Green Shoots Begin to Spread

06/01/2009 10:58 am EST


David Wyss

Adjunct Professor, Brown University

David Wyss, chief economist of Standard & Poor’s, says some economic data are beginning to look a bit better, though we’re not out of the woods yet.

The economic data are looking a bit more encouraging. We still don’t believe we are at the bottom, but most of the numbers are coming out a bit better than expected. Also, the pace of the decline is decelerating.

Record low mortgage rates and falling home prices pushed the Realtors’ Affordability index (based on the monthly payment required to buy the median home relative to median income) to a record high of 166 in April. Buying is currently cheaper than renting on an after-tax basis for most Americans, especially for anything beyond the starter level.

More than half of March buyers, according to the National Association of Realtors, were first-time homeowners who, we expect, are much less likely to default than investment owners or second-home purchasers. The percentage of first-time buyers is likely to rise even more in coming months in response to the stimulus package, which provides an $8,000 refundable tax credit for first-time buyers.

The inventory of new and existing homes for sale dropped in recent months, but we do not think that will provide much support for prices. Foreclosures dipped in the first quarter, but as housing sales improve, banks will likely foreclose on more homes.

In addition, homeowners who kept (or took) their home off the market because they did not think it would sell may be willing to put it back on. This hidden inventory should keep downward pressure on prices. We estimate the S&P/Case-Shiller Home Price index will drop another 10% by early 2010 (a 38% decline from its July 2006 peak).

Oil prices jumped to more than $60 per barrel in the last month, boosted by worries about supply and an expectation of stronger demand. We expect oil to stabilize near the current price in the short term, but drift up to $75 over the next two years. The current lower oil prices gave American consumers a boost of more than $200 billion in purchasing power. That boost could evaporate.

[Meanwhile, the government’s] bank stress tests appeared to calm financial markets. Credit-default swap rates dropped sharply the week of the release, even though ten of the 19 banks examined were reported to need additional capital.

Several also announced their intent to pay back the TARP (Troubled Asset Relief Program) funds they borrowed (and some banks already have raised billions of dollars in the capital markets—Editor).

The Federal Reserve [has said it] would buy $300 billion in long-term Treasuries and $200 billion in mortgage-backed securities issued through Fannie Mae and Freddie Mac. Despite this, bond yields are rising, as markets begin to look forward to stronger growth and heavier government borrowing. On the whole, the rise in long-term yields is encouraging, but we think it will make it more difficult for the Fed to keep rates down.

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