Financial crisis — not an economic crisis

What a couple of weeks!  The government takeover of Fannie Mae and Freddie Mac, its rescue of insurance giant AIG,  the collapse of Lehman Brothers, and this week’s hair-raising plunges in the Dow, has the media on overload and many of us worried that this downturn may be the Big One. I have been following the financial news closely all week and wanted to provide a quick recap of what I’ve read below: 

The good news is that from what we’ve seen so far this is a financial crisis —  not an economic crisis.  

Many of the Wall Street firms that failed in recent weeks were highly leveraged and dependent on funding that could and did disappear very quickly. During the debt feeding frenzy that characterized the housing boom, Wall Street brokers posted record profits as investors across the globe gobbled up mortgage-backed securities — assuming they promised the safety of government backed bonds with better yields. But the debt Wall Street was selling turned out to be less than safe — and it soon became apparent the firms had, like the investors in their mortgage-backed bonds, failed to take adequate precautions, ultimately leading to their failure.

In the meantime on Main Street, the broad U.S. economy grew at a very respectable 3.3% in the last quarter — fueled not by government stimulus checks but by a strong rise in exports. The unemployment rate, now 6.1%, is still not high by historical standards (after the 1990–91 recession, it hit 7.8%, and after the 1982 recession it hit 10.8%). Oil and other commodity prices are plummeting — down 30% from the highs we saw several months back. 

The U.S. economy survived the bursting of the dot-com bubble in 2001 and Black Monday in 1987, when the Dow fell 23% in one day (compared to a total of 7% on Monday and Wednesday’s drops). Both shocked the economy, but did not sink it. History assures us that eventually the rubble will clear, and we will again enter a period of growth, innovation and prosperity. 

In the meantime, buyers and investors should remember the words of Sir John Templeton: “The time to start buying is when blood runs in the street.” Or as Warren Buffett said more plainly on CNBC last Friday: “If I were going to buy a farm, I would try and buy in a drought year when prices are bad because I know what it’s going to do over time. ”  When conditions look the worst, you will find the best opportunities. 

 A few months ago we were all concerned that interest rates were heading to 7%, and now they are back below 6%!  We have also seen lending guidelines improve in our area. Earlier this week Prosperity Mortgage and Wells Fargo increased the maximum allowable financing back up to 95% on condos, which we have not seen for months.  If clients were waiting to pull the trigger on a home, now is the time.

This is the first of a weekly report brought to you by the Home Mortgage Consultant Emily Scarborough of Prosperity Mortgage (Wells Fargo) in our Grove Ave Long and Foster office

One Response

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