BFP Management Blog

Archive: October 2009

The Economy and the Mixed Signals Being Sent

Let’s look at some recent comments: Fed Chairman Ben Bernanke said on August 21, 2009 that “economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good.” At the same time when seeing the stats for July in existing home sales continue their upward trend, Ellen Zentner, a senior economist at Bank of Tokyo-Mitsubishi said, “We can count on housing no longer being a drag. The economic recovery is on track.”

 As the single family housing market has a symbiotic relationship to multi-family housing and right now a direct affect on the overall economy, let’s look at some statistics. In Figure 1 from the National Association of Realtors, existing home sales show a rebound


 Blog 1009 #1

Why are home sales increasing? Let me share a few thoughts:

1. The time of year; summer is usually the most active for home sales.

2. The federal government has intervened in the market by pushing down interest rates to a near record low, offering an $8,000 tax credit for first time home buyers (and have now monetized it) and are backing FHA loans. In other words, the government is fixing the problem caused by the bubble with the very tools that created it.

 The question now is whether we have found a false bottom (double bubble theory) or if government intervention stabilized the market and ended the slide. And if the worst is behind us, when will the government end the stimulus?

 The U.S. GDP is estimated to be 70% consumer driven. For most of the past 10 years, the economy has benefitted from home owners extracting their equity (some estimates have been 25 – 35% of every dollar of increased home equity) and consuming.

 The Joint Center for Housing Studies estimates that between 2005 – 2008, home equity had fallen 43% or $5.9 trillion. In figure 2, we see that Deutsche Bank has estimated that at the end of Q1 2009, 26% of all home mortgages in the US had negative equity. Their estimate is that in less than 2 years, 48% of all mortgages will have negative equity.


 Blog 1009 #3

For an economy largely dependant on consumer spending, the feeling of wealth or lack there of presents a big tail or head wind for growth. In figure 3, we see another issue brewing is the growing prime mortgage delinquencies both in fixed and adjustable rates.


 Blog 1009 #2

 In looking at the mixed signals and data, I conclude that while it is in the Federal Reserve’s best interest for consumer confidence to rise (followed immediately by increased consumer spending), the housing market and economy has yet to find a real bottom. A “jobless recovery,” an increase in foreclosures and more homes with negative equity will not jump start the 70% of our GDP that is dependant on consumption. While growth and prosperity will someday return, there is a lot more deleveraging needed to retrench an economy that enjoyed the biggest credit bubble in at least 70 years. In 2004 – 2006 when I predicted a housing crash, it wasn’t pleasant to be the negative economist in the room and today it gives me no pleasure to continue wearing my bear suit while so many are reading the tea leaves so positively.

Kyle Kazan

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