Volume 13 Issue 4
April 2008

By:
U.S. Senator John Seymour (ret.)

NATIONAL ECONOMY: The current economic debate continues as to whether we are in a recession, we're not in a recession, or maybe we are or maybe we're not. Their incessant babble reminds me of the two economists debating whether or not the rumpled bed sheets, found in a love nest, were the result of raw and wild passion or true love. The reality, is that a recession has been historically defined as two consecutive quarters of negative economic growth and; therefore, we won't know the answer to the recession question until after it has already happened. By that time, our economy should be growing at a moderate rate of 1.5% to 2.5%, as a result of more stable credit markets and the positive effects of $168 billion of tax rebates and tax credits that will be in the hands of consumers beginning next month. Estimates are that the stimulus package will add about 1% of positive growth to GDP. Adding fuel to the fire of the "we are in a recession" crowd and bolstering the steady negative drumbeat from the media, were the dismal new job numbers for the month of March. The economy lost 80,000 jobs last month and that follows the loss of 63,000 jobs in February and 22,000 jobs in January. The national unemployment rate rose to 5.1%. Expectations, since the fourth quarter of last year, have been that the unemployment rate would rise to 5.2% in the second quarter of this year before dropping back in the third and fourth quarters as the economy begins to pickup some steam. I do not minimize the severity of our current economy…without any doubt the housing and credit market crises combined have taken a tremendous toll on our economy; however, I also believe that the worst of this cycle is behind us, economic stability is on the horizon and positive economic growth will soon follow.

NATIONAL POLITICS: With just 222 days left before our November elections, the race for the White House is the most fascinating political campaign I have ever seen. Both the Democrat and Republican presidential primaries have taken more surprising turns than an Olympic gymnast performing on the balanced beam. On the Republican side, it seems like yesterday, when Rudy Guliani was the sentimental favorite, George Romney was breathing down his neck, ready to take the nomination at Guliani's first misstep, Huckabee was charming the evangelical right, hoping for a miracle, and John McCain was out of money, out of favor and just about out of the race. McCain, like the biblical Lazarus, rose from the dead, overcame insurmountable odds and has driven his "Straight Talk" express into the Republican primary winner's circle. On the Democrat side, Hillary Clinton was all but anointed as her party's nominee. With the Clinton's well oiled political machine and the Democrat establishment's apparent embracement, national polling indicated the primary was nothing more than a cakewalk and the candidate's financial and political strength permitted her to ignore the far left and to position herself as a centrist in preparation for the general election in November. Opponents like Edwards, Biden, Richardson and, oh yes, the young black upstart from the south side of Chicago, Obama, were nothing more than window dressing and potential VP running mates. As Hillary's opponents, unsurprisingly, fell by the wayside, the young, inexperienced, and unknown Obama came forth with an inspirational message of "change." He particularly preached to the far left, the young, and the black community, all of which the Clinton machine had mostly ignored and assumed had no choice but to follow her coronated majesty. Reminiscent of the Vice President Hubert Humphrey vs. young unknown Senator John Kennedy Democrat primary of 1960, Obama, like Kennedy, repainted the political landscape from experienced, known, and Washington establishment, to youth, energy, charisma, and new leadership. Clearly, Obama will go into the Democrat convention with the most delegates, the most state primaries won, and possibly the greatest number of popular votes. It would be a mistake to ever count the Clintons out. However, I believe that, should Hillary pull the rabbit out of the hat with the support of the Super Delegates at the convention, thereby winning the nomination, the Democrats would most likely lose the November election. The black vote, the young vote and the far left would all feel that Hillary had "stolen" the primary election and therefore, would unenthusiastically sit on their hands. Without those voting blocs, and Hillary's very high negative ratings with the general electorate, victory would be most difficult. McCain, on the other hand, has yet to succeed in healing the wounds of the far right conservatives in the Republican party. Although McCain has a 96% voting record and rating with the American Conservative Union, the most respected conservative group in Washington, his streak of independence, shown on proposed immigration reform with a path to citizenship for known illegal immigrants, his voting against the Bush tax cuts without comparable cuts in federal spending, and his reaching across the aisle to forge an agreement on the Senate stalled judicial confirmations, all have caused many Republican conservatives to less than enthusiastically embrace McCain. In addition to continuing to reach out to the far right, McCain can help himself with conservative Republicans by choosing a solid conservative as his VP running mate. Obama, assuming that he is the Democrat nominee, can help his cause by selecting a white, experienced, Democrat establishment VP running mate, much like Kennedy chose LBJ as his running mate in 1960. 222 days before the election is a political lifetime. The general election promises to be as exciting as the primaries. For an old political war horse, like myself, I find it all most fascinating, and contrary to many, I can't wait for the sure to come twist and turns of political debates and TV commercials in both political campaigns. Stay tuned…

THE FED WATCH & MORTGAGE RATES: The Federal Reserve, led by Chairman, Ben Bernanke, has, without doubt, been the most activist Federal Reserve since the great depression. Historically, the Fed has been content to stabilize our economy and financial markets by raising or lowering interest rates charged to banks. Beyond cutting borrowing rates by 3%, so far, Bernanke and his boys have infused about $200 billion of capital through their weekly auctions of loans to member banks, provided a $30 billion loan to JP Morgan to buy a failing Bears Stearns, strongly supported the Bush Administration and Congress in passing a $168 billion economic stimulus package, strongly supported the Administration's move to reduce capital requirements for Fannie Mae and Freddie Mac, and are now considering making loans directly to financial institutions, other than banks, for mortgage backed debt. Compare this approach to that employed during the early '90's financial crisis. During that time our federal government and federal reserve were content with closing the doors of many financial institutions, turning their assets over to the Resolution Trust Corporation (RTC) and then having the RTC hold "fire sales" of their real estate assets, which in turn, further depressed real estate values and lengthened the time for the housing markets to recover. Generally, I am opposed to government bailouts; however, I consider these recent moves as an attempt to permit our financial institutions time to manage their way out of this crisis as compared to summarily closing their doors. I also believe that this strategy will prove much less costly to the taxpayers than the RTC bureaucratic boondoggle that cost hundreds of billions and extended the housing slump for a six year period. The Fed's latest cut in their Fed Funds borrowing rate on March 18th was another 75 basis points to 2.25%. That was the sixth rate cut since last September and the second 75 basis point reduction in a row. Bernanke and his boys next meet on April 30th and I would expect at least one more rate cut of 25 basis points. Beyond that, further rate reductions are obviously possible but, as the Feds go below 2%, they begin to run out of ammunition and the risk of hyper-inflation begins to heighten. Bernanke testified before Congress this week and said that, "It now appears that real Gross Domestic Product will not grow much, if at all, over the first half of 2008, and could even contract slightly. In terms of the fiscal stimulus package that was put in place, it's a fairly significant package which should add something like a percentage point, or even a little more, to growth in the second half of the year. On that particular issue, I think we ought to give that some time to work before we take additional steps." Bernanke, in his testimony, also encouraged Congress to take further actions to thwart foreclosures. Meanwhile the Senate has forged another bi-partisan plan to assist the battered housing markets. Key provisions of the bill include a two-year $7,000 tax credit for anyone buying a home foreclosure, $4 billion in grants to local governments to buy and refurbish foreclosed homes, new authority for states to issue bonds to be used to refinance sub-prime mortgages (an idea that I laid out in last month's newsletter), and a proviso that would enable homebuilders to reclaim two years of paid taxes so that they might hold on to raw land assets rather than flooding the markets and depressing land values. Look for this bill to easily pass the Senate and then be "loaded up" with anti-business provisions when it is considered in the house. One of the major house amendments will be to let judges intervene in the home foreclosure process by delaying foreclosures for some unknown period of time. If the House insists on this provision, it could well kill the bill. If this provision is passed, it will only increase the costs of mortgage borrowing as the lenders' risk will be greater. Mortgage rates continue to hover around 6% on a 30 year fixed-rate mortgage and should continue there for at least the next ninety days. Fannie and Freddie continue to tighten underwriting standards raising minimum FICO scores to 580 and extending from 4 years to 5 years the required time since a foreclosure that a borrower must meet. With inflation beginning to rise, mortgage rates temporarily low, and home prices near the bottom, now is the time to buy!!!

NATIONAL REAL ESTATE: New home sales were down 1.8% in February compared to the previous month, according to the U.S. Department of Commerce. That follows a revised decline of 1.6% in January. On a positive note, unsold inventories of new homes dropped 2.1% in February. That's the second consecutive month showing homebuilder inventories receding. Regionally, sales were up 40.3% in the Northeast, up 5.7% in the South, and up 0.7% in the West, and a decline of 6.4% in the Midwest. In a sign that drooping home sales may have bottomed out, existing home sales rose 2.9% in February compared to January, according to the National Association of Realtors (NAR). Lawrence Yun, Chief Economist for NAR said, "We're not expecting a notable gain in existing home sales until the second half of this year, but this improvement in sales is another sign that the market is stabilizing." The unsold inventory of existing homes for sale fell 3% in February compared to January. This represents a 9.6 months supply compared to a 10.2 months supply in January. Regionally, February existing home sales were up 11.3 in the Northeast, up 2.5% in the Midwest, up 2.1% in the South and down 1.1% in the West. Although National foreclosures of homes are up 54% from a year ago, new foreclosures during February fell 4% compared to the previous month. In last December's newsletter, I said that I thought we would reach the bottom of this housing cycle and find stability in the first quarter of this year. I'm sure that some thought I was out of my mind and yet others that I was on drugs to enhance my optimism. One month's data certainly does not make a trend; however, I continue to believe that the next 60 to 90 days will confirm that, on a national basis, the bleeding has stopped and the healing process has begun. Another reason why, if a homebuyer has been waiting for the bottom, now is the time to buy!!!

CALIFORNIA ECONOMY: UCLA's Anderson School of Business is forecasting "no recession" for the nation or California. Edward Leamer, Chief Economist at UCLA predicts negative GDP of -0.36% for the second quarter of 2008, but then a return to positive economic growth for the remainder of the year, with 2.5% GDP growth in the fourth quarter of 2008. Kipplinger's economists project Gross State Product (GSP) to be -0.1% in the first quarter and -1.0% in the second quarter but bouncing back to 3% to 3.5% for the second half of 2008. They also predict 0.5% job growth for the golden state for 2008, 3% growth in personal income, 2.2% growth in taxable sales and a 1.1% increase in population. Despite the nation losing 63,000 jobs in February, California's State Employment Development Department reported that the Golden State had gained 25,800 new jobs for February. That's a big turnaround after reporting 29,300 jobs lost in the previous month of January. The unemployment rate for February was 5.7%. That's down from 5.9% in the previous month.

CALIFORNIA REAL ESTATE: Existing home sales rose 9.5% in the month of February compared to the previous month, according to the California Association of Realtors (CAR). That's the fourth consecutive month of home sales improvement. However, compared to sales in February of 2007, they were down 28.5%. Unsold inventories are also being worked off with CAR's Unsold Inventory Index dropping to a 14.3 months supply in February compared to January's 16.9 months supply. Regionally, sales were down 10.5% in Los Angeles County, up 34.1% in Orange County, down 7.4% in the Inland Empire, up 4.5% in the Coachella Valley and up 8.2% in San Diego County. The foregoing data is on "closed" sales. Beware of "pending" home sales data, as it may include "short sales," which are reporting a very high fallout rate of 50% or more. REO sales or foreclosure sales now represent 40% or more of total sales. Lenders continue to staff up on consultants to more efficiently handle REO and short sales. As this process continues, I would expect the fallout rates to dramatically decrease. Although new home sales data is not as accurate nor available as existing home sales data, what data there is, would indicate slowing sales but declining unsold inventories. Home shopping continues to be much more active and should result in month to month sales improvements. We continue to have a long ways to go before we return to the sales volumes of the last three years; however, I continue to believe that we have or nearly have reached the bottom and stability. That's a beginning…

If you would like a regular copy of this newsletter, ask your Title representative, and while you're at it, give them your next title order…Their superior "Whatever It Takes" service will make you glad that you did.

DISCLAIMER: This newsletter is published by Orange Coast Title for the benefit of its customers and those of its affiliates, California Title, and Equity Title. The opinions expressed herein are solely those of the author and, are not in any way to be attributed to the employees or management of Orange Coast Title or their affiliates. Comments, criticism, or opposing views are always welcome at jfseymour@verizon.net.

SOURCES: LA Times, Wall Street Journal, Desert Sun, DQ News, OC Register, San Diego Tribune, Inland Valley Bulletin, Barrons, Kiplinger California Letter, CAR, NAR, NAHB, CBIA, and MBA.