Bank Economist:
Affordable Markets Will Lead the Way Out

Wachovia Bank Senior Economist Mark Vitner Source: www.pbs.org

If housing started the freefall in the American economy last year, then look for housing to spark its return.

That was the conclusion of Mark Vitner, senior economist for Wachovia Bank, at the closing general session of the Industrial Asset Management Council’s Spring 2009 Professional Forum in Asheville, N.C., on May 6.

"We believe that housing has bottomed right now," Vitner told Forum attendees at the Grove Park Inn. "2010 will be a little better than 2009, and 2011 will be a little better than 2010."

But don’t expect all markets to rebound equally, the economist cautioned. "The most expensive homes are the ones losing the most value," he said. "A good example is the many high-end condos in South Florida. If you were given one for free, it would be a bad deal because your association fees are higher than your rent. I can’t even tell you where the break-even point will be in condos. In many price groups, we will see a 75 percent decline in prices."

Not all geographic markets are equal either, Vitner said. "If we are going to live within our means, people will move to places where the cost of housing is lower. If compensation is going down, people will say they can live better in Charlotte than in New York," he noted. "People will choose Dallas or Tampa or Charlotte over New York. We will see that dynamic play out in many markets around the country, as people seek out a place where they can have an affordable lifestyle."

The most attractive markets for housing, and thus new homeowners, will be the Midwest and the Deep South, places like Alabama, Mississippi, Louisiana, Arkansas, Tennessee, Kentucky and Texas, said Vitner.

The economist added that while he is "optimistic about the U.S. economy, I can’t sugarcoat what I am seeing." In other words, he said, things will get worse before they get better.

"We will see 11 percent national unemployment by June 2010," he said. "In terms of job losses, we haven’t seen anything yet. Sometimes the government will do something special to hide the pain, but more job losses are coming in the next few weeks. Every job lost on the automotive assembly line leads to at least six job losses elsewhere in the economy, and maybe as many as ten. But it is not the end of the world. The shutdown of the automotive plants will actually clear out a lot of the inventory. It will make for a more definitive turn in the business cycle."

Vitner: Recession Will End This Fall

Other potential positives coming out of this recession could be some key lessons learned by both corporative executives and financial analysts, Vitner noted.

"Some imbalances were built up in our economy. Anything that grows faster than the underlying foundation can support will have to come back down," he explained. "Examples of this included housing, the credit bubble, commercial real estate, consumer spending, and the entire financial services sector. Because we were sending so much money over to China and OPEC, they didn’t really know what to do with it, so they just kept buying Treasuries."

Unfortunately, the key leaders in both government and the financial services sector missed several ominous signs dating back to 2006. "Home prices started to decline three years ago, and they really haven’t stopped falling," Vitner said. "As a result, lenders began to rein in their risk. Among the first visible warning signs we saw were a number of big-box retailers beginning to slow down their rate of new store openings in Florida and California. Home Depot and Lowe’s began to curb their openings, and that was the start of the process. Later, in 2007, when mortgage companies began to drop like flies, we began to see the risk really reined in."

By mid-March of 2008, Bear Stearns was shut down completely and other major Wall Street investment banks were on life support. "At that point, we thought the economy would slow but certainly not go into recession," the economist said. "That was the consensus at the time, but it quickly changed."

The crisis came to a head in mid-September when GE could no longer issue commercial paper and had to go directly to Warren Buffet instead. "We went from crisis to catastrophe," recalled Vitner. "By the fourth quarter of last year, we were in freefall. By the fall of this year, we will come to a stop and that is when the recession will end – around October or November."

Earnings Spell Signs of Recovery

Vitner said he knew the economy was bottoming out once he saw the first-quarter earnings numbers earlier this year. "When those earnings numbers came out, people said, ‘We can work in this environment.’ Risk tolerances are beginning to work back out," he said. "The stock market is the best real-time indicator of risk tolerances about the economy. People are more willing to buy stocks when they are more willing to take on risks."

Vitner says the recovery will be slow but steady, with consumer spending picking up at a moderate pace this year. "Moderate gains in spending returned in the first quarter, but we are unlikely to go back to the days of superheated growth again," he said.

So what is the bottom-line lesson of this recession? "We’ve all been living beyond our means," said Vitner. "Deep recessions like this one and the one in 1981 and 1982 are transformative events. The economy that comes out of them is completely different than when they entered them. Living on credit now seems to be off the table. We are going to have to find a way to live within our means."

As a result, consumers are being much more careful about their spending habits. "The more discretionary spending is, consumers are buying less of it, from cars to big-screen TVs," he noted. "There is going to be a lot more permanence to this change in buyer behavior than people realize."