(When Small Business Loans Double over the course of the 1st Quarter 2009, that is a Very Positive Sign for Economic Recovery)

What shape is the recovery in?

NEW YORK – Aug. 14, 2009 – With the launch of an economic recovery all but certain this year – many experts say it’s already begun – the debate among pundits has turned decidedly alphabetical. In other words, what letter will the rebound resemble – U, V or W?

Typically, sharp downturns like the current one yield equally rapid, or V-shaped, upswings. But the worst recession since the Great Depression has been anything but typical, with housing and credit markets devastated. In a USA TODAY survey, 63 percent of economists said the recovery will be slow and gradual, or U-shaped.

Yet 37 percent said it will be moderate or fast. And a smattering of experts say the rebound will look like a W, with a precarious economy sliding back into recession before turning around for good. USA TODAY presents the case for each scenario:

Consumers aren’t spending
Sharp downturn followed by slow and gradual rebound

Most economists, including Federal Reserve Chairman Ben Bernanke, predict a slow and gradual upturn. To be sure, the telltale recovery signals have been flashing green lately. Factory output and new orders grew last month at the fastest pace in two years. The government’s cash-for-clunkers program has lit up a moribund vehicle market.

And with inventories of stores and manufacturers depleted, factories must soon ratchet up production just to restock.

But most experts say the recovery will be muted, largely because consumers are in no mood to open their wallets. They’ve lost $13 trillion of wealth in the recession’s housing and stock market crashes and appear determined to sock away any extra cash they have, says Mark Zandi, chief economist of Moody’s Economy.com. The savings rate jumped to 5.2 percent in the second quarter from a low of 1 percent before the crisis. Consumer spending accounts for 70 percent of the economy.

Meanwhile, the 9.4 percent jobless rate is keeping consumers “focused on necessities like food” and medicine, says Sung Won Sohn, economics professor at California State University.

Two underpinnings of a robust recovery – the housing and auto markets – are suffering from deep-seated problems that won’t soon fade. About 1.8 million in excess housing units built during the real estate bubble ensure a tepid rebound in housing starts, Zandi says. Foreclosures continue to rise. And vehicle sales have been hampered by a credit crisis that’s made it tough for consumers and businesses to get loans. It will take time for banks to feel comfortable lending again. While the cash-for-clunkers program has juiced sales lately, that will mean fewer sales next year, Zandi says.

“It’s hard to see how the economy can get going if people and businesses can’t borrow money,” Zandi says. He predicts anemic growth of 1 percent to 2.7 percent over the next year.

Hiring will ignite recovery
Dramatic tumble produces a similarly sharp upswing

Despite unusual obstacles in the housing and credit markets, some economists say traditional economic dynamics should still win the day, with the steep downturn producing a sharp rebound. Or at least a moderate one.

Businesses have cut their workforces far more than falling customer demand required in an effort “to get ahead of the curve,” says Ken Mayland, president of ClearView Economics. “They’re beyond lean, they’re understaffed,” he says. “They’ll have to start re-employing people faster than in past recessions” just to restock.

Rising employment should boost consumer spending.

Also, despite the massive drop in household wealth, the S&P 500-stock index is up 47 percent since its early March nadir. That should embolden consumers to open their pocketbooks wider than some predict, says Dean Maki, chief U.S. economist at Barclays Capital. So while Maki says the savings rate will stay high, that shouldn’t prevent consumer spending from rising at least moderately as well. Another boost to spending will come from incomes lifted by growing production and a housing construction rebound, he says.

Some optimists point to more basic economic principles. Consumers have been putting off purchases of everything from cars to appliances, leaving a storehouse of pent-up demand, says Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi. The population continues to grow 1.1 percent a year. And the positive economic news, along with rising stocks and gas prices that have fallen from their $4-a-gallon peak, should buttress consumer confidence, Rupkey says. The economic stimulus will likely provide an additional bounce when most of the money is spent next year, optimists say.

The economy “is kind of like a beach ball underwater,” Rupkey says. “It wants to bounce back.”

What’s more, automobile and housing sales have fallen so low that a return to even modest levels would mean a 10 percent to 20 percent increase and a V-shaped upswing, Mayland says. He projects the economy will expand at a fairly vibrant 4 percent clip in 2010, with unemployment peaking later this year.

Banks are still tightfisted. But Maki says the recovery will likely be driven by higher-income households and businesses “that don’t need credit or are still able to get it.”

More pain before the gains
Recovery cut short by recession, then a second rebound

A small group of experts believes the nation will endure an unusual W-shaped, or “double-dip,” recovery in which the economy falls back into recession before growing again.

That’s what happened in the early 1980s when the economy soared the first few months of 1981 following a recession, before the Federal Reserve raised interest rates to head off inflation. That put the brakes on the recovery, setting off another, more severe downturn.

Steve Hanke, professor of Applied Economics at Johns Hopkins University, predicts a similar pattern this time. Besides keeping a key interest rate near zero, the Fed is spending $1.75 trillion to buy government securities in a bid to keep mortgage and other loan rates low.

The massive liquidity, plus rising commodity prices, will increase inflation, says Hanke, who is also a fellow at the conservative Cato Institute. Meanwhile, Hanke believes the central bank will be loath to raise interest rates to stave off inflation in 2010, because doing so could tamp down what he says will be a weak recovery in an election year.

As a result, he says, the Fed “will wait too long” and then be forced, perhaps in 2011, to raise interest rates sharply, sending the economy back into a tailspin.

Wells Fargo economist Mark Vitner also believes a W-shaped recovery is possible, but for a different reason. The economy, he says, should grow at a fairly robust 3.4 percent in the third quarter as manufacturers boost output to replenish stocks. But he says it will likely hit a wall in the first quarter, with little customer demand to keep production up, higher state and local taxes that crimp spending and the expiration of the cash-for-clunkers program. Vitner thinks the economy will slow to a 1.8 percent crawl in the first quarter but could actually shrink before mounting a second, tepid recovery.

Copyright © 2009 USA Today. All rights reserved.

 
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‘Freaky’ side of real estate economics
Flat-fee brokers may put pressure on traditional commissions
Friday, June 23, 2006

By Glenn Roberts Jr.
Inman News

SAN FRANCISCO — Traditional pricing for real estate services is bound to crumble, and flat-fee brokers will likely deliver the deathblow — at least according to Steven D. Levitt, co-author of “Freakonomics,” a book that takes an unconventional approach to economics.

Levitt, who spoke to attendees Thursday at the PCBC builders’ conference and trade show at San Francisco’s Moscone Center, also said that the real estate brokerage industry is in some ways its own worst enemy, as low barriers to entry lead to proportional surges in agent population during housing market booms.

“It turns out that the median real estate agent is making the same amount of money today that they were 10 years ago, despite the fact that housing prices are up 50 to 60 to 70 percent during that time period nationwide. In the end … you’ve got to feel sorry for the real estate agents. Now, instead of selling six houses a year, the typical agent sells two or three houses. My own feeling is that if you were thinking about getting into the real estate business, I wouldn’t do it,” he said.

Such views have not won Levitt and co-author Stephen J. Dubner any popularity contests within the ranks of the National Association of Realtors trade group, Levitt readily acknowledges. Particularly because one of the chapters in the book draws parallels between real estate agents and the Ku Klux Klan. “We’re not big favorites with the National Association of Realtors right now,” he said.

But Levitt explained that the book is not intended “to imply that real estate agents are bad people in any way, shape or form,” he said. His research has raised questions, though, about whether real estate agents always seek to get the best deal for their clients.

In an analysis of 100,000 home sales in the Chicago area, Levitt found that real estate agents tend to sell their own homes for about 3 percent or so more than the selling price of their clients’ homes. When he speaks to real estate agents, he inevitably will hear a familiar range of responses, he said, such as: “Well, that’s just because we have better taste. We’re better at showing houses. We have good paint colors and that makes people want to jump in our houses and pay more.”

The research also found that real estate agents tend to leave their own homes on the market about 10 percent longer than their clients’ homes. “If they have such great taste in paint you’d think their homes would sell faster than their clients’ (homes),” he said, adding that he was not surprised by the findings.

He shared a personal story about a home he was interested in buying in the suburban Chicago area. The home had been on the market for about six or eight months, and he decided to call the listing agent directly.

“I had learned already that I didn’t want to have a buyer’s agent,” he said, since he knew that a buyer’s agent shares in the total commission paid by the seller to the listing agent. By going directly to the seller’s agent, that agent and the agent’s broker could keep all of the commission for themselves.

“I said to her, ‘I’m interested in this house and I don’t believe in buyer’s agents.’ I could hear her voice really pick up on the other side of the line.” Then, he asked a very direct question. “Can you just tell me the absolute lowest price at which the homeowner is willing to sell this house for?”

Her response, “You should be ashamed of yourself. That would be a complete violation of my client relationship to tell you any information like that and you should know better than that. It’s not right to ask me questions like that.”

Later, as the phone call came to an end, Levitt said the agent volunteered some information that led to his offer on the property: “Let me just tell you one last thing. The owner of this home is willing to sell this house for less than you can possibly imagine.”

He made an offer for $50,000 less than he had planned to offer, and the offer was accepted without any back-and-forth. “Basically, in order for that agent to put an extra $20,000 or $30,000 back in her pocket she basically stole $50,000 from her client.”

Levitt added, “When I tell this story in front of real estate agents, I always get the same reaction, completely predictably, ‘I would never, ever do something like that to my client. It’s just patently absurd.’ But you wouldn’t believe the people I interact with on a daily basis – every other real estate agent is doing this every time I turn around.”

Lately, Levitt has focused his attention on flat-fee real estate brokers that charge a flat rate for listing a home for sale in a multiple listing service. He has studied three markets, and so far has concluded that there isn’t much difference in the price that sellers get for using a flat-fee broker versus a traditional, full-service real estate broker.

“In some markets it may take 10 to 15 days longer to sell my house — in other markets I see no difference at all. In the end, if this is true, it’s really going to be bad, bad news for real estate agents, which I think is actually really good news for everybody else.

“I just don’t see how the real estate agents can maintain the level of pricing they have,” he said, referring to a commission rate that has traditionally hovered around 6 percent of the sale price of a home. “And I think that the way it will crumble is not through FSBOs (for-sale-by-owner transactions). What’s really going to be the undoing of real estate agents is going to be flat-fee brokers. It seems to me that’s a very viable option, unless (Realtors are) successful in the end in getting legislation passed which will preclude it from happening.”

Levitt said that lawyers for the National Association of Realtors asked about the source of the MLS data used in his and threatened litigation. But Laurie Janik, general counsel for the National Association of Realtors, said today, “NAR never at any time ever threatened Mr. Levitt with litigation nor did any member of my staff ever speak to him or contact him.”

And Steve Cook, a spokesman for the National Association of Realtors, said that the Realtor group has not taken any legal action against Levitt or the real estate professional who supplied the MLS data.

New doors opened to his research after the release of “Freakonomics,” Levitt said. “Suddenly, everybody wants to give me data.”

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