Fannie and Freddie to the Rescue?

Stressed single-family homeowners trying to pay their mortgages might be in for some relief after a recent move by Fannie Mae and Freddie Mac, the nation’s leading mortgage-finance issuers.  Since being placed under a government conservatorship in September, Fannie and Freddie have devised a plan to help homeowners who are 90 days behind in their payments and have high loan-to-income ratios.  The bailout could mean lower interest rates, and terms as long as 40 years to cut monthly payments to more affordable levels.  Borrowers then have three months to become current on the modified payment, as long as they have proof of income and have not declared bankruptcy. 

The proposal would reduce monthly payments to just 38 percent of the owner’s gross income.  By lengthening the mortgage term by 10 years, payments for both principal and interest will be reduced.  The plan is not part of the Treasury Department’s $700 billion bank rescue, and is not required of mortgage holders who receive government aid. 

“With such broad adoption, this new protocol will be a standard for the industry to quickly move homeowners into long-term sustainable mortgages,” said Neel Kashkari, the Treasury’s interim assistant secretary said. 

Any move to minimize foreclosures - and to help families stay in their homes - is good news for the economy at large.  A housing recovery is vital to the economy’s overall health, and Fannie Mae and Freddie Mac are to be commended for taking the lead in this extremely positive development. 

http://www.chicagotribune.com/business/chi-wed-mortgage-help-nov12,0,6120416.story

Wal-Mart Shakes Up Grocery Scene

Wal-Mart’s growth strategy is poised to overtake Jewel and Dominick’s as the leader in Chicago’s $12 billion grocery market.  Though not viewed primarily as a place to buy food, Wal-Mart’s new supercenters, offer savings in the 10 to 15 percent range over traditional grocery stores.  Wal-Mart currently has 16 grocery stores in Chicago’s suburbs, eight of which have opened in the last 15 months. 

This move is part of a national trend favoring big-box retailers which buy in larger volume and have greater control over their supply chains to offset pricing.  It will be interesting to see if Wal-Mart’s move affects the top of the market, where boutique stores like Whole Foods and Wild Oats have captured the market for organic produce. 

Wal-Mart is not shy about its expansion plans for the Chicago market.  Union and political resistance stalled plans to add to the single Wal-Mart store within city limits.  Suburban communities, on the other hand, welcome the tax dollars that Wal-Mart brings to them.  Current plans call for Wal-Mart to add seven new grocery stores in the Chicago area over the next year. 

Fed Chairman Bernanke Takes Steps to Restart the Economy

Ben Bernanke has spoken.  The Fed chairman and the Federal Reserve moved recently to stimulate the economy when the policy-making committee cut the federal funds rate - the rate at which banks lend to each other - to just one percent.  This represents a half percentage point cut from the previous 1.5 percent rate.  By contrast, during the summer of 2007, this rate was 5.25 percent. 

There is more good news.  Treasury rates have stabilized.  The value of the dollar and the yen are soaring.  The price of oil has fallen to less than $70 a barrel.  The New York Stock Exchange rose nearly 900 points in a single day, following the lead of markets ranging from Tokyo to Hong Kong to London.  The inflation rate is just 4.9 percent.  Unemployment is 5.7 percent - a lower proportion than was seen during previous recessions of recent decades. 

And, according to NAI Global’s recent Capital Markets Update, the doomsayers who describe the current situation as “the worst economic situation ever” either are very young or have short memories.  The seemingly endless stagflation of 1973 - 1981 was far worse; so was the collapse of the savings-and-loan industry from 1989 - 1993.  The dot.com failure and September 11 wiped out more wealth when compared with the GDP. 

Commercial real estate is in far better shape than the early 1990s, thanks to lower vacancy rates, higher rents and shorter construction pipelines.  Delinquency rates are virtually non-existent, though that situation could easily change.  Published in September of 2008, NAI Global’s report projects that recovery will occur within nine to 15 months. 

Signs of Optimism Amid Battered Consumer Confidence

Layoffs and the promise of more to come, falling home prices and shrinking investment portfolios have created the highest level of consumer pessimism on record, says the Conference Board.  According to an online AP report, consumer confidence sank to just 38 in October, a significant drop from the rather rosy 61.4 reported in September. The Conference Board is a nonprofit business membership and research organization that is best known for its Consumer Confidence Index and the index of Leading Economic Indicators.  Its membership includes top executives and industry leaders from the world’s most respected corporations.  Consumer opinion is crucial because spending equals approximately 70 percent of all economic activity. 

Despite the Conference Board’s report, good news does exist on the retail front.  Discount big-box stores are the bright spots, and Costco was the big winner.  The firm closed out its fiscal year on August 31, 2008, with sales up 13 percent compared with the previous year.  During September, Wal-Mart Stores, Inc., reported a 2.4 percent rise in sales as cash-strapped shoppers purchased food and medicine from the retailer.  Wal-Mart’s Sam’s Club warehouse division reported an increase of 4.6 percent.  The more upscale Target Corporation reported that its net retail sales during the five-week period ending October 4 increased by 2.5 percent.

Anecdotal Federal Reserve “Beige Book” Observations

As if we needed it, even more evidence attesting to the ongoing economic slowdown came to light recently.  According to a Federal Reserve Board report referenced on Market|Watch and known as the Beige Book, the slowdown in economic activity in late September. 

Among the findings are: 

• Factory activity is slowing.
• Non-financial services - typically the backbone of economic activity - are slowing.
• There is evidence that loan quality has actually depreciated because bank customers have moved their money into accounts that have the safety of deposit insurance.
• Inflation pressures eased slightly, particularly in the retail sector.
• The single bright spot was agriculture; the 2008 harvest was a good one.

Named for its nondescript color, the Beige Book is published to update the Federal Reserve on economic conditions just before its October 28 - 29 policy meeting.  The Beige Book is a series of anecdotal reports collected by the 12 regional Federal Reserve banks that gauge the state of the economy.  Although of interest, it has little influence on policymakers who rely more heavily on government reports in making decisions.  Another interest-rate cut is an expected outcome of the upcoming meeting.  

Foreign Investors Like Luxury

Volatile oil prices will minimally impact global air-freight growth over the long term, according to a Boeing Company report cited in a recent GlobeSt.com article.  The Chicago-based aircraft manufacturing giant’s Current Market Outlook 2008 predicts that growth will achieve an annualized average rate of 5.8 percent from 2007 through 2027.  Similarly, the report projects that the world freighter fleet will nearly double from 1,948 planes today to 3,892 over the next 20 years. 

“The forecast is based on a number of factors, most significantly economic growth in diverse areas of the world,” said Jim Edgar, Boeing’s regional director, cargo marketing for Asia.  “Over the long term, global economic growth will drive demand for new, high-value products as well as seasonal perishables that people have become accustomed to enjoying.” 

The report notes that the nature of the air-freighter fleet will change as larger aircraft increase their market share.  Currently, the largest freighters make up 26 percent of the market; in 20 years, that number will rise to 35 percent.  Fleet additions will include 863 new-production aircraft; 641 of those will be wide-body planes with the capacity to carry more than 80 tons.  The share of standard-body freighters (defined as having less than a 45-ton capacity with single-aisle body width) will fall from 39 percent to 35 percent over the next 20 years. 

“We expect several trends to continue,” according to Edgar.  “Dedicated freighters will continue to provide an increasing proportion of air-cargo capacity, going to nearly 54 percent, and the industry will continue to move to larger airplanes.” 

Paul Volcker: U.S. Is in a Recession

“It’s not going to be a problem in the short run.  Inflation doesn’t flourish in the face of recession,” said Paul Volcker, who served as chairman of the Federal Reserve from 1979 until 1987.  “It’s something we have to worry about when we get out of this recession.  I have been around for a while.  I have seen a lot of crises, but I have never seen anything quite like this one.  This crisis is an exception.  I don’t think we can escape damage to the real economy.” Volcker believes that the United States is officially in a state of recession.  In a Reuters’ article, Volcker affirms that stabilizing the financial system to ease the credit crisis is a government priority, even if it requires significant intrusion into the private sector. 

“The first priority is to stabilize the financial system.  It is necessary, even though the cost is heavy government intrusion in markets that should be private,” Volcker told an audience at a seminar in Singapore.  “Housing prices in the U.S. are still declining.  There are more losses to come.” 

Volcker, who is credited with battling the double-digit inflation of the 1970s, believes that the massive infusion of liquidity by the Federal Reserve ultimately could result in inflation or even stagflation. 

Volcker is currently chairman of the board of trustees of the Group of 30, an international body composed of central-bank governors, leading economists and private financial-sector experts.  Additionally, the former Federal Reserve chairman is serving as an economic advisor to Barack Obama’s presidential campaign.Â

The Federal Government Takes First Steps to Bail Out Banks

The Treasury Department is spending the first $250 billion of the $700 billion rescue bill that Congress recently approved in an attempt to defuse the financial crisis that has dominated the headlines for weeks.  According to a recent article on GlobeSt.com, the move - which partially nationalizes the banking system - is seen by some as conflicting with the free-market principles that typically have characterized the American economy. To shore up the United States banking system, the Treasury Department is partially nationalizing nine banks by using $125 billion to purchase minority stakes in major financial institutions.  Although the banks haven’t been named, they are believed to include Citigroup, Goldman Sachs, Wells Fargo, J.P. Morgan Chase, Bank of America, Merrill Lynch, Morgan Stanley, State Street and Bank of New York Mellon Corporation.  The Treasury Department is also expected to make the remaining $125 billion available to banks and thrifts across the country to purchase their preferred shares. 

According to Treasury Secretary Henry Paulson, “Today’s actions are not what we ever wanted to do, but are what we must do to restore confidence to our financial system.  The needs of the economy require that our financial institutions not take this new capital to hoard it, but to deploy it.”  Just weeks before the presidential election, outgoing President George W. Bush sees the move as a short-term measure.  “The government’s role will be limited and temporary.  These measures are not intended to take over the free market, but to preserve it,” Bush said. 

The question now is whether the banks will use the capital as the government intends - lend it to businesses and consumers again - or will they use it to sweeten their own balance sheets?  The government, no doubt, intends to exert significant pressure on the institutions to loosen credit so that people can start buying big-ticket items like houses and cars again.

Housing Prices Decline Sharply During July

Housing prices in the United States plunged a record 16.3 percent during July, compared with the previous year.  According to Standard & Poor’s/Case-Shiller Home Price Indexes, this indicates an ongoing home-price decline now in its second year. 

The S&P/Case-Shiller composite index of 20 metropolitan areas declined 0.9 percent in July, when compared with June.  That represents a 19.5 percent decline since the housing boom peaked in July of 2006.  According to S&P, the composite index of 10 metropolitan areas fell 1.1 percent in July, representing a 17.5 percent year-over-year decline.  Compared with 2006, the index is down 21.1 percent. 

“There are signs of a slowdown in the rate of decline across the metro areas, but no evidence of a bottom,” said David Blitzer, chairman of S&P’s index committee.  Economists see declining home prices -as a result of foreclosures - as one of the biggest threats to America’s financial system and economic growth. 

Declines on Las Vegas - the nation’s weakest housing market - hit 29.9 percent compared with last year, and 34.3 percent when compared with its August of 2006 peak, according to S&P.  Yearly declines for Phoenix and Miami were 29.3 percent and 28.2 percent in July, respectively. 

Chicago Spire Construction Delayed

A sign of the times from GlobeSt.Com:  Construction of the high-profile Santiago Calatrava-designed and engineered Chicago Spire condominium tower has been postponed - a victim of the ongoing economic slowdown.  The building is still in its infrastructure-construction phase, with the neighborhood’s utilities undergoing updates to support the structure and its residents.  With work at a standstill, the building is a large circular hole that accommodates the recently completed foundation. 

According to a spokeswoman for Dublin-based Shelbourne Development Group, Inc., construction of the 150-story tower will not restart until the economy improves.  “We are slowing the construction pace down to match the economy,” the spokeswoman said.  “The decision was made to do that because the markets have completely seized up.  When they are more fluid again, we will be in a very good position to move forward.” 

Even with the construction halt, sales efforts are still underway.  To illustrate, Ty Warner, CEO and founder of the Beanie Baby company, Ty, Inc., recently closed on the two-story, 10,292 SF penthouse that had been listed at $40 million. 

The Spire, which occupies a 2.2-acre site at 400 North Lake Shore Drive, has sold approximately 30 percent of its 1,194 units since marketing efforts began earlier this year.  Approximately half have been purchased by American buyers, with the rest snapped up by international investors. 

The target date for completion and occupancy remain 2012, as originally planned.  Once completed, the building will be the largest residential tower in North America and Europe.  The estimated construction cost is $1.2 billion.