Commentary on the Real Estate Market - June 2009
by Peter L. Zachary, MAI, MRICS
The biggest news since my last commentary was the filing of bankruptcy by Chrysler and General Motors. The May 1, 2009 issue of the New York Times had a front page article entitled, "Chrysler Files for Bankruptcy: UAW and FIAT to Take Control". The June 2, 2009 issue of the New York Times had a front page article entitled, "Obama is Upbeat for GM Future on Day of Pain Company Filing for Bankruptcy, Says It Will Shut 14 Plants and Cut Jobs". The article states that "after the factory closings, which will leave 12 in Michigan, GM will have fewer than 40,000 workers building cars in the United States - one-tenth of a work force that in the 1970's numbered 395,000 people". According to these articles, the new owners of Chrysler will be the UAW (United Auto Workers) 55%, FIAT 35%, U.S. Government 8%, Canadian Government 2%. The new owners of GM will be UAW 18%, U.S. Government 60%, Governments of Canada and Ontario 22%. The United States will provide $30.1 billion so GM can operate in bankruptcy in addition to the $19.4 already given and Canada will provide $9.5 billion in lending.
The June 2, 2009 New York Daily News stated that GM shareholders were wiped out as the company was delisted for the New York Stock Exchange, 500,000 retired auto workers will see their benefits cut, 2,600 dealership employing 100,000 people will be cut loose and may close. The New York Post stated on June 1, 2009 that 21,000 GM workers would be lost.
This month was a sad month for the American auto industry. It is ironic that the UAW are stockholders in the new GM and Chrysler since they caused the decline of the American auto industry with the inferior cars they made together with their high wages. Until the year 2000, I always leased American cars. Since then, I have leased Japanese cars and will probably continue to do so.
The May 10, 2009 issue of the New York Daily News had an article, "In Search of the End". It talked about how Chairman Ben Bernanke is making positive remarks about the economy, most notably about the "stress test" that many banks were given and how 9 of the 19 biggest banks got passing grades with "no needs improvement remarks". The bottom of the article had "9 Recovery Signs to Watch For". They are:
- The Job Market: When the month-to-month job loss numbers in the city and nation start getting lower - instead of climbing.
- The Stock Market: Sustained upward movement - bull markets - historically start six months before recessions end.
- Gross Domestic Product: It's decreasing at an annual rate of 6.1%. When that rate starts to turn positive, it's another sign.
- Consumer Confidence: Consumers who lose confidence stop spending. Indices were way down for months, flattened out in March, but soared in April, an encouraging sign.
- Retail Sales: Sales were down 8.8% for the first three months of the year, compared to that period in 2008. Take out plunging car and gas sales and it doesn't look so bad.
- Home Sales: Plummeting home sales fell another 3% from February to March. Only 1,195 homes were sold in Manhattan in the first three months of this year, a 47% drop. Not a good sign, but April figures show the housing market is stabilizing.
- Housing Starts and Commercial Leasing: Building permits and home construction nationwide fell 51% in the first three months of the year. Permits plunged some 80% in the same period in New York City, and midtown's vacancy rate jumped over 50%. When building and leasing pick up, recovery is in sight.
- Corporate Profits: Financial firms, the mainstay of the city's economy, saw profits decrease $178.7 billion in the fourth quarter. When that reverses or slows, the economy is improving.
- Travel: Tourism, the hotel occupancy rate and room rates are down in the city. When the airports and hotels get more crowded, a turnaround is near.
On Saturday, June 6, 2009, the New York Times front page article, "Hints of Hope in Jobless Data Even as Rate Jumps to 9.4%". The article stated that "the American economy shed 345,000 jobs in May and the unemployment rate spiked to 9.4%, but the losses were smaller than anticipated, amplifying hopes of recovery. "The free fall that the job market was in does finally appear to be tapering off", said Stuart G. Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. "It's the prelude to an economic and job recovery later this year". The article continues: "'Today is a sign that we are making progress,' said Christina Romer, a White House economic adviser. But experts emphasized that the slowing pace of deterioration did not alter the reality that the economy remained very weak. 'These are still terrible numbers,' said Ian Shepherdson, chief United States economist at High Frequency Economics. 'We're a million miles away from a recovery.'
Rather than a sign of renewed vigor, the May jobs report suggests merely the end of panic unleashed last fall, when the investment house Lehman Brothers crumbled, freezing credit through much of the economy. 'That wild disgorging of inventories and workers that we saw in the aftermath of Lehman, what you're seeing is the reversal of that dynamic,' said Robert Barbera, chief economist at the research trading firm ITG. 'You had companies throughout the world that suddenly had serious concerns about access to capital, and they slashed spending and cut workers well beyond any connection to demand. There's now a better tone to the data.'
But if primal fear has ended, comfort is nowhere to be found. Home prices appear to have hit bottom in some areas of the country, but construction remains weak. The auto industry and retailing remain in distress. The job market is likely to remain in the doldrums for many months, Mr. Barbera said. A home foreclosure crisis is growing, thus far unchecked by an Obama administration program aimed at stemming the problem. As more foreclosed properties land on markets, real estate prices are falling further, adding to the losses and uncertainties confronting banks. 'That's now the most significant threat to the economic recovery,' said Mark Zandi, chief economist at Moody's Economy.com.
For more than a decade, economic growth and attendant American job opportunities were fueled by swelling wealth and liberal access to credit. As home prices soared, homeowners availed themselves of myriad forms of credit that turned increased real estate values into cash. They sprinkled those funds on an array of industries, generating jobs from auto factories and lumber mills to construction companies and restaurants. Now, as paychecks disappear and home prices fall, peoples are increasingly inclined to save - a rough transition in a country in which consumer spending makes up roughly 70 percent of economic activity.
'People are not going to be moving forward based on housing wealth, and they're not going to be taking on debt,' said Lawrence Mishel, president of the labor-oriented Economic Policy Institute in Washington. 'They've got to get wage growth.' Yet wage growth has been stagnating even as gasoline and medical costs rise, putting pressure on household finances. Average hourly wages were 3.1 percent higher last month than they were in May 2008, but the month-to-month increases in April and May were just 0.1 percent, to a seasonally adjusted $18.54, from $18.52, according to the Labor Department. Wages for manufacturing workers fell 0.1 percent."
In my opinion, the current economic crisis is not going to make wage growth a very likely outcome. The May 11, 2009 issue of the New York Times stated, "Obama Advisor Sees Unemployment Rising Until 2010". The article stated, "Speaking on C-SPAN, Christina Romer, chairwoman of the White House Council of Economic advisers, said that she expected the economy to begin growing in the fourth quarter of this year. Ben S. Bernanke, the Federal Reserve chairman, made a similar prediction last week. The article continued:
"Ms. Romer also said that she expected unemployment to rise even after the economy turns, saying that gross domestic product has to grow at a rate of about 2.5 percent before unemployment will fall. Before that happens, she said, it is 'unfortunately pretty realistic' that the unemployment rate could reach 9.5 percent. It was reasonable to estimate that the G.D.P.'s growth rate in 2010 would be 3 percent, she said.
The economic recovery, Ms. Romer said, will be driven by business investment in sectors like renewable energy rather than consumer spending. She echoed the views of other economists who expect a long-term economic shift.
The chance that consumers are ever going to go back to their high-spending ways is not very plausible, nor do I think they should,' she said. 'We were a country that needed to start saving more.'
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