Local experts answer economic questions
December 2, 2008
– Real Estate Advisor: Duane Andrews, CEO, ClearCapital
–Bank/Investment Advisor: Stefan Murphy, Investment Advisor with Financial Network Investment Corp and Vice President, Investment Services Manager at Plumas Bank
Murphy: Unprecedented upheaval and uncertainty, if I’m using alliteration. Most investors feel like a small boat on stormy seas right now, with the added anxiety of not knowing if that light ahead is a lighthouse or an oncoming freighter. For investors who are still looking long-term, the market may be a very good time to invest as there can be some very smart buys out there with depressed prices.
Andrews: “The only constant is change,” Heraclitus 500 BC.
When markets are stable it is human nature to assume that they will remain stable, and when markets are violently volatile, such as they have been in late 2008, it is easy to fall into the trap of thinking that stability will never return. It is only a matter of time that the pendulum will shift to greater stability.
In 2003, the Dow Average hit a cyclical low of 7,591 on the heels of the “Dot-bomb” market adjustment and a mild recession. According to most economists, the recession that we are experiencing today will likely be much deeper and globally reaching than the 1993 recession. Therefore, it should not be overly surprising that the Dow is hovering around that 1993 low.
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Real estate cycles behave a little differently in that they are longer and slower to change. The United States has had a real estate cycle of roughly 18-year spans starting as early as 1800. This coincides with the most recent cycle. The last time that we saw a rapid increase in foreclosures and declining values was in the years surrounding 1990. Therefore, it should not be overly surprising that real estate values are now in an adjustment period and in many areas are now back at 2003 levels.
Murphy: Continued volatility for the next 2 to 3 quarters. The new Presidential administration will need to work quickly and with confidence to get not only the Senate and House working together, but also the other big nations. Additional drops in the various indices should be expected, but I see a floor approaching. Without a crystal ball, I can only wonder at what point we, as a global economy, will get traction in a forward direction. It is important to note how positively the market can behave in turn-around periods.
Andrews: Real estate speculators and investors drove up the real estate markets over the past 10 years, and they will be the ones leading the recovery. Prices in many areas of the country are now getting to the point where investors can purchase and hold rental property at a break-even or even better (positive monthly cash flows). This investor activity will stabilize local markets and give owner occupant homeowners the confidence to jump back into the market.
Murphy: Well, I think those individuals that rely on cable TV talk shows or internet blogs for their world view are the ones most pessimistic. It reminds me of the people who hoarded gold and canned food preparing for the Y2K calamity that didn’t happen. People who seek out a wide range of information sources (not just 4 different shows on one network) seem to be much more pragmatic about the present and quite hopeful for the coming year or two.
Murphy: One: That the “market” is a good place for my household savings. If you’re paying for your kids’ braces, or a car, or any other purchase in the next four years, that money needs to be in an insured account at a respected bank. The second common misconception is that “my retirement account is now gone.” Investors need to remember that all the years they contributed to their retirement plans in mutual funds, they bought actual shares of those funds, and while the underlying stocks may have declined in value, they haven’t lost shares. When the market rebounds, those prices will reflect that.
Murphy: As controversial as it may be, the Government “bailout” will aid companies immensely by helping to stabilize their cash flow. When they’re no longer making the nightly news, the public will become more comfortable with all the other changes that need to happen: A new international approach to monitoring large financial and insurance businesses; increased shareholder awareness of executive compensation and bonuses; new oversight of the mortgage industry. Like I’ve said at our recent Community Economic Forums, if you drop a busload of kids off at a playground unsupervised, in 30 minutes you’ll have chaos, as at least a couple of the kids are going to be taking all the toys or pushing other kids around. As much as I believe in our free-market system, I want a yard duty supervisor on hand. When we all feel like that supervisor is paying attention, the market will be back to normal.
Andrews: The current proposed moratorium on foreclosures in California and the announced self imposed company-wide moratoriums by Citigroup, Fannie Mae and Freddie Mac are positive steps that will help homeowners as well as the mortgage institutions. In addition to helping stabilize real estate values by reducing the oversupply of foreclosures on the market, it gives the mortgage companies additional time to work with homeowner’s to restructure their mortgages. This moratorium tool may need to be used even more in the coming months.
Murphy: Have a financial plan. If you don’t have one, find a professional to help develop one. Then stick to the plan. Like those people feeling like they’re in a small boat, if they have an experienced captain who’s navigated a course, he may have to alter course to help through the storm, but the destination remains the same.
Andrews: Similar to investing in individual stocks, local real estate markets behave very differently from each other. Financial institutions as well as individual investors should closely monitor the local market movements before making buy/sell decisions. Clear Capital’s HDI (Home Data Index) enables our institutional clients to monitor these changes within very small geographic areas, many times down to the zip code level.
Our other products such as BPOs (Broker Price Opinions) and appraisals, build upon this market data by offering our customers the opportunity to evaluate the physical condition, external influences and value of their properties. We deliver more than 500,000 of these “foot on the ground” reports per year to 75 percent of the major financial and investment institutions in the U.S. and its territories.