A lot has happened with our economy; where are we?
What is different as we look to the next decade?
Information Derived from the Sam M. Walton College of Business, Center for Business and Economic Research Business Forecast Luncheon, February 4, 2011 & the CEO Forum Proprietary Learning Conference Call with Keith Maio, January 20, 2011
1. Job Creation Remains a Problem / Large Concern
a.Â Â Â Â While Washington has spoken more optimistically about our economy, the Federal Reserve, in conversations we have had with them recently, are concerned about the U.S.â€™s economy to create adequate new jobs — Keith Maio, Executive – 20th largest U.S. Bank, speaker at the January 20, 2011 CEO Forum Proprietary Learning Conference Call (inquire within if youâ€™d like the link and pass code to the playback of this informative conference call)
b.Â Â Â Â The U.S. must create 300,000 new jobs to keep up with the monthly increases in our workforce yet in January of 2011, the U.S. produced 36,000 new jobs –Â Kevin Stephenson, economist with Cambridge Associates, advisers to large foundations such as the U of A Foundation, speaking at the Sam M. Walton College of Business 2011 Business Forecast Luncheon, February 4, 2011
c.Â Â Â Â Â In the early to mid prior decade, NWA was creating 10,000 new jobs a year.Â NWA lost 10,000 jobs last year and NWA is forecasted to create 2,000 new jobs in 2011 — Kathy Deck, Director of the Center for Business and Economic Research speaking at the Sam M. Walton College of Business 2011 Business Forecast Luncheon, February 4, 2011
d.Â Â Â Â As people drop out of the workforce and discontinue looking for employment, this will positively impact unemployment rates making the statistic potentially not as strong as it may sound.
e.Â Â Â Â U.S. unemployment rate today is 9.4% and is expected to decline to perform at 8.9% in 2011 â€“ consensus of economists â€“ Kevin Stephenson
f.Â Â Â Â Â Â NWAâ€™s unemployment rate is between 6 and 7%, much better than the U.S. Â – Kathy Deck
2. Housing Finance – Up to 20% down payment for future home financing?
Fannie Mae and Freddie Mac have â€œownedâ€ the home mortgage market other than large jumbo loans.Â The stimulus oriented low interest rate financing combined with accommodating terms have served to slow the decline in the home market pricing.Â As the government begins to reign in these two mammoth organizations and the private sector begins to become a larger provider of home mortgage finance, expect down payments and criteria to become more difficult.Â As this wind down begins to occur, we will likely see new home loans require more down payment ranging from 10 to 20% down.Â Financing will move toward the way private jumbo mortgages are issued today where the government is not buying the mortgages â€“ Keith Maio
3. Home Prices according to the median forecast of economists â€“ no decline in 2011 yet we could have across the U.S. an additional 15% decline before they stabilize
a.Â Â Â Â The consensus forecast of major economists, while individually having a wide range of predictions yet arrived at a median forecast of near 0% – Kevin Stephenson
b.Â Â Â Â Based on the most credible analysis we have found, home prices on average across the U.S. likely have another 15% decline before they stabilize â€“ Keith Maio
4.Â In any given region, median prices for homes will perform at three times the median income â€“ Keith Maio
a.Â Â Â Â This statistic may actually be valuable relative to NWA.Â NWA, in our view, has stability and the ability to have wages begin to increase compared to most of the U.S.
b.Â Â Â Â We will ask Kathy Deck for insight on NWAâ€™s median income and median home price and see where we are today.
c.Â Â Â Â Â The most aggressive larger high growth housing markets were trading at 4 and 41/2 times median income; not sustainable â€“ Keith Maio
d.Â Â Â Â Keith reviewed a Moodyâ€™s analysis that indicates that Las Vegas and Phoenix will be the last to come out of the housing price collapse and in those markets, prices are expected to return to the peak – mid 2006 around the year 2032
5.Â Credit to businesses is loosening; commercial loans in all banks increased in the most recent quarter by 5% for the first time in several quarters â€“ Keith Maio
6. Commentary from the CEO Forum relating to corporate finance and how organizations will be financed
As banks consider how they will make money moving forward, and without the ability to book large commercial real estate loans, banks will begin to pay significant attention to serving and lending to operating businesses.Â Banks will be increasingly interested in financing your business.Â That being said, banks will only do so with solid primary sources of repayment (cash flow) and a solid secondary source of repayment â€“ tangible accounts receivable, inventory and FF & E that offers a margined secondary source of repayment.
7.Â Â The SBA, similar to what Freddie and Fannie are doing in home financing, has tried to make adjustments that will be helpful to stimulate or stabilize the U.S. economy relative to small business.Â It took them a while to get around to this but it is meaningful.Â Â The SBA now allows for banks to renew their own bank owned credit to an SBA guaranteed loan.Â The SBA is willing to consider enterprises that have sufficient cash flow to service the debt but may not have a completely solid secondary source of repayment as will be required, in our view, to get bank financing, witbout and SBA guarantee.Â The SBA has also loosened how it extends their 504 product, a product to help businesses finance their owner-occupied commercial real estate.Â This too, can now be an existing commercial real estate loan held by a bank that can roll into the 504 program providing up to 90% of appraised value and will enable borrowers to lock in on fixed rates before, in our view, they begin to rise.
We will be asking Dennis Smiley and Mike McFarland, two of our CEO Forum members who are executives with Arvest Bank to consider having their SBA specialist shed additional light to these programs.
8.Â CEO Forum Recommendation
CEOâ€™s are smart to invest in their information systems as any third party supporting your organization financially such as a bank or obtaining a line of credit from a supplier or obtaining an equipment lease, will want to better understand the credit risk they are taking before approving such credit.Â This includes improving your accounting systems and use of accounting firms for reviews and audits to assure your information is put forth consistent with generally accepted accounting principles.
9.Â Â The hardest and smartest capital to access is known as institutional capital.Â This capital is often for organizations that are prepared to â€œtake offâ€ and this capital is used as â€œjet fuel.â€Â Â To access this capital in addition to having a great business model, plan to execute and team to execute the plan, an organization must prepare in an extra ordinarily disciplined manner in order to achieve success.Â For an outline on how to be successful at attracting institutional capital prepared by CEO Forum member Dathan Gaskill of River Corporate Finance, please inquire within.Â Dathanâ€™s background and experience makes him as excellent of a resource in this field as anyone we know.
10.Â There was a large volume of commercial real estate loan securitizations during our prior decade that are coming due at this time and most are not in â€œgood shapeâ€- Keith Maio
a.Â Â Â Â The majority of these loans are underwater and will require new equity and often partnerships in order to resolve the financial position â€“ Keith Maio
b.Â Â Â Â The good news is that these securitizations mature with a â€œtailâ€ as a group as the terms of these loans were 30 year amortizing loans due in 10 years.Â Each year some of these securitized loans come due allowing the market to better digest them vs. them coming due in a shorter span â€“ Keith Maio
c.Â Â Â Â Â Securitized loans are dealt with by servicing agents who do not like to take ownership of the asset via foreclosure but would prefer to sell the note at a percent of the loan amount in order to move the â€œassetâ€ before foreclosure to the owner is emanate â€“ Keith Maio
d.Â Â Â Â Because of the risk of commercial real estate and a larger amount of capital is required to finance and hold a real estate asset, capitalization rates have increased.Â Increasing cap rates and a difficulty in arriving at the income of a property looking forward from which to apply the cap rate both decrease real estate values, especially in the larger metropolitan areas of the U.S.â€”Keith Maio
11.Â Other comments worthy of sharing:
a.Â Â Â Â Maria Hayley, Director of Arkansas Economic Development Commission we have more inquiries from foreign country companies wanting to expand each year over last four years
b.Â Â Â Â Kevin Stephenson â€“ itâ€™s ok to feel good; don’t feel great
c.Â Â Â Â Â Kathy Deck – be thankful; we are less worse
d. On federal debt problem via a panel at the Business Forecast Luncheon â€“ no responses with answers that had meat
All of the above amplifies why regions need public and private sector leadership to develop regional development plans like the one that the Northwest Arkansas Council just released known as the Northwest Arkansas Development Plan.Â We all can be thankful for the leadership of this group over the past few decades and each one of us owes it, in our view, a debt of gratitude!Â A full copy of that plan can be found atÂ Â www.greaternorthwestarkansas.com.Â Our regional economy will likely out-perform the U.S. economy in the coming years.Â How does this help all of us?Â As one example, a region that has an economy with growing median incomes is a region that, over the long run, will have growing median home prices allowing every homeowner to prosper from the leadership of regional leaders usually for work done in a prior decade that is fueling an economy today.Â We encourage you to get involved in our region’s development plan supporting the great work of the Northwest Arkansas Council and it’s executive director, CEO Forum II member, Mike Malone!
More on federal debt problem and the category of finance when this report is further updated.Â Please contact us at 479-466-2606 or firstname.lastname@example.org if you have input or questions about any of the above.
To the 35 members of our CEO Forums, thank you for the opportunity to serve you.Â We hope you find this information of value.
We welcome any and all constructive critique to this or any report put forth by the CEO Forum.