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From the October-01, 2008 issue of Credit Union Times Magazine • Subscribe!
WesCorp's Top Economist Is Patiently Waiting for the Housing Bottom
LAS VEGAS -- WesCorp top economist Dwight Johnston, known for his dry humor as much as his economic prowess, managed to get some laughs during his 2009 economic forecast despite the stone-faced subject matter.<p>"Let me say upfront, I have not bought a house yet," Johnston said, drawing laughs as he referred to a common joke among the WesCorp crowd. The joke goes, you'll know the housing market has bottomed out when Johnston, who sold his previous home at the market's peak, gets back into the market.</p><p>"I'm thinking of starting a fund where credit unions can contribute, to give me a nice down payment cushion," he continued. "And if that doesn't work out, I think I'll go directly to Henry Paulson, and say, 'Look, just buy me a house, and you'll get your bottom.'" </p><p>Johnston then launched into his forecast with more smile-inducing words, sharing news that a housing market floor might, indeed, finally be coming around. In some areas of Southern California, for example, housing prices are almost back down to what are considered normal prices. The San Bernardino metropolitan statistical area is already back down to normal prices, Johnston said, and Los Angeles and Orange Counties are almost there.</p><p>And, home sales are leveling off. Johnston reported that 40% of California home sales last month were foreclosures. Those numbers should rise as foreclosure auctions get more aggressive, he said, but those foreclosures will increase the stability of new and existing home sales.</p><p>Housing starts have decreased significantly as well, down to a pace of 600,000 new units per month, roughly matching the pace of home sales.</p><p>"That's good news, because it will stabilize jobs on the construction side of that industry," Johnston said.</p><p>Another stabilizing factor will be less shocking numbers in news headlines.</p><p>"The four largest counties in California reported that prices dropped 35% year to year, but we won't see that next year, because we'll be comparing to a lower base," Johnston said. "Psychologically, it will restore confidence if we stop seeing those nasty headlines, and I think it will have a good impact next year."</p><p>However, the days of negative and shocking financial headlines are not over. Next year, when Alt-A securitized mortgages reset, it could spark another tidal wave of foreclosures, he said. Also, look for Fannie and Freddie to introduce some potentially controversial new programs, like 125% loan-to-value.</p><p>"It's at the risk to the taxpayer, but long range, if they make those loans to people who will keep the house, even though they're upside down, they'll probably be willing to do something like that," he said.</p><p>However, Johnston acknowledged the negative impact the GSE and Wall Street bailouts will have on the U.S. dollar.</p><p>"The dollar was improving and doing well, but when the government started rolling out plans for Fannie, AIG and the others, now we have to worry about foreigners wondering what the heck we're doing with all these bailouts," he said, adding, "we've already got the worst balance sheet in the world when it comes to national debt."</p><p>Johnston also expressed serious concern for the job market, projecting a continuation of this year's month-after-month trend of job losses. Not only have there been job losses in the manufacturing, finance, construction and retail sectors, but those who managed to keep their jobs have seen their hours decline.</p><p>"We can worry all we want about this other stuff, but the fact is, people need jobs, and it's worsening more than I thought," he said. "We haven't had a positive month yet this year, and I think we've got deeper declines coming in the next few months. There's still some hope next year will turn around, but right now I'm pretty concerned."</p><p>A lack of consumer confidence and a business-lending crunch are contributing to the problem, he said. Additionally, the heavy weight of consumer debt is restricting spending.</p><p>In general, Johnston predicted that in 2009, the economy will stabilize but will enter a long period of no or slow growth. The recovery probably won't begin until 2010, he added.</p><p>The credit crunch will ease, but new, tougher regulation will introduce some higher hurdles for both borrowers and lenders next year, he said. The housing market will bottom out and stay there, with no bounce back.</p><p>Johnston also anticipates the Fed will lower its rate 25 basis points as soon as October, though it may just be a token move.</p><p>"But, it's what the Fed has left right now, especially if the payroll numbers are ugly," he said.</p><p>Ten-year notes will be volatile. Ultimately, they will average around 4.25% to 4.50%, but expect volatility, he said.</p><p>Johnston weighed in on the pending bailout legislation, offering a potentially happy ending.</p><p>"Remember, $700 billion is not necessarily the cost of this plan, it's how much debt we'll have to issue to make the plan work," he said. "But, that debt can be repaid because there are assets underneath that have real value. Now, it will require good economic growth, but that growth will increase tax revenue, and five years from now, all that debt could be repaid in full through the sale of those assets." </p><p>--firstname.lastname@example.org</p>
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