Chicken Little on the Run
Stock markets are sending a message: the sky is not falling. The Great Meltdown is now a distant memory, a serious pothole that cratered proud and venerated banking institutions, most western economies, and your portfolio. Financial markets, in those frightening days, reflected a common belief that our economic world was hurtling irretrievably into a financial black hole. Fortunately, both the incoming and outgoing Administrations took bold sweeping actions on a scale never before contemplated or even imagined. The final tab to save the global economy will be delivered to our children and their children's children but in the end, there was no other good choice.
So far the actions of Henry Paulson, at Treasury, and Ben Bernanke, at the Fed, appear to be vindicated. The economy today looks better than was expected and surprisingly the net cost of the bailout looks smaller than was originally expected. The traditional tools economists use to measure present and future economic activity all seem to point in positive directions. As you might expect, business reportage over the past month has taken a new turn. Stocks are faring better because individual and institutional investors are reading the same entrails.
Economics is still local. Wall Street prospers and the very people who drove the bus into the ditch are back to sniffing around Ferrari showrooms. Down on Main Street the view is a bit more bleak, even considering sundry items such as an uptick in new car sales and Ford making a profit. Employment, or job creation and retention, is the lynch-pin for real growth and the subsequent recovery of housing values. Consumers will start spending only when those "Bank Owned!" signs stop popping up everywhere. When your neighbor gets his job back housing prices will increase and homeowners in distress will find a way to keep their homes.
This is not to argue that the news coming from New York and Washington means little for local real estate. There is a relationship between the performance of financial markets and home prices; but the link is not made of steel cable but out of bungee cords. Unlike stock indexes, residential markets turn very slowly and changes seems more anecdotal than quantitative.
Accordingly, residential real estate sales for new and resale properties present a mixed picture. The specter of higher interest rates, which will happen soon, has made buyers a bit more tentative. Further, the highly-anticipated second wave of bank-owned properties has not hit the market. Expensive credit and the potential shadow inventory of foreclosures are spoiling the party.
Still prices have at least stabilized over the past year. The value of retirement accounts and other investments have also recovered smartly, but that is only part of the story. Gains in stock portfolios are welcome, but on the individual level, most of the recently gained paper profits are merely recouping past losses from the Fall of 2008. The sudden whiff of prosperity is more about getting even and hunkering down, not in reinvesting or trading up to a better home. The back fence reveals far more about this economy than the Journal. Here is where hesitation and trepidation originate and fester. To real estate agents this comes off as unwarranted indecision. They get frustrated because they see this historic buying opportunity slowly slipping away. Cheap money and bank bargains will not always be here and at some point in the future, the business cycle will visit itself upon housing markets. This disconnect between what the professionals think (their own obvious self interest notwithstanding) and what the customers feel creates dysfunctional partnerships and a market that does not have a clear direction.
The Administration's financial reform proposal, or a bipartisan version of it, when enacted will entice many customers off of the fence. The actual substance of the bill will mean less than the perception that Wall Street's cowboys will be reined in. Wall Street is taking a much-deserved public flogging and the body politic likes that because it absolves them from their own economic sins. Americans have learned some hard lessons and it is clear we have to be protected from ourselves. The creativity of Wall Street's traders knows no bounds and only the Feds can insure at least a modicum of transparency, safety and order in the world of high finance.
By the end of the year both the health care and financial reform bills will have become part of our national fabric, just like the laws enacted during the New Deal. The party out of power will capture a few seats in the coming off-year election but nothing meaningful will come of that. By year-end the economy will be stronger and more stable, combat troops would have departed from Iraq, and the table will be set for 2011 for residential real estate to increase. Consider this: Had you bought six months ago your loan costs would have been cheaper than today. The price you paid would have been lower than today. I am certain that in six months I can make the same statement and be right. Waiting for the sky to drop will be a losing proposition.