Yesterday, Vectra Bank gave us the Colorado Springs version of their traveling show. Featuring two prominent PhD. economists, it was both educational and entertaining. Offering a free breakfast buffet at the Cheyenne Mountain Conference Center guaranteed a full house for the 7:30 start.
George Feiger spoke first. He is a former Stanford associate professor who is now CEO of Contango Capital Advisers. He had three main points to make:
- The economy is recovering but volatility will persist for years
- By balancing long-term opportunities with cautious planning, “good”portfolio outcomes are possible
- Be mindful, however, of the implications of the fiscal crisis
Dr. Feiger’s talk was enhanced by several graphs and charts that were striking in their messages, but also so easy to understand instantly from the back of the room. The first one had four red lines scrolling across the page until October 2008, when they all dropped rapidly. Then in about March of 2009 they all moved upwardly very fast and in unison. The lines represented the leading economic indicators for the US, the “Euro Area,” China and Japan. This, he said was, “an unambiguous recovery.”
However, because of personal, corporate and government debt, volatility will mark the economy for at least ten years. Americans have lost ten years of their net worth in a very short time, and household debt is at an all time high. Although houses are again affordable for more people, more people than ever are walking away from their mortgages. In fact, you might guess that unemployment, a subprime FICO score, or a rate reset might be the top reason for foreclosures, but they’re not. Most foreclosures now are on people who have a job and can pay their debts, but just don’t want to continue paying a $300,000 mortgage on a house that’s now worth $200,000. They’re called “walk aways.”
And the sad part is, we won’t even see the peak of this for another few years. For the first quarter of 2009, the amount of negative equity was 26%. By the first quarter of 2011, it’s projected to be at 48%. That means that almost half the houses in the country will be worth less than the amount owed on them. Luckily, only 10-15% of these will end up in foreclosure, but that’s still a very big number. Certainly large enough to drive down home prices.
The next big wave in debt problems is just beginning now and may run for the next ten years. Commercial real estate is experiencing the same underwater spiral of sales residential has been in for awhile. Owners of commercial real estate typically have loans that are fixed for 5, 7, or 10 years. At that point they need to refinance to keep their loan, or sell the property. Unfortunately, with the economy in the tank, most buildings aren’t producing enough income to validate the debt on them. So the owners are stuck. They can’t refi because the value won’t support it, and they don’t want to sell because they’re facing a large loss. Tough times out there, and there’s a lot more where that came from.
In conclusion, he said to expect ongoing credit market problems and a sluggish economy after the summer of 2010.
The other speaker was Tom Zwirlein, a business professor at the University of Colorado at Colorado Springs (UCCS). He spoke about the local economy, mainly Colorado Springs, and a bit about Pueblo.
He reported that the area hit bottom and started back up in February 2009. He showed a November 2009 chart of eleven leading economic indicators he tracks, and all but three are up compared to the previous year. The largest gain was in manufacturing, which was up 88.6%.
He next talked about the economic impact of the military on the region, which is responsible for 20% of our local GDP. He thinks this demonstrates a lack of diversity, which could compound problems if the military ever cuts back its presence here. The military is projected to create 42,000 direct jobs and 54,000 indirect jobs and put $65-75 million into the tax coffers. Right now about the only construction going on in town is at Fort Carson.
Dr. Zwirlein noted that our local unemployment is at 7.9%, well below the national average that’s near 10%. In addition, the projections for 2010 show a drop in that rate to 7%, and increases in population growth, employment, wages, personal income, retail trade and a huge jump of 25% in single family home permits.
In conclusion, it looks like we’re coming out of the chill of the recession earlier than many parts of the country, partly because of a layer of military insulation.
Download the speaker presentations here.
- Commercial property values in record rise (telegraph.co.uk)
- Reuters Breakingviews: Real Estate Could Be a Red Flag for Smaller Banks (nytimes.com)
- Really? Empty apartment at 30-year high (lansner.freedomblogging.com)