2008 Economic & Housing Report Presented by Gary Watts, Real Estate Economist

The following are the notes provided by Gary Watts to attendees to share with their clients. He feels that only as buyers and sellers are knowledgable about the market will the market start to improve. His first comments included "If you don't have to sell, then get off the market!"

FACTORS EFFECTING AND AFFECTING HOUSING

The Economy:

Over the past 12 months, our economy grew at a very healthy rate of 2.8% and creted a $11.52 trillor dollar economy. Since 2003, the U.S. has created over 5 million new businesses and almost 8.3 million new salaried jobs - employing 1.3 million more people over the past year. Add the 16 million self-employed and the 25 million part-time workers, and you can see why the government has received a lot of extra tax revenue this last year. Last year our government projected a deficit of $177 billion dollars. that would have been a 28.7% reduction from the previous year's budget. As the government's fiscal year came to an end, the deficit was only $162.7 billion dollars.

Since 1980, the Gross Domestic Product has risen 70% and helped to shrink our federal deficit. Today, our national debt is less than 1.2% of the GDP, compared with 6.0% in the 1980s and 4.7% in the 1990s. this current percentage level of 1.2% is below the 40 year average.

Corporate Profits:

The 3rd quarter numbers showed that U.S. corporations are still doing very well. They now have 21 straight quarters of double digit earnings, and corporate profits are running at an annual rate of $1.62 trillion dollars. These profits have almost doubled during the past 5 years.

Financial Corporations:

The media only talks about their huge write-downs due to the sub-prime crisis, and fails to mention that the majority of these financial companies still have surprisingly strong cash flows, and continue to pay big dividends. Since the market has already driven down their share prices, they have very little to lose by writing off any potentially bad loan. These write-offs include bad: business loans, credit cards, leasing contracts, currency fluctuations, bond devaluations, collateralized debt obligations, structured investment vehicles, mortgages, and failed mergers. If they hold these securities to maturity, they will likely get 98 cents on the dollar.

During the 3rd quarter of 2007, banks took write-downs of $43 billion dollars, yet they still made a net profit of $28.7 billion dollars - even after putting aside reserves (a 20 year high) for more potential loan losses. Here is a look ats some of the larger banks' profit positions (in billions) from the 3rd quarter; Citigroup: $2.38; Bank of America: $3.7; JP MOrgan Chase: $3.4; Wells Fargo: $2.8; Morgan Stanley: $1.54; and Goldman Saks: $2.85

(Source: Bureau of Labor Statistics, Bloomberg, Bureau of Economic Analysis, Federal Reserve)

Income Growth:

In 2006, the IRS reported that wage earners in the U.S. had their highest income growth in 5 years, and that personal income grew more rapidly than spending in 2007. Since the housing slowdown began two years ago, personal income has risen 7% leading to a $1.35 trillion dollar rise in the nation's income.

Employment:

December marked the 52nd consecutive month of job growth - this is the longest period of uninterrupted job growth on record. Over the past year, 1.3 million new jobs were created and the current unemployment rate is at 5.0%. Since 3% of the population won't work, even if you give them a job, we are near full employment. for 2007, the unemployment rate averaged 4.6%, the same as 2006.

Interest Rates:

Current conforming rates for mortgages are within 3/4 of a percent of historical lows. Last summer, rates rose to 6.75%, but by the end of the year they had fallen into a range of 5.75% to 6.12%.

With the benchmark 10-Year Treasury trading around the 4% range, interest rates for home mortgages should be around 5.5%. The reason they are higher is the lenders are still adding extra basis points for the fear premium.

Lending:

The financial markets have been in turmoil since summer. This was largely due to an over reaction in the subprime market, whereby financial institituions had bundled all types of loans into mortgage-backed securities. With investors not knowing exactly how much of their portfolio was sub-prime, they panicked and pulled the plug on additional funds being available for mortgages. As the investors either put on hold or adjusted their lending criteria, the whole landscape of lending changed.

(Source: Federal Reserve, U.s. Treasury, U.S. Bureau of Labor, IRS, Mortgage Bankers Association)