<ul><li>Tax rebates may short circuit outright declines in Real GDP. </li></ul><ul><li>With a deteriorating labor market, personal consumption will be weak at best, except for a brief pickup mid-year from the fiscal stimulus package. </li></ul><ul><li>We now see outright declines in business spending, as firms become more cautious considering the weak economic picture and tightening credit conditions. </li></ul><ul><li>The worst of the decline in residential construction is now behind us, but homebuilding will continue to fall throughout 2008 and early 2009. </li></ul>U.S. Economic Overview Highlights Surging Energy Prices And The Still Unfolding Housing Slump Have Pushed The Economy Over The Edge Source: Federal Reserve Board, U.S. Department of Commerce, U.S. Department of Labor and Wachovia Corp. National Economic Overview
U.S. Economic Overview Surging Energy Prices And The Still Unfolding Housing Slump Have Pushed The Economy Over The Edge National Economic Overview Wachovia U.S. Economic Forecast Depending on oils ripple effect Depending on the dollar
Consumer Overview Consumers Are Getting Squeezed On Many Fronts <ul><li>Energy & Food Costs </li></ul><ul><ul><li>Food and energy continue to eat a larger share of consumer income. </li></ul></ul><ul><li>Housing & Home Equity </li></ul><ul><ul><li>Housing prices and home equity are now falling, weighing on consumer spending and sentiment. </li></ul></ul><ul><li>Weakening Labor Market </li></ul><ul><ul><li>The labor market is expected to continue its weakening trend for at least the rest of the year. </li></ul></ul><ul><li>Labor Market </li></ul><ul><ul><li>Despite the weakening labor market, unemployment remains near what is considered full employment. </li></ul></ul><ul><li>Income Growth </li></ul><ul><ul><li>While we expect that income growth will slow in-line with a weaker labor market, it’s still up five percent year-over-year. We also will see a pick-up from the tax rebates. </li></ul></ul>Negative Discretionary Consumer Spending Positive Source: U.S. Department of Commerce, and Wachovia Corp. National Economic Overview
<ul><li>The real trade balance has been improving in recent months, on phenomenal export growth, fueled by a weak dollar and strong global growth. The nominal deficit has remained wider on energy price changes. </li></ul><ul><li>Real final sales to domestic purchasers, a measure of what the economy consumes, as opposed to produces, shows a much weaker picture than real GDP. This measure is more indicative of how businesses and consumers are feeling. </li></ul>U.S. Economic Overview Highlights The Economy Feels Weaker Than the GDP Data Indicate Source: U.S. Department of Commerce and Wachovia Corp. National Economic Overview
U.S. Economic Overview <ul><li>Nominal GDP, a measure of ‘revenue growth’ for the economy continues to grow at a below trend pace, which means corporate revenue growth will remain sluggish. </li></ul><ul><li>Inventories are relatively lean and are unlikely to see the large declines of previous recessions. </li></ul>Highlights The Economy Feels Weaker Than the GDP Data Indicate
<ul><li>Mortgages are more expensive than they have historically been. Restrictive lending standards have also made them more difficult to obtain. </li></ul><ul><li>Corporate credit is also more costly but businesses are tapping the market anyway to build a capital cushion. </li></ul>Credit Spreads & The Yield Curve Highlights We Are Not Out of the Woods Yet Source: Bloomberg LP, Federal Reserve Board, International Monetary Fund and Wachovia Corp. National Economic Overview
<ul><li>Global growth has been very strong, but should moderate this year. </li></ul><ul><li>Some foreign central banks have begun easing, we expect others will follow suit as growth slows and inflation subsides. </li></ul><ul><li>The dollar should begin to appreciate versus European currencies as the Fed easing cycle comes to an end late this year. </li></ul>Global Growth & The Dollar Wachovia Major Currency Forecast Highlights Global Growth Remains Steady But The Dollar Is Poised For a Turnaround in the Second Half Source: Bloomberg LP, Federal Reserve Board, International Monetary Fund and Wachovia Corp. National Economic Overview
Timeline of a Financial Crisis A Crisis Timeline: Eight Months of Fed Maneuvering Source: American Banker and Wachovia Corp. National Economic Overview The Fed will continue to innovate until financial markets stabilize
Results of the current credit crisis MBS to Treasury Price Spreads
Homebuilders <ul><li>Overall Starts Remain Volatile But on a Downward Trend </li></ul><ul><li>While we are not ready to call the current low of 954K starts in March the low water mark, we believe we are closing in on the cycle bottom. Starts may fall another five to ten percent from here, but many of the worst markets are already seeing little to no new activity and simply cannot decline any further. The volatility in multi-family starts over the first half of 2008 was fueled by funding problems at a few large lenders. Those problems have largely been resolved and apartment starts have bounced back. The improvement makes the overall numbers look a little better but single-family starts show no sign of bottoming. </li></ul>Overall Starts Remain Volatile But on a Downward Trend
Homebuilders Permits in the worst housing markets are rapidly approaching or are already essentially at near zero levels. Some states have seen permits decline more than 80 percent from their peak levels. Permits did bounce higher in April for the first time since last Spring. Like starts, we think that the declines are mostly behind us, but would not rule out a few more small declines this summer. Much more of today’s decline in single-family permits is due to deteriorating credit conditions than to oversupply. The builder inventory of unsold homes has fallen considerably, even in massively overbuilt markets like Florida, California, and Arizona Permits Are Rapidly Approaching Zero in Many Markets
Homebuilders <ul><li>New home sales have been declining for the past two and a half years, but the slide is beginning to show signs of moderating and may bottom out in the next few months. The new home market has worked off far more excess inventory (though there is still a long way to go) than the existing home market, as builders have been more willing to cut prices to the new equilibrium levels. If inventories continue to decline at the same pace as they have over the past year, the total number of new homes available for sale would return to its relatively low late 1990s level in about 18 months. Significant nearly new inventory still exists in the resale market, however. </li></ul>Highlights
Homebuilders <ul><li>Existing home sales also show tentative signs of a bottoming, even in hard hit areas like Fort Myers and West Palm Beach. Foreclosure sales in Florida, California and Arizona are helping boost the overall figures but are also fueling price declines. Sales of foreclosed homes provide tough competition for other sellers, causing inventories to rise. The increase in April almost entirely erased all of the improvement eked out over the previous six months. With builder inventory declining, we expect the resale market to gradually strengthen over the next 18 months. Higher fuel costs are also helping boost demand for homes located closer to key employment centers . </li></ul>Existing Home Sales
Homebuilders <ul><li>Delinquencies Continue to Rise, Government to the Rescue? Homebuilding </li></ul>The overall mortgage delinquency rate increased 53 basis points to 6.35 percent in the first quarter. The delinquency rate on prime loans rose 47 basis points to 3.71percent, while the delinquency rate on subprime mortgages surged 148 basis points to 18.8 percent. Nevada, Arizona, Florida, and California are once again at the top of the list in terms of gains in the delinquency rates, along with Louisiana and Mississippi. Credit quality is deteriorating rapidly on both prime and subprime mortgages, but the biggest problem, by far, is subprime adjustable rate mortgages. Credit quality is a lagging indicator and will not likely meaningfully improve for at least another year.
Homebuilders <ul><li>Foreclosures Continue to Climb </li></ul><ul><li>Foreclosures are still rising. The Mortgage Bankers Association (MBA) reported that foreclosures surged 43 basis points to 2.47 percent during the first quarter, up 119 basis points over the past year. Foreclosure starts on prime fixed rate loans rose just 7 basis points to 0.29 percent, while starts on prime adjustable rate mortgages (ARMs) rose 49 basis points to 1.55 percent. The biggest problem is subprime ARMS, which saw foreclosure starts surge 106 basis points during the first quarter. Subprime ARMs account for just 6 percent of all mortgages outstanding but accounted for nearly 40 percent of all foreclosures started during the first quarter . </li></ul>
Homebuilders Mortgage Applications Applications Slide Anew Applications for purchase have renewed their downward trend amid tighter credit standards. Declining home values have also kept many potential buyers on the sidelines and significantly cut into demand for second homes. Demand for adjustable rate mortgages has cooled considerably, despite a steeper yield curve, as reports about homeowners struggling with some ARM products circulate. Consumers are now opting for more traditional products. Applications for mortgage refinancing have fallen even more significantly, reflecting higher mortgage rates and tighter underwriting. Highlights
Homebuilders Figure 2 Figure 3 Source: Mortgage Bankers Association and Wachovia Corp.
OFHEO OFHEO Home Price Index Home Prices Are Now Falling in the Majority of American Cities Source: OFHEO and Wachovia Corp. Wachovia
Investor & Second-Home Mortgages Non-Owner Occupied Purchase Loans: 2006 Investors Were Responsible For More than Half of the Purchases in Some Markets in 2006 Source: HMDA and Wachovia Corp. Residential Real Estate Summary
<ul><li>North Carolina’s economy is still seeing solid employment gains, but the unemployment rate has moved higher in recent months. </li></ul><ul><li>Industrial development remains strong in most major metropolitan areas, particularly in technology and energy related ventures. </li></ul><ul><li>North Carolina has seen record population gains during the past two years, with the Charlotte and Raleigh-Durham regions leading the way. </li></ul><ul><li>New single-family activity has declined from cycle highs, as national builders have scaled back to bolster their balance sheets and reduce inventories. </li></ul><ul><li>Inventories of new homes are relatively lean in Charlotte and Raleigh, with total inventory in Charlotte at its lowest level in six years. </li></ul>North Carolina Highlights Employment & Income Growth Remain Solid Source: Office of Federal Housing Enterprise Oversight, U.S. Department of Commerce, U.S. Department of Labor and Wachovia Corp. North Carolina
North Carolina Highlights <ul><li>The state did not experience the same rapid price appreciation during the housing boom as was seen in some parts of the country. As a result, home prices are holding up relatively well and median prices are roughly in line with the national median. </li></ul>Source: Office of Federal Housing Enterprise Oversight, U.S. Department of Commerce, U.S. Department of Labor and Wachovia Corp.
Wilmington-Cape Fear HBA Wilmington, NC Our Economics Team
Wachovia Economics Group I would like to thank our Wachovia Economics Group Commentary http:// www.wachovia.com/economicsemail [email_address] (704) 374-4407 Economic Analyst Tim Quinlan [email_address] (704) 715-9660 Economic Analyst Adam G. York [email_address] (704) 383-6805 Econometrician Azhar Iqbal [email_address] (704) 715-0575 Economist Anika Khan [email_address] (704) 383-7372 Economist Sam Bullard [email_address] (704) 383-3518 Global Economist Jay H. Bryson, Ph.D. [email_address] (704) 383-5635 Senior Economist Mark Vitner [email_address] (704) 374-7034 Chief Economist John E. Silvia, Ph.D.
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