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Expert: Real estate decline fears â€˜overblown' for 2005Mortgage PressHousing Bubble
The early signs point to a solid year for U.S. investors and the
economy in 2005, according to Barker French, Brinker Capital's
chief investment strategist. In the latest quarterly forecast from
the investment consulting firm, French said he expects to see 2005
end with 2.5 percent real gross domestic product growth, a two
percent rise in productivity, profits up 11 percent, the S&P
500 rising 9-10 percent, oil closing just above $40 a barrel and
the Federal Reserve Board interest rate at the relatively low level
of 3.5 percent.
"We are looking to see the economy and markets in 2005 shake off
some of the doldrums that they went through in 2003 and 2004 and
move forward in a solid if not dramatic fashion," said French.
"While it is impossible to gauge in advance the potential impact of
unpredictable factorssuch as another major terrorist attack on U.S.
soil or the outbreak of further or new conflict in the Middle East
or North Koreawe enter 2005 with an optimism that is less guarded
than has been the case in past year. If there is a dark spot on the
horizon, it is the continuing problems of the U.S. dollar, where we
do not expect to see any meaningful improvement."
In his forecast, French looked at specific issues and segments of
Most reports indicate that household debt is at its highest level
ever and there are fears that this may threaten consumer spending.
Consumer spending has been responsible for two-thirds of economic
activity. A precipitous drop in consumer spending would have
significant consequences on business decisions and thus employment
"If you look at household debt as a percentage of personal
disposable income, it is at its highest level ever. Current debt is
117 percent of personal disposable income (PDI). Going back to
1990, debt was about 80 percent of PDI," said French. "However,
much of the consumer debt increase is mortgage debt. When you look
at bank loan delinquency rates for consumer loans, you find that
they have been falling. They were highest, 4.2 percent, in 1993.
For 1997-2003, they hovered between 3.7 percent and 3.5 percent. By
the end of 2004, delinquencies have fallen to 2.9 percent of all
consumer loans. Clearly, the consumer is handling debt well."
According to French, "The fear of a housing collapse is overblown.
There are pockets of excessive valuations, mostly on the east and
west coasts. Selectively, there may be significant declines in
prices but for the most part house prices are locally determined.
It is highly unlikely that house prices across the U.S. would fall
in unison. More likely, prices would stop rising and allow
valuations to catch up. Further, it should be noted that
delinquency rates for residential real estate, as a percentage of
total bank loans, have been falling since 1990. In 1990, 3.2
percent of real estate loans were in default. Between 1995 and
2003, the percentage floated in the two percent to 2.4 percent
range. During 2004, the percentage of loans delinquent fell to 1.6
"I am glad to report that businesses are in great financial shape
today," stated French. "Balance sheets are strong and clean."
With economic indicators pointing towards continued growth, French
predicted that profit growth for 2005 would be between six to 10
Noting that businesses paid a high price for over-hiring during the
stock market expansion of the late 1990s, French said that
companies have been working on raising productivity through
technology and out sourcing, and have just begun to become net
"Jobs are the one variable that has seemingly lagged in the
recovery," said French. "On the one hand, initial jobless claims
have dropped to around a 310,000 average weekly level. Continuing
claims have also trended lower and now are approximately 2,750,000
weekly. Total employment growth is averaging about two percent
annually. The highest annual rate of growth in the 1990's was about
four percent. So, employment is getting better."
Economic indicators suggest that inflationary pressures may be
building at the wholesale level and that high-energy prices have
been the single most significant driver of inflation.
"There is much uncertainty surrounding oil supply that is keeping
prices high," commented French. "Our conclusion is that inflation
will not be a recovery buster unless oil remains above $50 per
barrel for an extended period of time."
Historically, the long-term inflation rate has been around 3.5
percent. During the past few years, the inflation rate has been
much lower than that. In anticipation of inflation rising from low
levels we currently experience back towards the norm, the Fed has
been gradually raising interest rates.
"The Fed's decision to begin an orderly increase in the rate moving
it towards the equilibrium rate, estimated to be between 3.5
percent and four percent, is good policy," French said. "Good
policy because gradual measured increases shouldn't adversely
affect the economy and because a Fed Funds [rate] closer to the
equilibrium rate affords the Fed an opportunity to lower rates if
indeed the economy starts to stall."
The dollar has fallen against the major currencies and appreciated
slightly against minor currencies in emerging markets like China's,
with which the U.S. has a major trade deficit. As the dollar drops
in value and the price of goods from emerging markets fails to
increase, the problem of the U.S. trade deficit with those markets
"What's the future outlook for the dollar? The 'bad' scenario, or a
variant, suggests that consumers start a determined rebuilding of
savings, undermining profits. Weaker U.S. demand curbs imports
reducing the current account deficit," said French. "A weaker world
economy affects export growth and results in a U.S. recession and a
drop in the equity market. A variation might have the global pool
of excess savings continue to fund the U.S. deficit, as it is doing
now. We think the likely outcome is the bad scenario with the
variation. There is an enormous amount of excess global savings and
with European economies lagging, investors seem happy to buy U.S.
For more information, visit www.brinkercapital.com.
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