Catching up with... Milton Ezrati

There has been a bit of turmoil in the economic markets in recent months, making many investors–and their advisors–a bit skittish. Milton Ezrati, senior economic strategist at Lord Abbett, sees a number of culprits behind the recent turmoil including moves by private equity firms and hedge funds, not to mention the whole supbprime mess. He spoke with Managing Editor Bob Keane just after Labor Day.

What are the big economic issues connected to housing?

We had anticipated, and are seeing, a major adjustment in housing, it’s ongoing and we at Lord Abbett are saying [it will last] until the end of the year at least.

What we’re seeing outside the subprime area, which was pretty predictable (although I didn’t go on record predicting it), is that most of the defaults are speculative properties. When you’re in the house, if you have trouble, you might be able to renegotiate with the lender. But if it’s a speculative property and you have a negative cash flow, people are just walking away. That’s where most of the trouble is outside of subprime.

The next wave that we have to face is the resets. We’re already seeing some of the adjustable rate mortgages start to reset. By our calculations, with the data that I’m getting from the mortgage bankers, the worst resets are going to be in the first half of 2008. Most of these are outside the subprime area, most of them are not speculative properties, so we don’t think it’s going to add so much to the pressure on housing, although it’s not going to help. It may cause a bit of a slowdown in consumer spending early next year.

Is that an indicator of a slowing down of the economy as whole?