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Housing Outlook - January 2008
by Peter L. Zachary, MAI, MRICS

According to the December 06, 2007 issue of the New York Times, the Bush Administration reached an agreement with the mortgage industry on December 5, 2007 to freeze interest rates for up to 5 years for a portion of the 2 million homes with adjustable sub-prime mortgages. However, the government efforts to help the sub-prime mortgage crisis may offer limited aid. This is according to the New York Times on December 4, 2007, two days before the formal plan was announced. "The Bush Administration's efforts to help borrowers in danger of default on their sub-prime mortgages could help only a small number of those who took out such loans, industry analysts said Monday". The New York Times reports that "administration officials have yet to agree on crucial details with mortgage lenders and the securities industry, however, a similar effort in California is likely to help about 12% of borrowers in the state with adjustable rate mortgages". The Times states that "about 2 million people have sub-prime mortgages with monthly payments that are likely to jump sharply in the next year or so as their introductory teaser rates expire on December 6, 2007".

The New York Times reports that the agreement is expected to contain many limitations that would exclude many, if not most, sub-prime borrowers, according to industry executives who have seen it. It would exclude those who are delinquent on their payments, about 22% of all sub-prime borrowers, according to First American Loan Performance, an industry research firm. The plan also excludes any borrower whose introductory rate expires before January 1, 2008. Mortgage companies could also exclude borrowers whom they conclude are making enough money to afford higher monthly payments". While President Bush has noble efforts, he won't be able to help the people who have been hurt first.

"Slowing growth in jobs seen as Ominous Sign For Economy" was the headline in the Business Day section of the December 8, 2007 New York Times. This article stated "the nation gained a modest 94,000 jobs in November, the Labor department reported yesterday, pulling back considerably from the previous month in the clearest sign yet that the American economy was headed for a substantial slowdown". The expansion is intact, but increasingly frayed, said Mark Zandi, chief economist at Monday's Economy.com. The article states that the typical responses are for further easing of the Federal Funds rate. "Unemployment Sounds Warning About Economy" was the headline on the first page of the New York Times on January 5, 2008. This article stated that "the unemployment rate surged to 5% in December as the economy added a meager 18,000 jobs, the smallest monthly increase in four years, the Labor Department reported on Friday". This compares to 94,000 jobs in November.

The article further states: "Economists viewed the report as the most powerful indication to date that the United States could will be falling into a recession". "The swift declaration in the job market resonated as a warning sign the troubles once confined to real estate and construction are spilling into the broader economy, threatening the ability of American consumers to keep spending with customary abandon". The article quotes Mark Zandi, chief economist of Moody's Economy.com. "The economy is on the edge of recession, if we are not already engulfed in one". (Job losses were my concern when I started my Commentary on the Housing Market on 09/10/07).

On December 12, 2007, the Federal Reserve did in fact cut the Federal Fund rate to 4.25% and its discount rate to 4.75%. The Times reports the Fed as suggesting "that it would lower rates again if the credit crisis continued to damage not just housing, but the rest of the economy as well".

Meanwhile, the titans of the banking and securities industry are taking a beating. Merrill Lynch announced a bonus reduction of 40% to 70% according to the New York Post on December 15, 2007 and Morgan Stanley reported its first quarterly loss in its 72 year history, because of a $9.4 billion charge on sub-prime linked investments. This was reported in the December 20, 2007 issue of the New York Times. Citigroup dismissed 30 employees in its ‘structures credit group" according to the New York Post on December 20, 2007. They also took $9 billion in write downs. Morgan Stanley received a $5 billion equity investment for nearly a 10% stake from the China Investment Corporation, the country's sovereign wealth fund, as reported in the New York Post on 12/20/07. This follows a $7.5 billion purchase, a 4.9% stake in Citigroup, Inc. as reported by Associated Press on November 28, 2007. Both deals involve a 9% (Morgan Stanley) and an 11% (Citigroup) interest rate and convertible preferred securities.

Retail sales, only rose 3.6%, according to Master Card Advisors, as reported in the New York Post of 12/27/07. It is more in line with the lower end of expectations. In my opinion, it was helped by after Christmas as sales being held before Christmas. On a recent trip to the mall before Christmas, every store had 40 to 60% off signs. Without these sales, in my opinion, the real sales growth figure would have been lower.

And to conclude with the effects of the sub-prime mortgage crisis, despite the Bush's Administrations aid and the Federal Resources cutting interest rates, home prices fell faster in October than previous months, according to the New York Times on December 27, 2007. Prices fell 6.1% from October 2006 to October 2007 in 20 large metropolitan areas according to Standard and Poors/Case-Shiller indexes, compared with a 4.9% decline in September. On a monthly basis, prices fell 1.4% in October, the fastest they have declined in 7 years. 1.4% annualized is 16.8% but I can't predict the future. And new home purchasers are down 34.4% from a year earlier, according to the New York Times December 29, 2007 issue.

In my opinion, things will eventually get better. Housing prices will level and eventually go up. But until that time, which could be years, many people will feel the pain of losing their house and their jobs. Perhaps the Bush Administration's freeze on interest rates will help some homeowners.

When I was a young man, a little bird landed on my shoulder and said: "Don't worry, things could be worse". And sure enough things did get worse.

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