“While recent data suggest a weakening outlook for U.S. growth, we still see a strong case for accelerating growth in 2011. Momentum should build over the remainder of 2010 as businesses respond to easier credit and rising profits. Profits are up 39% over the past year, the largest four-quarter rise since the mid-1970s. Financial firms led the initial move up in 2009, but gains this year have been concentrated among nonfinancials, which tend to have a bigger influence on business spending.” [Aaron Smith, Moody’s Economy.com]

 As I was preparing this week's national economic commentary, I began to feel the weight of the bad economic data on my chest. I have felt it necessary to deal with that bad news, of course, and to do so in such a way that my clients and readers don't think I'm trying to paint a happy face on seriously bad news. The existing home sales and new home sales reports were, of course, something of a disaster. Their severity can be explained in part by the confusing workings of the homebuyer tax credit programs' demise, but those programs skewed the numbers of sales beyond understanding--so they don't offer up a clear explanation of where we are right now.

I have written several times about the odd fact that very few businesses seem to be hard-pressed for money. If they were, there would be demand for lending, and it would be very difficult to keep rates as low as they are. Similarly, lenders have been rather comfortable in their "carry trades," borrowing short-term and low, and then investing the money in securities rather than in loans with even a little bit of risk. Sounds like a formula for going nowhere fast, and that is what it has been--and may continue to be for several more months. But as people see that there is more money to be made--including people who want to earn more money with which to pay down existing debt--the markets will come more alive.

This is not a foolproof prediction, of course. One of the specialties of this year's economy has been SURPRISE. But we've reached the point where recovery itself would be such a surprise that it would take us a long time to recognize it. Further, it's probably not going to look the way we expect recovery to look. It hasn't thus far.

In any case, we can hope--and we have reason to do so. We've seen recovery in the luxury home market, in certain areas like Inclin Village Nevada and the San Francisco Bay, in formerly comatose markets like Stockton (once the foreclosure capital of the nation), and rising median prices throughout California. Other states are likely to follow this lead--gradually...as California itself moves forward--gradually.

 

KEY INDICATORS

 

Gold $1250.20/ounce [up]

Crude Oil (Brent) $75.06/brl [up]

U.S. Dollar to…

    Euro .7912 [up slightly]

    Japanese Yen 84.14 [down]

6-mo Treasury Bill Yield 0.18%

10-yr Treasury Note Yield 2.48%

[6-month unchanged, 10-yr down 2 bps]

11th Dist Cost of Funds 1.797%[+]

30-yr Fixed-rate Mortgage 4.78%

15-yr Fixed-rate Mortgage 4.24%

1-yr ARM 3.84%

[HSH averages rates: 30-yr

down 2 bps;15-yr down 4 bps; 1-yr ARM down 6 bps]

 

Mortgage Bankers Association Mortgage Applications Index

week ending 8/20

  Overall

    870.3 (up 4.9%; up 13%

the week prior)

  Purchase Money Loans

    170.5 (up 0.6%; down 3.4%

            the week prior)

  Refinancing Loans

    4944.7 (up 5.7%; up 17.1%

the week prior)

 

Jobless Claims 8/21

    473,000 – prior week 500,000 – continuing claims at 4.456 m

 

New Home Sales July

    Down 12.4% m/m – inventory rose to 9.1 months

 

Gross Domestic Product (GDP) second quarter revision

    Down from 2.4% to 1.6%

 

Consumer Confidence Aug

    Up from 51 to 53.5

 

Weekly Commentary

For the past year or more, there has been a nagging question that those offering up negative forecasts have failed to answer: How can the economy be on the edge of another swan dive into recession if most American companies have an unusually large amount of cash stowed in their bank accounts?

 

There’s a fairly obvious related question, though: Why aren’t American companies busily hiring up new workers when they have plenty of money with which to do so?

 

The answer to the second question, as we’ve recently seen, is that no one wants to lose money; therefore, until such time as demand for their goods and services looks like it will continue to grow in the future (and not sputter like a wickless candle, as it has seemed ready to do recently), companies can simply hold back on further hiring, comfortable enough because there is plenty of money in their coffers. And most companies have artfully met momentary increases in demand with their existing employees, sometimes abetted by the hiring of temporary workers.

 

But back to the first question: The inactivity in the markets—including the real estate market—has looked very much like a downward slide. Perhaps, instead, the economy has simply been stuck in the mud, like a bunch of little children standing at the edge of the lake waiting for someone to be the first to actually step into the water.

 

So instead of going proactive, hiring new workers, making new loans, and pushing the economy into second gear at last, everyone has been waiting. Notice, by the way, that it’s much easier and safer in an uncertain economy to borrow money at rock bottom short terms rates and then invest that money for a secure higher yield than it is to wade into the slightly riskier waters of loaning that money. That will very likely change relatively soon; banks need better yields than the “carry trade” now provides.

 

With an increasing ability to borrow at favorable terms, and with money already in the banks, businesses are in a position to grow—to hire, to invest, to market themselves aggressively. Before too many months pass, this should be far more obvious to the entire American marketplace, including the real estate marketplace.