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REAL ESTATE AND THE
FINANCIAL MARKETS
Bill O’Grady
Chief Global Investment Strategist
A.G. Edwards
October 19, 2007
TWO KEYS
• THE DIRECTION OF SAVINGS
– WHAT FORM DOES INVESTORS/CONSUMERS
HOLD SAVINGS
– WHAT DRIVES THAT DECISION
• THE IMPACT ON THE ECONOMY
– WILL A WEAK HOUSING MARKET KILL THE
ECONOMY
– WHAT ARE THE THREATS FROM SAVING
HOUSING
THE SAVINGS DECISION
• SAVING=INCOME – CONSUMPTION
– WHAT THE FINANCIAL SERVICES INDUSTRY
DOES IS FINISH THE “LOOP”
• SAVING = INVESTMENT
– WHAT FORM THAT SAVING IS HELD
DETERMINES THE PATH OF MARKETS
• DO SAVERS HOLD THEIR SAVINGS AS REAL
OR FINANCIAL ASSETS
• WHAT IS THE KEY TO THAT DECISION?
MONETARY POLICY
TOP 5 ECONOMIES AVERAGE REAL INTEREST RATE
8
6
4
%
2
0
-2
-4
-6
1970
1975
1980
1985
1990
1995
2000
REAL POLICY RATES
SOURCES: USDA, OECD, BLOOMBERG, AGE
2005
MONETARY POLICY
GLOBAL INTEREST RATES AND
HOUSING PRICES
4
16
0
12
-4
8
-8
4
0
1970
1975
1980
1985
HOUSE
SOURCES: USDA, OECD, BLOOMBERG, FREDDIE MAC, AGE
1990
1995
2000
2005
REAL POLICY RATES
TOP 5 REAL RATES
YEARLY CHANGE, HOME PRICES
8
THE SAVINGS DECISION
72
34
70
32
68
30
66
28
64
26
62
24
60
22
58
20
56
18
60
65
70
75
80
85
FINANCIAL ASSETS
SOURCES: FRB, AGE
90
95
00
05
REAL ASSETS
% FINANCIAL
% REAL ESTATE
REAL ESTATE VS FINANCIAL ASSETS
THE SAVINGS DECISION
34
9
32
8
30
7
28
6
26
5
24
4
22
3
20
2
18
1
60
65
70
75
80
REAL ESTATE
SOURCES: FRB, BLS, AGE
85
90
95
00
05
CPI (10-YR AVG)
CPI
% TOTAL
HOUSEHOLD REAL ESTATE ASSETS/
% OF TOTAL ASSETS VS CPI, 10 YR AVERAGE
THE SAVINGS DECISION
72
9
70
8
68
7
66
6
64
5
62
4
60
3
58
2
56
1
60
65
70
75
80
85
FINANCIAL ASSETS
SOURCES: FRB, BLS, AGE
90
95
00
05
CPI (10-YR AVG)
CPI
% TOTAL
HOUSEHOLD FINANCIAL ASSETS/
% OF TOTAL ASSETS VS CPI, 10 YR AVERAGE
THE SAVINGS DECISION
• BY ALL ACCOUNTS, SAVERS HAVE SHOWN
A STRONG DESIRE TO HOLD REAL
ESTATE AS SAVINGS
– FLIGHT FROM THE EQUITY BUBBLE
– EASY MONEY
THE SAVINGS DECISION
72
34
70
32
68
30
66
28
64
26
62
24
60
22
58
20
56
18
60
65
70
75
80
85
FINANCIAL ASSETS
SOURCES: FRB, AGE
90
95
00
05
REAL ASSETS
% FINANCIAL
% REAL ESTATE
REAL ESTATE VS FINANCIAL ASSETS
THE FUTURE
• NEAR TERM, THE ISSUE IS WHETHER THE
HOUSING DOWNTURN WILL CAUSE A
RECESSION
– FINANCIAL MARKET ISSUES
– ECONOMIC IMPACT
MORTGAGES
Adj Rate Home Mortgage Loans: Loan-to-Price Ratio Rate
%
Fixed Rate Home Mortgage Loans: Loan-to-Price Ratio
%
82. 5
82. 5
80. 0
80. 0
77. 5
77. 5
75. 0
75. 0
72. 5
72. 5
70. 0
70. 0
67. 5
67. 5
Sour ce :
85
90
95
Fe de r a l Housing Fina nce Boa r d /Ha ve r Ana lytics
00
05
MORTGAGES
Purchase of Newly-Built Homes: Loan-to-Price Ratio, Adj Rate Mtg
%
Purchase of Newly-Built Homes: Loan-to-Price Ratio, Fixed Rate Mtg
%
84
84
80
80
76
76
72
72
68
68
64
64
85
Sour ce :
90
95
00
Fe de r a l Housing Fina nce Boa r d /Ha ve r Ana lytics
05
FINANCIAL MARKET STRESS
THE "TED" SPREAD
2.0
1.6
1.6
1.2
1.2
0.8
0.8
0.4
0.4
0.0
0.0
%
2.0
92
94
96
98
00
02
04
T-BILLS LESS EURODOLLARS
SOURCES: BLOOMBERG,FRB, AGE
06
FINANCIAL MARKET STRESS
FED FUNDS MODEL
10
8
6
DEVIATION
4
4
2
2
TIGHT
0
0
-2
EASY
-4
88
90
92
DEVIATION
94
96
98
ACTUAL
SOURCES: FRB, BLS, CONFERENCE BOARD, AGE
00
02
04
06
NEUTRAL RATE
FED FUNDS
NEUTRAL RATE =
3.50%
THE ECONOMY
Stock Price Index: Standard & Poor's 500 Composite
% Cha nge - Ye a r to Ye a r
1 9 4 1 - 4 3 =1 0
60
60
40
40
20
20
0
0
-20
-20
-40
-40
60
Sour ce :
65
70
75
80
85
Wa ll Str e e t Jour na l / Ha ve r Ana lytics
90
95
00
05
THE ECONOMY
Housing Starts: Total
% Cha nge - Ye a r to Ye a r
NSA, Thous. Units
120
120
80
80
40
40
0
0
-40
-40
-80
-80
60
Sour ce :
65
70
75
80
Ce nsus Bur e a u /Ha ve r Ana lytics
85
90
95
00
05
THE ECONOMY
Civilian Unemployment Rate: 16 yr +
SA, %
Housing Starts: 1 Unit
% Cha nge - Ye a r to Ye a r
SAAR, Thous. Units
12
120
r = 0. 32
10
80
8
40
6
0
4
-40
2
-80
60
Sour ce s:
65
70
75
80
85
90
95
Bur e a u of La bor Sta tistics, Ce nsus Bur e a u /Ha ve r Ana lytics
00
05
THE ECONOMY
CONSTRUCTION JOBS % OF PAYROLLS
AND THE UNEMPLOYMENT RATE
12
UNEMPLOYMENT RATE
8
6
6.5
4
6.0
2
5.5
5.0
4.5
4.0
50
55
60
65
70
75
CONSTRUCTION
SOURCES: BLS, AGE
80
85
90
95
00
05
10
UNEMPLOYMENT RATE
CONSTRUCTION
10
Additional Information Available Upon Request
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A.G. Edwards & Sons, Inc., Member SIPC.
This document has been approved by A.G. Edwards & Sons (U.K.) Limited, regulated by the SFA. © 1999
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