Economic Commentary

We are going to have to pay the price…

Eventually we are going to have to pay the price. The government has reported that our monthly budget deficit was over $100 billion in July. Projections show that we could easily exceed a $500 billion deficit for this fiscal year. What caused these exploding deficits? There are too many factors to even count on one hand–but economic stimulus payments, rescuing financial institutions and fighting a war while the economy slows down are all part of the equation. Why is the government borrowing so much even important? When the government borrows it increases general demand for funds. Essentially, the government is competing against us when we are borrowing to purchase a home. This forces interest rates higher.

The long-term result of big deficits is higher interest rates. However, we need lower rates desperately right now to help the real estate market and thus the economy to recover. It is another catch-22. Higher rates make the deficit worse because the government pays more on the debt. Higher rates also slow down the economy. And that in turn makes the deficit worse. Therefore, the Federal Reserve Board knows we need lower rates to help the economy. Low rates in the face of large deficits can cause inflation to increase and the latest consumer price numbers show that we are indeed in danger of inflation running out of control. This is why the recent drop in oil prices is such good news. The message? We need to find a way to get the budget under control so that we have room to let the economy recover–without the strong medicine of higher rates. Our slow economy will force the President and Congress to consider more economic stimulus payments. Perhaps they should resist the temptation.

Why the Fed's not done cutting rates---What is happening with a market?

The market is past its panic phase, but a grinding slowdown may soon put Bernanke back into easing mode.
By Colin Barr, senior writer

The market is eager to see Ben Bernanke heading for the sidelines. But with the U.S. economy softening, he may not stay there for long.

The Federal Open Market Committee is due to conclude a two-day policy meeting Wednesday afternoon. Trading in futures markets predicts the Fed will cut its key fed funds overnight lending target by a quarter-point, to 2%, and hold the line there in coming months. If the markets are right, the Fed is ready to go on hold for the first time since it began cutting rates last summer in response to troubles in the credit markets. The shift wouldn't come a moment too soon for some observers.

"Lower fed funds?" wrote Bill Gross, managing director at bond investor Pimco in Newport Beach, Calif., in his May investment outlook. "They would, in Pimco's opinion, likely do more damage than good from this point forward." Gross wrote Tuesday it's imperative that the Fed hold rates steady because "foreign and domestic investors are being fleeced with negative real interest rates, and the weak dollar, stratospheric commodity prices and steadily rising import inflation are the result."

But while surging food and energy prices have stolen the headlines this month, some observers believe falling house prices will force a substantial consumer retrenchment that could turn the Fed's attention back to economic growth. So while the Fed will surely be eager to show Wednesday that it hasn't forgotten that inflation is a concern, it could find itself cutting rates again later this year.

"The Fed is very likely going to find a way to signal a wait-and-see approach," Merrill Lynch economist David Rosenberg wrote this week. "That should not, by the way, be confused with an end-of-the-cycle approach."

For now, a pause in Fed action would be a welcome development after months of unrest. In addition to cutting the fed funds rate from 5.25% back in September, the Fed has expanded the scope of emergency loan programs to keep financial institutions lending to consumers and businesses. Since last month's Fed-brokered rescue of Bear Stearns (BSC, Fortune 500), fears of a default at rival brokerages such as Merrill Lynch (MER, Fortune 500) and Lehman Brothers (LEH, Fortune 500) have fallen sharply, judging by trading in the firms' credit default swaps.

But if Bernanke's policies have succeeded in easing the market's liquidity problems, signs of a slowdown in the United States economy have only become more pronounced. Rosenberg points to steep declines in home sales, retail sales and consumer confidence over the past three months. Merrill Lynch now expects second-quarter gross domestic product to fall 2.3% from a year ago, in the first quarterly contraction of U.S. economic output since the 1990 recession.

Rosenberg, who has been saying the Fed will cut its target rate as low as 1% during this cycle, isn't the only one talking about a prolonged slowdown. Merrill chief John Thain made a similar point in the firm's first-quarter earnings call two weeks ago. He said the firm believes the worst of the capital markets dislocation is past, but that related problems could just be coming to light.

"I think the real risk going forward here is how much do all of the problems in the financial and credit markets seep into the real economy," Thain said. "What is the impact of higher energy prices, higher food prices, higher unemployment, and falling home prices on the consumer and what's the impact of that in terms of the U.S. economy and ultimately the global economy?"

More bad news on the home-price front came this week, when Standard & Poor's said prices in 20 major markets dropped an average of almost 13% from a year ago in February. "There is no sign of a bottom in the numbers," said David M. Blitzer, chairman of the Index Committee at S&P. "Prices of single family homes continue to drop across the nation."

Falling house prices are likely to weigh on consumer spending, by preventing homeowners from funding consumption by tapping their home equity. That slowdown makes Dan Libby, a senior portfolio manager of the Sands Brothers Select Access Management fund, skeptical of the prospect that the economy will bounce back fast enough to permit the Fed to hold rates steady for long.

Libby said he believes Bernanke has staved off a deep recession and a market panic by acting as quickly as he did. But he said that he sees little sign that a strong recovery is at hand. While Libby said the Fed doesn't want to repeat its mistakes of the last cycle, when it left interest rates at very low levels even as economic growth picked up, he believes rates could fall to 1.5% before Bernanke & Co. are forced to confront a possible monetary tightening.

"I expect to see a slow, grinding muddling-through type of economy" for the next year or two, Libby said. He added that the Fed must "be careful about sounding too hawkish" when it issues its statement Wednesday laying out how it sees the risks confronting the economy.

That statement is what investors expect to be focusing on at 2:15 p.m. EST, when the Fed announces the results of today's meeting. "What is critical is what signal the Fed provides in the press statement," Rosenberg wrote this week, "and how much emphasis they put on inflation."

First Published: April 30, 2008: 3:42 AM EDT

Will Tax Rebates help Economy?

President Bush said tax rebates will start going out Monday, earlier than previously announced, and should help Americans cope with rising gasoline and food prices, as well as aid a slumping economy.

Please leave your comments here, Marina

Best Cities For Jobs amd its effect on Real Estate Market

Best Cities For Jobs
By Matthew Kirdahy, Forbes.com
October 12, 2007
A mining community has struck gold -- with tech jobs.
Topping the latest ranking of out Best Cities for Jobs list is Salt Lake City. The Crossroads to the West, an economy that has been predominantly driven by the mining and steel industries, has developed into a service-based city and has become a tech sector hub for digerati migrating from Silicon Valley.
The city also had almost the lowest rate of unemployment in 2006, a tick behind Honolulu, and ranked 19th overall.
To compile the rankings for the Best Cities for Jobs list, we used five data points, weighted equally: unemployment rate, job growth, income growth, median household income and cost of living for full-year 2006 (only partial data is so far available for 2007). We measured the largest 100 metropolitan areas, as defined by the U.S. Census Bureau, and obtained the data from Moody's Economy.com.
It's important to note that this list doesn't weight for specifics like job composition or job stability, two significant characteristics that will appeal to any job seeker.
Mark Zandi, chief economist and co-founder of Moody.s Economy.com, said this ranking shows job market strength but acknowledged these limitations. "There's nothing directly about quality or stability of a job market [in the ranking]," Zandi said.
"Some years are more volatile. Boom years are followed by years that don't quite measure up. For most people, a market that is more stable is most desirable, and this analysis doesn't account for that," he said.
Raleigh, N.C., led the pack before the full 2006 data were available. (Forbes.com published a Best Cities For Jobs list in February.)
"They're both strong economies and very solid job markets," Zandi said of Salt Lake City, vs. Raleigh. "It's Yankees-Red Sox. What's the difference? There is no real fundamental reason why Salt Lake is now No. 1."
New to the top 10 are Tulsa, Okla.; Albuquerque, N.M.; Wichita, Kan.; and Oklahoma City for income growth. Las Vegas just missed the top 10 by a spot but showed the second-best job growth. In 2005, it was ranked No. 48.
San Jose, Calif., posted the most significant jump, from No. 91 in 2005 to No. 14 in 2006. The third-largest city in the Golden State has the highest median household income, at $87,869. According to the data, that figure is projected to increase to $92,048 by the end of 2007 and $94,209 in 2008. However, it's also the priciest city on the list in which to live.
Normally, one might expect the great metropolises of the U.S. to rank higher than they do. New York City, arguably the world's financial capital, is listed at No. 63, a substantial change from its 99 ranking in 2005. Job growth overall is expected to increase along with job growth in the Big Apple.
San Francisco is at No. 31, up from 86, while Washington, D.C., fell to 32 from No. 5 in 2005.
Raleigh, however, remained among the five best in the job growth category. Phoenix reigned at No. 1, largely because of housing development. Given the recent housing bust, it will most certainly be dethroned in that category. The same goes for Florida -- Orlando, Sarasota, Tampa and Fort Lauderdale won't be so prominent for 2007 considering the impact of the downtrodden housing market. The next list will be "almost upside down," Zandi said.
In Pictures: Best Cities For Jobs

SLC will drop in price 3.4% (79 place), and Ogden-Clearfield-2.9% (85 place)

Double-digit home price drops coming (http://money.cnn.com/2007/09/19/real_estate/steep_home_price_drops_coming/index.htm)
Three quarters of housing markets - many in crashing Sun Belt areas - face price declines over next few years.
By Les Christie, CNNMoney.com staff writer
September 19 2007: 3:24 PM EDT
NEW YORK (CNNMoney.com) -- Over the next few years, more than three-quarters of the nation's housing markets will suffer some decline in home prices. Many will experience double-digit hits in a forecast that has worsened considerably in recent months.
According to an analysis conducted by Moody's Economy.com, declines will exceed 10 percent in 86 of the 379 largest housing markets. And 290 of the cities will experience price drops of 1 percent or more.

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The survey attempted to identify the high and low points of housing prices in each of the markets, some of which started declining from their peak in the third quarter of 2005. All are median prices for single-family houses.
Nationally, Moody's is projecting an average price decline of 7.7 percent. That's a jump from the 6.6 percent total price drop that the company was forecasting in June and more than twice that of last October's forecast of a 3.6 percent price decrease.
Many of the worst hit cities are in Sun Belt areas that experienced outsized home-price growth during the real estate bubble, according to Arnold Slesers, an associate economist at Moody's. The home price correction in many of these cities will be severe as unsold new homes and leaps in foreclosures add to already big inventories.
The Stockton, Calif., metro area, where Moody's predicts a 25 percent price drop, will be the hardest hit among the 100 most populated cities surveyed.
Prices in Stockton - in California's Central Valley - rose quickly through 2005 as many would-be Bay Area buyers, frozen out of the expensive San Francisco area housing market, moved in. That influx drove up the median, single-family home price to about $375,000. Stockton prices peaked during the first quarter of 2006 and have gone downhill since. Prices likely won't turn around until the end of next year.
Just a tick or two behind Stockton in the Moody's survey were two Florida metro areas, Palm Bay/Melbourne (down 24.9 percent) and Sarasota/Bradenton (down 24.8 percent). All three markets are on almost the same peak-to-trough schedule, with Moody's forecasting that Sarasota will bottom out in the third quarter of 2008, a quarter sooner than the other two.
Outside of the Sun Belt, the worst hit areas are in the Midwest, where auto industry layoffs and plant closings have devastated local economies.
Detroit prices are experiencing the steepest fall of any large Rust Belt city. Moody's forecasts a 21.3 percent drop in Motown, which was hit earlier - in the third quarter of 2005 - and will suffer longer than most places. A turnaround in Detroit isn't expected until early 2009.
Six of the nation's 10 biggest cities face price declines of 1 percent or more with Phoenix, at a 17.8 percent loss, undergoing the worst reversal. The San Diego area will suffer through a 10.9 percent fall, Los Angeles (down 10.6 percent), New York, (down 5.3 percent), San Jose, (down 4.4 percent) and Philadelphia (down 3.1 percent) will also fall.
Among smaller cities, the biggest price declines will be in Saginaw, Mich., where the drop is forecasted at a numbing 31.8 percent. Other devastated markets will be in Punta Gorda, Fla. (down 28.8 percent), Merced, Calif (down 26.5 percent) and Santa Barbara, Calif. (down 25.9 percent).
The markets where Moody's is forecasting growth generally have one thing in common: Home prices in these cities are quite low. The top appreciating market will be the Brownsville/ Harlingen area in Texas, forecast to rise by 7.9 percent between July 2007 and the end of 2009. The median single-family home price there is less than $120,000.
In Killeen, Texas, the No. 2 appreciating market, prices are forecast to rise 4.6 percent and the median home price is about $129,000. Other inexpensive housing markets showing predicted price growth include Buffalo/Niagara Falls, N.Y.; Pittsburgh and Huntsville, Ala.
The table below shows the 100 largest-by-population markets among the 290 metro areas that are forecast to have declines of 1 percent or more. In an analysis that considered mortgage rates, the local job market and other factors, the study makes projections on when those markets would peak, when they would hit their worst point, and how much the total decline would be.
#storyTable .txtrgt3TBL {font-weight:bold;}

100 largest metro areas by population that are forecast to witness a decline in the median existing single-family house price
Rank
Area
State
Peak
Bottom
Peak to bottomhome price decline
1
Stockton
CA
06Q1
08Q4
-25.0
2
Palm Bay-Melbourne-Titusville
FL
06Q1
08Q4
-24.9
3
Sarasota-Bradenton-Venice
FL
06Q1
08Q3
-24.8
4
Reno-Sparks
NV
06Q1
09Q1
-22.4
5
Modesto
CA
06Q2
08Q3
-22.3
6
Detroit-Livonia-Dearborn
MI
05Q3
09Q1
-21.3
7
Fresno
CA
06Q2
09Q1
-20.0
8
Oxnard-Thousand Oaks-Ventura
CA
06Q2
08Q3
-19.2
9
Sacramento--Arden-Arcade--Roseville
CA
06Q1
08Q4
-19.1
10
Las Vegas-Paradise
NV
06Q2
08Q4
-18.7
11
Deltona-Daytona Beach-Ormond Beach
FL
06Q1
08Q3
-17.9
12
Phoenix-Mesa-Scottsdale
AZ
06Q2
08Q2
-17.8
13
Hartford-West Hartford-East Hartford
CT
07Q1
08Q4
-17.6
14
Cape Coral-Fort Myers
FL
06Q1
08Q4
-17.3
15
Visalia-Porterville
CA
06Q2
08Q4
-16.1
16
Riverside-San Bernardino-Ontario
CA
07Q1
09Q2
-15.9
17
Bethesda-Gaithersburg-Frederick
MD
06Q2
08Q4
-15.9
18
Lansing-East Lansing
MI
05Q3
09Q1
-15.7
19
Bakersfield
CA
06Q2
09Q1
-15.6
20
Warren-Farmington Hills-Troy
MI
05Q4
09Q1
-15.4
21
Newark-Union
NJ-PA
07Q1
08Q4
-15.4
22
Vallejo-Fairfield
CA
06Q1
09Q2
-15.3
23
Orlando-Kissimmee
FL
07Q1
09Q1
-15.1
24
Santa Rosa-Petaluma
CA
06Q1
08Q4
-14.0
25
Poughkeepsie-Newburgh-Middletown
NY
06Q2
08Q3
-13.9
26
Edison
NJ
06Q3
08Q4
-13.3
27
Worcester
MA
05Q4
08Q3
-13.0
28
Baltimore-Towson
MD
07Q2
09Q2
-12.8
29
Peabody
MA
05Q4
08Q3
-12.5
30
Nassau-Suffolk
NY
07Q2
09Q1
-12.3
31
West Palm Beach-Boca Raton-Boynton Beach
FL
06Q1
08Q3
-12.2
32
Tampa-St. Petersburg-Clearwater
FL
06Q4
08Q3
-11.7
33
Tucson
AZ
06Q2
08Q4
-11.7
34
Santa Ana-Anaheim-Irvine
CA
06Q2
09Q1
-11.6
35
Washington-Arlington-Alexandria
DC-VA-MD-WV
07Q3
09Q4
-11.5
36
Fort Lauderdale-Pompano Beach-Deerfield Beach
FL
06Q1
08Q4
-11.5
37
Flint
MI
06Q1
08Q2
-11.3
38
Cleveland-Elyria-Mentor
OH
05Q3
07Q4
-11.3
39
San Diego-Carlsbad-San Marcos
CA
06Q1
08Q4
-10.9
40
Los Angeles-Long Beach-Glendale
CA
07Q3
09Q1
-10.6
41
Oakland-Fremont-Hayward
CA
07Q3
08Q4
-10.3
42
Portland-South Portland-Biddeford
ME
06Q1
08Q3
-10.2
43
Rockingham County-Strafford County
NH
06Q1
08Q3
-10.2
44
Miami-Miami Beach-Kendall
FL
07Q2
08Q4
-9.9
45
Boston-Quincy
MA
05Q3
08Q4
-9.4
46
Providence-New Bedford-Fall River
RI-MA
06Q1
08Q3
-9.4
47
New Orleans-Metairie-Kenner
LA
06Q2
07Q3
-9.4
48
Wilmington
DE-MD-NJ
06Q3
08Q3
-9.2
49
Cambridge-Newton-Framingham
MA
05Q3
08Q3
-9.0
50
Youngstown-Warren-Boardman
OH-PA
05Q1
07Q4
-8.7
51
Toledo
OH
05Q4
07Q4
-8.3
52
Salinas
CA
07Q3
08Q4
-8.1
53
Colorado Springs
CO
07Q1
08Q3
-7.8
54
Boise City-Nampa
ID
07Q2
08Q4
-7.7
55
Winston-Salem
NC
05Q2
07Q4
-7.6
56
Denver-Aurora
CO
06Q2
08Q3
-7.6
57
Lakeland
FL
07Q2
08Q3
-7.5
58
Portland-Vancouver-Beaverton
OR-WA
07Q3
08Q4
-7.2
59
Pensacola-Ferry Pass-Brent
FL
06Q1
08Q3
-7.0
60
New Haven-Milford
CT
07Q3
08Q3
-6.7
61
Jacksonville
FL
07Q3
08Q3
-6.4
62
Camden
NJ
07Q2
08Q3
-6.3
63
Minneapolis-St. Paul-Bloomington
MN-WI
06Q3
09Q2
-6.0
64
Albuquerque
NM
07Q3
08Q3
-5.9
65
Tacoma
WA
07Q3
08Q3
-5.5
66
New York-White Plains-Wayne
NY-NJ
07Q3
08Q4
-5.3
67
Grand Rapids-Wyoming
MI
05Q4
07Q3
-5.3
68
Bridgeport-Stamford-Norwalk
CT
07Q3
08Q4
-5.1
69
Lexington-Fayette
KY
06Q1
08Q1
-5.1
70
Fayetteville-Springdale-Rogers
AR-MO
06Q2
07Q4
-4.6
71
San Jose-Sunnyvale-Santa Clara
CA
07Q3
08Q4
-4.4
72
Virginia Beach-Norfolk-Newport News
VA-NC
07Q3
08Q3
-4.1
73
Columbus
OH
05Q4
07Q1
-3.7
74
Dayton
OH
06Q4
07Q3
-3.7
75
Indianapolis
IN
05Q3
06Q4
-3.7
76
Provo-Orem
UT
07Q3
08Q3
-3.6
77
Chattanooga
TN-GA
06Q3
07Q4
-3.5
78
Tulsa
OK
06Q3
07Q4
-3.4
79
Salt Lake City
UT
07Q3
08Q3
-3.4
80
Allentown-Bethlehem-Easton
PA-NJ
07Q3
08Q4
-3.3
81
Philadelphia
PA
07Q3
08Q3
-3.1
82
Lake County-Kenosha County
IL-WI
06Q3
08Q2
-3.1
83
Wichita
KS
07Q1
07Q4
-2.9
84
Seattle-Bellevue-Everett
WA
07Q3
08Q3
-2.9
85
Ogden-Clearfield
UT
07Q3
08Q3
-2.9
86
Milwaukee-Waukesha-West Allis
WI
06Q3
07Q1
-2.9
87
Birmingham-Hoover
AL
06Q3
07Q3
-2.9
88
Jackson
MS
06Q3
07Q4
-2.9
89
Richmond
VA
07Q2
10Q3
-2.8
90
Cincinnati-Middletown
OH-KY-IN
05Q3
07Q2
-2.8
91
San Francisco-San Mateo-Redwood City
CA
07Q3
08Q2
-2.7
92
Albany-Schenectady-Troy
NY
07Q2
07Q4
-2.7
93
Springfield
MA
07Q3
08Q2
-2.6
94
Spokane
WA
07Q3
08Q3
-2.6
95
Omaha-Council Bluffs
NE-IA
06Q2
07Q4
-2.1
96
Kansas City
MO-KS
06Q1
07Q2
-2.0
97
McAllen-Edinburg-Mission
TX
05Q1
07Q2
-2.0
98
Fort Worth-Arlington
TX
06Q2
07Q1
-1.9
99
Oklahoma City
OK
07Q3
07Q4
-1.6
100
Memphis
TN-MS-AR
06Q2
07Q3
-1.1