AMERICA TODAY - PART TWO

AMERICA TODAY PART TWO is drawn from a speach made by Mark Dotzour and Economist from the Texas A & M University, he travels all over America addressing the market on the subject of Real Estate.
Breakdown of American spending
*71.2% - Consumer spending
* 13.9% - Business and Investment spending
* 20.1% - Government spending
* - 5.2% Net Exports
Consumer Confidence
38, the lowest in the index's 41 year history. WHY?
The Government have received the 700 Billion in "bail out funds" but have not told the public what they are actually going to do with it. In the past the Government has not told the truth to the American people, and now they will not come out with a clear mandate for the 700 Billion, so this is just driving confidence through the floor.
There is also the sentiment the Government wanted to get the election out of the way.

Expect the unexpected! Expect the unprecedented!

THE GOVERNMENT CANNOT TOLERATE A PROLONGED RECESSION! WHY?

The Sub Prime Crisis may have been a 1.5 Trillion Dollar cancer, but there is a much much bigger problem that lays dormant, and the Government, absolutely cannot let this become a problem. What is this?

CORPORATE BONDS MARKET - this is a 65 Trillion Dollar potential problem. The US Govenment will do what ever it has to do to keep this market from being a problem. The Government is not worried about the stock market, this can find it's own level, but the corporate bond market must be protected no matter what. Even if the Govt has to actually buy these Corporations they will do it!

In a recession, 1/3 loose money and 2/3rds make money.

Right now corporate profits are easing, but by the last 4th quarter 09 this will change, profits will be back, Stock Market will be up, Market Confidence will be up, Business and consumer sending will be up.

What are the odds? There is a 30% chance the Government will not communicate clearly with the public and confidence will not be restored. However we have the "Obama factor", and this is a very big positive.

Why do we say corporate profits will be up in the 4th quarter 09?, On average a recession lasts 17 months, business spending stopped Jan 08, so business has already been in recession for 10 or so months.

Unemployment will peak in November 09.

The Stock Market will bounce back in the Spring.

REMEMBER - the Government will do what ever it needs to to protect itsself!
* Lower interest rates - some say to 0% but it will more likely to be 2 - 3%
* Forgive a portion of every home owners mortgage, let's say the mortgage is $200,000, the Government may say, from now on this mortgage is only going to be $170,000. Would be calculated on a "loan to value ratio" possibly
* Give away a lump sum of cash to each person. This has happened before. Remember consumer spending is 71.2% of all spending, so if the consumer confidence comes back and they start spending, this will drive the economy forwards. It is interesting that the Government has already given out $600 to each person, but this did not have the desired effect as in the main the public response was to save the cash or pay it off their mortgage. The Government will not make the same mistake again, they will give the money by voucher that has an expiry date or something like that.
* Increase the Prime Lending Limit. Freddy Mac and Fanny May are there to help the average Americal purchase homes. Right now they are under Government contol but not doing their job! So they need to begin lending in greater volumes.

The growth sectors of the economy are -
* Retail * Food * Entertainment * Education * Health Services
The sectors in decline are -
* Hotels * Professional and Business Services * Transport

History shows there are only 3 ways to protect onesself from recession -
* Buy Gold
* Purchase Real Estate
* Go to another Country
Buying Gold is not really an option, in previous recessions we have seen the price of Gold fall substantially, this will happen again.
Going to another Country is just too risky.
AND THAT LEAVES JUST REAL ESTATE!

COMMERCIAL REAL ESTATE -
There is a 12 - 18 month pipeline of new commercial real estate.
Anyone who has owned commercial real estate for more that 4 years is in an excellent position as long as they are not carrying too much debt. It is those who have entered transactions in the last 24 months or so that have been over priced and poorly underwitten that are at grave risk.
Developers are committed to the projects but wished they were not - certainly their banks wished they were not committed. But there is no turning back and this real estate will eventually come onto a very difficult market.
This has not gone unnoticed to this investment funds with serious cash - there is around 130 Billion Dollars in "Vulure Funds" waiting to take advantage of this situation.
When would be the right time to enter the commercial market? 2 - 3 years time. There will be a turnaround once the current problems flush through.

RESIDENTIAL REAL ESTATE -
I will deal with this in a separate blog. WHY? Becuase some of this information is outside the scope of what this Economist spoke to.