Tough outlook for the economy.

The outlook for real estate finance is tough far into 2008, with credit markets in turmoil, risk spreads widening considerably, house prices declining, foreclosures rising and the economy slowing. While the risks are mainly on the downside, we expect the economy to skate close to the edge of a recession in early 2008 prior to modest growth later in the year, as the worst of the housing market adjustment passes.

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Between the second quarter of 2006 and the first quarter of 2007, the U.S. economy downshifted to a below-trend pace. The biggest source of the slowdown was residential investment, which has continually subtracted from real (inflation-adjusted) gross domestic product (GDP) growth since the first quarter of 2006. [??] Despite the declining housing sector, economic growth accelerated to an above-par pace in the second and third quarters of 2007, thanks to strong net exports. The trade sector switched places with the hou...

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