3nd Quarter 2007
Volatile, But Stable 2007
By Luke T. Miller
Over the last quarter, volatility in economic indicators and the markets has increased significantly as anxiety grows about the depth of the widening recession in residential real estate and the potential for accelerating spill-over effects to the overall economy. There appears to be a growing unease among both consumers and investors which is undermining confidence in asset valuations across the board.
However, in my opinion, things are not nearly as bad as some would have you believe. Yes, oil is over $90 a barrel, Americans' confidence in George Bush is in the mid-20s (with confidence in Congress even worse), and statistically the housing market hasn’t been this bad since the early 1980s. Nevertheless, consider the following:
- Housing is only about 5 percent of the economy. If housing valuations fall by 15 percent, that would represent a fall-off of about 0.75 percent in the national economy. That's not trivial, but it's also not enough to solely push the economy into a recession.
- The subprime mortgage industry is a mess. Two of the top five largest mortgage-only companies have declared bankruptcy and the largest mortgage-only company required a $15 billion bailout. But let’s put this in perspective. Subprime mortgages account for roughly 20 percent of mortgages even in the most heavily exposed states. About 20 percent of them are delinquent in some way. That's 4 percent of mortgages. Of these, maybe half, or 2 percent, will go into foreclosure, and there will be roughly 50 percent recovery on sale of these. Accordingly, this is a loss of 1 percent in the mortgage market – a manageable sum.
- Merger & acquisition activity is restarting, even with higher interest rates to finance deals versus six months ago. In fact, the spread between low-rated debt used in mergers & acquisitions and risk-free Treasuries remains historically low and points to better than perceived credit markets.
- Federal and state spending remain extremely strong, with the defense sector especially strong with long-term high growth expectations.
- The economy is suffering from a labor shortage, not rampant unemployment. Other than the upper Midwest, employment opportunities abound and with consumer spending supporting two-thirds of the economy we should be okay on this front.
Locally, Durango is showing relative strength in employment, housing, and business activity. Unemployment in Southwest Colorado is about the state average, with Durango unemployment 30% less than Colorado and the nation. New housing permits are down 32% year-over-year, but median home prices are relatively stable. To put things in perspective, the magnitude of the real estate boom from 2001 to 2005 was historically a one-in-fifty year event. The market will need some time to wring out any excesses. Inflationary pressures for the nation and Denver were down year-over-year, with Denver inflation down over a third. Finally, weekly wage growth in Durango and the surrounding area is actually up 4% versus 4 th quarter of 2006 versus slight to down for Colorado and the nation.
We encourage you to visit our website at soba.fortlewis.edu/econoweb for more information on today’s topic plus supporting materials.
Unemployment in Region 9, Colorado and the U.S.
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Mortgage Rates and U.S. Treasuries
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