Thursday, May 22, 2008

Stuck in a trading range of emotion, stimulus checks may not help

We had a great run from the March bottom that ended late last week. We seem to be stuck in a 1,200 point trading range on the Dow. When we go up, we feel good and when we go down, we feel depressed. When you add together the uncertainty of the real direction in the markets and the parabolic rise in oil prices perhaps, we should be concerned that the trading range may have lower lows and lower highs.

I know I have written to you on the subject of how long it will take to a recover in real estate many times. In fact, some of you may think that I spend too much time on the subject. I regularly write about the problem because I think housing is core to our economy, the quality of life in America and most importantly how long the decline will be till we have economic recovery.

I stand by my prediction that I do not think we will hit bottom in real estate and in turn the economy until some time in late 2009. I know that it appears that it cannot get much worse, but let me assure you it can and will. Later this year we are worried about the 2 year ARM re-sets on mortgages. The years of 09 and 10 we have an even greater number of 5-year arms re-setting. The most recent numbers I saw was over 8,000 foreclosures come on the market each month. With almost a year of new homes in backlog plus all the other property for sale, I don’t see how we can have enough pent up demand to absorb all of this inventory. It may take many years before we bring the supply back into a more normal range.

Home equity loans are the next big problem we have to face. Countrywide, JP Morgan just to name two mortgage lender, have announced in certain markets, that they are freezing home equity lines unused because the value of the homes will not support both the first mortgage and the full line of home equity.

The banks are saying that the house is worth less, then homeowners will appeal their real estate taxes to the government. Lower tax revenue will cause a significant squeeze in the budgets of state and local governments. I know it is depressing to talk about all of these negatives, but it is my job to be concerned about these issues and bring them to your attention. I need to understand the big picture so I can protect your money.

A great deal of hope has been placed on the backs of the $600 stimulus checks that went out in May, for economic recovery in the second half of the year. I believe that with the increase in the price of gas that most of the stimulus check will be spent on higher fuel cost. If we spend on average an extra $20 a week on gas, it will take the entire $600 to cover the increase through the end of the year.

Dan Perkins

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