Thursday AM December 6th, 2007

President Bush to discuss subprime mortgage crisis...Panel discussing 2008 Houston real estate market...National Association of State Budget Officers and National Governors Association warn state governments to prepare for economic downturn...

A senior official says President Bush will discuss his administration's response to the subprime mortgage crisis Thursday. Congressional sources say they expect the administration to unveil the details of an agreement hammered out with the mortgage industry. Houston's economy is in good shape, according to Joel Marshall with Trendmaker Homes. But starter homes here could be affected.

"Well, we are going to be impacted by that. The subprime mortgage—those instruments did get used in Houston, and those loans are coming unwound now. And I think that the portion of the market that was using those subprime mortgages is going to be impacted. It's primarily the entry level here in Houston and we're seeing a fairly dramatic drop-off in business at the entry level here in Houston because of the subprime market." Ed: "What other changes do you foresee for 2008?" "Well, like I said, I think you're going to see a drop-off in the business at the entry-level because of the change in the mortgage market and I think we're going to see overall starts drop in Houston in 2008. But I think you're going to continue to see a stable pricing situation, where you don't see the drops in pricing that you're seeing in Florida, for example. That's just not in the cards here in Houston. There'll still be plenty of people being able to buy houses because if you got, you know, documentable income, you've got a good credit history, you know there's plenty of mortgage money out there for you. So I think it's going to be something where people will be able to buy a house and there'll be plenty of wonderful product on the market for them to buy.."

An agreement announced by the president could freeze interest rates on thousands of subprime mortgages that are scheduled to reset to sharply higher rates. The plan would be an effort to curb an explosion in defaults that is occurring as interest rates on subprime mortgages reset to levels that in many cases are boosting monthly payments by as much as 30 percent. Marshall says the housing industry in Houston is faring better than the rest of the country because of job growth.

"Well, I think that people in Houston have probably been exposed to a little bit too much of the national media about the downturn in housing, which is really just occurring on the east and west coast. They're not really seeing the picture as it is here in Houston, and what I want to emphasize is that the housing business in Houston is fine, and the housing values in Houston are fine. In fact, 2007 is a record year for Trendmaker. So it's a different market in Houston, and that's something I'm going to emphasize. Ed: "The government, of course, is trying to freeze rates. That's sort of underway as we speak, here, the efforts. Is that a good response? Will that help?" "I think it will help. There are going to be people that simply will have to walk away from their house. They will be unable to afford it as the rates reset, and I think to the extent that they can stop that from occurring, you'll keep people in their houses, hopefully long enough that they can get their feet under them and get to a place where they can actually afford the house they bought. And that's the problem, is where people (were) buying houses that they couldn't afford."

An estimated two million subprime mortgages are expected to reset over the next two years. However, the administration's plan is expected to only cover borrowers who have kept current on their monthly payments at the introductory "teaser'' rates. Marshall is part of panel speaking this morning in a breakfast forum sponsored by Boyar & Miller.

State governments are being warned to prepare for an economic downturn if conditions worsen. An analysis by the National Association of State Budget Officers and the National Governors Association finds rising health care costs and the housing crisis are putting pressure on both revenue and spending. States are spending less now than they did in fiscal 2007. And this year, spending is expected to grow by less than five percent, below the historical average. The report says a few states are considering dipping into their "rainy-day'' funds to address budget shortfalls caused by lower than expected revenues. The analysis says total reserves for states remain healthy but are starting to decline.

A trade group says the nation's service sector grew in November, but at a slower pace than the month before. It is also below forecasts. It was further evidence that the nation's economy has been cooling in the face of higher oil prices and a tighter credit market. The Institute for Supply Management says its index measuring performance in non-manufacturing industries registered 54.1 in November, compared with 55.8 in October. A reading above 50 indicates expansion, while one below 50 shows contraction.

Worker productivity roared ahead at its fastest pace in four years over the summer. The Labor Department is reporting that output per hour was up at an annual rate of 6.3 percent from July through September. The number was far bigger than expected. At the same time, wage pressures slowed. The department says labor costs dropped at a rate of two percent in the third quarter. That was the biggest decline in four years. The combination of stronger productivity growth and easing wage pressures should ease concerns about inflation at the Federal Reserve and help clear the way for another cut in interest rates next week. Investor hopes for an interest rate cut have been rising in recent days. Fed officials hold their last meeting of the year next week.

Treasury Secretary Henry Paulson says that Chinese product safety will be a key topic for U.S. officials at high-level economic talks with China next week. Paulson said China's ability to manage the safety of its goods will be an important part of Beijing's future growth and of its trade relations with the U.S. Paulson and other cabinet-level officials are going to China December 12th for the third round of the so-called Strategic Economic Dialogue. Paulson launched the talks a year ago, but so far they have produced little results. Vice Premier Wu Yi leads the Chinese side. The U.S. has pushed China to improve the safety of its exports given a string of high-profile recalls of various items from toys to toothpaste.

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