Posts Tagged ‘recovery’

Median Family Wealth Slid 40 Percent During Recession

Tuesday, June 19th, 2012

While the American public was bailing out Wall Street, those same taxpayers saw their families’ net worth decline by nearly 40 percent. The recession took roughly 20 years of Americans’ wealth, according to government data, with middle-class families faring the worst.  According to the Federal Reserve, the median net worth of families plummeted by 39 percent in just three years, from $126,400 in 2007 to $77,300 in 2010.  That means that American families median worth has reverted to 1992 levels.

The study is one of the most comprehensive examinations of how the economic downturn altered family finances.  Over three short years, Americans watched progress that took a generation to accumulate fade away.  The dream of retirement that relied on the expected rise of the stock market proved deceptive.  Homeownership, once viewed as a source of wealth, became a burden because the market collapsed.  The findings emphasize how deep the wounds of the financial crisis are and how healing is impossible for many families.  If the recession set Americans back 20 years, economists say, the road ahead is certain to be a long one.  And so far, the country has experienced only a halting recovery.  “It’s hard to overstate how serious the collapse in the economy was,” said Mark Zandi, chief economist for Moody’s Analytics.  “We were in free fall.”

Net worth is defined as the value of assets like homes, bank accounts and stocks, minus mortgage and credit card debt. The Fed found that median home equity declined from $95,300 in 2007 to $55,000 in 2010, a 42.3 percent drop.  Home equity is defined as the home’s value minus how much is owed on the mortgage.  According to the Fed, median incomes fell from $49,600 in 2007 to $45,800 in 2010, a 7.7 percent drop.

Additionally incomes fell the most among middle-class families.  The wealthiest 10 percent saw their median income decline 1.4 percent over the three years, while families in the second and third quartiles experienced a drop of 12.1 percent and 7.7 percent.  The lowest-income Americans saw their paychecks fall by 3.7 percent.  Families were less confident about how much income they could expect in the future.  In 2010, slightly more than 35 percent said they did not “have a good idea of what their income would be for the next year,” an increase over the 31.4 percent reported in 2007.

Although declines in the values of financial assets or business were important factors for some families, the decreases in median net worth appear to have been driven most strongly by a broad collapse in house prices,” according to the Fed.  The survey’s findings cast a harsh light on the damage done to the economy by the recession and which helps to explain the exasperatingly slow pace of recovery.  The housing market’s collapse was at the core of the recession, during which the economy contracted approximately 5.1 percent between the 3rd quarter of 2007 and the 2nd quarter of 2009, and the unemployment rate soared 4.5 percent to 9.5 percent.  “Housing was of greater importance than financial assets for the wealth position of most families,” the Fed said.  “A substantial part of the declines observed in net worth over the 2007-10 period can be associated with decreases in the level of unrealized capital gains on families’ assets.”

Incomes improved in late 2011 but have begun falling again this year,  said Gordon Green, cofounder of Sentier Research.  The decline is larger and more unrelenting than in the recovery after the 2000 recession, when family incomes returned to previous levels within 18 months, Green said.  “Incomes went down more during two years of this recovery than during the recession itself,” he said.  “I don’t think we’ve seen anything like this.”

The impact a given family felt depended on where they live, how much they earn and what kind of investments they had, said Scott Hoyt, an economist at Moody’s.  “Richer people owned more bonds that didn’t get killed,” Hoyt said.  “For middle-income households, their primary asset is their house at the low end and the government stimulus backstopped incomes.”

Household net worth reached a high point of $66 trillion before the recession hit in December 2007 and sank to just $54 trillion in 2008, according to the Fed.  It was $63 trillion in the 1st quarter this year, but that doesn’t reflect the stock market’s volatility since then.  The Fed estimates Americans lost $7 trillion in home equity because of the housing bust that followed a significant increase in mortgage defaults after 2006.

As Spring Arrives, Companies Are Hiring Again

Monday, March 21st, 2011

January’s big snowstorms on the East Coast contributed to the creation of just 63,000 jobs nationally in that month.  In February, however, businesses started to hire workers. The economy added 192,000 jobs, the best showing since May of last year, the Bureau of Labor Statistics reported Friday.  The unemployment rate – which is politically important — fell from nine percent to 8.9 percent.  Economists said the employment numbers were “solid” but not “ebullient.”

The optimistic view is that the economy has at long last turned the corner.  “I think the economy has not only turned the corner: I am expecting the employment gains to accelerate slightly,” said Sung Won Sohn, a professor of finance at California State University, Channel Islands.  “We have definitely reached the point where the economy is self-sustaining.”  Sohn thinks that the Federal Reserve can halt its monetary stimulus program for the economy.  “There is a growing possibility they will cut short their bond-buying program before the end of June,” he said.  Improved job growth would also help cut the federal budget deficit, since income-tax revenues would rise and requests for unemployment benefits will be reduced.  States and cities would get a boost for the same reasons.  “The chances are the revenue projections may be slightly better than the government anticipates,” according to Sohn.

Other economists were not as sanguine about the pace of recovery.  “If we see 200,000 jobs added in March, April, and May, that will convince market participants that the recovery is self-sustaining,” said John Canally, economist at LPL Financial in Boston.  “You can’t make that call just by looking at February, because the numbers may have been distorted by the weather.”  According to Canally, the most accurate indications of how the weather affected the numbers were in construction, which gained 22,000 jobs in February after falling 33,000 in January; transportation, which added 22,000 jobs compared with losing 44,000 in January; and leisure and hospitality, which added 21,000 jobs after dropping 3,000 the previous month.  “All of those swings are because of the weather,” he said.

Manufacturing added 33,000 jobs in February, primarily in producing durable goods such as washing machines and refrigerators.  This comes as no surprise to Frank Fantozzi, president of Planned Financial Services in Cleveland.  “In talking to our corporate clients, we were hearing there was definitely hiring going on and activity improving,” Fantozzi said.  “My litmus test is when our corporate clients from manufacturing to services send me e-mails saying they are looking to hire someone and asking if we have anyone in our network who would qualify.”

Not surprisingly, the Obama administration was cheered by the February numbers.  “We are seeing signs the initiatives put in place by this Administration – such as the payroll tax cut and the investment tax credit – are creating the conditions for sustained growth and job creation,” said Austan Goolsbee, chairman of the Council of Economic Advisers.  Republicans countered, suggesting that the improvement was because they had convinced the Obama administration to extend the Bush-era tax cuts for two years.  “Removing the uncertainty caused by those looming tax hikes provided much-needed relief for private-sector job creators in America,” said House Speaker John Boehner (R-OH).

According to Esmael Adibi, an economist at Chapman University in California, “Three sectors – construction, financial activities and government – are taking the oomph out of the recovery.  Job creation is what is going to bring housing back, but with this pace of job creation, we’re not going to see a quick turnaround.”

Santa Delivered Coal to New Homebuilders

Tuesday, February 8th, 2011

New-home construction fell 4.3 percent in December compared with November to its lowest level in more than a year to a seasonally adjusted rate of 529,000 starts for 2010.  December saw the lowest level of new home starts since October of 2009, according to Department of Commerce statistics.  Starts ended the year 8.2 percent below December of 2009 and the chance that the numbers will rise anytime soon is highly unlikely.

December’s poor showing reflects a decline in single-family housing starts, which comprise the lion’s share of new residential construction, with construction falling nine percent to 417,000 units, the lowest level since May of 2009.  Demand for new housing is a victim of the recession and the large supply of existing homes on the market.  The high number of foreclosures also has impacted new residential construction.  Stricter lending standards and the fear of unemployment are also slowing new home sales.  Sales were boosted for a time last year when the federal government offered a first-time homebuyer tax credit.  Once that incentive expired, sales declined.

Another reason behind the slow pace of new home sales is likely the surplus of foreclosed homes that are on the market at extremely attractive prices.  Prices in 20 major metropolitan areas declined during the same time period, according to the Standard & Poor’s Case-Shiller Home Price Index.  The index is only 3.3 percent above its nadir, which it reached in April 2009 and has fallen 1.6 percent from a year ago.  There are several areas, however, where prices have stabilized and are not reflected in the Case-Schiller Index.

The slowdown in new home construction also raises the issue of what is happening to the acres of developed land that are shovel-ready?  In some cases, new builders are buying the vacant lots from banks and developing lower-cost housing than the original concept.  Builders are buying lots at 50 percent their original prices from lenders who want to move distressed construction loans off their books.  Developments are being revived in markets such as Florida, California, Las Vegas, Utah and the suburbs of Washington, D.C., according to Brad Hunter, chief economist for Metrostudy, a Houston-based housing researcher.  “This is a natural progression of the cycle,” Hunter said.  “Projects fail, the price of the asset drops until it reaches a point where it’s profitable for someone else to pick it up and remarket it.  They reposition the project and then what was formerly infeasible, is feasible.”

Developers are building smaller, more efficient homes that cost less to build, according to Tom Dallape, principal at the Hoffman Company, an Irvine, CA-based brokerage advisory company.  “They’re tailoring them to the market,” he said. “The average new house used to be 3,000 square feet.  Today, it’s 2,100.”

In another example, a homebuilder sold 1,300 acres of land and more than 1,500 homes sites — property once valued at $110 million for just $12.7 million. That amounts to just 12 cents on the dollar and is symptomatic of the level of financial pain banks must endure to stabilize themselves in a insecure economy.

Increased Consumer Spending Lifts U.S. 2010 GDP

Monday, February 7th, 2011

road-sign-blogThe United States’ 2010 GDP soared at an annualized rate of 3.2 percent, as consumer spending rose by the greatest levels in four years.   “The consumer really drove the economy in the 4th quarter,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.  “The economy has moved beyond recovery to a stable state of growth.”  For all of 2010, the economy expanded 2.9 percent — the biggest one-year jump in five years — after contracting 2.6 percent in 2009.  The volume of all goods and services produced climbed to $13.38 trillion, for the first time surpassing the pre-recession peak reached in the 4th quarter of 2007.  Tiffany & Co. saw a significant increase in the sale of fine jewelry.  Apple reported record 4th quarter sales as consumers bought 7.73 million iPads as holiday gifts.  Ford Motor Company’s sales have been so good that the automaker plans to add an additional 7,000 manufacturing jobs over the next two years.  The automaker, which did not undergo bankruptcy, did lay off some salaried employees in 2008 as part of a restructuring in the face of slumping sales.

Exports also helped boost the American economy which should boost job creation over the next several years.  “The U.S. is expected to be one of the fastest growing developed countries in 2011, largely reflecting the contrast of the ongoing stimulus with other countries, such as the U.K. and other heavily indebted European nations, where austerity measures designed to reduce deficits are stifling domestic demand,” said Chris Williamson, chief economist at Markit, a London-based research firm.  “The acceleration of the U.S. GDP in the 4th quarter, and the changing composition of growth, raises hope that the economic recovery will move into a more self-sustaining phase in 2011 and generate sufficient jobs to reduce unemployment.”

Even the Federal Reserve, which renewed its commitment earlier this week to buying $600 billion in government bonds, agrees that the report shows the economy ended 2010 with moderate strength and breadth, but not enough to bring down the 9.4 percent unemployment rate anytime soon.  Personal consumption spending contributed slightly more than three percent to 4th quarter growth.  That is in line with retailers’ reports showing a respectable holiday shopping season.   Whether that level of spending holds up remains to be seen.  Many retailers remain cautious in their forecasts and report that consumers are still bargain-hunting.  As gasoline prices rise, disposable income may be limited.

Alter Now does see it as important to note the correlation with an overall increase in consumer credit debt in December, the first spike since 2008.  According to the Fed, overall consumer credit debt rose by 6.1 billion, or 3.0%, to $2.41 trillion while revolving credit debt (primarily from credit cards) rose by $2.3 billion (3.5%) to $800.5 billion. No revolving credit rose by $3.8 billion, or 2.8%, to $1.61 trillion.  While the spike in GDP is good news, let us remember that it is still being driven by deficit spending.

Compare the U.S. GDP with that of other nations last year and it’s clear who is winning.  China, for example, is expected to report an 8.5 percent jump in its GDP, not unexpected in the world’s fastest growing economy.  Japan’s real GDP was 3.9 percent higher in annualized terms for the 3rd quarter, beating estimates for a 2.5 percent rise for the year.

In the U.K., the economy shrank by 0.5 percent in the 4th quarter, compared with a 0.7 percent increase in the 3rd quarter.   By contrast, the nation with Europe’s largest economy – Germany – recorded a 3.6 percent growth rate in its GDP in 2010. 

Will the Stock Market Recovery Continue in 2011?

Tuesday, January 11th, 2011

Will the Stock Market Recovery Continue in 2011?  With the stock market ending its best December since 1987, there is hope that 2011 will see a strong Wall Street recovery.  One source of hope is the fact that the Standard & Poor’s 500 Index has returned to its pre-Lehman Brothers level.  It joins the Dow Jones Industrial Average, the Nasdaq Composite Index and the Russell 2000 in seeing strong improvements in their levels.  Stocks have risen 20 percent in just four months.

The recent surge was helped by performance chasing.  The proportion of money managers lagging their benchmarks by five percent has increased from 12 percent at the end of October to 22 percent in the middle of December and trimming their risk exposure “on the presumption that the markets had reached the upper end of a trading range,” said JPMorgan’s Thomas Lee.  BTIG’s Mike O’Rourke, chief market strategist, believes the purchase of hard assets as a hedge against depreciating currencies has helped drive the price of oil to above $90 per barrel.  He also points to high silver and copper prices – with the latter at an all-time high.  “There is no doubt commodities have performed well even though the dollar has not broken down, but the question is how long will it take before speculators bail on the trade,” O’Rourke said.

Wall Street market strategists are consistently bullish, generally forecasting 2011 gains of 10 to 17 percent, with Deutsche Bank forecasting gains of as much as 25 percent Main Street investors are equally upbeat: Recent polls indicate the greatest level of optimism since 2007, with the bullish crowd surging to 63 percent of those queried, with just 16 percent claiming bearishness.

Threats To the Economy Averted

Tuesday, October 19th, 2010

Good news for the economy!  Deflation is unlikely and jobless claims are shrinking.  Two significant threats to the economy are receding, although the recovery still has a long way to go. One of the threats was the specter of deflation – which has not occurred since the 1930s – now belied by the 0.3 percent inflation rate reported for August, and driven primarily by rising food and energy prices, according to the Bureau of Labor Statistics. The second is that another round of mass layoffs looks unlikely now, given the third drop in jobless claims in four weeks.

First-time applications for unemployment benefits fell by 3,000 to a seasonally adjusted 450,000 recently, the lowest level in two months, according to the Department of Labor.  In Illinois, for example, the unemployment rate fell to 10.1 percent in August, the eighth straight month that the rate was steady or declined.

Chris Rupkey, an economist with Bank of Tokyo-Mitsubishi UFJ, described August’s spike in unemployment claims a “false alarm.  The labor markets are stable and companies are not increasing layoffs.”  David Resler, chief U.S. economist at Nomura Securities agrees, noting that the August spike likely resulted from temporary census jobs that came to an end.

Two New Studies: Commercial Real Estate Recovery Seen in 2011

Wednesday, February 24th, 2010

Two major new reports see recovery in 2011.  Commercial real estate will begin its long-awaited recovery in late 2011 or 2012, according to the fourth-quarter Korpacz Real Estate Investor Survey, which questioned more than 100 real estate investors, including REITs, pension funds, private equity firms and insurance and mortgage companies.  Confirmation is provided by a PricewaterhouseCoopers survey, which notes that Washington policymakers are increasingly tweaking the strings that impact pricing.

According to the Korpacz survey, “Rental rates will continue to decline until strong, consistent job growth resumes.  With $1.4 trillion of commercial real estate debt maturing by the end of 2012, some property owners will not be able to survive the downturn.  Problems related to refinancing that debt could further delay a recovery in the sector.”

Government and regulatory policy will have greater impact on pricing than occupancy levels or rents, according to Real Capital Analytics, Inc.  “Policymakers control what happens to commercial mortgages in default,” Robert White, the president of Real Capital Analytics, wrote in a report.  They “have encouraged loan modifications and extensions even in cases where loans are above a property’s current value.  Tax policy, meanwhile, has made it easier for special servicers to negotiate with borrowers, a move meant to prevent a wave of maturity defaults and property fire sales.  Keep rates low and easing restrictions on foreign capital will also influence industry prospects.”  Real Capital Analytics notes that commercial mortgage-backed securities (CMBS) hold 42 percent of distressed loans; American banks 31 percent; and foreign banks 13 percent.

Investors Lining Up for U.S. Real Estate

Wednesday, January 20th, 2010

Investors placing their bets on the United States once again.  Foreign banks, American private equity firms and a leading Chinese sovereign wealth fund have been investing in commercial real estate in the United States in the hope that interest rates stay low.

This increasing interest from investors could be a sign that the market is experiencing some stabilization.  According to Bob Steers, co-chairman of Cohen & Steers, a real estate investment firm, “We believe the real story is that capital is ready to buy, even though it may not be so visible today.”  As one example, the state-owned China Investment Corporation has enlisted several investment firms to identify commercial real estate opportunities in the United States.

Another sign of incipient recovery is the fact that Colony Capital won a Federal Deposit Insurance Corporation (FDIC) auction for $1 billion worth of commercial property loans previously held by banks that had failed.  The transaction valued the loans at 44 cents on the dollar and is structured so the FDIC put up $136 million owns 60 percent of the equity.  Los Angeles-based Colony put up $90 million for a 40 percent share.  Colony’s founder, Tom Barrack, said the investment is “an implicit bet that rates stay low.”

In another example, JPMorgan Chase raised $625 million for Inland Western, which put $500 million into CMBS.  The deal was significant because it closed without assistance from the Term Asset-Backed Loan Facility (TALF).

Two New Studies: Commercial Real Estate Recovery Seen in 2011

Thursday, January 7th, 2010

Two major new reports see recovery in 2011.  Commercial real estate will begin its long-awaited recovery in late 2011 or 2012, according to the fourth-quarter Korpacz Real Estate Investor Survey, which questioned more than 100 real estate investors, including REITs, pension funds, private equity firms and insurance and mortgage companies.  Confirmation is provided by a PricewaterhouseCoopers survey, which notes that Washington policymakers are increasingly tweaking the strings that impact pricing.

According to the Korpacz survey, “Rental rates will continue to decline until strong, consistent job growth resumes.  With $1.4 trillion of commercial real estate debt maturing by the end of 2012, some property owners will not be able to survive the downturn.  Problems related to refinancing that debt could further delay a recovery in the sector.”

Government and regulatory policy will have greater impact on pricing than occupancy levels or rents, according to Real Capital Analytics, Inc.  “Policymakers control what happens to commercial mortgages in default,” Robert White, the president of Real Capital Analytics, wrote in a report.  They “have encouraged loan modifications and extensions even in cases where loans are above a property’s current value.  Tax policy, meanwhile, has made it easier for special servicers to negotiate with borrowers, a move meant to prevent a wave of maturity defaults and property fire sales.  Keep rates low and easing restrictions on foreign capital will also influence industry prospects.”  Real Capital Analytics notes that commercial mortgage-backed securities (CMBS) hold 42 percent of distressed loans; American banks 31 percent; and foreign banks 13 percent.

Stock Market Heads Toward 10,000 Mark

Monday, September 28th, 2009

The recent upward trend of the stock market has led investment experts to believe that the Dow Jones Industrial Average will soon pass the 10,000 mark  for the first time in a year.

Craig Peckham, equity trading strategist at Jeffries & Co., and Michael Cuggino, president and portfolio manager at Permanent Portfolio Funds, believe it will happen sooner rather than later.

invest“I think we’ll see [10,000] before the end of the year,” Cuggino told CNBC.  “We’re going to continue to see momentum in earnings growth in the third and fourth quarters and that’s going to propel stocks further.”

Cuggino said the markets may be in for a wild ride but they have come a long way in 2009, but he believes economic trends are “ones of growth” and will rally the markets.

Peckham believes the Dow will reach 10,000 in a few weeks.

“My bigger question is that when we will see earnings results in the third quarter — the bar has been raised pretty dramatically and the expectation is for a much more significant improvement in the topline from corporate America,” Peckham said.  “So it’s imperative that we have a real good sense of where expectations lie going into the third quarter, relative to stock prices.”

The harder question is when we will see the buoyant stock market and recuperating earnings affect the labor market.  This is the real indication of recovery.