Tuesday, September 16, 2008

Stock Market Crash - A Few Thoughts

by Osman Parvez
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A stock market plunge may have unexpected consequences. At first glance, you may not think that yesterday's roller-coaster drop (+500 pt in the DOW) has anything to do with real estate.

Guess again.

Both primary and vacation home markets are affected by a downturn in the stock market. Primary home markets are supported by the job market. A strong stock market encourages new investment. In our region there are dozens, perhaps hundreds, of employers dependent on that investment capital continuing to flow. If institutional investors don't see an exit strategy... they won't be investing. Meanwhile, vacation home markets (such as in the resort towns in the mountains) are largely driven by wealthy baby boomers. Boomers won't feel very wealthy as their portfolios continue to decline in value.

Initially, you might be joyful knowing that crude prices continue to fall. Just remember that many local startup companies are "clean tech" or "green tech," driven by long term expectations of high oil prices. Today crude prices touched $92 in Asia, a massive decline from nearly $140 only a couple of months ago.

To the counterpoint, at the same time investors are zombified by a plunge in the DOW, CU is celebrating a $485 million research grant, it's largest in history. New technology and new companies will inevitably result. The virtuous cycle will continue. Meanwhile, Colorado continues to have about 1% lower unemployment than the national average.

Central to everything is how Fannie and Freddy will fare. The initial reaction to the government's takeover was a substantial drop in mortgage rates. But since then, rates have crept back up slightly as general risk and uncertainty have increased. Assuming that there is continued investor appetite for securitized mortgage products, rates could head somewhat lower. If the GSE's aren't able to place newly created mortgage securities because there isn't enough demand, rates will be headed upwards. That's something that could further slow the national housing market. The good news is that the first GSE placement after the government takeover was oversubscribed. But that was before yesterday's plunge.

As usual, stay tuned...


image:
library mistress


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The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

1 comment:

  1. Osman, this is what I was afraid of, Ughhh!! Our financial system is literally a house of cards, leverage to ungodly levels, unsustainable business models, real estate prices well beyond 3x income, what a mess! I was happy to read that you went long US $ some time back, good job. Let's just hope Ben and Hank don't bailout every corporation in the country and make our dollars completely worthless.

    Sustainability!!!! in the economy, in nature, in everything. The lessons will be hard to swallow, but they will come, and they will come hard and fast.

    It's so sad, most people I know don't see any trouble on the horizon, they are too busy with work, and kids, and watching football, you know, all the normal distractions. They check their 401k statement once a quarter, and think to themselves, "it'll be better next quarter" then file and forget.There's no time or will to be a citizen anymore. Let's hope people take some responsibility for themselves and their community when this shakes out.

    Best to all,

    Regards,

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