July 15, 2008

Expert says no need to panic over economic woes

by Christi Mathis

CARBONDALE, Ill. -- News reports in recent days of problems at Freddie Mac and Fannie Mae, along with scenes of customers of IndyMac Bancorp withdrawing their savings as federal regulators took over the bank, are adding to Americans’ worries about the economy and their own financial situation.

Is it a recession? Is the nation headed toward a depression? Is it merely media hype?

“I don’t know that this is media hype. I think this is a real financial crisis in our economy,” said Ike Mathur, finance professor and member of Southern Illinois University Carbondale’s College of Business faculty since 1977. Mathur is an award-winning finance scholar and researcher.

Mathur is quick to add that people shouldn’t panic. He said careful planning is the key to security in the current economic confusion.

Media Advisory

Ike Mathur, professor of finance at SIUC, is available for media interviews regarding the United States’ current economic situation. To contact Mathur, call 618/288-4025.

“All of the economists are able to forecast a recession after it’s over,” Mathur said. “It’ll be the same this time. We probably are in a recession. A recession is defined as two consecutive quarters of negative economic growth. We are there. The stock market has declined more than 20 percent. From October 2007 to now, it’s down 21 percent. We’re in a bear market. We expect to see another one to two quarters of this not-so-good economic situation.”

But, the news isn’t all bad. Not by a long shot. Mathur said he’s confident a major depression won’t happen.

“The Federal Reserve System is much better at smoothing out the fluctuations. I think their actions will preclude going into a 1930’s-style depression,” Mathur said. “And, there’s no need to panic. The housing market will come back.”

Moreover, Mathur said it’s actually a good time to enter the housing market if, and that’s a big if, you do it the right way. While there’s no doubt the real estate market is in a major decline, there are a couple of main reasons why. Mathur said two factors helped precipitate the housing crisis: people who really couldn’t afford to buy a house were able to do so thanks to easy access to variable rate loans, and there was a lot of speculative construction going on all over the country.

In recent years, some lenders approved mortgages without even requiring verification of income. Some buyers acquired homes with mortgages that allowed them to pay interest only. Adjustable rate mortgages became increasingly common, often starting with a low “teaser” interest rate and then jumping to a higher rate that resulted in a payment so large, homeowners couldn’t afford it. All of these factors have adversely affected the housing market. On the positive side, Mathur said he’s watching for mergers among various homebuilders, a sign that the country is heading out of its recession.

Mathur encourages homeowners with these types of mortgages to contact their financial institution or the institution that now holds their mortgage, as lenders frequently sell mortgages. The goal is to switch to a fixed rate mortgage. He said financial institutions aren’t anxious to foreclose and acquire even more property. That just costs them money and often leaves them with more real estate they’ll have a hard time selling.

Meanwhile, it’s a good time for investors to purchase real estate, if they have the capital or are confident that their mortgage is at an affordable fixed rate. Mathur said real estate prices are down as much as 15 to 20 percent or more in many markets, making it most definitely a buyer’s market. Those selling houses may get lower prices or have to hold out a little longer to get something closer to their asking price, though. Mathur anticipates housing prices will remain low, perhaps even declining for the next year or two, as well as more foreclosures within the next one to two years.

In recent years, builders have saturated many housing markets with speculative construction, contributing to the current problems. For instance, Mathur noted that builders in Las Vegas put up numerous condominiums in recent years, often purchased sight-unseen by people hoping to flip them for a profit. Instead, buyers ended up with mortgages they couldn’t afford when the housing market slipped. Some builders also were stuck with unsold developments.

The problems for property owners translated into major problems for some financial institutions, particularly those holding some of the more unsecured or variable loans. The result is what’s happening with lenders such as IndyMac, Fannie Mae and Freddie Mac. For investors in these institutions, it’s not going to be good, Mathur said. He noted that share prices for Fannie Mae and Freddie Mac are down 85 percent. But, he thinks bondholders are “in pretty good shape” and he believes U.S. Sen. Christopher Dodd, D-Connecticut, will be successful in pushing through a federal bailout of those two lenders. Federal banking regulators have already seized control of the California-based IndyMac.

Individual bank account holders can protect themselves by making sure they put their funds in Federal Deposit Insurance Corp.-insured accounts, since each account is insured up to $100,000. Mathur points out that spouses can each have individual accounts and a couple can have a joint account in the same financial institution. Each account up to $100,000 carries FDIC insurance. People can also simultaneously hold secured accounts in more than one financial institution.

“No one should have more than $100,000 in any one account at a bank,” Mathur emphasized.

While there are “no easy solutions,” Mathur said people can protect themselves and he encourages them to “think in the long term.” The Dow Jones was down 180 points Tuesday morning with some stock prices down sharply, but Mathur said it’s not the time to react hastily and sell.

“If stocks are in tax-deferred accounts, it doesn’t make sense to switch them around at this time. In the long run, the market will do well,” Mathur said.

He anticipates the current problems will have the eventual benefit of stronger regulation of financial institution, likely eliminating such things as the loans approved without income verification.