Economic Recovery Top - Low Country View by: Cal Haupt

I wrote an OP ED back in December 2011 about the relativity of a recession and the best course of action based on my data supported by 3 recessions.  Now the recovery top view.  http://southeastmortgage.blogspot.com/2011/12/low-country-view-of-recessions-from.html  

As we move into the 8th year of the recovery, a DOW 20116, Commercial Flights Full, Malls Full, Restaurants Full, New Car Dealer Lots Over Flowing, and everyone on your street doing home renovations, everyone should govern their actions by data vs. the euphoric feel of a recovery.

With respect to the Mortgage and Real Estate Industry, I am still confident we are in the 15th month of a 60 – 72 month cycle expansion.  I am confident to the tune of investing millions in a 30,000 sq. ft. operations and life balance center at 3575 Koger Blvd in Duluth.  The growth for the past 15 months is ahead of my projections which provides a large enough sample to proof that my hypothesis is correct.

Now for the Yang to the Real Estate cycle Yin.  The financial markets, various stock markets and other financial derivative instruments, can falter without an impact on the Real Estate Market.  Why?  The primary participants or the 80% of the underlying trades in the above markets are institutions and traders.  When it corrects and it will, the retail consumer in general will not be hit the way they were in the last financial crisis because they are not in the markets as deep as they were in 2008-2009.  As a result, they will be unaltered in their euphoric quest for Real Estate.  Whether their need is trading up, trading down, or new home creation for families this trend has 4-5 years left before a plateau. 

My low country view is we all have to navigate the same rivers in a low tide (2011) that we navigate at high tide (today).  Anyone who has been at the helm of a boat knows rivers can be a mundane transit or a harrowing experience depending on tide and weather.  No matter the size of your boat, the outcome is the same.

 This is relevant in that although there looks like more water and routes to take at high tide, beware that the tide cycle and that route outside the normal river may be mud at a lower tide.   The only constant is the Captain (leadership) must know the tidal pattern and govern voyages based on that data.  Financial Markets are no different.  You just need the tide table. 

Most of the Mortgage Lenders that went out of business in 2008-2009 were all navigating in areas that were not part of the average safe tide and were not paying attention to the data that determines our financial tide table.

My advice to MLOs and other professionals related to the Mortgage Industry is although low score, high LTV, and limited documentation products fit a specific need for a very narrow segment of clients; be careful when a Mortgage Company leads with these unique products.  If they do, be prepared for a change in career. 

The safe river is clearly defined by the regulations and directives of our elected officials.  Fannie, Freddie, FHA, and VA products.  Yes, FHA has some low score parameters and should be ingested carefully given Neighborhood Watch reflects gluttons and common sizes them given low scores correlate to higher default and delinquency.  Prudence dictates moderation and sell to client need which is always a fiduciary's safe path for industry participants and clients at all tides.

 

Cal Haupt

Chairman and Chief Executive Officer

Southeast Mortgage of Georgia, Inc.

www.southeastmortgage.com

770-279-0222

Pay attention to the Tide.

 Over the past six months or so, I have been seeing the equation getting out of balance or not making sense.  2 + 2 has to = 4 or at some point other factors will.  As you can see from the chart below, we are extended past the last re balance.  Normally the equation or cycle adjusts every 7 years.  The jobs data is only one factor to look at. 


Change in Payroll Jobs Jan 08 - Jan 17

Another very important factor is what is supporting the stimulus?

In the beginning of the recovery (see the chart below), you can see it was supported by liquidity in the credit markets which trailed off and or was dwarfed by long term treasury purchases.  The purchases are government and safety related.

The positive and or negative aspect of this scenario is that the economy will experience another economic pullback, the flight to safety (real estate) will be a cornerstone of low risk tolerant families and a generation of non-stock investing Millennials.  We are already surging in volume from this prediction and preparation last year when we initially saw it.

Due to the changes in the mortgage industry's regulation and the lack of funding for non sustainable product, there is no need for a rebalance in our industry and I do not anticipate one.  Some are advertising and adding unsustainable product to boost revenue.  This reduces the draft they need to navigate the coming tide.  Southeast Mortgage, SEM, always plans to run well in any tide with sustainable product, great service, and a diverse source and mix.  I am so confident, we are investing in another 31,000 square feet of Operational and Employee Work / Life balance space that comes online in September 2016.

As with past cycles, a great plan and learning from the past is critical to prospering during an economic down turn.  Leadership and Companies tend to have a safe geographic area that they live in and work in.  They may expand out during HAPPY times, but they always pull back to their home states when the economy turns.  SEM lives and works in Georgia and thus we have been open for business since 1993 with the same leadership and corporate structure.  We can drive to AL, FL, and SC thus we remain balanced and service our markets in any tide.

Luck favors a great plan and execution.  Even though you have to be in the right place at the right time to derive more than the average, you have to plan for what if.  A strong balance sheet with cash to fund without warehouse banks becomes relevant.  Organizations that expand past their home foot print must fund the additional cost via their balance sheet or debt from other sources.  When the economy turns, the dominos fall from highest debt to lowest debt which in our industry generally correlates to experience and how stretched the span of control is.

Nobody knows the timing, we just read the tide and plan accordingly.  MLOs and Mortgage companies can do very well in downturns; however, boats that run at high tide despite their weight generally hit the bottom before more nimble boats as the tide gets too low.  Its best to have a wide "diverse" boat that runs great at high tide and low.  We can only control the boats weight (debt), strategic plan (sustainable product), and engine (Great Service Oriented Operations TEAM).  You cannot control the tide.  You can only control what boat you step on.  Now is the time for Mortgage Professionals, MLO's, MLO Assistants to put themselves in a position to maximize this recovery over the next few years and know the foundation they build will support them during an economic contraction.  The next recession will be the fourth that SEM navigated.  When you step on a plane do you feel better knowing you have a 30 year veteran at the stick flying the same dependable plane.

Depending on your boat the fishing will be great for the foreseeable future.

Cal Haupt
Chairman and Chief Executive Officer
Southeast Mortgage of Georgia, Inc.
www.southeastmortgage.com