Technology TransactionsHas The Economy Reached Bottom?
Is it true we"ve reached bottom, that this is as bad as the economy will get for the next several years?
There is surely some evidence to support the bottom-is-now theory -- the stock market has reached levels not seen since September 11th, mortgage rates have pushed up during the past two weeks, retail sale reports after Thanksgiving looked strong -- but with big discounts storekeeper profits are less certain.
And, of course, our efforts in Afghanistan have been an enormous success.
For those with an interest in real estate the question of which way the economy is critically important. A strong economy means generally rising prices and home equity, something owners and sellers prefer. A weak economy, a recession, typically means less competition for homes, greater affordability for purchasers, and a situation which tilts the marketplace toward buyers.
But while there are many signs that the worst of the economic slowdown has passed, there are also signals that perhaps we have not reached bottom.
We have, for example, lower interest levels, rates which should encourage business expansion -- but many industries already have excess capacity, so there is little incentive to buy new equipment or hire additional workers.
There have been substantial layoffs in many industries, but replacement positions with equal compensation are difficult to find. In the travel and lodging industries, in particular, the last few months have been enormously difficult -- and travel and tourism are major industries in many areas.
Japan"s economy has been sluggish since 1989 and now Germany, the world"s third-largest economy, has reported a .1 decline in the third quarter. To encourage the purchase of our goods and services overseas it would be better to see economic expansion in major foreign markets.
As to the stock market, it is sometimes said that the market runs about six months ahead of general economic events -- under this theory if the market is now rising we should see the economy expanding in April or May. The catch, of course, is that Wall Street can be terribly wrong -- just look at the various predictions, multiples, and models associated with any number of Internet companies and telecommunications firms during the past few years.
If you believe that traditional price-to-earnings ratios still have some validity, than today"s share values are discomforting. Today"s multiples are "high" relative to past standards in large measure because profits are low -- when there are profits.
The President properly reminds us that the fight against terrorism is a long-term battle. Destroying the Taliban and much of the Bin Laden organization is likely to reduce the threat of terrorist activities against the U.S. But whether such activities will completely stop is an open question, and a major terrorist action could have serious consequences.
As a nation, we now have a new set of costs -- security in more places than ever in our recent past. The economics of many businesses have changed, economics which we may not yet understand. For instance, will higher costs filter through the economy and lead to higher prices? Will higher prices lead to significant inflation and steeper interest rates?
Given increased expenses for security, the airline bail-out, assistance to New York City, and enlarged military costs it follows that the federal budget surplus will be reduced and perhaps even eliminated. At the state level, virtually all jurisdictions have higher security costs and will feel the impact of larger unemployment rolls -- more expenses and reduced tax revenues.
The bottom line looks like this: We are at a place, economically, where the terrain is new and different. We may not have a model or past experience which properly duplicates our situation today. Thus predicting whether or not the economy has reached bottom is perilous.
That said, while we may not know what will happen in the future, we can see what"s happening today. The #1 reality for real estate is that interest rates are low, roughly 85 basis points below interest levels at this time last year, according to HSH Associates. This means if your income is the same or larger when compared with last year, and if your credit standing has remained stable, you should be able to borrow at significantly less cost -- or borrow more.
A quick example: $100,000 financed over 30 years at 7.90 percent requires monthly payments of $726.80 for principal and interest. At 7.05 percent -- 85 basis points lower -- the monthly cost drops to $668.66. That"s a savings of $58.14 a month or $697.68 a year.
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