Quarterly Review and Outlook - Third Quarter 2007

This week in Outside the Box, Van Hoisington and Dr. Lacy Hunt of Hoisington Management undertake an assiduous analysis of the economy, specifically quantifying the underlying impact of the real estate market on GDP growth through the follow-on adverse effects on consumer spending.

As outlined in previous publications, the housing debacle has not by any stretch of the imagination reached bottom, having an estimated $800 billion of adjustable rate mortgages reset between October 2007, and December 2008. These resets Hoisington indicates are the home buyers who bought at the top of the 2006 housing market, many of whom paid zero down and received mortgage rates of 0%. A somber fact: estimated current market value of homes is $21.0 Trillion; historically having one dollar change in wealth equate to a five-cent change in consumer spending ? would result in $210 billion reduction in consumer spending, given a 20% decline in home prices, or a wealth loss of $4.2 trillion. Others think this estimate conservative, Dr. Robert Shiller of Yale University has calculated that home prices would have to decline by 50% to be at par with cost of rental housing.

Hoisington Investment Management Company focuses on long-term investment strategies based on Economic Analysis. The firm is a registered investment advisor specializing in fixed income portfolios with over $3.5 billion under management for large institutional clients. Van R. Hoisington is the President and Chief Investment Officer and has produced an outstanding fifteen-year performance record. Dr. Lacy Hunt, an internationally known economist, joined the firm in 1996 adding depth and expertise with his in-depth research and analysis.