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Tag Archives: Home Prices

Below is the link to the 3Q12 Economic Report I wrote for a Colorado Bank’s Board of Directors and  (reproduced with permission):

http://www.QuantumRisk.com/PDF_Files/4Q12EconomicUpdates(2013-01-09)-Public.pdf

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Attached is the presentation I gave to about 35 business executives at TiE Rockies’ Business for Breakfast, yesterday morning Nov 30 2012. It was very well received. http://www.QuantumRisk.com/PDF_Files/AreWeGoodStewards(2012-11-30)TiERockies.pdf

Below is the link to the 3Q12 Economic Report I wrote for a Colorado Bank’s Board of Directors and  (reproduced with permission):

http://www.QuantumRisk.com/PDF_Files/3Q12EconomicUpdates(2012-10-12)-Public.pdf

I’ve temporarily had to put aside QuantumRisk, since the data pricing was raised to $800,000 p.a., and now work for a bank. The link below provides the 2Q12 Economic Report I wrote for the  bank’s Board of Directors (reproduced with permission):

http://www.QuantumRisk.com/PDF_Files/2Q12EconomicUpdates(2012-07-18)-Public.pdf

My earlier forecast agrees with a National Association for Business Economics survey of top business economists:

1. In my post 14.5 million Jobless & Counting I had shown that if the Government does not do anything radical from historical responses our unemployement rate will take until June 2014 to reach 6.1%. 87% of the business economist surveyed expect that unemployement will drop to 4.7% by 2012 or later. That is, the history of President Carter suggest that President Obama is looking to be a one-term president, too. I hope not but that is what it appears as of today October 12, 2009.

2. In my post Have We Hit the Housing Bottom? the business economist concur that home prices will experience a gain from 2010.

3. In my post Have We Hit the Housing Bottom? I forecasted that banks will have difficulties until 2012, and will thus be a drag on the economy. The business economist concur that this will be the case as they expect financial markets to return to normal sometime between 2011 & 2013. 

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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Our GDP contracted very severely this recession. To understand the severity of this contraction the Federal Reserve of St. Louis data shows that the Annual Percentage Change in GDP has not been negative this last 50 years, until 2009, but the Quarter to Quarter Percentage Change in GDP has 4 times.

 

Economic Outlook
There is some good news though. It is not all bad. Figure 1 shows that the updated moving average of Home Price Growth will likely turn positive 4Q 2009, which is about 1Q earlier than my original forecast 2 months ago. That is Home Prices will bottom in 4Q 2009. Lets hope.

HomePricesNONREVNS

Figure 1: Home Price (Composite-10 CSXR) Growth & Total Non-Revolving Credit Outstanding

However, the Total Non Revolving Credit is still contracting, but the lag to Home Prices appears to be around 2-years, or we can expect Total Non Revolving Credit to bottom in 4Q 2011. This is much better news than my preivous forecast. But we are not out of the woods yet.

 

What to do?
The necessity for caution is reinforced by the lack of near term job recovery & non-revolving credit in my forecast. Here are several suggestions on how to reduce business risk:

1. Manage your cashflow: Cash flow is what pays the bills, not profits, so watch your cash flow.

2. Be careful: Cost cutting is temporary and will unravel the moment you stop wacthing and it can affect what little revenue you are generating.

3. Manage labor wisely: Reduce your man hours but not your manpower. Seek voluntary temporary pay cuts with the biggest cuts at the top and reducing amounts to the lower ranks. This will allow you to bounce back quickly when your sub-segment of the economy turns around because the human asset of your company is still intact. Remember it takes 3 years to bring a fresh graduate engineer up to par. Therefore though it looks cheaper, it will take that much longer to recoup any costs or savings.

4. Reduce dependence on debt: Non Revolving Credit Outstanding shows that banks will continue to have difficulty lending for at least until 4Q 2010 and more likely until 4Q 2011. Pay down your debt as much as you can because it reduces your costs and it gives banks more breathing room to lend to someone else and thereby hastening the turnaround of the Non Revolving Credit Outstanding and the unemployment situation.

5. Watch your A/R: A/R is how your customers borrow while you pay the interest on their credit. A/R is also reflective of your downstream customers, so take care. I have seen companies go under because they did not manage their A/R until it was too late.

6. The Goldman Sachs mini case study shows that we can change the how and why we do things to be more successful, and that we don’t have to wait for eveyone else before we make internal improvements. If we wait we still incur the cost but have lost the competitive advantage.

 7. Slope of the Pay Cuts: Biggest proportion at the top and smallest proportion at the bottom. Why? First, that is how risk-returns (or risk-reward) works there are no two ways about this. Second, large pay cuts at the top of the company have a bigger impact on saving the company but small impact on consumer spending. Pay cuts at the bottom of the company add up to real slow down in consumer spending, save the compnay in the short term but generally leads to negative future effects. There was a study done some time in the 70’s or 80’s (I forget the name and year) that showed that companies that retrench/layoff labor on a regular basis generally don’t last very long.  

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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This blog is in response to a discussion on LinkedIn.

The unfortunate answer is no, we have not yet bottomed out. But there is a second unasked question, when will the housing market and the residential mortgage industry recover?

Regarding the first question. Agree with you in that the economy is so bad that the media and the economist are putting on a bright face.

If you look at the Composite-10 CSXR Home Price Index as a guide there appears to be some more downside to home prices.

HP(1)

But if you look at the 1-yr moving average in the growth or change in this index we see that growth peaked in June 2004, and was in decline but positive until August 2007 when it turned negative. (The 1-yr MA is a lagged index.)

HP(2)

The important point to note is that the negative growth bottomed out in May 2009, however, it still remains in negative territory. The extrapolation would suggest that growth would turn positive around February – April 2010 time frame. That is residential home prices will bottom out in 1Q 2010.

To answer the 2nd unasked question, when will the residential mortgage industry recover? This is more complex. The FRED data would suggest that between April 1993 to October 2004, Nonrevolving Credit was a driver of home price appreciation, with an average lag of about 2.5 years (>2.5 yrs in the earlier years and<2.5 yrs in the later years).

It is interesting to note that this was also about the time securitization of mortages was introduced.

But from October 2004, the relationship is inverted, with Home Prices driving Nonrevolving Credit, and the lag appears to be arounf 2.5 years. So add that lag to the 1Q 2010 forecast bottom we get a residential mortgage industry that at the very earliest, recovers in 3Q 2012. Sorry, the bad news is no residential mortgages no real estate jobs.

Given a 2.5 year lag it is a good thing that the Obama Administration is “pushing heavily” otherwise the lag could be much longer and we will definitely be looking at a 1930s type depression. This is not a political statement (my opinions have always be apolitical) but a need to face the gravity of the situation.

Regarding 53% modified loans go back to foreclosure. The number used to be much higher, and the very simple reason for this was the so called “modification” actually led to a higher monthly payments! Add to that a substantial unemployment situation.

Sometimes I just don’t understand the banks, which would they prefer (1) lose a few % in interest for a few years or (2) take a 50% cut in principal value today? This problem is not going to go away anytime soon, and everyone needs to be patient. Given these two options, foreclosure moratorium is the only viable solution for the banks if their customer doesn’t walk away. The banks need to try very much harder to keep homeowners in their homes if they are to forestall writting down their asset values, which will in turn depresses home prices further.

The more distressed properties you have the less likely people will buy because they can wait for further distress. There are properties (in Illinois?) where banks are giving the “vacant & disgruntal owner” properties away for free because it is more expensive to bring them up to code to sell them.

So what do we do between now and 3Q 2012? Reduce our risk. Contact me, Ben Solomon, benjamin.t.solomon@QuantumRisk.com, for a free phone review on what QuantumRisk can do for your company.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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