2007 November

The facts speak loud and clear…The questions floating around- Is the US Housing market going to spiral out of control and destroy the US economy? What are the long term effects of the misguided leaders of the subprime lending industry? Will the “Credit Crunch” force the US into a major recession?… and on and on.

Let me give you my short version of the answer- NO, NO, NO, NO, NO

The Long Version… The US Housing market is still robust- 2007 will close out at approximately the same level as we saw in 2002 (which was a record setting year). When put in perspective, it’s not that bad. We are simply seeing a market correction and shrinkage to levels that we should have been operating within.

HUD released figures in November so that we can really see how bad the subprime collapse really was. Figures show that that subprime mortgages make up about 15% of all mortgages, and out of that 15% of mortgages, only about 12% will result in “full foreclosure”—- That’s only 2% of all the mortgages in the US. Another point of interest is that most of those foreclosures have been isolated to Florida, California, Nevada, and New England— The price of real estate in these areas was grossly inflated in recent years.

The Fed stated on 08/07/07 that “there is no recession”… and, ironically, we are seeing a labor shortage in the US. Corporate Profits are setting new record levels each day, and the Fed and other foreign governments are ready to infuse the Us economy with another $300 billion if the economy shows signs of stumbling again.

 Sounds to me like we are in pretty good shape as a whole… but, you know that good news doesn’t make for as flashy of a headline. That’s why I rely on the facts rather than the news (and all of it’s hidden agendas). I’ll close with a quote from one of the few intelligent members of the media… Ben Stein.

Mr Stein said on August 12, 2007: “Some smart, brave people will make a fortune buying in these days and then we’ll all wonder what the scare was about, in the first place?”

We are not facing our doom, we are simply on the edge of change.

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To begin, the standing total for lending institutions that have folded is currently: 185

I am sure that the former employees of these companies would argue that any relief would be “too little, too late”… However, there have been several interesting events in recent weeks that could have both positive and negative effects on the current credit situation.

The Federal Reserve has stepped in and begun to lower the Fed Funds Rate, which is in turn reflected in the “Prime” rate available to consumers. This move by the Fed is typically a mechanism used to minimize the effects of inflation. It does, however, influence the movement of money between the stock and bond markets in the US. This movement of money and general activity in the markets actually goes a long way toward building consumer confidence and subsequently shift the American public out of the “credit panic mode”

Interestingly, investors and investment funds are finding ways to regain some of the losses they incurred due to the collapse of the sub-prime/Alternative lending industry. Large US corporations are issuing corporate bonds with some of the highest yields (profit to the bond holder/consumer) in those companies’ history. Investors are demanding to make more money in order to assume the risk of purchasing corp bonds over US Treasury Bonds. To me it seems like the public is telling “big business” that they will be glad to help keep it afloat, but they’re going to need to make back some of the money that they previously lost. On the flip sde of that, “big business” is waving their white flag and surrendering a larger portion of their profits in order to gain public support and to keep the corporation strong enough to weather the rest of the storm.

Wow!… It actually seems like the two are working together to pull each other through the muck.

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