I received an email from our media coordinator the other day.  She sends me emails from time to time, asking for my take on the article.  The article Pam sent me last week was talking about an economic rebound and how a survey of CFOs predicted that the economy would not rebound until mid-2009.

The article cited inflation and employment concerns as the main culprits with rising fuel prices as the biggest concern.

While I agree with the rising price of oil as a major concern, I would add another item to the list of major concerns, and that is the housing market.  I think we need to see the housing market stabilize and inflation to be reined in before we see a rebound in the economy.

The foreclosure numbers just keep going up and this is leading to another problem.  In neighborhoods like mine with a homeowners association, the fees are going up.  Let me explain.  The homeowner’s association has a relatively fixed budget for items like security, landscaping, pool maintenance and so forth.  There are approximately 350 homes in my neighborhood, and just for round number purposes lets say the annual budget for the association is $350,000.  This would mean each homeowner would pay $1,000 per year in HOA fees. 

Now comes the problem.  With so many homes in foreclosure, the HOA budget is being divided among a smaller pool of homeowners.  So instead of dividing the $350,000 by 350 homeowners, it is being paid by say 275 homeowners.  I don’t know exactly how many homes are in foreclosure in my neighborhood, I am just illustrating a point.  If you divide $375,000 by 275, the homeowners are now paying almost $1,273 annually.

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And this is only part of the problem.  Homeowners in good standing are seeing their monthly expenditures rise as the underlying asset is falling in value.  I know those that are losing their homes are far worse off, but there are ancillary effects.  The inventory of homes on the market is causing values to decline.

Now we get the real Catch 22.  The best way for the Fed to fight inflation is to raise interest rates.  But this will make the housing market worse than it already is.  Talk about beating a dead horse.

So what is the easy answer?  There isn’t one.

The Fed will raise rates in the near future in order to curb inflation.  This might actually cause the economy to get worse in the near term, but in the intermediate term, it will help the economy stabilize. 

Stabilizing and rebounding are two different things though.  The rebound won’t happen until the housing market stabilizes.  The housing market won’t stabilize until we see a slowdown in foreclosures and a depletion of the inventory glut.  The only thing that will help this happen is time.

I wouldn’t look for a rebound until the second half of 2009, and even then, it might not be a robust rebound.

The bottom line is that the economy is being hit from all sides right now and we already have a low interest rate environment.  Raising rates is going to hurt in the beginning, but in the end, it will be the right thing to do.  Kind of like getting the cortisone shots in my knee: they hurt like hell in the beginning and the knee is sore for the rest of the day, but then it feels great.

Good Luck and Good Trading,

Rick

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