Weekly Economic Update- August 1

The financial markets are rushing around and around without clear direction, but with many forebodings of possible panic-driven shocks to the stock markets, to interest rates, to the credit markets. While the Fed continues to worry (in public, at least) about higher inflation, the markets seem genuinely concerned about an approaching credit crunch of some severity.

It is time to serve the genuine long-term needs of our clients, the ones that arise as their lives go through changes.

 Thumbnail Sketch: The data continue to confirm a market that is still deep in correction mode. “Median house prices are flat to down over the past year across a good portion of the country. It looks like no new home equity has been created in the aggregate for at least nine months, and equity extraction is down over 50% from its peak. An increasing number of homeowners are delinquent on their mortgage payments and are headed for foreclosure. Credit quality will get worse before its gets better, particularly if housing-related job losses start to subtract more heavily from nominal incomes.” [Aaron Smith, Moody’s Economy.com] But the focus has moved partly from housing to embrace the entire credit markets, with small earthquakes and aftershocks being set off by worries that the current credit crunch may deepen, slowing major company acquisitions to a halt and hammering overall economic growth. If investors are leery of supporting debt growth—whether in the form of high-yield securities backed by subprime mortgages or in the form of corporate bonds (often called junk bonds)—then the interest rates on all such debt has to climb sharply…and this is what has been happening, with several big-money deals postponed until the necessary borrowing to complete the deals can be more readily arranged. The markets, as you’ve noticed, have been full of fear—one day regaining their confidence that we’ll weather the current storms, the next day terrified that we may see the economy ground to a halt (read: recession) by uncertainty over debt issues. These are dicey times, to say the least! In the midst of these concerns, the slowing of real estate sales looks like relatively small potatoes…but it’s still a big concern to the world of Wall Street. It is odd to see lower-middle-class homeowners worried over having to default on their home mortgages and, at the same time, hedge fund managers who makes hundreds of millions of dollars each year worrying about problems from essentially the same source: Neither can get the financing they need. Where this will go is impossible to say. One guesses that the Fed continues to focus on its concern over rising inflation because it knows it would compound the fears if it lowered the fed funds rate.  
Suffice it to say that the world of real estate will continue on.  After all, real estate is what we and our households LIVE in, not just what we invest in and therefore —there will always be a market.


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