Economic Outlook
By Rocky Tarantello
Recession Still Up for Debate,
But Market Could Be Nearing Bottom
WE HAVE YET TO REACH THE TRADITIONAL
benchmark definition of recession, but all the signs of
economic contraction are there—unemployment is rising, retail sales are falling, corporate profits are stagnant
and GDP was at a virtual standstill in the first quarter of
2008. So the question of whether we are likely to fall into
recession is now becoming a debate about the severity
and duration, regardless of the technical definition.
With housing prices falling and mortgage rates and
food and energy prices rising, American consumers are
beginning to face some of the most difficult conditions in
many years. By the end of the first quarter, both the
National Association of Realtors’ median sales price and
the Case/Shiller Composite- 20 Index had fallen by
roughly 5% to 10%. There has been a great deal of
Shrewd investors would be wise to
consider this economic environment and
stand ready to make strategic plays.
speculation regarding when the housing crisis may
begin to abate, but with year-over-year home foreclosure filings up above 60% in February, anytime this year
may be overly optimistic.
The market will not return to normalcy until the inventory of unsold homes has been reduced. Expect the Fed
to continue its policy of accommodative interest rates
until credit becomes more plentiful and housing stabilizes. At this point, it appears that mid- to late-2009 may
be the point at which we can expect to see tangible evidence of a housing recovery.
Food and energy prices have added to the uncertainty as consumers face declining disposable incomes and
rising unemployment. Oil prices are now hovering in the
range of $115 to $120 per barrel, roughly double the
price of two years ago. The immediate outlook remains
murky, but there appears to be growing sentiment that
the speculative premium paid for a barrel of oil may be
grossly inflated and that the nominal price per barrel
could fall well below $100 in the coming months.
With the economies of both China and India beginning to feel the effects of the global credit crisis, and the
prospect of a potentially stronger dollar as the Fed
returns to a more neutral policy stance, the falling oil
price scenario seems to hold some legitimacy. This
would also have the added benefit of relieving some
pressure on food prices and delivery costs of other commodities. For now, prices remain near their peak level,
but an adjustment is not far off. When prices do come
down, the benefit will not be indefinite.
Prices will eventually rise again as the global demand
for oil grows in concert with the emerging middle-class
consumers of China, India and the former Eastern
European block. But expect some relief in oil sometime
soon. With fears of a global economic slowdown beginning to rise, oil price speculation will likely decline. For
American consumers, it cannot come soon enough.
So long as the credit markets remain stressed and bank
liquidity is still an issue, both the price and availability of
mortgage credit will tend to suppress real estate market
activity. Vacancy rates are rising as employment declines,
and prices are falling accordingly. Most seasoned market
veterans have seen these cycles before and know full well
that genuine buying opportunities are only known in retrospect. It takes courage to sell when everyone else is buying and the same holds true in reverse.
It is reasonable to assume that the current cycle is within months of a market bottom. Shrewd investors would be
wise to consider this economic environment and stand
ready to make strategic plays as we see improvement over
the next 12 to 18 months. Despite cycles, policy adjustments and negative news, the markets always return to
normal. We have been in this current cycle, in one form or
another, for more than two-and-a-half years. Whether the
next several months are marked by a modest or more
severe economic slowdown, real estate investment opportunities are bound to be more attractive than at any time in
the recent past. If the old saying “buy low, sell high” has
any merit, courageous investors know their time is near. ◆
The views expressed in this article are those of the
author and not Real Estate Media or its publications.
Rocky Tarantello is president of Tarantello & Associates, which
is based in Newport Beach, CA. He may be contacted at
rtarantello@tarantello.com.
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