Dazed and confused

The line from the Led Zeppelin song is: "Don't know where you're going, only know just where you've been."

Economists have the opposite problem: they don't really know where we stand now but that's not stopping them from predicting where we're going.

Some 71 percent of economists surveyed by the Wall Street Journal think the U.S. is in a recession and they predict that on average, home prices will fall 5.3 percent this year and 1.3 percent in 2009.

Contrast that with the more optimistic take on the prospects of recession from the respected UCLA Anderson Forecast, also out this week.

What folks in the real estate industry would really like to know is when sales will pick up, and a lot of that has to do with whether would be buyers think prices in their market will fall. Only 28 percent of the economists surveyed by the Journal said they expect prices to bottom out this year.

Although buyers have to be convinced that prices are stable, they'll also need to be able to obtain a loan if and when they decide to get off the fence. A report out by Standard & Poor's today suggests there's light at the end of the credit crunch tunnel (free registration required to view link).

Analysts at S&P say write-downs of securities backed by subprime loans (ABS) will reach $285 billion, but that financial institutions have already recognized about $150 billion of those.

"The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation write-downs of subprime ABS," analysts said. "We believe that the largest players, such as Merrill Lynch & Co. Inc. and Citigroup Inc., have rigorously and conservatively valued their exposures to subprime ABS such that most of the damage should be behind them. Indeed, these institutions may benefit from future recoveries in market prices if the performance of subprime borrowers stabilizes and risk premiums for uncertainties dissipate."

Why do we care about Merrill Lynch and Citigroup? Well, we don't necessarily care about those specific companies, but the S&P report raised hopes that the strains that have crippled credit markets may soon ease.

(Also worth noting: RealtyTrac today reported a 4 percent decrease in foreclosure activity in February compared to last month (it was up 60 percent from a year ago), and Countrywide financial said delinquencies in its loan servicing portfolio fell slightly, the first time that's happened in almost a year).

In the mean time, however, market forces are prompting more write-downs. S&P analysts say they believe any "near-term positive impact" of increased disclosures and write-downs will be offset "by worsening problems in the broader U.S. real estate market and in other segments of the credit markets."

One problem with the debate economists are having is that by the time we have all the numbers needed to determine whether we are actually in a recession, it could already be ending.

According to the Journal, "most forecasters expect a recovery to begin in the second half of this year, as the government's stimulus package and the Fed's interest-rate cuts begin to spur the economy. By the end of the year, the economists expect inflation still to be hovering at an uncomfortably high 2.7 percent, raising the question of when the Fed will start raising rates."

Raising interest rates?

On average, the economists surveyed by the Journal think the federal funds rate will bottom out in June at 2.06 percent and begin climbing again slightly in December, to 2.11 percent. The Fed's target for federal funds rate -- the rate charge to lend each other money overnight -- is currently 3 percent, and most observers expect a 50 or 75 basis-point cut when the committee that sets the target meets next, on March 18.

Although fixed mortgage rates move independently of the federal funds rate (and most ARM loans are tied to the London Interbank Offer Rate), inflationary pressures could push mortgage rates up as well.

That might mean that by the time home buyers are ready to go shopping, their buying power will be reduced -- putting more downward pressure on home prices.

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