http://knowledge.wharton.upenn.edu/article.cfm?articleid=2719&sms_ss=email&at_xt=4d5d19a5ff55d00d%2C0
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"When opportunity comes, it's too late to prepare." (John Wooden)
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My perspective is always informed by the folks who are respected professionals in the field of finance and economics. I've attached the K@W which came out yesterday on "...Decoding the Economy's Mixed Messages."
For those of you who know me, I define economic recovery by where we are with jobs? Interestingly, Susan Wachter, who is a real estate professor at Wharton, looks upon it the same way: "Job growth, is, of course, the key factor in recovery and in the fact that it's a slow recovery. Profits have certainly been strong, and that is usually a precursor of job growth, but job growth is slow. From the negative side, in many recessions, housing is the power driver to recovery. And, of course, it's missing in action in this recovery."
Jeremy Siegel's perspective (one I'm always interested in since he is the best finance professor in the best finance department in any business school) is that there are some hopeful signs. He sees better job growth coming with corporate profits expected to hit record highs this year. But, he is also concerned about food and/or commodity inflation around the world.
Back to Susan Wachter: she sees housing at the mercy of the overall economy. The "consensus is housing prices continuing to bounce along the bottom ... (with) prices declining another 5%." So, "People who are on the sidelines, who are thinking about buying into the housing market, becoming an owner versus a renter, were actually looking forward to what was happening with prices. As the threat of price depreciation increases, you'll find more people sitting on the sidelines [because] it becomes reinforcement [not to buy a home]."
With the statistic on underwater mortgages (people who owe more on their mortgages than their house is currently worth) actually going up from 23% last quarter to 27% this quarter, professor Wachter observed that this is a "fundamental failure" the consequences of which are going to be with us for many years.
Our thought on this: housing is not coming back anytime soon.
And, of course, commodity price inflation is a concern now all over the world and the K@W finance panel acknowledged that.
Professor Siegel's optimism about the stock market was of interest because one wonders how much momentum is left after a couple of good years. Siegel's position on that is that we have higher corporate earnings now (with lower interest rates) than we had when the stock market hit it's previous all time high in June of 2007. With stocks selling at an average PE ratio of 13 when the average PE has historically been around 15, there's still room to grow. Even with rising interest rates, there'll be a rising stock market. With commodity prices going up, oil is a risk to economic growth at a certain price but not yet.
To Siegel, the Facebook potential IPO is something that's as unique to Facebook as Google was to Google: it doesn't reflect a potential internet "bubble." Interestingly, Siegel has the same question as many of us: how does Facebook go from $25 billion as a "valuation" in "The Social Network" movie that came out recently and it's "already" (in less than a year since the movie came out) up to $50 billion without yet being "publicly" traded? If Siegel's asking that question, the rest of us should.
Overall, it's nice to see some reasons to be positive about the economy but we're not back yet.
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Good article!
ReplyDeleteI feel very positive as well. It's a narrow view, but I feel like at my company the "fat cows" are coming back. More lunches are being catered in for team meetings, we're hiring more, growing, very aggressive growth plans, etc.
What you say about housing is very interesting though. There are many factors at play in this, both economic and social. From an economic perspective, it makes sense - interest rates are as low as ever and people still aren't buying. What other incentive can come (besides government handouts)? However, I think even bigger at play here is Gen Y. They should be the first time home buyers - instead, they are generally not getting jobs after college and living with their parents, they are staying in school longer, and they generally just don't want to get married, settle down, and own a house.
This is huge, and will have major implications. It's a generation that doesn't want to be "tied down" - they're not having kids until their mid-30s. They're fine with renting an apartment. They devote 60+hrs a week to their jobs, they don't want to deal with the maintenance that a house calls for.
I think for a very long time, you can't look at a house as an investment. It's a consumable good, much like a car - you buy it, live in it for some time, then sell it and hope to break even.
I'm currently in the process of buying my first house, and that's the attitude I've taken. It's something to be enjoyed for 5 or so years, and I want to break even at the end. If I want to "upgrade," I'll be socking away more money for a bigger down payment on a house and/or hoping for a bigger paycheck.
Marcelo: absolutely brilliant! You're right! I'd love to have my class read my post, the article attached, and then read your comment. You've really gotten to the heart of your generation's attitude.
ReplyDeleteI'm still thinking double dip. How can we truly be having a recovery if we aren't seeing meaningful levels of job creation, a dollar which is becoming weaker every month, and a deficit that no one wants to deal with? Government: "Hello citizen. What's that you say? You've given up looking for a job or settled for part-time work? Great! We'll take you off our unemployment count. What's that? You don't think we're really out of the recession? Why, just look at how the stock market has bounced back! Oh, you noticed how our currency's value fell 11% in the last 7 months of 2010 which wiped out any meaningful gains. Well...who asked you to be so observant?!"
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