Read the title of my column and you will want to give me a grammar lesson and possibly have my head examined. Okay … call the grammar slip-up poetic license and allow my optimism to come from a broader view. I agree, if you live in the real estate industry, this recession and sparse recovery has been nothing short of devastating. Sure, the super low rates have helped originators increase their income through refinances; however, we all understand that our long-term bread and butter is financing purchases. Without enough purchases, real estate does not recover and neither does the general economy.
In addition to the fact that we work in a depressed industry, we are working under a new regulatory environment with stricter credit conditions. From low appraisals to underwriting with a microscope, what little mortgage business is out there is exceedingly difficult. In the “olden” days, we could charge more for difficult business, but that’s not possible under the new compensation regulations.
How can I say that “It ain’t that bad?” Again, let’s look at a broader perspective. How bad does the “average” American think things are? Here is the “prevailing” view from CNN/Money …
“Economic fears are not diminishing. More than eight in 10 Americans think the economy is in another recession, according to a new CNN/ORC poll released in early September. Americans have “a bad case of economic jitters,” according to CNN Polling Director Keating Holland.
The bottom line is … Americans predominantly think we are still in the first recession or have started a double-dip recession. So the public’s view is not far off the view of those within real estate. Certainly we know real estate is still in recession.
The numbers from the overall economy do not bear out the call of a present overall recession. Construction spending is up, the service sector is expanding, consumers are still spending cautiously and manufacturing is expanding. The September employment report was certainly not robust, but it did exceed analysts' expectations, especially considering the upward revision of the two previous months. According to the numbers, we are not in a recession … so why all the gloom and doom?
First, our growth is too slow to undo the damage done by the deep recession. If someone hits you with a hammer several times, your body is still going to hurt after they stop hitting you. You need medical help. Job growth of 100,000 per month barely keeps up with population growth, let alone, replacing the millions of the jobs we lost.
Secondly, Europe is a concern. The markets are concerned, and rightly so, that a default by Greece and/or failure of European banks could drag us down into a recession. That is all we hear about every day—Europe. This makes the consumer even less confident. We may not be in a state of recession now, but economic growth is not likely strong enough to ward off such a worse-case scenario in Europe.
Thirdly, the government is a drag upon the economy right now. It is great for everyone to call for balancing the budget, however, in the short-term, any jobs lost hurts. Those who are losing their jobs include teachers and even those representing our country overseas as our commitment in Iraq winds down.
This is a pretty ominous one-two-three. I still have not advanced any reason for optimism about the future. Well here are my own three points regarding these issues.
►The economy. Yes, growth is too slow. However, we are a lot closer to more substantial growth than we were a few years ago. It is a much shorter jump from adding 100,000 jobs per month to adding 250,000 (where we need to be), as opposed to losing 400,000 jobs per month and scratching our way to a positive of 100,000. At least that is the way my calculator works.
►Europe. I believe the world will take the action necessary to put a plan in place to avoid economic calamity in Europe, just as we did when the fiscal crisis hit in 2008. Already in mid-October, the nations are formulating a plan to rescue banks and countries. Will this plan succeed? Some analysts think that the plan will not be broad enough in scope to be effective. Remember, I am the eternal optimist.
►The government. As I have mentioned time and time again, the reduction of government budgets will prove to be a negative influence upon growth in the short-term. However, the long-term health of our economy requires this pain. Just like the hurricanes, earthquakes and government debt negotiations that have all slowed down the economy this year, government “shrinkage” remains a substantial but temporary factor.
If you were to look for evidence that we are closer to recovery than many think, look at the bond markets. It is true that rates moved to record lows in the face of the summer slowdown and in reaction to negative statements by the Federal Reserve and the introduction of their “Operation Twist.” These low rates were indicative of the prevailing view—recession is either here or imminent.
But as soon as we received “decent” employment news and positive news from Europe, the bond market dove with a vengeance. The 10-year Treasury moved up close to 0.50 percent within about 10 days. I have been saying for months not to get too used to super low rates. Good economic news is all we need to move the markets in the other direction. That good news will give the stock markets and the consumer confidence. This is the next step required in order to turn it all around. Note that these rates rose in the face of implementation of Operation Twist. The Fed will not be able to keep rates low in the face of a recovering economy, nor will they desire to do so.
Could Mother Nature, Europe or the debt negotiations throw another wrench in this scenario? Absolutely. I cannot predict the future. I like the refinances. They are making loan officers busy and freeing up more cash for consumers. However, we know rates will have to rise before purchases pick up because the markets will react before consumers do. And I repeat my warning to loan officers: You should be instilling a sense of urgency for those who are considering refinancing. Yes, some are waiting until rates hit 3.5 percent, but there is a lot more room for them to rise than to fall, and there is a daily cost of waiting if they are already in a profit situation with regard to today’s rates. If you don’t know how to calculate that number, e-mail me … “The Optimist?”
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 OriginationPro Marketing System can be found at OriginationPro.com and he may be reached by e-mail at [email protected]