A Skittish Market Doesn’t Mean a Recession

Dire financial reports in the news have made everyone skittish. The mere fact that the stock market has dropped over two thousand points in the last month is enough to spook anyone. There is, however, a significant difference between the current economic environment and that which created the meltdown two years ago.

Back then, the country was overheated. Housing prices had accelerated over 100% in five years. The number of homeowners had risen to over 65% of the families in the country. This growth was fueled by toxic mortgages that offered unqualified purchasers a chance to buy a home with minimal equity and with variable rates on the loans. Bank lending was overextended. A lot of people knew that we had a time bomb ticking.

Currently, we see corporate earnings on the mend, mortgage rates at the lowest level in history, enormous levels of liquidity in the banks, and the United States government has finally figured out that it has no more money to spend. Is this a time of transition? Absolutely.

This is what I see. We are phasing out of our foreign involvement in Afghanistan and Iraq. Governments are becoming more prudent in spending. Job growth, although slow, appears to be gaining traction. Consumers are building their balance sheets and reducing debt levels. We are demanding greater accountability of expenditures by government officials. If you think about it, that sounds pretty good.

When I look at the local housing market, I see a declining inventory that has fallen below 9,000 apartments for the first time in years. I am hearing about bidding wars for two bedroom apartments priced between $1million and $2 million. Our real estate offices are seeing reasonably good attendance at open houses. While transaction levels throughout the city in June were disappointing, July performance was in line with expectations and August has been moving progressively forward. These are all signs that the economy is moving steadily ahead.

There will be bumps in the road – the excessive level of volatility in the current environment only affirms that we are all skittish and anxious about anything that spooks us.

This reminds me of something that happened during a balloon ride I took years ago on safari in Africa. Down below us were teeming herds of wildebeests standing idle as they grazed on the grasses. The balloon operator of the balloon said us, “Hey, you want to see how the stock market works?” He pulled down on a lever, and with a loud whoosh, a flame surged with the hot gas that filled the balloon. The noise alarmed the wildebeests. Suddenly en mass, the teaming multitude spurted into action, running widely in an undefined but uniform direction. It was a stampede of thousands lasting for about three minutes! Then just as suddenly, the animals stopped in their charge. They settled back to a casual graze as if nothing happened.

I propose that the S&P’s action in lowering our credit rating has created a similar frenzy. What does it mean? Probably very little. Does it mean that interest rates are going up? Probably not. Currently, Japan has a lower credit rating than we do, and their interest rate is 1%.

The level of supply and demand has not radically changed, and for entities looking to park funds into low risk assets, the U.S. Government is still the best choice. That’s why Japan has loaned us about $900 billion and why China, to which we owe $1.2 trillion, hasn’t skipped a beat in giving us even more money in recent days.

My advice is that the mend will continue and we should focus on those great interest rates and flexible sellers. It’s a good time to buy real estate if you have a good credit rating and enough equity cash. Smart buyers get it and so should we.

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