Credit Availability will Determine Future

Implications: When making your determination on the future of the economy, how many units will be sold next year, or how many people will move to Phoenix, consider how banks have reacted to bad news this year; the statistics above; and how lenders may react to bad news next year.

Analysis:

If you are one of those people still on the fence, one of those questioning if we could find ourselves in a recession next year, one of those wondering how in the world Belfiore Real Estate Consulting (“BREC”) could conclude that Phoenix population growth could shrink to 78,000 people and only 26,525 single-family home permits might be issued in 2008 (our latest forecasts, population based on Moody’s Economy.com projections), pick up a copy of today’s Wall Street Journal. The subject article provides an explanation.

As Karen Weaver, international research leader at Deutsche Bank AG puts it in the article, “Mortgages are still deteriorating at an accelerating pace, and that’s scary. We haven’t come near a stabilization, and we expect things to get worse as the bulk of resets have yet to come”. And, J.P. Morgan Chase & Co. analysts recently said, as quoted in the article, “As bank losses continue, we expect bank lending capacity to be reduced”. BREC’s translation: Lending standards will tighten in the future. I have long shared my belief of, “he who controls the money, controls everything”. In this case, the “he” is the banks, and the “everything” is the economy. The housing market and overall economy will deteriorate further if credit continues to tighten.

According to the article, citing First American LoanPerformance, 20% of subprime mortgage loan holders were more than 60 days behind in August. Mark Zandi, economist at Moody’s Econoy.com, estimates in the article that mortgage losses could hit $225 billion. Zandi believes $2 trillion in wealth, in the form of home values, will be wiped out by the bottom of the fourth quarter of 2008.

All of these statistics scare lenders into becoming more conservative, and ultimately into requiring higher FICO scores for loans and higher down payments for home purchasers. While most industry players believe some tightening was necessary (from mid-2005 lending standards), inevitably lenders become overly-cautious, and make it impossible for less risky buyers to purchase homes, and unnecessarily push the economy downward.

When making your determination on the future of the economy, how many units will be sold next year, or how many people will move to Phoenix, consider how banks have reacted to bad news this year; the statistics above; and how lenders may react to bad news next year. Consider what will happen if loan standards become more stringent than they are today.