economic growth and talk about how inflation is currently affecting our economy.  Finally, we will take a look at H.R. 6867 “Unemployment Compensation Extension Act of 2008.”

Cliff Pape
Home-Buddies

So far this year the Houston economy has slowed by half. Unemployment is now trending up which will be a key factor affecting projections for real estate demand. However, we are still waiting to see the affects of the diminishing financial conditions and the drop in energy prices.

Real Estate
Real estate markets were hit hard by the one-two punch of the credit crunch and hurricane Ike. Existing home sales are down 29.5% over the past twelve months. New home sales are off by more than 50% over the past twelve months as well.
The Houston rental market continues to see strong demand that is driven by tighter credit standards that keep renters from becoming homeowners, and local job growth. With such a strong current demand for rentals, single family homes for rent should continue to be a hot commodity in key areas of the city. However, with the pace of new apartments coming online, the apartment rental market could begin to sputter as we move in to 2009.

Rig Count, Oil & Gas
During September and October drilling rose sharply. The strongest evidence was that the number of working rigs averaged over 2,000 for a full month. The last time 2,000 rigs were working for a full month was in 1985! However, the number has begun to fall back as energy prices have fallen. In addition, producers have announced cuts in drilling budgets as oil prices have fallen to under $70 and natural gas prices under $6.50. With this current trend we are probably coming to the end of Houston related hiring in the oil industry until financial and economic conditions improve.

Obama
Now that the elections are over, financial markets are shaky with the uncertainty of what the new president will do in order to assist markets. This uncertainty will cast a shadow over the economy leading into the first quarter of 2009.

Houston business owners should exercise extreme caution heading into 2009. Key fundamental drivers of the Houston economy are now beginning to pull back which points to a slowing Houston economy. However, without any exogenous shocks to the Houston economy, business owners as well as investors should be able to navigate through this economic transition.

Cliff Pape
Home Buddies

The overall economy in the southwest has been bucking the trend of the overall US economy. Although the southwest has been strong it appears to be finally slowing down. Business owners will need to proceed with caution as we move into 2009.

Retail Sales
Consumer retail tells us a lot about an economy because they typically represent about two-thirds of an economy. Retail sales in the southwest have been stronger than US retail sales since 2005. Nothing has changed during 2008 of which from December to August, in the southwest region, retail sales increased at 10.1% when compared with 0.8% for the nation.

Effects of Hurricane Ike
The estimated cost of Ike to the Gulf Region is between $7 billion to $12 billion. This makes Ike one of the most costly storms in Atlantic history. Texas Workforce commission estimates that approximately 35,000 unemployment claims where made that are directly related to Ike. However, the Gulf’s energy infrastructure remains intact after Ike, and the storm had minimal affect on gas prices.

Commercial Real Estate Investment
As the financial markets fell into turmoil many businesses have postponed commercial real estate deals. In addition, some lenders have backed out of deals, especially larger transactions. Currently, there is uncertainty surrounding the commercial real estate investment market. However, economic drivers that attracted investors to Texas commercial real estate have remained in place. It is safe to say that once the credit situation stabilizes, Texas commercial real estate will benefit once again as investors begin to become active again in the market.

Employment
As always, employment is very important because it is one of the key drivers for real estate demand. The southwest employment continues to grow as the national employment continues to decline. Texas employment rose 0.6 percent annualized rate in September, which added 5,500 jobs.

Texas Home Prices
Texas home prices continue to hold up despite the national woes. Texas home prices rose 3.6% over a year, compared with a 1.7% decline for the nation.
The sluggish national economy and the global credit crunch have taken some steam out of the Texas economy. Businesses and investors will need to proceed with caution moving into 2009. Although the Texas economy is slowing, it is still doing better the national economy.

Cliff Pape
Home Buddies

Does the overall economy really affect you? This is a question one must ask as many Americans are making the argument that the government should stay out of the way of financial and real estate markets. As well, they are making the argument that government should stay out of the way of the economy. So how does the economy affect you and should government stay out?

The Economy

The economy is simply a series of markets that work together to give an overall economic picture. Think of it as a puzzle. Each piece of a puzzle is its own piece, however when you put all the pieces together you get a picture. This is how the economy essentially works. The challenge with the economy is that while you are putting the puzzle together some of the pieces of the puzzle can change shape which will cause a change in the “economic picture.” This is why it is difficult to determine exactly what the economic picture is on any given day. We only arrive at a clear picture when we look at historical data over several months.

Key Drivers of the Economy

The economy has several key drivers or players within its complex system. One of the main players that can affect the economy is government. By increasing spending, government can stimulate the economy. This is necessary during periods of economic slow down. Consumers are also an active player in the economy. If consumers spend more money, then they can cause the economy to expand. In addition, businesses play a similar role to consumers; in that if businesses spend more money to meet consumer demand for goods and services, then the economy can expand. Perhaps the biggest part of the economy that everyone pays attention to is how many or few jobs the economy generates. Arguably the biggest player in the economy is human emotions. That’s right human emotions. Human emotions drive expectations of what will happen in the economy which ultimately drives people’s behaviors, which ultimately drive the economy up or down. Now there are several other factors that affect the economy but, for the sake of this post I will only mention these few.

How the Economy Affects You

Employment is probably one of the biggest factors of the economy that affect you. By looking at the biggest factor that most consumers pay attention to, we can see how the economy affects you. For example, if your city is experiencing high unemployment then you can bet that real estate sales will slow, or even worse, real estate prices could begin to fall. This is why a recession is so dangerous. Because they are usually marked by a time of high unemployment. The flip side is if an economy is booming people have more money to spend and purchase more goods and services. This causes businesses to expand their production which increases employment and household income. In other words people feel richer. It is important to note that people may not be richer but their expectations are positive toward the economy and this is driving their behavior which ultimately affects them and the economy.

The Importance of Government in the Economy

So as we can see, you and the economy are closely intertwined. You affect it and it reflects you. Now let us turn and take a look at the role of the government in the economy.
During times of economic prosperity the government’s role in the economy is not needed. The only role government should play is to utilize monetary policy to make sure the economy does not over heat. To better understand how this works think of a car. You want the car to run well and be able to go fast; however, if you go too fast the engine will over heat. So if our economy is fast we need to slow it down so that it does not over heat. However, during time of an economic slow down, the government should and must play a critical role of stimulating the economy. The government can stimulate the economy in two ways; through fiscal and monetary policy. Fiscal policy is actions taken by congress, and monetary policy is actions taken by the Federal Reserve.

Yes, the economy does directly affect you. In addition, it affects you to such an extent that during economic slowdowns, the government responds and gets involved in stimulating the economy. However, perhaps the most interesting part of the economy is that you affect it and it reflects your expectations and emotions toward the future.

Cliff Pape
Home Buddies

As national housing woes continue to be a drag on the overall economy, the government was able to step in and provide much needed liquidity to financial systems. As congress, the Federal Reserve and the Treasury Department, continue to navigate through the current credit crisis several key factors must be watched by mortgage and real estate professionals. Below we provide an overview of what time it is…

National Housing Downturn

The national housing decline continues to hold as sales of existing and new homes fell further in August. At this point new home sales are at a 17- year low. In addition, the median home price for new homes is at a four-year low. As foreclosures continue to rise and credit remains tight the national scene will remain a bumpy ride, well into 2009.

Bullish on Houston Real Estate

As we have stated many time before Houston is still one of the strongest real estate markets in the nation. Several factors have allowed Houston to avoid the national real estate woes. Going forward, Houston should continue to be a safe haven for those seeking to buy real estate. However, the current credit conditions appear to be keeping some potential home buyers from jumping into the market. For investors, now is an excellent time to buy for appreciation. With less people purchasing homes, rental markets will begin to deepen and provide an opportunity for investors willing to buy and hold for long term appreciation.

Government Intervention Not Over

One of the biggest issues facing the economy was solved when congress passed, and the president signed, $700 billion dollar package to provide much needed liquidity to our financial systems. This was the largest government intervention ever done for our financial systems. This more than likely will not be the last of government intervention to not only assist our financial systems but also the overall economy. Several government stimulus efforts are under consideration within congress.

Recession & Inflation Update

With the overall economy in a recession, the government appears to be taking the necessary actions to ensure that we do not enter into a deeper and more prolonged recession. However, as we enter into 2009, realtors, mortgage lenders and investors will need to keep a watch on unemployment which is the key driver for demand of real estate. If the recession intensifies and unemployment continues to rise we could see some short term drops in real estate. On the inflation front, oil prices have been falling which is causing the fear of inflation to abate. This was a much needed sigh of relief for our overall economy.

Cliff Pape
Home Buddies

Economics, Politics = Bad mixture…what is really going on?
PART TWO

Last week we discovered that the current credit crisis seeds had been sown after the bursting of the dot com bubble. In addition, we learned that during recessions that the Fed supplies markets with liquidity in order to jump start the economy and grease the machine of financial markets. This week we pick up with the Sub-Prime collapse and the freezing of credit markets.

Collapse of the Sub-Prime Market and the Credit Freeze
Finally, with banks realizing that many of the mortgages on their books would ultimately begin to fail, they pulled out of the “Sub Prime Market.” Unfortunately at this time there was no longer a secondary market in which to sell the sub prime mortgaged backed securities, which forced major mortgage companies to keep these risky assets on their books. This would prove to be one of the biggest catalysts to causing the overall credit freeze. With real estate markets in parts of the country such as California, Las Vegas, Florida and the Midwest beginning to falter; mortgage companies would begin to feel the pinch. Since, mortgaged back securities are backed by real estate, and as these markets would begin to falter, the value of the mortgaged backed securities on banks books would fall as well. In addition, since banks are required to have capital to cover the write down of an asset on their books, banks would begin to have an urgent need to raise capital! Perhaps the biggest problem is that no one could know how far these assets would fall.

Bold Moves by the Federal Reserve and the Treasury Department
With banks now experiencing continual capital needs, the Federal Reserve (Fed) was forced to take action to supply much needed liquidity to markets.
First, the Fed encouraged banks to borrow from the “over night window”. The over night window is when banks can borrow from the Fed on a short term basis. Normally banks would not use the overnight window because of how they would be viewed by other banks. Those other banks would feel that if a bank utilized the overnight window then it was a sign that a bank was experiencing problems and could fail. However, the Fed enticed banks to use the over night window by convincing banks that were not having difficulty, to borrow from the window. With strong banks utilizing the window, weaker banks felt confident that they would not be viewed negatively by using the over night window. This was crucial because it gave the Fed a way to supply markets with much needed liquidity.
Second, the Fed extended to banks longer loan terms.
Third, the Fed financed the purchase of Bear Stearns by JP Morgan Chase by lending JP Morgan Chase the money to purchase Bear Stearns. In return for the money, JP Morgan Chase gave the Fed the mortgage backed securities from the Bear Stearns books. Since that bank would not have to pay the Fed back, as it normally would have, other banks now can view the over night window as a safe vehicle to borrow money.

Solutions to Crisis
There are two solutions to the current crisis. The first solution is to allow markets to correct themselves. This is what we did in the 1920’s when the federal government sat back and allowed financial markets to fail. At the time it seemed to be the best plan that those financial institutions who had taken overly risky bets, should have to pay for their mistakes. However, as we now know, one of the key impetuses of the Great Depression was the government allowing financial markets to fail. The second option is to supply liquidity to markets as Alan Greenspan did in early 2000, to buffer the bursting of the dot com bubble. By doing this instead of having a prolonged recession, we had one of the smallest recessions in our history. Clearly, the government has decided on the latter decision. Although there are many critics of the governments decision, it is the safer route for our economy as a whole.

Cliff Pape
Home Buddies