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Commentary on the Real Estate Market as of January 2011
by Peter L. Zachary, MAI, MRICS

The Business News section of the January 7, 2011 New York Daily News had an article entitled "Happy Holidays for the Retailers - Best Since 06' Despite Storm."

The article stated: "RETAILERS sealed their strongest holiday sales surge since 2006, as a robust November more than offset spending that tapered off amid last month's blizzard. From October 31 through January 1, sales at stores open at least a year - a key measure of a retailer's health - rose 3.8% over last year, according to a new report by the International Council of Shopping Centers. The figure represents the biggest increase since 2006, when sales rose 4.4%.

The mountain of snow that caused the metro area to grind to a halt took a bite out of sales in the week after Christmas. However, early holiday discounts, which started in October, has consumers finishing more of their shopping before the December rush.

The article continues: "The overall season was good, but the strength came from the beginning of the season," said Michael Niemira, chief economist at the International Council of Shopping Centers. Still, December's smaller increases underscore the challenge retailer's face in getting shoppers back into stores in the coming months when there are no holidays to give them reasons to spend. "This is kind of a wakeup call," Niemira said. "It's back to reality." But December's spending is in line with at 3.3% average growth rate for 2010. Niemira said he's confident that the growth rate will continue in 20111 - as long as the job market keeps improving. "What really has to kick in is the employment story to keep the momentum going," Niemira said.

The January 8, 2011 issue of the New York Times has a first page article "Slow Job Growth Dims Expectations of Early Revival - unemployment at 9.4% - "Recovery Could Require Another 4 or 5 Years," Fed's Chief Says. The article stated: "The year 2010 ended on a disappointing note, as the economy added just 103,000 jobs in December, suggesting that economic deliverance will not arrive with a great pop in employment.

Signs still point to a long slog of a recovery, with the unemployment rate likely to remain above 8% - it sits at 9.4% after Friday's report- at least through the rest of the president's four-year term.

President Obama is not unaware of the political dangers posed by high unemployment. On Friday he appointed a new head of his National Economic Council, Gene Sperling, to replace the departing Lawrence H. Summers.

The latest report was also a let-down for some within the White House, as recent economic data had suggested that the recovery would gain speed going into 2011.

The political stakes are high, as Democrats and Republicans wrestle over who should take credit for the progress of the jobs market, or the blame for its failure to ignite.

"We need collective patience," said William C. Dunkelberg, chief economist for the National Federation of Independent Business. "You can't recover quickly from a disaster like we've been through."

With local governments continuing to shed some jobs, all of December's gain came from private employers. In fact, private employment grew each month last year. The unemployment rate, which is based on separate surveys of households, fell from 9.8% in November, though a substantial part of that drop is caused by Americans leaving the workforce.

Long-term unemployment, however, remains a malady without an easy cure. The percentage of the unemployed who have been without work 27 weeks or longer edged up last month to 44.3%, virtually unchanged from a year ago. Other indicators, such as the length of the work-week, remained stagnant.

The challenge, still unsolved, is how to add enough accelerant to light the employment fire. The Federal reserve chairman, Ben S. Bernanke, said Friday that he expected economic growth to be "moderately stronger" this year.

"We have seen increase evidence that a self-sustaining recovery in consumer and business spending may be taking hold," Mr. Bernanke told the Senate Budget Committee in his first testimony to the new Congress.

He was less optimistic about employment, noting that the job market has "improved only modestly at best." And he added a cautionary forecast: "It could take four or five more years for the job market to normalize fully."

Mr. Bernanke noted that housing, an enormous potential driver of middle and working-class jobs, continued to edge downward. The Fed, he emphasized, plans to proceed with its plans to buy $600 billion worth of government bonds in hopes of stirring more growth.

President Obama, in a speech at a factory in Landover, Md., accentuated the positive, which was a year of private sector job growth. "That's the first time that's been true since 2006," he said. "The economy added 1.3 million jobs last year."

Left unsaid, however, was the fact that job growth was not enough to absorb people entering the workforce in the United States, much less to shrink the unemployment rolls.

R. Glenn Hubbard, dean of Columbia University's business school and former chairman of the council of economic advisers for President Bush, remains a guarded optimist. He sees signs of the economy gaining speed. "We could run as high as 200,000 per month this year, but keep in mind that might only bring the unemployment rate down to 9%," Mr. Hubbard said. "That does very little for the person who is long-term unemployed."

The so-called real employment rate, which includes those workers who are discouraged or have given up looking for work, stands at 16.7%.

Daniel Alpert, managing partner at Westwood Capital, pointed to a disturbing fact in Friday's report. "We are seeing what appears to be evidence of structural unemployment," he said, "among those in the prime, higher-earning 35 to 44 year-old demographic, where unemployment actually increased in December."

The president's advisers dispute this. Austin Goolsbee, the chairman of the council of economic advisers, agrees that long-term employment poses a great challenge, but he says there a few signs of European-style structural unemployment, in which job seekers essentially surrender hope.

"We are not cutting them off and dumping them out the door," he says. "The biggest help for them is to drive down the overall employment rate."

In the days leading up to the Friday report, economists pointed to hopeful signs. Consumer spending was on the rise, businesses were spending more, car sales nosed upward. And private surveys pointed to the possibility of a sharp, even explosive increase in hiring by small and midsize businesses.

Mr. Dunkelberg, however, noted that surveys of his membership showed no strong tend toward such hiring. Fifty percent reported they had no need to seek bank loans, as they had little intention of hiring.

"The consumer still has way too much debt and our members are very cautious," he said. "Their only capital spending going on is to fix a leaking roof."

Employment growth decelerated a bit toward the end of the year, with the biggest increases coming in October - the Bureau of Labor Statistics revised that number upward by 38,000 jobs on Friday.

Adam Hersh, an economist with the liberal-leaning Center for American Progress recently ran a calculation to see when, at the current pace, the nation would regain the number of jobs lost during the great recession. The answer was 2037.

"Look, we have a huge employment crisis," Mr. Hersh said. Much growth of the last month came in the hospitality sector, which added 47,000 jobs. Such jobs however, tend to provide lower wages and uncertain prospects for long-term employment.

Manufacturing, a source of encouragement earlier this year, added 10,000 jobs. And health services added 36,000, continuing a year-long rise in that area, fed in part by the aging American population.

Local governments shed 10,000 workers, fewer than in some past months, and state employment held more or less steady.

For the longer term, economists see hopeful signs. Some take the view that, in retrospect, the recovery of early last year was a false spring, reflecting only the bounce-back of the deep gloom of 2009. Real signs of recovery, including a pickup in shipping and manufacturing, took hold this autumn they say.

"It's pretty clear the economy went into a swoon last summer," said Steve Blitz, senior economist for ITG Investment Research. "Now the real recovery is beginning, and I expect to see improvement."

But, he acknowledged, he could as easily point to a glass still half empty. American corporations, sitting atop nearly $2 trillion of cash, are not doing much hiring, even as the president of Congress at the carrots of tax cuts and investment incentives. "The most disturbing fact is that you're not seeing any breadth in the hiring," Mr. Blitz said. "It's looking to be a slow climb."

On January 8, 2011, the New York Post's Business section has an article "Big Bank Battered by Foreclosure Ruling." It stated: Two huge mortgage lenders fought the law - and the law won. Wells Fargo and US Bancorp got slapped in the briefs yesterday, losing a closely-watched legal battle over a botched foreclosure in Massachusetts. The state's top court said it was OK for a judge to void the taking of a home if the bank couldn't prove it owned title to the property. While the case centered on just two Bay State houses, experts said the ruling could ripple through tens of thousands of properties and across the nation. "My belief is that New York will take its cues from Massachusetts," said consumer bankruptcy lawyer Linda Tirelli. Investors feared the worst as well, selling off a host of bank stocks - running for the exits in large numbers. Wells Fargo shares fell as much as 5% while US Bancorp dipped 2.4% on the news before recovering a bit in the afternoon. Both had very high volume.

The ruling by the top Massachusetts court upheld a trial court ruling last year that voided the seizures by Wells Fargo and US Bancorp, saying the banks lacked the authority to evict homeowners from their properties because the institutions couldn't prove they owned the mortgages. Similar problems have popped up in courthouses across the country but the ruling yesterday is believed to be the first that reached the state's top court. Banks have trouble finding the proper paperwork because most mortgages are pooled and then converted into bonds and sold to investors around the world. Massachusetts Attorney General Martha Coakley said that her state is still suffering from the housing crisis and that the burden proof of ownership must fall on the big bank. The verdict also comes days after the Bank of America and Ally Bank agreed to pay hefty sums to settle claims with mortgage giants Fannie Mae and Freddie Mac that they improperly originated mortgages during the housing boom.

"We really see a pattern of the major banks being either unwilling or unable to come forward with the appropriate documents," Philip Stein, a partner at Bilzin Sumberg told The Post. "This judgment has no financial impact on US Bancorp, a bank spokeswoman said. "Wells Fargo believes the court's ruling does not prevent foreclosures on loans in securitizations," it said.

On January 22, 2011, there was an article on page 3 of the Business section of The New York Times entitled: "Mortgage Woes at Core of Bank of America's $2.2 Billion Loss for 2010." The article stated: The bank lost $2.24 billion for the year, or 37 cents a share, as gradual improvements in its core banking business were offset by charges linked to its disastrous 2008 acquisition of Countrywide Financial, the subprime mortgage specialist whose lending practices have come to typify how the housing boom turned to bust. "We're making progress resolving some pretty significant legacy issued that arose from the crisis," said Charles Noski, Bank of America's chief financial officer. "The mortgage issues in this country were built up over a number of years, and we've said it will take some year to resolve that." The bank was forced to set aside $4.1 billion in the last quarter to settle claims by investors who hold soured mortgage securities, citing evidence that the underlying mortgages did not conform to underwriting standards or that they lacked the proper paperwork. Of that $4.1 billion charge, $3 billion was earmarked to satisfy claims by Fannie Mae and Freddie Mac, the government-controlled companies that dominate the mortgage market. In addition, Bank of America took a noncash charge of $2 billion to reflect a write-down of good will on its acquisition of Countrywide.

The article continues: Bank of America's report Friday capped a series of earning announcements by the nation's biggest banks over the last week and a half, but it stands in sharp contrast to the resurgent profits recorded by its giant peers, like Citigroup, JPMorgan Chase and Wells Fargo.

The article then continues: As the nation's biggest mortgage servicer, Bank of America handles one in five home loans in the United States. It was forced to halt foreclosures across the country in October after questions arose about its internal practices, including the use of so-called robo-signers to approve thousands of documents a month with only a cursory review.

The company says it has revamped its procedures, and but resumed foreclosures in December in states where court approval is not required beforehand. Foreclosures in the remaining states are expected to resume before the end of the first quarter.

Conclusion: As I read the newspapers, I believe the positive impact in housing prices will be very slow - probably several years. This is because housing prices and the economic recovery are directly related. One is a mirror of the other. More next month.

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