ECONOMIC FOCUS

Volume 15, Issue 02 For the week of January 17, 2011 Housing's Adverse Feedback Loop BANKS/LENDERS Much of the concern about another housing dip centers on the banks. A sharp house-price decline could lead to more foreclosures, hammering profits and reducing lending, such as it is. Here is a look at just a few factors that contribute to housings Adverse Feedback Loop. Economist Michelle Meyer identifies an "adverse feedback loop" where: Lower Home Prices => Tighter Bank Credit => Fewer Jobs => Prolonged Housing Recession HOME EQUITY Economists at Bank of America Merrill Lynch say one key to a jobs recovery is an improvement in housing - because so much job creation is driven by new businesses that have in recent years been financed in part by home equity borrowing. It has been reported that over $1 Trillion in homeowner's equity has been lost during this past recession, so far. This represents Billions of dollars that are no longer available to small businesses. Whatever the final numbers are this traditional source of financing small businesses has been severely limited creating another adverse feedback loop: Lower Home Prices => Lower Home Equity => Less Financing Available for Small Business (a key source of financing) => Fewer New Jobs => Prolonged Housing Recession THE OTHER FACTORS Truth is that you can create additional adverse feedback loops for Shadow Inventory, Distressed or Foreclosed Housing and you have the same outcome – Prolonged Housing Recession. The feedback loops seem unlimited. Recently, we hear that an economic recovery will exclude both jobs and housing. While the other economic fundamentals are encouraging it is will be difficult for any sustained economic recovery to exclude the key factor to economic growth over the past 30 years - housing. Housing has and continues to be the primary support to the US economy and very little commerce is not impacted by housing: land, building materials, the trades (jobs), furnishings, appliances and local, state & federal tax revenues, and on and on. Any genuine economic recovery must include jobs and housing. Key Economic Reports Released This Week RELEASE DATE ECONOMIC INDICATORS RELEASED BY CONSENSUS Wt. INFLUENCE ON INTEREST RATES Tue 01/18 8:30 am et Empire State Mfg Survey for January '11 Dept. of the Treasury 15.0% **  If strong demand Error! Filename not specified. If weak demand Tue 01/18 10:00 am et NAHB Housing Index for January '11 National Association of Home Builders 16 ** Undetermined Tue 01/18 1:00 pm et Weekly Bill Auction Dept. of the Treasury N/A **  If strong demand  If weak demand Wed 01/19 8:30 am et MBA Mtg Apps Survey for week ending 01/14 Mortgage Bankers Association of America N/A * Undetermined Wed 01/19 8:30 am et Housing Starts / Permits for December '10 Bureau of the Census Dept. of Commerce 555k ***  If abov! e consensus  If below consensus Thu 01/20 8:30 am et Jobless Claims for week ending 01/15 Bur. of Labor Statistics Department of Labor 425k *  If abo! ve consensus  If below consensus Thu 01/20 10:00 am et Leading Economic Indicators for December '10 Bur. of Econ. Analysis Dept. of Commerce 0.6% ***  I! f above consensus  If below consensus Thu 01/20 10:00 am et Existing Home Sales for December '10 National Association of Realtors 4,90M ***  If above consensus !  If below consensus Thu 01/20 10:00 am et Philadelphia Fed Survey for January ' 11 Federal Reserve Board 22.5% ** Undetermined * Low Importance ** Moderate Importance *** Important **** Very Important

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