Economic Crisis of 2008

Economic Crisis of 2008

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Report provided by Dr. Filer to the Hampton Roads Partnership Executive Committee on 17-Oct 2008.

Summary: as of Aug08, the U.S. has $19.3T in housing stock with $10.6T in debt. 91.6% are at prime rates; only 8.4% is sub-prime. So, how did this small sub-prime number create such havoc? Regionally, Hampton Roads has less sub-prime stock than the nation and comparable MSAs (such as Charlotte, Jacksonsville, Atlanta). Locally, while still small, the majority of sub-primes are #1) Suffolk, with an alarming rate #2) Chesapeake #3) Portsmouth #4) Hampton.

Hampton Roads has a low foreclosure rate compared to national average. However, over the next year, local ARM resets will be slightly higher in number than national average. Hampton Roads’ median monthly average house payment income as a percentage of monthly income has always been lower than the national average, that is, until 2007.

Hampton Roads' home inventories are a definite concern, although we’re approaching “bottom”, our historical minimum of home sales and at the peak of our historical home inventories. Is our current housing situation the result of fundamental appreciation or over-speculation in home values? This is debatable among local economic experts, including Dr. Koch.

Hampton Roads and NOVA are the only MSAs in Virginia not already in recession or at risk, but “expansion” mode. Expansion in Hampton Roads is evidenced by personal income growth and job growth versus job losses.

In 2008, 59% of mortgage debt was being sold on the secondary market and not held by banks, two times as much as any other period in history. Warren Buffet referred to this rise as “weapons of financial mass destruction”. The credit default market is at $58T while the debt rate is actually $10.6T. These are highly leveraged “insurance contracts”. Credit on “paper” is at 13 times its actual worth and the assets attached to that credit.

The TED Spread, the percentage banks pay to borrow money from other banks, has experienced huge spiking in the last two months. The commercial paper market (basically IOUs) for short-term needs, i.e. paying debt with debt has been rolling over since Jul07 and has started to “crash”. Banks have liabilities and can’t find buyers for the debt.

As of 3rd Quarter of 2008, essentially 80% of the banking industry is finished with sub-prime lending. 60% of banks report tight lending even with credit cards.

So, where’s the bottom? The fundamental weakness is in housing defaults. Foreclosures will continue until this market stabilizes. The high-end market in housing is much more volatile than the conforming market (valued at $417k or less). World-wide recession is indicated by the slowing of GDP. The recent moves by the Federal Reserve and the federal government are very aggressive and need to be allowed time to work in the various markets to stabilize the economy.

The solution to Hampton Roads' housing excess inventory? Need to address the supply side by keeping buyers in the market and attracting new buyers and encourage banks to make loans. Current federal response hopefully will stimulate demand. Hampton Roads builders should be highly commended, having responded well by reducing new permits and avoiding over-building. Other regions are not so fortunate.