Market Analysis for the Week of December 3, 2007

By Erica Elliott

“The U.S. economy had a fabulous summer. GDP grew at about a 5% clip between July and September, according to numbers from the government this morning, but – there’s always a but – things are not looking good for the quarter we’re in now. Analysts expect growth to slow all the way down to 1.5% or less.” (NPR Marketplace Morning Report, Thursday, November 29, 2007 with Scott Jagow)

I heard this on the radio this morning, and had to download the audio clip on the internet just to make sure that I had heard correctly. My first reaction was anger. I thought, “You’ve been telling me for months how bad things have been, and now you’re telling me, ‘Well, they’ve actually been great, but they’re gonna get bad, this time, I swear!’”

This is a bad revisitation of the boy who cried wolf, only every time, we believe the little boy, and when there’s not really a wolf there, we say, “Oh, he must’ve run off, but he’ll certainly be back.” “Oh, the economy was good, yesterday, but it looks like it’s going to be so bad tomorrow. Better wear a jacket.”

Then, while waiting for my anger to subside, I started looking at the text of the audio clip. Honestly, my first thought was, “Who uses the phrase ‘fabulous summer’ to describe positive economic growth? Maybe Scott Jagow should be writing about shoes for Vogue.”

Then, I came to the realization of what this story was truly about: good news. It’s clear that NPR got a press release from “the government” (how ambiguous is that? The government? That could be anyone from George Bush to an intern in the mayor’s office.) about third quarter economic numbers. The results were…good. Good news? How do we make this newsworthy? I know! Add a “but”!

So the story essentially became: “Well, remember how we told you all year long that things have been bad? Well, we were kind of off. They’ve been, well, “fabulous!” Don’t worry though, it won’t last for long. I’m sure something dark and stormy is ahead. I’ve talked to analysts.”

Yeah, that’s the other part. “Analysts expect growth to slow all the way down to 1.5% or less.” Who are these analysts?! Is he talking about Ben Bernanke or Donnie Osmond ? Are these the same analysts and “experts” telling me to put all my money in China (the country, not the place setting)?
And don’t think I didn’t hear the part at the end, where the report said, “Analysts expect growth the slow all the way down to 1.5% or less.” Ok, let’s break this down in parts: “expect growth to slow” “all the way down to” “1.5% or less”.

First of all, slow growth is growth, nonetheless. And maybe I’d believe this statement, if I hadn’t heard this other statement earlier in the broadcast:  “The last two days on Wall Street have been phenomenal. The Dow is up almost 550 points – the best two-day streak in five years.” (NPR Marketplace Morning Report, Thursday, November 29, 2007) Yep, sure looks like the end of the economy as we know it.
Secondly, I would like to object to the use of the phrase “all the way down.” This is a loaded phrase, intended to sound like the economy is going to come to a screeching halt. Next time I get pulled over for speeding, I’m going to tell the officer that I slowed “all the way down” to 80 in a 55, so he needn’t give me a ticket.

And thirdly, “1.5% or less.” Or less? We’re just guessing at this point, aren’t we? We don’t really know what’s going to happen, do we? 1.5% or less. Or more. Or purple. Who knows, really.

As a public relations instructor at Auburn University, I drilled into my students the importance of being critical media consumers. Because of the inordinate amount of time we spend absorbing media messages, it is important that we train ourselves as critical thinkers. Reading a media text, as we call it, is also a valuable skill to develop as a REALTORÒ in order to enhance your business and help you guard against messages that are potentially damaging to our industry. It’s not the big stories that are most damaging (i.e. “Water Causes Death!”), it’s the little blips in between other stories that no one thinks to question, because we cognitively dismiss those snippets as irrelevant. Those blips are chipping away at our collective social unconscious, however, and leading us to subconsciously accept facts that aren’t true. We must refuse to let two sentences of undocumented information (what are his sources, really?) make a bad economy sound like a foregone conclusion.

As you read through this week’s news clips, try to apply your critical thinking skills. Look for selected pieces of statistics used to support the author’s/speakers point. Oftentimes, these statistics aren’t an accurate picture of the whole. Look for words like “meltdown” and “crisis,” then look out your window and see if the sky is really as dark as these economic experts describe (provided that it’s daytime. At night, it’s supposed to be dark. That’s normal). Really examine the information they are feeding you to see if you can determine what’s actually going on, not just the picture painted with their apocalyptic drivel.

News Exercise
Ok, use your critical thinking skills, what do you draw from this New York Times Op-Ed article? Your clients and potential clients have read articles like these. What do you have to say? I’ve bolded a few of the questionable words and phrases in the beginning for you. For the rest of the article, you’re on your own! See what you can find!

A Time for Bold Thinking on Housing
By ROBERT J. SHILLER
We have to consider the possibility that the housing price downturn will eventually be as big as that of the last truly big decline , from 1925 to 1933, when prices fell by a total of 30 percent.
As of this August, domestic home prices were already down 5 percent from their peak 14 months earlier, according to the S.& P./Case-Shiller Composite Home Price Index, and prices were falling at a faster rate in the months leading up to August.
This crisis should be an occasion for some inspired thinking about fundamental changes in our real estate institutions . The actions that have already been taken are not impressive . The housing market is worsening , and more and more home owners are getting into trouble with their mortgages .
The public response to the housing downturn of 1925-33 provides an important lesson in what government and private institutions can accomplish. Back then, people weren’t content with temporary palliatives. They were thinking big , and revolutionary changes were made in real estate institutions . Without those fundamental changes, the Great Depression would have been much worse than it was, and we would be in a more vulnerable situation today.
In 1932, the National Association of Real Estate Boards proposed and Congress created the Federal Home Loan Bank System, modeled after the Federal Reserve System. Twelve regional banks were created, and a Federal Home Loan Bank Board, like the Federal Reserve board, was set up to oversee them. This was an ambitious plan: these banks were to be a special lender of last resort for real estate, discounting mortgages so that troubled banks and loan associations could keep issuing mortgages.
Also that year, the real estate appraisal industry pulled itself together to become a truly professional organization, founding the Appraisal Institute, which established national standards.
In 1933, in the last days of the Hoover administration, Congress modified bankruptcy law to allow insolvent wage earners to file to protect themselves from eviction from their homes. This was a democratization of bankruptcy law: the new statute led the way to the current situation, in which individuals and businesses both have access to important bankruptcy arrangements.
Later in 1933, after Franklin D. Roosevelt became president, Congress created the Home Owners Loan Corporation to sponsor loans for those having trouble making payments, replacing short-term mortgages — then typically five years with a final balloon payment that was often hard for homeowners to afford — with much more sensible 15-year ones that were fixed-rate and self-amortizing. In 1934, Congress created the Federal Housing Administration; it insured mortgages and insisted they be 20-year fixed-rate and self-amortizing.
The Federal Deposit Insurance Corporation, a radically new invention intended to prevent runs on banks from depleting resources for home mortgages, among other calamities, was also created in 1934. And in 1938, Congress created Fannie Mae, which eventually led to the huge securitization of mortgages.
Seven decades later, our reaction to the current crisis is anemic in comparison. The “Super S.I.V.” rescue plan, instigated in October by Henry M. Paulson Jr., the Treasury secretary, in an effort to prevent a meltdown of the market for so-called structured investment vehicles, will be less than a tenth the size of the Federal Home Loan Bank System that is still with us from the 1925-33 debacle.
The FHASecure bailouts announced by President Bush in August, to help borrowers whose adjustable-rate mortgages are resetting at prohibitively high rates, will likely amount to only roughly 2 percent of the amount of mortgages guaranteed by Fannie Mae.
Congress is already on track to eliminate the provision — Section 1322 of Chapter 13 of the bankruptcy law — that prohibits courts from adjusting terms of first mortgages. But there could be more fundamental changes to bankruptcy law than that.
Bankruptcy law is a risk management institution, and such an institution should adopt more modern practices. For example, Andrew Caplin, professor of economics at New York University, has proposed that in personal bankruptcy proceedings, the courts should be allowed the latitude to substitute real estate equity — a share in the ownership of the property, to be realized when it is eventually sold — for first mortgage debt. This could let troubled borrowers stay in their homes, and might be better in terms of efficient risk sharing: it would provide incentives for the mortgage industry and would be friendlier to prospective home buyers who would otherwise face higher mortgage rates to pay for others’ bankruptcies.
In light of modern financial theory, this would also be a good time to think about the nature of the implicit subsidies given to government-sponsored enterprises like Fannie Mae and Freddie Mac and whether they provide enough incentives for them to properly manage their own risks as guarantors of mortgages. We should think about whether the F.H.A. should be encouraged to take on a bigger role that might compete with activities of the subprime lenders that have grown so rapidly over the last decade. We might create a new consumer-oriented regulatory authority, like the Financial Products Safety Commission that Elizabeth Warren, a professor at Harvard Law School, has been advocating. It would monitor financial products for consumers and draft regulations to prevent practices like the recent widespread issuance of adjustable-rate mortgages to low-income borrowers who couldn’t afford the rate resets.
The real estate appraisal industry needs to rethink its methods. How did it happen that appraisers acquiesced in valuations that were more and more discordant with economic fundamentals? Basic concepts and procedures need change.
Beyond that, we should think creatively about how to use vastly improved tools for risk management and apply them to mortgages. For example, I and my colleague Allan Weiss (now C.E.O. of Index Capital Advisors) proposed in 1994 to make home equity insurance — insurance on the market value of a home — part of a home mortgage contract. Had our proposal been put into place on a large scale, it would have gone a long way toward ameliorating the current crisis and reducing the need for personal bankruptcies.
The radical financial innovations of the 1930s were possible because the real estate crisis and other economic problems of the Depression created a sense of urgency. Innovation, after all, tends to come in troubled times.
We should take full advantage of the innovation opportunities stimulated by our current troubles. We would emerge much stronger and better for it.
Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC.

A New Deal for the Housing Market
TEXT OF NPR INTERVIEW
TESS VIGELAND: A course of treatment for the ailing housing market? Shot of adrenaline, stat.
The federal government says average home prices in October dropped 3.5 percent from last year. The U.S. Conference of Mayors forecasts another 7 percent drop over the next year. What to do?
Well, economist Robert Shiller wrote an Op-Ed in the New York Times recently calling for major new government initiatives to fix the housing situation and he joins us now:

VIGELAND: Welcome back to the program.
ROBERT SHILLER: Hi.
VIGELAND: In your editorial in the Times, you compared today's housing market to that of a big decline that happened between 1925 and 1933 and all of the big reforms that spurred. Remind us what some of those reforms were.
SHILLER: First of all, it used to be that people would get short mortgages -- three years, five years -- that would have you pay back the principal at the end and people were losing their houses because they couldn't refinance. So what they did is they moved to the long-term, fixed-rate mortgage and this was done through government intervention, through the Home Owners' Loan Corporation and the Federal Housing Administration, which were just set up in 1933 and 1934. And we also invented other things, like deposit insurance, at that time.
VIGELAND: Back to the current situation, what are your suggestions?
SHILLER: I think that we need to do something about the kind of erosion of regulatory standards that has occurred in the mortgage industry. Since 1990 or so, we've seen the growth of subprime lenders who are not banks and they're escaping from regulation. I like the idea that Elizabeth Warren, who's a professor at Harvard Law School, has proposed: that we should create a Financial Product Safety Commission modeled after the Consumer Product Safety Commission that would collect information about how people were being treated, how various financial products are suitable or not for individuals and whether some things are amiss.
VIGELAND: You make a suggestion of a kind of a price insurance that home owners would be able to pay for. Can you explain what that would be?
SHILLER: Yes, what's happening right now is that home prices are falling and they're falling rapidly in a number of places. And so, they're in trouble. If they sell their house, they can't pay back their debts. This has brought on a wave of defaults. So this leads me to think that really, mortgage contracts should have entailed some kind of protection against this kind of event -- you might call it home equity insurance or a mortgage with down payment insurance. We could have offered these all along. We didn't, so now there's all this talk about adjusting mortgages ex poste. It'd be better if it was done from the beginning; mortgage contracts should have had some flexibility built in.
VIGELAND: What do you think it's going to take to get everybody to the table to talk about these issues?
SHILLER: Well, I think it could happen and the thing that would make it happen would be a worsening of the crisis. I think there's a good chance that we're going to have a recession and we'll see a lot of defaults on mortgages and people are going to get angry and say "look, let's do something important about this problem."
VIGELAND: Robert Shiller is a professor of economics and finance at Yale. He's also the co-founder and Chief Economist of MacroMarkets LLC and also the author of "Irrational Exuberance." Thanks so much for coming in.
SHILLER: It was a pleasure, Tess.

In Other News…

New-Home Sales Edge Up in October
New single-family home sales edged up 1.7 percent in October following a dramatic downward revision to the preliminary estimate for September, the U.S. Commerce Department reported today. October’s seasonally adjusted annual rate of 728,000 units was 23.5 percent below a year ago.
            “The progressive tightening of mortgage lending conditions during 2007 has been the major factor behind the setback in home sales this year,” said  David Seiders, chief economist at the National Association of Home Builders (NAHB). “NAHB expects home sales to begin a gradual recovery in the early part of 2008.” (NAHB, 11/29/2007)

Paulson to offer fix for mortgage market
Treasury Secretary Henry Paulson says he hopes by the end of the week to have a plan for fixing some of the subprime mortgage meltdown. (Text of NPR story)
KAI RYSSDAL: The conference in Washington today was officially called the "National Housing Forum," but it might as well have been the "What've you done for us lately Hank" gathering. We mentioned Friday, Treasury Secretary Henry Paulson's trying to engineer some kind of fix, or at least a band-aid, for the continuing subprime mortgage mess. The topic du jour is the millions of mortgages still out there waiting for rates to reset, or foreclosure to begin. The White House is negotiating with the mortgage industry to somehow freeze rates on some of those loans. Paulson said today he hopes to have a plan in place by the end of the week, but that it's not gonna be easy.
HENRY PAULSON: The company collecting your mortgage payment every month is most often doing that on behalf of those who own the mortgage, and they are limited in the decisions that they can make on behalf of those ultimate owners who are spread all over the world.
There are about 2 million mortgages at risk over the next couple of years. Paulson didn't say how many this plan might help, but he did try to share the political pain.
PAULSON: The administration and the private sector are taking action. Congress needs to act now.

Freddie Mac Commentary
Interest rates for U.S. Treasury securities have been drifting lower this month over market concerns that the housing slump and stress in the credit markets could slow future economic growth.  As a result, interest rates for fixed-rate mortgages had room to slip lower this week.

Freddie Mac Weekly Primary Mortgage Market Survey

Moody’s Economy.com Survey of Business Confidence
“Business confidence fell sharply again last week and is signaling that the US economy is likely contracting. In the five years of the survey, respondents have never been as dour in their assessment of the economy’s present condition or its prospects six months hence. Responses regarding sales strength, inventory investment, and office space all deteriorated. Businesses are more positive when responding to questions regarding payrolls and equipment investment. Confidence is stronger outside the U.S., but it has notably weakened elsewhere in the past couple of weeks. Sentiment is weakest among firms in housing and financial services, and strongest among high-tech businesses.” (Moody’s Economy.com, 12/3/07)

*This is primarily an indicator of what people are hearing from the media and how business people feel as a result. We can change this!

Humor

A client bought a new home and the broker wanted to send flowers for the occasion.

They arrived at the home and the owner read the card; it said "Rest in Peace".

The owner was angry and called the florist to complain. After he had told the florist of the obvious mistake and how angry he was, the florist said. "Sir, I'm really sorry for the mistake, but rather than getting angry you should imagine this: somewhere there is a funeral taking place today, and they have flowers with a note saying, "Congratulations on your new home".

And finally, Good News from Steve Bauer, our friendly Weichert Financial ServicesÒ Guru:

“Rates are down, the market is coming back up!”