New Economic Perfect Storm, Ongoing Deleverage Effect

The intertwinings of commercial RE, unemployment, contnued deleveraging, consumer debt and ongoing housing risks continues.

Deleveraging will continue with a negative unemployment surprise coming with companies rethinking the organizational charts while they can. Easier to reorganize, while lean and mean, which companies have more opportunity now to do than ever before. These are the companies that will churn out incredible numbers from this point forward. Unfortunately, with a predominant services industry the downsizing will continue and productivity will be the new game. Employers will become more and more productive with what they have. Believe me, companies are re-thinking organizational structures and procedures to create the new norm for how their companies are run, managed and products are delivered. Productivity gains will continue as long as people feel they must do whatever they need to do to keep their current jobs, which is a factor that is really keeping the consumer confidence levels below the 50 mark.

The current NFP unemployment numbers at 10% still poses an incredible consumer debt exposer of banks and the fragility of commerce as eventually continued high unemployment's effects start to uncover many more fragilities in the system regarding defaults in respect to consumer and bank exposure, compounded by a still apparent credit crunch caused by governmental requirements on bank cash reserves. Add to the above our projected GDP growth to optimally correct unemployment, we would need about 12% next year. Don't hold your breath.

As companies continue to deleverage companies will require less commercial space and as companies become more lean and unemployment slightly increases or more likely stays at these levels for a lengthy period of time, the less need for office space expansions as long as the economy doesn't go down further. As commercial re companies scramble to fill empty space, deflated prices will start to really snowball and a true showing of supply and demand will be revealed. Many will be forced to default on current loans, as consumers in the residential markets are "in over their head", the commercial re sector is headed directly into this same predicament. Furthermore, as the credit crunch continues, the scramble will continue for commercial re, as in residential for refinancing, while banks continue to shun anything real estate as both an over reaction of really getting burned once already and fulfilling the governments requirement of larger cash reserves.

Housing exposure of banks due to unemployment are too large a factor to not worry about. This single handedly has everyone worried, especially the Feds and the Whitehouse. Housing and employment are the largest components of consumer confidence and as housing continues to drag the economy, so will consumer moods and spending. The full exposure of banks to housing has not been fully realized from a combination of consumer credit, unemployment and continued private sector deleveraging. What we have seen is the subprime loans and some prime loans falling into default. The full brunt has not been felt on the prime loan side and, 2nd mortgages and heloc's. This is just developing. Fallout of the large unemployment pool will increasingly uncover prime borrowers that are unemployed, living off quickly evaporating severance packages. Additionally, as improvements only show up regionally and as these borrowers' severances dry up, expect more people walking away from their homes if they have a little equity after housing price depreciation. Those borrowers with equity built in and with severances drying up will sell their houses for far below market to move to areas where they believe their employment chances will increase further fueling housing price index declines . Either way, these are not good signs for housing.

The above predictions depend mainly on all things being the same. If the economy gets better, the better the outcome. The worsening, which is accepted consensus wide, or the worse is ahead view and the worse things may come.