Jobs, oil, real estate, oh my! And, we can add snowstorms, earthquakes and politics. Or should we say "pile them on." Now we know just how Dorothy must have felt trying to get back to Kansas as she followed the yellow brick road. Certainly this recession was one for the ages. However, the recovery is proving to be just as challenging. Everyone predicted a recovery of "stops and starts," but few could envision all of the factors we would be overcoming. Certainly, jobs and real estate have been the focus for years.
With close to 10 percent of the nation unemployed, and 25 percent of the nation's real estate market underwater, there has been a huge canyon to dig out from. And we are happy to say that jobs and real estate are on the road to recovery—albeit a road of stops and starts. Last month's employment report gave us a glimpse of what could help us recover much more smoothly, with 192,000 jobs added for a shortened and wintry month of February. The real surprise was the unemployment rate moving below nine percent. With weekly jobless claims coming down significantly in the past few months, it appears the employment recovery is finally gaining some momentum.
Have you ever noticed that the quicker someone drives, the more it hurts when you hit a pothole? Well, let's consider the widening world conflict causing oil prices to soar as quite a pothole. Then let’s pile on the economic devastation felt by Japan in the wake of the most recent tragedy. The effects of this latest crisis are just being felt as I write this column.
How about the government? We previously addressed the end of government stimulus becoming a drag on growth for the coming years. But what happens if the government shuts down because Congress cannot agree on a budget solution? That could mean a halt to the most popular home loan programs: Federal Housing Administration (FHA), Rural Housing Service (RHS) and the U.S. Department of Veterans Affairs (VA). If that happened even for a few weeks, how much of a pothole would that be for the fledgling housing recovery? Quite a deep and wide one. We are not saying that this will happen—but anyone with any sense can see that we don't need to be creating deeper potholes in front of our recovery car. Not right now. The government has run out of money to patch them.
As tough as this analysis may seem, I would like to say that things are not always what they appear to be along the Yellow Brick Road. Here are two flying monkeys that have many alarmed: Higher oil prices and lower real estate prices. Many are concerned that we are heading to $4 per gallon gas and a double-dip in housing prices. However, we caution observers to look beyond the headlines.
Let's start with oil. At the onset of the fiscal crisis, oil prices plummeted. And they plummeted just after spiking up to around $130 per barrel. Oil prices have been rising ever since in line with the recovery from the recession. A stronger economy translates into more demand for oil. However, with the political turmoil escalating in the previous two months, the rise in oil prices has also escalated. Analysts are not all on board with the permanence of this escalation. For example, Fortune reports:
Given that Libya represents less than two percent of global production and that the IEA has over 1.6 billion barrels of oil in storage, clearly the current price movement is about more than Libyan disruption. Even if Libyan oil production were completely turned off, the IEA has enough oil in storage to offset that lack of production decline for a full year. Further, it is estimated that OPEC collectively has between four and six million spare barrels of daily production.
The article concludes that oil is trading not on fundamentals, but fear. Assuming that Libya stabilizes either under the present or a new regime, the country will realize quickly that producing oil will help them rebuild. The result could actually be more production of oil, not less. This means that oil prices could finish the year lower than where they are now. We are not saying that is going to happen, but many analysts believe this to be the case, especially if the crisis does not spread and deepen to Saudi Arabia and other oil producing countries. As a matter of fact, the initial reaction to the devastating crisis in Japan has been lower oil prices—and interest rates.
Now real estate. We had similar bubble which burst in real estate around the time of the fiscal crisis and recession. Real estate does not move in price as quickly as the stock market or oil and therefore the rise and fall was more gradual and less pronounced. Like oil, the price of real estate has been recovering over the past two years. However, this recovery was pumped up by the existence of tax credits and other government subsidies. Everyone knew that when the tax credits ended that there would be a negative effect on the markets. Therefore, the second half of 2010 saw the real estate market, including prices, weaken. Some have said that this is the beginning of a "double-dip" in prices. Again, we caution observers to keep an open mind. While real estate will be weighed down by shadow inventory and a steady stream of foreclosures for some time, the one factor the real estate market needs to reverse the slide is a stronger employment picture. Again, this appears to be happening with the unemployment rate and weekly employment claims sliding. A few stronger months will not get the economy turned around, but it appears we are heading in the right direction. If people can get jobs, kids will move out from their parents' houses and household formulation will increase. We are not building enough homes to accommodate this latent demand. Even those who were foreclosed upon will need houses to rent. The conclusion? If the economy continues to progress thorough 2011, the real estate market could turn around quicker than the doomsayers expect.
So, while the tendency will be to hang your head low while the flying monkeys are around, those who lead this industry in the future will be ahead of the curve. Recently it was reported that sales of million dollar homes were up significantly in 2010. Those who are successful do not wait for the markets to turn around, they act when others don’t. Many loan officers are scared to make moves with refinances slowing and the compensation plans about to be put in place. What you should be doing getting ready for the recovery so you are ready when it comes. That means understanding what your customers will need in the new world. You will need to be an expert—letting them know what is happening with rates to helping them qualify when others cannot. More on this later. For now, gain some long-term vision. Even the Wizard was not who he appeared to be …
Dave Hershman is a leading author for the mortgage industry, with eight books and several hundred articles to his credit. He is also a top industry speaker. If you would like to stay ahead of what is happening in the markets, visit www.ratelink.originationpro.com for a free trial. Dave’s NewsletterPro Marketing System can be found at www.webinars.originationpro.com and he may be contacted by e-mail at [email protected]