Thoughts / Summary after hearing economist Chris Thornberg

Every October Newwest.net holds a real estate conference regarding real estate and development in the Rockies. Each year they've had an economist, Chris Thornberg, come and speak. Chris has been on-target all three years, predicting the burst of the housing bubble, the effects of the stock market collapse, and the rise in foreclosures. This year he was the keynote speaker, and here's what I took away from it:

• The United States is pulling out of the recession, all signs point to that, we're no longer heading downhill. In fact GDP growth in the 3rd quarter will be positive, the first time since the 2nd quarter in 2008.
• Job losses and the shrinking of the job market will continue. Jobs are a "lagging indicator" which means that they're usually one of the last things to correct after a recession. Chris is the 2nd economist I've heard this year say this, NAR's cheif economist Lawrence Yun also said it. Both cautioned that news media will use the shrinking job market to suggest we're still in a recession, which is not true.
• Unemployment is still high due to this, but it's improving a bit. Here in Montana, unemployment is acutally still pretty good. State-wide we are about at 6.5% unemployment which is about 2% lower than the current national average.
• Nationally, many housing markets have bottomed out and are now seeing recovery in terms of volume. Meaning that more houses are selling than in prior quarters, those markets include; Cleveland, San Fran, Minneapolis, Washington DC, Dallas, Boston, Denver, San Diego, Miami, Atlanta, Phoenix, LA, and others. Of the large national markets only Seattle, Detroit, Las Vegas, and Charlotte had negative volume in his reports
• Montana's median sales price has leveled out but seen little drop, his numbers suggested roughly a 4% drop in values. He predicts some correction will still occur, however Montana's market never spiked during the boom years and so it's only seeing a slight decline over the bust years.
• Prices nationally will continue to go down this coming year, in Chris's opinion and per his data, they're still too high, but getting a lot better.
• Montana is ranked 48th nationally in regards to houses with "mortgage issues" being people who are 60 days+ late or in foreclosure. Only Wyoming and Alaska are in better shape than us. Montana only has 3.15% of it's total housing market that are having mortgage issues.

The most interesting discussion was about where Chris believes we need to go from here, and how important the Federal Reserve is for all of us at this point. He even went so far as to call Ron Paul a "nitwit" for suggesting in his newest book that we should "end the fed." The federal reserve controls inflation and the US is on the brink of another massive inflation risk. Federal stimulus plans have injected billions of dollars into bank reserves, if that cash begins to seep into the market, our inflation rates will go up substantially. Interest rates would spike, in fact Chris compared it to the early 80's with 14% - 16% interest rates. Henry Paulson and the Fed have continued to monitor inflation and curb it as best they can, the issue that comes up is national pressure on further stopping job loss. Below me is what is known as the Phillips Curve. This very simple chart follows the relationship between inflation and unemployment. Chris Thornberg stated that if the Fed folds to political pressure and focuses on curbing unemployment, we will shift along the line below and inflation will rocket up.

The federal deficit will also affect inflation, and this next year we'll have a record deficit. However that should work to correct itself over the years to follow, he believes, and there will be other factors that will increase GDP, and shrink our deficit.

He went on to point out that this next year the Bush tax-cuts eclipse, so taxes will be going up. While as tax-payers this is bad news, for the economy, it's real good news. Tax revenues will increase for the government cutting back the deficit.

Also we want a weaker dollar globally, the reason why is that a weaker dollar means our exports cost less globally, and our export market will go up. Inversely our import market will go down and we'll buy locally a little more. This will further reduce our deficit, and help our economy.

Chris's overall projections went as follows:

• Expect 2010 to start with a sea of foreclosures. Many markets have investors who are begging for more foreclosures to come out for sale. His analogy was that they're begging for a glass of water and they're going to get a title wave. Banks will dump more foreclosures on the market in 2010 than ever before.
• Inflation will creep into the market regardless what the Fed does, but if they stay on target it will be a small effect.
• In 12 - 18 months interest rates for mortgages should be in the 7% - 8 % range.
• Unemployment will not dramatically improve, it should drop to around 7% but probably won't get much better.
• Next year we should see solid GDP growth in all 4 quarters.
• Expect taxes to go up once the Bush tax-cuts go away.
• Do not expect any more federal stimulus or bailout plans as further actions could really push inflation rates.

Chris said that of course his data could be all wrong and there are some big wild-cards that can dramatically affect our economy next year:

• It could be positively affected if our export market improves strongly, as suggested with a weaker dollar.
• It could also be positively affected if business spending goes back up.
• More tax cuts and/or more federal spending would have a negative influence on our economy.
• If Fed policy shifts from fighting inflation rates to fighting unemployment rates, that would also have a negative effect on our market.

Chris said it too, the scary thing is that both Democrats and Republicans right now have it wrong. And the other thing that really frightens him is that none of the actual reasons that caused our economic collapse have been addressed (such as compensation pay for stock brokers and loan brokers, and regulations regarding stock markets and loan markets).

The big theme was that this will be a slow recovery, be patient, because nothing will be fixed overnight.