So what’s Part 2 about?   Here’s what I wrote last time:

2. Don’t worry so much about what you paid for your house. Instead, look at the difference between what you can expect to sell your house for and what it’s going to cost you to buy the new one that you want. I expect you’ll find that those are much more important numbers (unless you end up without any equity, in which case you don’t sell).

There are a couple of things that I think still hold true and one big thing that I think doesn’t hold true any more.    First the things that hold true:

• If you are selling one home to buy another, the most important number is not what you paid for the existing home, the most important number is the difference between the two homes.   If the value of your home has fallen by $40,000 but you’re in a situation where you can buy a newer home with less maintenance and 1000 square foot bigger for a “net” difference of $20,000, then it might very well be a good deal.
• If your family situation has changed (i.e. – We got married and are expecting our second set of twins in the last 2 years! – Yikes!) then what you paid for your house doesn’t matter.   I’ve got a client who is negotiating on a house where the seller has to sell within the next three weeks but they are “hung up” on what they paid for the house.   If you need to do something, don’t worry about what you paid for your house, just focus on what the financial and logistical aspects and make the move.    I’m working with a client who is relocating for a new job.   His new position is a nice enough “step up” from his current position that they sold their home for approximately 20% less than they paid for it and still be able to buy a new house.   He told me that while he didn’t want to sell his house for less, the overall picture of the move is “the right thing” for them at that point.

Now, the one big thing that has changed since last year.   Let me lay it out this way:

• On March 4, 2009, Bloomberg reported that More than 8.3 Million Home Owners were underwater.
• On October 20, 2009, I was on a conference call where Dr. Nouriel Roubini said that if housing prices drop another 7 to 10% over the course of the next year, by the end of 2010, there will be 25 million home owners who are under water.   Oh and he said that it’s almost guaranteed that they will drop because of the imbalance between supply and demand.   There already is too much inventory, credit is still tightening, foreclosures are still climbing and jobs are still getting eliminated.   That means the inventory problems aren’t going to go away any time soon.

Let me make that perfectly clear.   There are approximately 51 million home owners in the United States who have mortgages on their homes.   By the end of 2010, almost half of them will owe more on their homes than what they are worth.

If you’re sitting in a coffee shop reading this on your laptop, look at the guy at the table next to you.   Now look at the guy on the other side.   1 out of the 2 of them owes more on his house than what it’s worth.    Ouch.

That means a number of things that are different than last time:

• There will be sustained upward pressure on foreclosures.
• There will be marked lack of geographic mobility.   A lot of people who would consider and/or actually relocate to get a job/a better job won’t be able to because they can’t sell their house.   Or they’ll relocate, give the old house back to the bank (lots of credit ramifications – topic for some other time) and rent.
• Over the years, the “old rule of thumb” was that the average home owner would move every 7 years.   Now with almost 50% of the homeowning population “trapped” in their homes, we’re going to see people staying in their homes a LOT longer and we’re going to see a lot less move up buyers, a lot less move “over” buyers and a lot less downsize buyers.    That’s going to accentuate the inventory problems and keep downward pressure on house prices.
• That also means that there will be a lot less opportunities for builders, Realtors and lenders because of the decreasing mobility of the American population.

So, on the one hand, things are similar to what they were last year in that if you are going to make a move, what you paid for your house isn’t that important, it’s the difference that matters.   But, for more and more people, the changes in the market since last year mean that if they want to move, they have no good options.   They can stay put or they can do the short sale/foreclosure/rent for a long time option.

The market is different than it was in the summer of 2008.

Tom Vanderwell

P.S. Stay tuned for Part 3 – Is this the market for Do It Yourselfers?

6 months ago is ancient history. What your neighbor sold his house for 6 months ago doesn’t matter.   What the seller was asking for the house 6 months ago doesn’t matter.   What matters is what the market will support today.

So, how are things the same and how are they different?   A couple of things that need to be discussed:

How are things the same?

• What happened 6 months ago is still ancient history.   Since I wrote the first piece, Fannie, Freddie and FHA have tightened up their appraisal guidelines and they will no longer allow an appraiser to use a sale that is more than 90 days old unless they have no other comparables and can write a 5 page essay of why they need to use that one.
• I can’t tell you how many times over the last 12 months, I’ve heard people say, “3 years ago, the seller bought the house for $100,000 more than what I’m paying the bank for it.   I’m getting an awesome deal!”    My first response is, “Maybe.”   Maybe you are getting a deal.   But maybe the seller bought it at the peak of a bubble in the market and paid way too much and now things are just adjusting down to the market.    Maybe it’s not down to what the market will really absorb for the house and if you tried to sell it next year, you’d end up selling it for less than you paid for it.
• “They just dropped the price by $50,000!”   This is a great deal!    Maybe, but then again, I can put my house on the market for $650,000 and then offer to give you $100,000 off the asking price.   Is that a good deal for my house?  (Hint – my house is still WAY overpriced at $550,000 – but I’ll sell it to you for that.)

So what is different?   A couple of things are a bit different from last year:

• The First Time Home Buyer Tax Credit/Buyer Frenzy – If you are any where near the radio/newspaper/any mortgage lender or Realtor, you’re probably getting sick of hearing about the $8,000 first time buyer tax credit.   I’ve written about it before and I’m not going to discuss it here other than to discuss it’s impact on property values.  
• As the number of first time buyers has skyrocketed in virtually all areas (got to get that free money), it has stablized and in some areas has turned around the property values in the lower end of housing prices in many areas.  
• So that can actually show prices now being higher than what they were 6 months ago (for certain segments of the market – but certainly not all of them).  Does that mean that the market has turned around?   Do you rush to buy now because houses are going to be more expensive next year?
• Or is real estate going to follow the same route that automobiles did with the “Cash for Clunkers” program?   You know, the one where sales spiked during the first few weeks of the plan, then slowed down and after the program was over, they dropped quite dramatically?   If that happens to real estate, then how does that play into the plans of  first time home buyer?    If they can’t make it to the November 30 deadline (and time is almost up), do they buy now any way thinking prices are going up or wait because prices are going to come down?

In summary, 6 months ago is ancient history in real estate even today.   However the government’s initiatives that have been attempting to prop up the housing market and encourage first time home buyers have made the calculations and prognostications of what is and what might happen with housing prices much more challenging.

Next we’re going to look at the question of whether what you paid for your house matters or not and the negative equity situation.

Thanks for reading, if I can help shoot me an e-mail at tvanderwell@straighttalkaboutmortgages.com.

Tom Vanderwell

So this is the introduction to what will be a 7 part series over the course of the next weeks.   I’m going to take each item, one by one, and look at what my view was in July of last year and then factoring in what I think has or has not changed over the last 15 months.

Here’s a hint for you – out of the 7 parts, I think that we’re going to find that at least 3 or 4 of them have changed substantially.

I’ll have the first one up in a day or two.

Thanks for listening in/reading what my thoughts are…..

Tom Vanderwell

• Last July (2008), I wrote a piece called “The Seven Things Every Home Buyer Should Know.”   It got picked up by a couple of very high traffic sites (like the New York Times
• for one) and generated a lot of discussions.
• I’m taking a step by step review of the items that I looked at then and taking a look at them in light of today’s market.

Some of them have changed, some of them have not.

Hope to have it up within the week, thanks for your patience!

Tom Vanderwell

.    As usual, my comments will be inserted inside the statement and will be in bold and italics.   Here goes:

For immediate release

Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. I think it’s important to notice that they didn’t say things are improving, just leveling out.   The Fed never uses any words without a reason.  Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.  I think that what they mean by household spending is stabilizing is that people have slashed and burned their budgets down to the minimum and aren’t cutting back further.   However, if you look at the Retail Sales Report this morning, it raises a question of whether household spending is stabilizing. Businesses are still cutting back on fixed investment and staffing that’s a nice way of saying jobs are still being lost  but are making progress in bringing inventory stocks into better alignment with sales. inventory in better alignment with sales – what that really means is that the jobs that “make things” are still being eliminated.  Although economic activity is likely to remain weak for a time a time – that’s a nice way of saying we’re in for a long slow climb back, the Committee continues to anticipate “continues to anticipate” is that sort of like, “Please, please please, I really really want it?” that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.  They have had this sentence in there for a substantial length of time.    The longer that they put it in their statements, the more “hollow” it sounds.   Rather than being very confident, it’s starting to sound a bit more like, “We think we did everything right, now we just need to wait and see if the patient will recover.”   Oh wait, it’s 6 months and he’s still in a coma.

The prices of energy and other commodities have risen of late. However, substantial resource slack resource slack is a nice way of saying that we’ve got way too many production facilities and the demand isn’t nearly as high as the available supply is likely to dampen cost pressures – if there are 20 suppliers who are looking to make enough of something that could be done by 16 of them, the 16 that got the work can’t raise prices and the Committee expects that inflation will remain subdued for some time.  For some time – yes, it will.   In my mind, inflation and correspondingly interest rates will remain low for 12 to 18 months.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability we haven’t put any of our tools back in the box yet.  We’re ready to use them if they need to.. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, important words – this isn’t something new, it’s a restatement of what they have done, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. 

This is the only real change in the whole thing – they were supposed to be done in September but what they are saying is they will take the rest of August’s purchases and Septembers and spread them out through the end of October.  Now ask yourself, if they anticipated that the wind down of their purchases would have either a good or non-market moving effect, they would have finished up like planned in September.   But they didn’t, they said, “we need to spread it out over an extra 30 days to “mute” the impact to the market.   What sort of impact?   Let’s look at it this way:   If there are 20 buyers and 20 sellers, the demand and the supply is in balance.   If there are 20 sellers and suddenly 1 of the buyers, a relatively big buyer, says, I’m not going to buy any more, things get out of whack.   That means that most likely interest rates on Treasuries are going to go up.   And if interest rates on Treasuries is going to go up, what’s the most likely outcome for mortgages?   If you said, that they’ll go down, you’re wrong.

Now ask yourself, the Fed is buying $1.25 Trillion in mortgage backed securities from Fannie and Freddie.   What do you think is going to happen when those purchases are done?   Yep, higher rates again.

The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

You know, I’ve had more than one person accuse me of being way too negative in today’s market.   I prefer to think of it as way too educated or something like that.   No matter how you call it, I feel like it’s way too important to not only my business but the financial futures of too many people for me to just take the numbers at face value.  

So, with that being said, let’s dive into Friday’s Jobs Report for July and take a look at what the report says and doesn’t say.   First, the basics:

• The number of jobs lost is reported at 247,000.   That’s down substantially from the jobs lost in June and it’s about 75,000 less than the “market” had been expecting.
• Unemployment went down from 9.5% to 9.4%.  Yes, that’s correct, the unemployment rate dropped.
• The manufacturing work week jumped .8% compared to June.   More on that later.
• Average weekly earnings rose .5% compared to June
• The May and June reports added 43,000 jobs (actually reduced the losses by 43,000).

Now some questions that this report brings up:

1. What’s the margin of error in the market’s expectations?    Probably not a 20% miss like this.    The market did get thrown a curveball from that standpoint.
2. Am I the only one who finds it questionable that a quarter of a million (almost) jobs were lost and yet the unemployment rate went down?   Well, according to David Rosenberg, the reason for that is because there were a substantial number of people who essentially fell off the ranks of the “employable” and gave up looking for work.   So, that drops the number of unemployed workers and voila!  The unemployment rate drops.
3. Remember how, with both the May and June job reports, the losses were “worse than expected” because the auto industry was doing their summer thing (and their bankruptcy thing) earlier than normal.   Well, guess what, they are back at work and according to the reports that I’ve read, that added 28,200 jobs to the payroll (many of which had been shut down in May and June).   To put that in perspective, if the auto industry added that many on a regular basis, that would increase the amount of auto industry workers by 69%.   There’s no way that is a sustainable number in today’s market.
4. Federal workers – There were a lot of census workers hired this spring.   Then the government laid off 57,000 workers in May and June (census?).  Well they hired another 12,000 in July.  
5. Average weekly earnings rose – but so did the minimum wage.   Is there a connection between the two?   It makes one wonder……

Am I trying to paint the jobs report for July as a bad report?  No, I am most certainly not.   It was substantially better than many of the recent months.   I’m grateful for that.

But, like many of the economic reports that we’ve seen recently, it’s not as good as it sounds.  Between the auto industry fluctuations and the census bureau fluctuations, we have enough of a “swing” to put the number almost right back to where the “market” expected.

So what difference does this make for the housing and mortgage markets?   Here’s the way that I see it:

• The mortgage and bond markets got beat up quite badly on Friday after this report came out.
• Rates jumped quite a bit Friday morning.
• Most likely, the time will come, and probably as early as this coming week, when the markets will see that all is not as good as the headline numbers say in these reports.
• And then the stock market will pull back and we’ll see mortgage and bond market rates drift downward again.

Do I expect it to happen on Monday?   Probably not.   Remember the saying, “Mortgage rates take the elevator on the way up and the stairs on the way down.”    Go up fast, drift down slowly.

Stay tuned to both here and http://straighttalkaboutmortgages.com for more thoughts and insights into the markets.

Tom Vanderwell

• What is an “exit strategy?”
• Why is an exit strategy necessary?
• What does it mean for the housing and mortgage markets?
• What should I do to prepare myself and/or my clients for what’s coming?

Before we get into those questions, here’s a clip from Bloomberg that talks about an exit strategy and what Bernanke might be thinking and planning.   This interview was done last week and was looking forward to Bernanke’s testimony this week.

Now, time to dig into the details of it.  What is an exit strategy? It’s pretty simple:

How in the world is the government going to get out of owning an insanely large share of the US economy and the US financial industry?

Seriously, we’ve got a big issue.   In order to keep the financial world from melting down completely (and I don’t believe I’m being melodramatic when I say that we were that close to a total meltdown), Bernanke and company had to throw everything they could at the problem to keep it from being a disaster.   So the government now owns large portions of many financial institutions, they are in the process of buying over $1 Trillion worth of Treasury bonds and mortgage backed securities, they are majority shareholders in 66% of the US car makers, and they have guaranteed billions and billions of dollars worth of bonds, mortgage backed securities and other very complex financial instruments.

Now I want to pause for a minute and say something about Fed Chairman Bernanke.   There are many people in the main stream media who like to bring up Bernanke’s comment in 2007 about the problems being contained in the subprime mortgage market and use that as an excuse for saying that Bernanke doesn’t know what he’s doing and shouldn’t be reappointed.   A couple of thoughts about that:

• Bernanke has a long standing reputation as a scholar and an extremely well educated member of the Federal Reserve, long before he was appointed to the “big office.”
• One of his main areas of his educational focus has been the Depression, what caused it, what was done during the Depression, and how the “solutions” made it worse than the original problems.

So, we’re dealing with someone who really knows what he’s talking about.   Is he a human?   Absolutely.   Has he made mistakes?  His “contained in subprime” quote is a classic example of a mistake that was made.   But in my mind, he has done more to prevent the terrible financial mess that we’re in from getting even worse than anyone else and deserves way more credit than he’s getting.

So we have a situation where we had to take emergency and heroic measures to save the economy from a total meltdown.   But now we have to figure out, once the market and the economy comes around enough, how do we get out of the situation we’re in:

• How do GM and Chrysler “buy out” the government from their ownership?
• How does AIG pay back the multi billions that they got from the government?
• How do the financial markets pay back the government?
• How does the Federal Reserve change their interest rate pattern and move it to a more “normal” pattern (rather than .25%) without tanking the economy?
• How is the Treasury going to change the 0% discount window that they are currently charging to banks to a “normal” rate?
• And how is the economy going to react as all of these things happen?
• And what is that going to do to the housing market?

Why do we need an exit strategy?

There are a couple of reasons that we need an exit strategy:

• Because socialism doesn’t work.   We are in a situation now where the government owns a substantial amount of our financial and auto industries and the long term prognosis of government run industry doesn’t bode well for our economic health.  I know what you’re thinking, “How well did capitalism serve us in the past 5 to 10 years?”   The answer, not so well.   But there’s a substantial difference between having the government institute rules and regulations regarding leverage, capital requirements and so forth, and the government actually owning the industry itself.   The one can work, the other won’t work.
• Because a 0% interest rate is and will eventually be inflationary. That’s right, the government is currently loaning money at 0% interest and eventually it’s going to come back and become inflationary.   Do I expect the inflation to show up soon?   More on that in the “what to do” section below.
• Because we have to pay the money back. That’s right, the government is borrowing all of the money that they spent on these bailouts and buyouts and we’re going to eventually have to start paying that money back.   The cost per tax payer would be simply unpayable.   If the amount is unpayable, then liquidation is the only way to go.   So, the government is going to start selling some of the Treasuries, mortgage backed securities and other collateral that they have purchased.

So, what does the need for an exit strategy mean for the housing and mortgage market?

There are a few things that it means looking forward:

• Bernanke said in his testimony on Capitol Hill this week that interest rates will stay stable and low for a substantial period of time.   I’m in total agreement with that statement.   I believe that we’re looking at most likely 12 to 18 months with stable interest rates.   I believe the overall trend during that period will be slightly higher, but not substantially higher.
• During that time period, the economy will begin healing.   It will eventually start turning around and become a decent economy.   As soon as that happens, inflation is going to become an issue.   When inflation becomes an issue, interest rates are going to spike and spike dramatically.   Am I willing to say how high?   Nope.   I’ll use the term substantially, but I won’t say how much higher than they are now.   Why not?  Because how high they go will depend in many ways on how the government does at unwinding all of the government interventions that have taken place.
• The law of supply and demand when it comes borrowing money for mortgages is going to make it harder to get a loan.   What’s that?   A couple of thoughts:  As the government unwinds their position in the Treasury and mortgage markets, they are going to flood the market with debt looking for a place to go.    If there is $100,000,000,000 out there looking for a place to go, it’s going to be easier and cheaper than if there is $500,000,000,000 out there looking for a place to go.    So, an investor has $20 Billion in his account and is looking to buy bonds.   He’s got choices of buying existing stuff from the government or buying new “stuff” that’s coming on the market.    The financial institutions that are coming out with new bonds and mortgage backed securities are going to need to make sure that their stuff is really clean (meaning good quality) and attractively priced (meaning higher rates) so that it can compete with what the government is trying to unload.

So we’ve got a situation where the likelihood is that over the next 12 to 48 months, we’re going to be looking at a government that needs to unwind their current positions in the financial markets and it’s going to create an economic situation where we’ve got higher interest rates, lower demand and the possibility of a double dip recession.

So what do you do to prepare for it?   And what do you tell your clients?   A couple of recommendations:

• We’ve got 12 to 18 months until interest rates go up. Any consumer, mortgage and business debt that won’t be paid off within the next 2 to 4 years should be moved to fixed rates. Why 2 to 4 years?  Because rates are so low that it’s going to take a little while for the “average rate” that you’d pay on a variable rate to catch up to what rates are going to go to.  Call me at (616) 209-8811 and let’s talk about how to go fixed on your debt.   E-mail me at tvanderwell@straighttalkaboutmortgages.com and we can take a look at things that way too.
• Take a look at your real estate holdings.   If you own investment properties, the time to look at whether you’ve got the right property and the right loan on it is not next month, next year or when Junior graduates from college.   The time is now.   Call my friend and real estate investment professional, Jeff, “Bawld Guy” Brown at (619-889-7100) or e-mail him at Jeff@brownandbrowninc.com to get the input of someone who truly has your best interests and your retirement plan in mind.
• Take a look at your financial and real estate moves. Do you see the likelihood of wanting or needing to do anything in the next few years?   Buy a bigger house?   Downsize because the kids are moving out?   Move out to the country?   You might want to see if makes sense to adjust and tighten those time frames.

I have a confession to make, I didn’t see the scope and size of this economic crisis coming.   Yes, I felt that certain areas couldn’t continue to go up as fast as they did but the nearly nuclear meltdown, nope, I didn’t see it coming.   I do take some comfort in knowing that I’m not the only one who missed it.

But, I do see the unwinding of what we had to do to keep the ship floating as the source of trouble in the future.   Understanding and being prepared for what’s coming is a large part of handling an incoming storm.   And that’s why an Exit Strategy for the Fed makes a difference to the housing and mortgage market.

Stay tuned, I’ll be writing more in depth articles on Straight Talk – the Bigger Picture in the future to help us all adjust and prepare for the new realities that we are and will continue to face going forward.

Sincerely,

Tom Vanderwell

Former Fed Chairman Greenspan, when talking about the inverted yield curve, “It’s different this time.”  (It wasn’t.)

A quick search on Google for the term, “It’s Different this Time” and “economics” yields over 25,000 entries.

There are many ways that it can be said that this current economic downturn is similar to past economic struggles.   However, John Maudlin wrote a compelling article laying out why This Time It Really Is Different. In it he talks about the major reasons why this recession/economic mess really is different than others.   We’re going to hit the highlights of what he says and then talk a bit about the significance of those issues for the mortgage and housing market.

The first reason why it’s different is leverage. I’ve heard it described that America woke up with a “debt hangover.”    For many years we lived in an economic situation where the only thing that mattered was “how much was my payment.”   We have loaded up on debt and in many instances, we’ve pulled it from our homes.    Calculated Risk has a graph that illustrates the absolutely massive amounts of debt that we’ve taken out of our homes and spent on other things.   We did it by means of refinancing our mortgages and taking out equity lines of credit.

Guess what?   It’s going to take a very long time to pay down all of that debt and unwind how highly leveraged the consumer and the businesses are.    It’s different this time because this is a problem brought on by too much debt and too much debt doesn’t go away in a year or two like most recessions.

The second reason it’s different this time is because it’s a New Normal. What’s the new normal?   It’s a realization that is coming from all areas of society that says:

• Real Estate doesn’t always go up.
• There are more things that matter than “How much are my payments.”
• There is more to life than the size of your TV.  (This commercial still irritates me)

“What really struck us in the employment report of a few weeks ago was the fact that the only segment of the population that is gaining jobs is the 55+ age category. This group gained 224,000 net new jobs in May while the rest of the population lost 661,000. In fact, over the last year, those folks 55 and up garnered 630,000 jobs whereas the other age categories collectively lost over six million positions. This is epic.”

So what’s up with that category getting more new jobs where as everyone else lost jobs?

They are going back to work or taking an additional job because they have to.   They lost too much money in the stock market and the value of their home and they can’t afford to retire otherwise.

The fifth reason it’s different this time is jobs. Look at the capacity utilization and combine that with what we talked about above in terms of a lack of consumer spending.    We aren’t going to see a revision in consumer spending that will spur massive job growth any time soon.

So, now that we’ve looked at my summary of five main reasons why “it’s different this time.”   Also known as “Five Main Reasons This Won’t Be Over in 2009,” what do we do about it?  A few thoughts in an effort to guide your thinking, planning and assisting clients over the next period of time:

• Be methodical.    Think clearly and plan and run your business methodically.    Now is not the time to be similar to Don Quixote and chasing windmills.
• Pace yourself.  Is it a tough market?  Yes it is, but as it’s been said, we’ve stepped back from the precipice of financial Armageddon and so now it’s just going to be a long slow “slog in the mud” to get through this.
• Urge your clients (and yourself) to take the bigger picture (pun intended) and to look at any and all financial decisions in light of all of the information available.
• Don’t attempt to be a professional of everything.   I can’t tell you how many times I’ve said, “I’m not an accountant, so talk to your accountant about that.”    “I’m not an attorney, so…..”
• As they say on the Charles Schwab commercials, “I’m rethinking everything.”   Don’t assume that what has always worked in the past will work in the future.   If you are working with a Realtor, builder, lender who is always talking about the way things were and doesn’t seem to be adjusting to the new realities of the market, get a different one.

It’s not a pretty picture, but it’s a picture that we can get through.   I’m working on a plan that will help my clients navigate through the difficult market that we’re in.   Stay tuned for more.

Tom Vanderwell

It’s Different This Time

There has been a lot of talk about the June employment reports and
how they are somewhat of a “watershed” event.   I’m going to take a few
minutes (actually more than a few) and work through the various
components so that it something we can all fully understand.   Oh, and
I’m also going to throw some thoughts in there about what it means for
the housing and mortgage markets.

To start, let’s take a look at the unemployment rate…….

A couple of points about this graph:

• Unemployment isn’t the hightest that we’ve seen in my lifetime, but it’s a close second and if you look at the “trajectory” of the unemployment rate, it could very well hit that number.
• The year over year drop in the employment rate is the largest we’ve seen since 1960.   That means that over 4% of the population had jobs a year ago but don’t have jobs now.    That’s a tough number.

This next chart is an interesting one.   It tracks the job losses as related to the peak employment of that market.   In other words, how far has the market fallen and how long did it take to get to that point.    More comments on the other side of the graph……

A couple of observations:

• Only the Post WWII job losses had a sharper and larger overall job loss ratio than we have so far and frankly, their’s was very understandable.   If we aren’t needing thousands and thousands of guns and ships and tanks, we don’t need the people making them.
• The majority of the recessions saw an uneven descent into joblessness.   It kind of moved in fits and starts.   Our recession hasn’t.   It’s been pretty much a waterslide that started a little slow and then has gone straight down.   Anyone been to Blizzard Beach at Disney?
• We aren’t quite following the trajectory of the other recessions and I think the main reason is because this recession was caused by an overabundance of debt and that’s going to take a longer time to deal with……

Two things that struck me about this graph:

• Just under 60% of the population is employed.   I’m assuming that the “non-employed” includes retired, stay at home moms, students etc.   I would have expected that number to be higher.
• Even though it’s dropped dramatically, it’s been quite a bit lower in the last 40 years than it is now.

Is the employment picture really worse than it looks?   Let me explain:

• The number of people who are working part time jobs because they can’t get full time jobs is almost double what it was 2 years ago.
• Are we splitting many jobs between part time workers?   Are there businesses who are hiring 2 part time workers rather than one full time because it’s cheaper?
• So if you “combined” those part time jobs into full time jobs, would we have that many more people unemployed and the jobless rate would be how much higher?

Not much needs to be said about this one.   There’s been a continuing deterioration in the number of hours that production workers are putting in as the manufacturing industry is shedding jobs and sending more business overseas…….

Do you remember the stress tests that the banks were put under?   And how the government set “scenarios” that they were comparing the banks to in regards to various economic standards?   How was Citibank going to hold up if unemployment went to _____?   That type of thing…..

Well, take a look at the chart below.   Both the first and second quarter of 2009 have been worse than the worst case scenario from the government.    Does that make you a little uncomfortable about the results of the stress test?

The chart below (the last one) shows a couple of interesting things about unemployment claims (see below)

• Both initial claims and continued claims are up substantially from the start of the recession.
• Both of them also show a noticeable downturn recently.   Is the downturn enough to establish a trend?   Not necessarily but it’s a potentially good sign.

So what do you do with this knowledge?
I’m going to end every (or at least 96%) of the posts on here with that question and then I’ll answer it.   Knowledge for knowledge sake doesn’t do any good.   Here are some suggestions on what to do with the knowledge about the jobs situation:

• Take the role of a financial counselor and help your clients who are struggling.   There are many people who are struggling now and taking the opportunity to help them through their struggle will not only earn you a grateful client but a solid referral source.
• Don’t spout the “platitudes” that make people feel someone is just a sales person.   Acknowledge and be sensitive to what’s happening in the market.
• Realize that this big of a hurdle as far as jobs is going to take some time to overcome and that therefore a change in real estate plans might not be best for everyone now.

I’ll continue to be in touch.   Let me know how I can help.

Tom Vanderwell
tvanderwell@straighttalkaboutmortgages.com

Employment Report