Jackman Journal - Economy

Despite Government Attempts to Boost Liquidity, Consumer Credit Continues to Contract, Stalling Recovery

mike@gotmike.com (Mike Harris) — Fri, 09 Oct 2009 23:27:00 +0000

Recent consumer credit data suggests that the economic recovery will be far slower than after previous recessions. Despite a moderating pace of job losses and heightened government spending, consumers remain cautious and are increasingly choosing to pare down debt rather than overextend themselves. Consumer credit balances fell by a greater-than-expected $12 billion in August, a 5.8 percent annualized drop, following a $19 billion decline in July. Lenders remain reluctant to extend credit, while consumers are increasingly cautious of taking on new debt due to uncertainty in the employment market.

The impact of tighter credit conditions and changing consumer behavior is most evident in revolving debt, which is comprised primarily of credit cards; revolving debt fell at an annualized rate of 12.3 percent in August. The recent decline was the second steepest monthly drop since the onset of the recession and signals that a consumer-led recovery will take some time to gain traction. The drop-off in revolving credit was surprising, however, given that personal consumption accelerated in August, which should support the use of credit.

Non-revolving credit, which is used to finance automobiles, home improvements and education, fell by $2.1 billion in August, a 1.6 percent annualized drop. The “Cash for Clunkers” program increased vehicle sales, offsetting some of the contraction associated with modest consumer demand. Non-revolving credit was expected to rise in September as more auto loans began to show up on credit balances, but the increase will likely be temporary, as consumers are putting off large purchases due to persistent concerns surrounding the weak employment market.

A growing propensity to save will have a dramatic impact on the speed and degree of the recovery, as consumption accounts for roughly 70 percent of gross domestic product. After peaking at 5.9 percent in May, the savings rate eased to 3 percent of disposable income in August, although that figure is much higher than in recent years.

The decreased use and availability of credit cards continue to hinder retail property fundamentals and lead to concerns heading into the holiday season. According to preliminary third quarter estimates, retail vacancy spiked 150 basis points year to date to 9.9 percent on negative net absorption of approximately 67 million square feet. Thus far in 2009, nearly 8,300 store closures have been announced, compared with 6,900 closures all of last year.

Merchants have trimmed inventories as a way to reduce costs and weather the recession. As a result, tenant demand for industrial space has slowed, pushing up vacancy 170 basis points year over year to 12.1 percent on negative net absorption of 88 million square feet.

Headwinds Blow in September; 263,000 Jobs Cut

mike@gotmike.com (Mike Harris) — Fri, 09 Oct 2009 23:22:00 +0000

The economy continues to face significant headwinds, as 263,000 jobs were cut in September, and the unemployment rate rose 10 basis points to 9.8 percent, indicating that the effects of the recession continue to linger. The worst of the job cuts may be over, though, as 768,000 positions were shed in the third quarter, compared with the elimination of about 2.1 million workers in the first quarter of this year.

The severity of the recession has been extreme, as more than 7.2 million positions have been lost to date. Despite the moderation in job reductions, significant hiring is not expected to resume until well into 2010. In a recent survey, 13 percent of chief executive officers expect to add workers in the next six months, an improvement from the second quarter, when only 6 percent intended to hire. Nonetheless, this will not offset the 40 percent who expect to cut additional workers. The survey confirms that most CEOs remain cautious, pointing to slow employment growth ahead.

The unemployment rate is forecast to climb to 10 percent by year end. Notably, the number of individuals unemployed for 27 weeks or longer increased from 2 million one year ago to more than 5.4 million in September. Individuals unemployed for 27 weeks or more account for 36 percent of all unemployed, the highest percentage in the past 29 years. The inability of the unemployed to find jobs will diminish the strength of a recovery by suppressing spending and the creation of new households. In addition, the average hours worked fell to 33 hours last month; employers will likely increase the hours of existing workers before resuming hiring.

In the apartment sector, nationwide vacancy rose 90 basis points to 7.6 percent in the first half of this year and is projected to hit 8 percent in the third quarter. The unemployment rate in the prime renter age cohorts remains high, which will suppress rental demand in the months ahead. The unemployment rate for individuals ages 20 to 24 is elevated at 14.9 percent. Among individuals ages 25 to 34, the unemployment rate has increased to 10.6 percent.

Weak employment continues to weigh on the office sector, where vacancy is projected to exceed 16 percent in the third quarter, compared with 14.5 percent at year-end 2008. Last month, 18,000 office-using jobs were eliminated, the lowest monthly total this year. As leases renew in the months ahead, however, the full effects of the loss of 1.2 million office-using jobs year to date will materialize.

Hotel employment is one of the few sectors that has expanded this year. Although hotel employment is down year over year, about 30,000 jobs have been added in 2009 as a result of new hotels opening. Additions to hotel supply, plus a sharp decline in room revenue, have resulted in an 18.3 percent drop in revenue per available room, or RevPAR, so far this year, creating a strain on the operations of many properties. Opportunities to invest in distressed properties are expected to increase in the near term.

Home Sales Data Disappoints; Recovery Likely Choppy

mike@gotmike.com (Mike Harris) — Fri, 09 Oct 2009 23:15:00 +0000

The collapse of the housing market was one of the primary drivers of the recession, and the sector’s rebound will be an essential step toward an economic recovery. Recent home sales trends show that the market is improving slowly, but fundamentals remain weak and unlikely to spark a recovery in the near term. Year over year, the median prices for existing and new homes are down 12.5 percent and 11.6 percent, respectively.

Sales of existing homes lagged expectations in August, falling 2.7 percent. New-home sales rose for the fifth straight month, ticking up 0.7 percent, but current levels are still down 3.4 percent year over year. Demand is expected to remain weak in the fourth quarter due to the expiration of the government’s first-time homebuyer subsidy and the troubled labor market. Soft demand will likely keep prices in their current ranges, limiting new building and construction employment into 2010.
Inventory levels are contracting but still have a ways to go before reaching traditional equilibrium points of approximately four months to six months of stock. The inventory of new homes has fallen from 12.4 months in January to 7.3 months of supply in August. After peaking at 11 months of inventory last November, the current stock of existing homes is now 8.5 months, although not all foreclosed homes are counted in inventory, skewing this figure.
While the first-time homebuyer credit has driven some renters to homeownership, the increase in foreclosures has sparked demand for single-family home rentals to a greater degree than apartments. Year over year through the second quarter, the single-family vacancy rate declined 30 basis points to 10.1 percent, while the apartment vacancy rate increased 150 basis points to 7.6 percent. The significant availability of shadow rental stock will continue to apply downward pressure on apartment rents and drive concessions higher.
Home price declines have pushed down household wealth 12 percent from one year ago. Consumers have reined in spending as a result, causing a drag on retail property conditions. Specifically, retail vacancy is up 110 basis points year to date on negative net absorption of 50 million square feet.

Retail Sales Fuel Economic Momentum

mike@gotmike.com (Mike Harris) — Mon, 21 Sep 2009 04:37:00 +0000

A 10.6 percent spike in automobile purchases in August generated a 2.7 percent surge in total retail sales, the largest monthly increase since January 2006 and the latest sign that the recession may be ending. Excluding the spike in auto sales, which was fueled by the “Cash for Clunkers” program, retail sales rose 1.1 percent during the month.

Despite the uptick in August, retail sales remain down 5.3 percent on a trailing 12-month basis. Modest year-over-year increases may occur in the months ahead, but comparisons will be made against the depressed level of sales in the fourth quarter of last year. Indeed, retail sales remain constrained, falling 8.6 percent year to date through August compared with the corresponding period in 2008. Spending has suffered as a result of the weak labor market and will not rebound significantly until employers start to hire again.
Some of the factors that contributed to the increase in retail sales last month may be difficult to sustain. A government rebate propped up auto sales in August, and, without the aid of significant intervention in the months ahead, demand may falter. A 5.1 percent jump in sales at gas stations attributable to higher prices also sparked a rise in retail sales; excluding autos and gas, sales rose by a tepid 0.6 percent in August.
On a positive note, eight of 10 retail categories posted increases in sales in August, compared with only two categories in July. Some of the rises may be due to seasonal factors such as back-to-school shopping or the relief of pent-up demand. Housing-related sales declined in August, though, with sales of furniture down 1.6 percent and sales of building materials falling 1.2 percent. The rebound in the home sales, partly fueled by the government’s first-time homebuyer credit, appears to be insufficient to stimulate demand for housing-related goods thus far.
Retail property fundamentals remain battered. In the first half of 2009, diminished spending forced stores to close, resulting in negative net absorption of 50 million square feet nationally. More stores have closed in the third quarter, and few retailers are expanding. As a result, vacancy will rise to the 10 percent range in the quarter as occupied space decreases and vacant new space continues to come online.
Despite the surge in retail sales in August, hospitality properties are still suffering from the economic downturn. Preliminary data estimates occupancy of about 61 percent during the month, compared with 67.5 percent one year earlier. While government rebates to purchase autos caused retail sales to spike in August, the year-long attempt by hotel owners to boost demand by slashing rates has not improved property performance.

Consumer Credit Declines as Households and Banks Repair Balance Sheets

mike@gotmike.com (Mike Harris) — Sun, 20 Sep 2009 19:47:00 +0000

While the latest Federal Reserve Beige Book showed the economy stabilizing, the July report on consumer credit balances illustrates the severity of the recession. Consumer credit, excluding real estate loans, fell at an annualized rate of 10.4 percent during the month, as the effects of job losses have forced many Americans to scale back spending and pay down debt. Consumer demand for credit has waned, but banks also have clamped down on lending. The credit freeze may be starting to thaw, however, as the proportion of loan officers reporting tightening standards on credit card issuance decreased in August.

Consumers are taking unprecedented steps to rein in debt and bolster household finances ravaged by the recession. The $21.6 billion decline in consumer credit in July is the greatest since records were first kept in 1943 and the ninth monthly drop in the past 10 months. Consumer credit decreased only 62 times during the preceding 788 months.
Significant declines were recorded in both types of consumer credit. Non-revolving credit, which is used to finance automobiles, home improvements and education, fell $15.4 billion during the month, marking an 11.1 percent annual drop. A rebound in August is expected, however, due to the “Cash for Clunkers” program. Revolving credit, primarily comprising credit cards, decreased at a 7.8 percent annual rate in July.
The steady drop in consumer credit decreases the likelihood of a short-term rebound in consumer spending, which accounts for about 70 percent of gross domestic product. With nationwide unemployment approaching 10 percent and employment prospects remaining weak, consumers are expected to spend less, save more and continue to pare down debt.
The decline in spending has resulted in fewer visits to shopping centers by consumers, contributing to negative net absorption of 23 million square feet nationwide in the second quarter. Additional store closures in the third quarter foreshadow higher vacancy, with the national vacancy rate expected to rise 210 basis points this year to 10.5 percent.
The decreased use of credit cards to purchase airline tickets and pay for hotel stays was a factor in a 410 basis point fall in hotel occupancy in July. Occupancy was 64.1 percent during the month, as the number of rooms rented to guests slipped 4.3 percent from one year earlier. Similar results are projected in August. Lower hotel occupancy in most areas also places additional strain on the performance of bars and restaurants.
Consumers continuing to spend less and pay down debt in the near term also will affect the performance of properties that store and distribute consumer goods. Since the recession started, the nationwide vacancy rate in industrial properties has climbed 240 basis points to 11.8 percent on negative net absorption of 51 million square feet.

CNBC Features Marcus and Millichap's Harvey Green

mike@gotmike.com (Mike Harris) — Fri, 11 Sep 2009 12:47:00 +0000

Reflecting on the commercial real estate market in the past year, with Mike Kelly, Caldera Asset Management and Harvey Green, Marcus & Millichap Real Estate Investment Services.

Job Cuts Diminish in August as Unemployment Hits 9.7 Percent

mike@gotmike.com (Mike Harris) — Tue, 08 Sep 2009 14:08:00 +0000

A slowing in job losses in August offers additional evidence that the worst of the recession has passed. During the month, employers nationwide cut 216,000 positions, raising to 955,000 the number of jobs eliminated in the past three months. By comparison, 2.1 million jobs were shed in the first quarter of this year. Despite the welcome moderation in employment losses, a transition to stabilized payrolls and a resumption of hiring may still be a few quarters away.

Two factors revealed in today’s employment report indicate that the pace of hiring new workers will be slow. Average hours worked was unchanged during August at 33.1. Employers will increase hours for existing employees before hiring new ones. In addition, temporary employment services, one of first sectors to hire after a recession, slashed 6,500 positions last month.

Job losses were spread across most sectors in August. Notably, retailers trimmed only 10,000 positions last month, compared with the loss of 43,000 jobs in July. The decrease in retail employment cuts is attributable to fewer seasonal staff reductions and the effects of the “Cash for Clunkers” program, which created 5,200 positions at auto dealers. Meanwhile, the education and health services sector generated 52,000 workers in August, with health care employers accounting for 47,000 of these jobs; this was the only sector to add positions last month.

The rising unemployment rate represents another concern clouding the prospects of an economic recovery. In August, the unemployment rate increased 30 basis points to 9.7 percent, the highest rate in 26 years; the unemployment rate is expected to peak at more than 10 percent in 2010. In addition, unemployment claims remain elevated. The high rate of joblessness will make it difficult for the economy to start a sustainable recovery, as consumer spending, a key driver of economic growth, will likely stay sluggish until employment prospects improve.

The slowdown in consumer spending and ongoing job losses in the retail sector are being reflected in retail property fundamentals. After rising 50 basis points to 9.5 percent in the second quarter, retail vacancy continues to increase across the country as more merchants close and national brands scale back new store openings. The weakness in fundamentals also has discouraged investors year to date, as transaction velocity is down significantly in most markets over concerns regarding near-term vacancy and rents.

The decline in employment this year is adversely affecting the office property sector, where tenants are still realigning space needs with reduced head counts. After 20 consecutive months of contraction, though, the pace of office-using job cuts is slowing, which may stem the erosion of fundamentals recorded year to date. So far in the third quarter, 124,000 office-using positions have been eliminated. Approximately 421,000 office jobs were shed in the second quarter, when negative net absorption of 20.6 million square feet was posted.

Outlook: Goverment Programs to Restart Commercial Real Estate Credit Flows Beginning to Show Promise

mike@gotmike.com (Mike Harris) — Wed, 02 Sep 2009 14:56:00 +0000

Marcus & Millichap recently released our August 2009 Commercial Investment Real Estate Outlook, regarding Goverment Programs and their ability to restart commercial real estate credit flows. Below is an Executive Summary of the content, the full report is available by clicking here.

Executive Summary

Having weathered the recession with resilience throughout most of 2008, commercial real estate is now facing a dual challenge of rising vacancies and exceptionally tight debt financing. Both are largely the result of the escalation of the recession into a global financial crisis last fall.

Tangible results from government initiatives to stimulate the economy and loosen lending are modest at best; however, it is clear that government action helped to avert the worst-case scenario. Interbank lending has stabilized; investor and consumer confidence levels have moved off of recent lows; home sales are rising, albeit largely as a result of foreclosures; and aggressive cost-cutting is resulting in better-than-expected corporate profits. The U.S. economy and the availability of debt capital have a long way to go before returning to "normal," and many challenges remain. It appears, though, that conditions are improving and moving in the right direction.

Status of Government Programs: Pages 3-5
Term Asset-Backed Securities Loan Facility (TALF)

TALF was expanded in May to include highly rated commercial mortgage-backed securities (CMBS). Spreads on AAA-rated CMBS have since narrowed dramatically.
At its first subscription date in July, the legacy CMBS component of TALF received requests for $670 million in loans. All but one of the bonds submitted were accepted as collateral for TALF loans.
Two REITs are expected to soon test the new CMBS component of TALF, with each projected to borrow up to $600 million against assets in their portfolios. A substantial amount of the capital raised will likely be utilized to pay down maturing debt.
As a result of the lengthy ramp-up time for this program, TALF has been extended through March 31, 2010, for existing CMBS and through June 30, 2010, for newly issued CMBS.

Public-Private Investment Program (PPIP)

PPIP was initially proposed to remove up to $1 trillion of legacy loans and securities from banks’ balance sheets but has been scaled back to roughly $40 billion in legacy securities only. The Treasury cited improving financial markets as the reason for the change.
The Treasury recently released its list of prequalified fund managers to participate in PPIP. Each fund manager is required to raise $500 million in private capital. The government has committed $30 billion to PPIP, which will be used to match private equity capital raised and to provide financing.

Commercial Real Estate Market Conditions: Pages 6-7

Commercial real estate sales volume during the first half of 2009 was down 75 percent from the same period last year and was 90 percent below peak levels recorded in the first half of 2007. The drastic reduction reflects a buyer/seller price expectations gap, as well as the tightening availability of financing. Buyer interest has been rising as more properties become available at realistic prices.

Beyond hampering sales velocity, tight credit markets add another layer of complexity and challenge to commercial property owners, who have an estimated $550 billion of commercial mortgage debt slated to mature in the next two years. In many cases, lenders are focusing on minimizing further losses by modifying loan terms.

Emerging Opportunities in Commercial Real Estate: Pages 8-9

As sellers become increasingly motivated due to maturing debt or general capital needs, a wide array of commercial properties will likely hit the market. To prepare for this opportunity, investors are defining strategies today to ensure they can move quickly when attractive assets become available. Pricing differentiation will persist, driven by property quality and location.
In recent months, more buyers have re-engaged their pursuit of opportunities, and more owners have begun to accept market realities when pricing their properties. With ample capital waiting on the sidelines for the right time and/or opportunity to arise, the transaction market would likely be posting improvement already if financing was more readily available.
Investors waiting to redeploy capital into commercial real estate until economic growth resumes or a central clearinghouse for distressed properties is established, similar to the Resolution Trust Corporation (RTC) in the early 1990s, run the risk of missing solid acquisition opportunities.
The complexity of financial sector challenges has prompted an unprecedented amount of government stimulus and intervention, all of which require time to trickle through the system. Once credit markets are restored and economic growth resumes, investors will face significantly more competition from other prospective buyers when desirable acquisition opportunities arise.

Long-Term Outlook for Commercial Real Estate: Page 10

Aside from retail, there was minimal overbuilding in recent years, and construction starts will remain limited through at least 2010. As a result, commercial property owners should have an opportunity to lease existing vacant space ahead of the next construction cycle.

Payrolls were relatively lean heading into the downturn, and employers will need to rehire workers when a recovery takes shape. Consequently, the commercial real estate market could experience a relatively swift recovery compared to previous downturns.

Demographic shifts and solid population growth in the coming years are expected to lend support to commercial real estate fundamentals. In addition to bolstering apartment demand, the growing population will require more services, reinforcing demand for other types of commercial space.

Rise in Durable Goods Orders a Positive Sign for Economy

mike@gotmike.com (Mike Harris) — Mon, 31 Aug 2009 14:48:00 +0000

Further signs of a pending economic stabilization emerged with this week’s announcement of durable goods orders spiking 4.9 percent in July, the largest monthly increase in nearly two years. The improvement was driven by a near doubling of civilian aircraft orders; however, non-transportation orders also rose 0.8 percent, the third consecutive monthly gain.
The “Cash for Clunkers” program helped boost orders for motor vehicles by 0.9 percent in July, marking just the second monthly increase in auto orders this year. The government incentive program was in place for nearly all of August, which should fuel an additional uptick in this month’s measurement. A similar government program for energy-efficient appliances could offer a much-needed boost to retailers.
The increases in new orders and shipments are positive news for the economy, particularly in parts of the country that have been battered by employment losses in the manufacturing sector. In the past year, more than 1.6 million manufacturing jobs have been shed nationwide, a 12.2 percent decline. Losses in July slowed considerably, however, and the uptick in orders will likely provide some support to the industry as manufacturers slowly increase production to meet rising demand.
Tenant demand for industrial properties could increase in the months ahead if the production of durable goods continues to gain momentum. In the first half of this year, negative net absorption of industrial space exceeded 63 million square feet, and effective rents declined by more than 4 percent. Any rise in demand would be welcome news to owners of industrial properties, and, with the construction of new space slowing, rents and vacancies could begin to stabilize in the coming quarters. Property fundamentals in the industrial sector will likely be among the first to recover when the recession comes to an end.
Retailers also should benefit from increased orders. Durable goods orders are a predictor of future consumer demand, and if this demand materializes, it should result in greater foot traffic and sales for merchants. Operators of retail properties have cut effective rents by more than 3 percent in the past year, often by raising concessions to beleaguered tenants. Improving sales ultimately should allow operators to bring concessions closer to historical averages, which would boost NOIs and investor demand for assets.

Housing Recovery Beginning as Sales Surge in July

mike@gotmike.com (Mike Harris) — Mon, 24 Aug 2009 14:56:00 +0000

Sales of existing single-family homes rose for the fourth consecutive month in July, providing further evidence that the housing market has started to recover and that the recession is nearing an end. Achieving an annual rate of 5.24 million homes, the highest level since August 2007, home sales rose 7.2 percent last month. Year over year, sales of existing homes are up 5 percent, while the median price has declined 15.1 percent to $178,400. Months of inventory decreased 11 percent from a year ago to 9.4.

The restoration of housing affordability, low mortgage interest rates and a federal tax credit relieved pent-up demand and contributed to the increase in velocity. The tax credit spurred activity among first-time buyers, who must complete transactions by the Nov. 30 expiration. The real estate industry is lobbying Congress to extend the credit. Sales of foreclosed and other distressed properties accounted for about 30 percent of transactions last month, partially generating the drop in the median price. Foreclosed and distressed homes will comprise a significant portion of single-family home sales in the coming months, as 13 percent of homeowners with a mortgage are either behind on payments or in foreclosure.

Housing is a key driver of economic growth, and the stabilization in single-family sales over the past few months has bolstered the construction sector. Single-family home starts increased 1.7 percent in July and are 37 percent greater than the low point recorded in January. A rebound in home building will benefit the economy by creating jobs and eventually stimulating spending on housing-related and household items.

The rebound in the housing market has yet to affect retailers. Earlier this week, both Lowe’s and Home Depot reported declines in same-store sales, following a report of lackluster performance at Wal-Mart. The weak performance by anchor retailers such as these continues to weigh on the performance of smaller merchants that occupy adjacent spaces. National shopping center vacancy rose 50 basis points to 9.5 percent in the second quarter and is still increasing in many metro areas.

The single-family housing rebound will have a significant effect on the apartment sector. A resurgent housing sector will underpin an economic recovery that will create jobs and spur both household creation and demand for rental housing. A continuing rebound in existing single-family home sales also will remove shadow rental stock, providing traction to multi-family property owners in many markets. An increase in home sales to first-time buyers, though, will likely shrink the renter pool in many areas, creating additional vacancies and a greater need for concessions from property owners who are already facing high vacancy rates due to job losses. In the second quarter, national apartment vacancy rose 30 basis points to 7.3 percent, while concessions increased to 6.3 percent of asking rents from 5.9 percent of asking rents in the preceding quarter.

Auto Sales Spike in July; Economic Data Remains Mixed

mike@gotmike.com (Mike Harris) — Mon, 17 Aug 2009 14:26:00 +0000

The “Cash for Clunkers” program is proving popular with consumers, as new car production is ramping up, and auto sales have gained momentum. While weakness persists, some recent data signal that the economy is beginning to pull out of the recession. Specifically, second quarter gross domestic product and July employment contractions were much less severe than in preceding periods; both measurements beat market expectations.

Following eight consecutive months of contraction, industrial production surged 1 percent in July, the largest monthly increase in nearly three years. Additional output gains are expected in the coming months, as inventories have been retreating for nearly a year, and businesses will have to order new stock to meet demand. Improvement in the battered manufacturing sector could boost employment and incomes and should ultimately stimulate demand for industrial properties.

While the base of a recovery is forming, the economy remains soft. Retail sales dipped 0.1 percent in July, despite a 2.4 percent increase in auto sales and parts. Core retail sales, which exclude auto and gas, fell 0.4 percent in July, marking the fifth consecutive monthly decline, and are down a record 4.6 percent year over year. Retail vacancy has surged 230 basis points to 9.5 percent since the onset of the recession.

Falling consumer sentiment will likely continue to weigh on retail property performance in the coming months. Preliminary data for August show consumer sentiment is at its lowest point since March due to ongoing weakness in the job market.

With the economy expected to pull out of the recession by the end of this year, commercial real estate investors are beginning to more closely evaluate opportunities in the marketplace. Tenant quality has emerged as a primary consideration in the current climate, as business bankruptcies are at their highest level since 1993. Investors targeting office and retail properties will want to thoroughly examine the solvency of existing tenants when considering acquisitions.

Marcus & Millichap on Fox Business

mike@gotmike.com (Mike Harris) — Thu, 13 Aug 2009 20:06:00 +0000

Harvey Green, CEO of Marcus & Millichap recently appeared on Fox Business to discuss the issues with Commercial Real Estate loans coming due.

Savings Are Good, But May Slow Recovery

mike@gotmike.com (Mike Harris) — Sun, 09 Aug 2009 14:43:00 +0000

Mark Gongloff recently reported in the Wall Street Journal an interesting piece which may affect the long-term valuation models of many real estate investors. In our discounted cash flow models, we must assume a certain stabilized growth rate and over the recent years, those growth rates were likely higher than we expect to see going forward, according to Gongloff. The article references a recent San Francisco Fed Paper which predicts as much as a 75bps drop in consumption growth each year due to increased savings rates. The latest personal-income and personal-spending data is reported at the BEA website. Below are some highlights of the article:

Strength of the recovery dependent upon savings accounts

Combination of falling incomes and higher spending means consumers' savings will likely fall after surging to 6.9% in May

Long-term path for savings is inevitably higher

Ratio of household net worth to disposable income is at its lowest level since 1992

Current net-worth figures are consistent historically with savings rates of between 6% and 10%

If savings merely rise to the low end of that range, $700 billion in consumer income could be removed from GDP next year

A 10% savings rate between now and 2018 would shave three-quarters of a percentage point from consumption growth each year

High savings rates could spur demand for Treasury bonds and short-term corporate debt, keeping interest rates low