Thursday, May 28, 2009

It is simple, just watch two things as indicators of the turn in the economy.

Depending upon to whom you listen, read, or watch, everybody has his or her own idea of the most important thing that we have to watch for in the coming economic recovery. In speaking with a client today who is the CFO of a company, he said that and I quote, “You only need to look at two things and these two will give you a very good indication of the direction of the economy. The two things that I’m watching are jobs and housing”.

He feels that one feeds the other. With jobs still being lost, people will loose their homes unless they can find a new job quickly, and more houses will come on the market increasing supply and in turn depressing prices. If people start going back to work then they will start saving to buy that house. I saw a report this week that the average price of a single family home in Ft. Myers Florida at the end of 2007 was $325,000. This week the report said that the average price was $89,000.

People who have a good secure job and may want to buy a house will be reluctant because they fear that they will be paying too much for the house. If they wait, they might be able to get the house they want at a lower price. In a real sense, we now have the reverse of what was happening in 2007. People were buying houses and condominiums and speculating that the price will go up. Now people are speculating that prices will go down and they are on the sidelines waiting for the opportunity to buy at the bottom of the market.

Getting back to my CFO friend, he said that they have already built their budget for next year and are talking about budgets for 2011 and beyond. I told you many times in the past I do not think we will have a snap back recovery like other recoveries post WWII. I do not think unemployment will drop below 8% by the end of next year and those people who are projecting 6% to 8% GDP for the second quarter 2010 I think are from China.

Let me add a third item to watch. It is in some ways a part of housing and that is interest rates. The 30-year conforming home loan interest rate is based on the 10-year Treasury note yield. Recently we have seen an increase in the yield on the 10-year from 2.47% in April to a yield of 3.62% as of May 28. This backup in interest rates has increased the cost of home loans. The President wants more loans refinanced and the Fed can’t buy enough 10-year notes to bring down mortgage interest rates and keep them down.

It appears to me that we are in a "tug of war "between the Fed and the bond trades for control of the bond markets. There is an old saying in investing, “Don’t fight the Fed.” I think that it is possible that the fed will win and we will see 30-year mortgage rates fall dramatically as the market comes to grips with an economy that will be slower than expected.

Dan Perkins

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