Are We At The Bottom?

July 17, 2008

June is the time when many investors and analysts take stock of how the economy has fared so far this year and compared with a year ago at this time.  So how have we done?  The almost-a-year-old subprime credit crunch has wiped out some $3.3 trillion in stock market wealth in the first two quarters of this year alone.  It was the worst first half for stocks since 2002, when the dot.com bomb was still exploding and we were working through our last brief recession.  The Dow Jones average fell 14.4 percent through the end of June, while the Nasdaq fell 13.6 percent.  Meanwhile, the mortgage meltdown has resulted in $400 billion in write-downs by financial institutions.  The result: tighter credit standards, which – along with falling home prices, rising unemployment and sharply higher energy and food prices – are pushing U.S. and other global economies closer to recession.  While some observers believe the “bottom” is near or has been reached, still others fear there are more shoes to drop during the last half of the year and into early 2009.

• Some baby boomers may be wishing they had saved more for retirement and done a little less dipping into their home equity during the real estate boom, according to a report from the Center for Economic and Policy Research titled “The Housing Crash and the Retirement Prospects of Late Baby Boomers.”  The study predicts that by 2009 the average household aged 45 to 54 years will have approximately 25 percent less wealth than the median household of that age group had in 2004, based on March S&P/Case-Shiller home price figures.  What’s worse, these households could see another 10 percent lopped off their wealth should home prices fall by that amount before the end of the year.  At a 20 percent additional decline, their wealth is 46 percent lower than in 2004.  The study’s authors point out that renters actually fared better.  Although they didn’t participate in the boom’s upside, renters tended to save more money toward retirement during what is considered the peak retirement savings years and have not suffered the fate of those homeowners who tapped into their home equity.

• The Federal Reserve Board’s decision last week to leave the federal funds rate static at 2 percent has so far failed to put the brakes on rising mortgage rates, which climbed to their highest level in over nine months to 6.45 percent for a 30-year fixed-rate loan, according to Freddie Mac.  That was up from 6.42 percent the previous week and the highest rate since reaching 6.46 last September. Interest rates on fifteen-year fixed-rate mortgages rose from 6.02 percent to 6.04 percent last week.  Adjustable-rate mortgages (ARMs) also climbed:  a five-year ARM moved from 5.89 percent to 5.99 percent, while a one-year ARM rose from 5.19 percent to 5.27 percent.  Even so, interest rates were still lower than they were for the same week in 2007.  A year ago, 30-year fixed-rate mortgages were at 6.67 percent, 15-year fixed loans averaged 6.34 percent, five-year ARMs were at 6.3 percent and one-year ARMS were available at a 5.65 percent rate.  Observers say the recent week’s increases reflect the market’s growing concern over inflationary pressures and uncertainty over how the Fed may react in the future.

Posted in Lending, Real Estate