If your only source for current affairs is 'Entertainment Weekly', it may be news to you that the 2008 forecast for the US economy is stormy weather. The dark clouds gathering on the sky appear to be a harbinger of a recession caused by a confluence of winds from a bursting housing bubble, a rapidly developing cold front from a credit freeze that reacts violently with the hot air from politicians and economic 'experts'.For those following the Jamie Lynn Spears '16 and preggers' scandal but think 'Ben Bernanke' (Current US Federal Reserve Chairman) is a brand of Rice:-
- Following 2001, the Federal Reserve went mad. Fed Chairman Greenspan lowered fed rate to 1% which made cost of borrowing ultra-cheap. On the flip side, treasury bonds, CDs and savings rates correspondingly went down, so investors sought higher yields with more riskier ventures.
- Wall Street and Financial institutions went mad. They borrowed that 1% money and actively sought for ways to lend it to anybody. Over the years, rational practices such as down payments or evaluating risk of borrower were abandoned. Brave New World products were created by MBA hotshots with fancy sound names as collateralized debt obligations (CDOs). In reality, they were financial sausages made from pieces of risky mortgages and Wall Street positioned them as prime steaks complete with “AAA” ratings.
- The US populace went mad. Real Estate, once perceived as being a place to live in with modest appreciation expectations, was now a 'can only go up' investment and a ticket to riches. Why work when you can flip a fixer upper for $100K by providing a only a lick of paint, staged furniture and baked bread prior to a visit to give it that 'welcome home' smell. Prices appreciated year after year which appeared to confirm the perception. Greed took over, people bought condo's unseen and people willingly signed themselves up with toxic products such as ARMs and Interest only loans.
- Investors went mad. In their haste and newfound belief that RE could only go up, they never thought too hard about what is was exactly it was that went into the financial sausages they were consuming nor how those sausages had been cooked.
- The RE professions went mad. Appraisers knowingly overinflated property values, Realtors willingly jumped on the bandwagon as their lively hood is commission based to talk up the market. Mortgage brokers happily facilitated fraud to get people into mortgages that they knew were not affordable with pitch that “you can always re-fi before the reset”.
- Politicians went mad. They clapped as rapid RE appreciation happened since it is a source of taxes and money that could be recycled into the economy. GDP would go up. % ownership was at an all time high and touted as a success of President Bush's leadership. Fanny Mae and Freddy Mac were challenged to lend even more although those newcomers were poorer. Politician's also neglected their watchdog role.
- Media went mad. (Not perhaps since they are no longer independent thinkers). They willingly cheered articles encouraging the myth of RE always goes up – they had self interest in selling ad space to REIC - and never questioned if it was a good thing. The fact that RE prices got out of whack to peoples incomes never was raised. Interesting to note that the peak of the housing bubble probably corresponds to the June 13, 2005 TIME magazine cover.
So now where are we in 2008. We are beginning year 3 from the peak and individuals are recovering their senses one by one.
Flippers are left with flops. ARMs are resetting higher and payment amounts are increasing. Foreclosures are (no pun intended) through the roof and 'jingle mail' is increasing. Selling prices have dropped at least 5-10% and trend is down, Volume of sales has dropped even more, at least 20%. Sellers needing to get out are finding it a long and lonely wait. Open houses can have no visitors. Many sellers and unable to drop their price.
Investors, having caught a bad case of poisoning, have not surprisingly lost their appetite for mortgage sausages or other meat products which have Wall Street brand.
The inventory of unsold sausages are now rotting on the accounts of the financial institutions that created them and spreading to the institutions themselves. Many are not looking too healthy: SIVILIS where symptoms are lenders are no longer in a position to lend due to massive profit losses.
In the REIC world, Mortgage brokers are going broke. Appraisers are no longer appraising. The 6% RE agents are 0% RE agents. Builders may be building for now but they are selling and are cash flow negative. Ironically enough. Sub-prime was named word of the year for 2007.
Washington Politicians are pretending they are concerned but looking for political opportunities at the others party's expense. “Hope Now” is and will continue to be a flop. Other tinkering will be attempted but with low probability of success. Market forces are too strong, there is too much debt and overvalued assett prices vs. what market is able to pay.
Local and State politicians on the other hand have to face the music sooner, Unlike Washington, they are no allowed to deficit spend and must balance the budget.
- Foreclosures = no taxes from an occupant and lower property values for neighborhood.
- Declining house prices = lower taxes.
- Lower build starts = lower fees.
- Lower revenue = cuts somewhere.
Media are now slowly waking up and pretending they knew it was going to happen all along. However, they still parrot happy talk backed by quotations from a hapless industry insider 'experts' such as Lawrence Yun.
Unfortunately for many people who jumped on board, the gravy train has been derailed. The golden days of RE have ended. People will wake up from the “American Dream” and realize it was just a dream. Supply vastly exceeds demand and prices will revert to the mean with an overshoot to the downside. The house prices to salary is still too high. Critical enablers to the bubble, exotic mortgage products and willingness of investor to buy mortgage backed assets are dead. Conservative lending with a down payment and proof of ability to pay will be back in vogue.
So what the heck has this got to do with travel ? The answer is a great deal. Disposable income for much of US (especially areas with higher price appreciation) will decline. Consumer sentiment is negative. The revenue streams that people used to fund their discretionary spending -:Refinancing and HELOCs - are being shut down. As RE went up, people would withdraw equity and leverage up their notes. The money would be frittered away on cars, home improvements, pay down credit cards but it would also be used for holidays. Next year as house went up again, Re-Finance and take money out again. Wash-rinse-repeat.
Secondly, much of the economic expansion and GDP growth has come from housing. Jobs will be cut and consumer spending will contract.
Is the travel industry projecting a decline? Nope. Just like National Association of Realtors (NAR), who's projections only seem to go upwards, Travel Industry Association of America (TIA)'s annual forecast,
the U.S. travel industry is expected to post only moderate gains in nearly all sectors in 2008. Travel spending by domestic and international visitors in 2008 is forecast to increase more than 5 percent to $778.2 billion, up from projected full-year 2007 travel spending of $740 billion. Domestic leisure trips are expected to continue an upward trend of modest growth in 2008 and a slight increase in travel for business is expected.
My predications are discretionary vacation trips will be cut back in 2008 as a financial crisis starts to bite: Disney, Cruises, Winter holidays, Hawaii, New York will be impacted. Vegas, US #1 destination, will be especially vulnerable as it has gone through a huge RE boom itself not only in residential but also expanded it's accommodation capacity.
Sales of RVs will also be hit as boomers revisit their budgets and they realize selling their property may not bring the windfall they expected.
Families who are cash starved will still take a vacation. However, it more likely to be local and more frugal. Perhaps camping will be more popular.
Is the US alone in this situation with exposure to RE? Absolutely not. The RE mania seems to worldwide phenomena albeit to differing degree. The differences are between methods of financing. Some countries like Ireland, Spain, UK have seen a similar speculative run up with funky loans. All seems to have peaked which does not bode well for those counties. Like US, troubles in RE will impact their currencies.
In 2008, I expect the UK to be more slightly more attractive as a destination as the pound decreases. Since Nov 07, pound peaked at 2.11 to the greenback. It is now 1.967: a 7.5% decline in just 2 months!It is still not a steal as I remember it at 1.5 but for a frequent visitor to UK, I like the trend. I also predict the the Euro to decline in 2008 as ECB caves under pressure to help it's exporters and drop interest rates.
Don't get me wrong here. I am not saying the dollar will strengthen. I am saying the European ones will weaken.
Ben Bernanke in attempt to protect economy will likely drop interest rates again. However, this will not rescue economy as it is not a liquidity crisis now, but a solvency one. Regardless, it will drop the dollar down further. I expect to see more energy surcharges in 2008: Commodities are priced in dollars and value of dollars will decrease. If dollar drops 20%, why is it we are surprized when oil goes up at least 20%? Also factor in China and India demand and fact that limited investment has gone into energies in past decades due to declining commodity prices.
One region which I project to benefit from lower rates in US and Europe are Asian countries. Their currencies will appreciate and assuming they will put up with US Immigration hassle, it will mean an increase of visitors from Asia.
Other areas that will impact travel are cut back in state budgets. An easy target being closure of state parks. California is facing a $14 Billion shortfall and is proposing cutbacks with a closure of 48 state parks.
So on the bright side, if you still are employed and cash positive, 2008 should present some travel bargains as prices are slashed to attract visitors.
Question then is which ghost towns should we visit?
Phileas Fogg,
Houston, Texas
Jan 2008
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