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Transcript
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 A.G. Edwards & Sons, Inc. • One North Jefferson • St. Louis, MO 63103 Member New York Stock Exchange Additional information is available on request. The material contained herein has been prepared from sources and data we believe to be reliable, but we make no guarantee as to its accuracy or completeness. This material is published solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or investment product. This material is not to be construed as providing investment services in any jurisdiction where such offers or solicitation would be illegal. Opinions and estimates are as of a certain date and subject to change without notice. You should be aware that investments can fluctuate in price, value and/or income, and you may get back less than you invested. Past performance is not necessarily a guide to future performance. Investments or investment services mentioned may not be suitable for you and if you have any doubts you should seek advice from your financial consultant. Where an investment is described as being likely to yield income, or as being suitable for an investor particularly seeking income, the income from the investment may fluctuate and part of the capital invested may be used to pay that income. Where the purchase or sale of an investment requires a change from one currency to another, fluctuations in the exchange rate may have an adverse effect on the value, price or income of the investment. Certain investments may be mentioned that are not readily realisable. This means that it may be difficult to sell or realise the investment, or obtain reliable information regarding its value. The levels and basis of taxation can change. This document has been approved by A.G. Edwards & Sons (U.K.) Limited, regulated by the SFA. 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 A.G. Edwards & Sons, Inc., Member SIPC. www.agedwards.com 26 A.G. Edwards & Sons, Inc. Member SIPC 30