Blown Mortgage » Economy

Housing prices sink as underwater number rises

Constantine von Hoffman — Tue, 11 Aug 2009 14:24:38 +0000

Two reports out say if you’re thinking of buying, wait. The prices are going to continue to drop. The reason they offer are the same: Continuing increases in the number of homes worth less than their current mortgages.

Zillow reports that 23% of US mortgage holders owed more than their homes were worth in the second quarter of this year. This number is challenged, but not in a good way, by Deutsche Bank which says it’s actually 26%.

Both numbers are a stark contrast to recent upbeat spins on real estate news. National Association of Realtors report that pending home sales rose for a fifth straight month in June. (Remember, the NAR’s last chief economist admitted lying about his numbers.) And the most recent Case-Schiller numbers which were widely misreported as showing a price increase in May.

While the Zillow report makes the relatively sure prediction that underwater mortgages will increase to 30% by mid-2010, DB goes all in and says it will be 48% by 2011.

This will further decrease prices as it increase the amount of housing for sale. There were 3.8 million homes for sale in June which take 9.4 months to sell at the current pace of transactions, and those numbers are from the ever-optimistic NAR.

The number of homes for sale doesn’t (and perhaps can’t) include the huge number of shadow homes out there. These are homes being kept off the market by banks, investors and individual owners waiting for prices to improve before putting them on the market. “If” prices continue to descend look to these folks to hit the market in a big way as they try to get anything back on their investments. This, of course, will further depress the price of homes. That’s a helluva catch, that Catch-22.

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The home price increase that isn’t

Constantine von Hoffman — Tue, 28 Jul 2009 15:54:26 +0000

The media organizations are abuzz with bad information this morning.

CNN: Home price index up for 1st time in 3 years
Wall St. Journal: Home Prices Post Monthly Increase
Financial Times: US home prices rise in May

What they all said was that month-to-month prices rose 0.5%, according to Standard & Poor’s and Case-Shiller. Coming on the heals of yesterday’s stories about a third straight month of increased home sales, this would seem to be very important. And it would have been – if it had been true.

When Case-Schiller reports they first put out a raw set of numbers and then a seasonally adjusted set (sales go up in the fall, down in winter, etc.). I suspect these stories were based on the first set of numbers. In the non-adjusted number, the 20-city composite index actually went up 0.6%! Unfortunately adjust for the seasons and they decreased by 0.22% Seasonally adjusted prices fell in 12 of the 20 Case-Shiller cities.

(While the WSJ did update its story, it hasn’t changed the headline – leading to very confusing reading.)

The fact that even a half-a-percent improvement in prices caused reporters to get all hot and bothered shows exactly how desperate we are for anything resembling good economic news. Look at how CNN tried to put lipstick on this pig: “On an annual basis, home prices in the 20 cities fell 17.1%, but it was the fourth straight month that the year-over-year decline lessened.” Break out the champagne!

While it is undoubtedly a good time to buy a house, it is still a very tough time to sell one and no amount of spin will change that.

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Is Trust Returning to the Mortgage Industry?

Jay Hammond — Wed, 01 Jul 2009 16:12:57 +0000

“The economy is based on trust,” said Dean Johnson, associate professor of finance at Michigan Technological University in Houghton, Michigan.

In situations like the recent housing bubble, or even the stock market collapse of 1929, where markets were driven by debt and fueled by the false expectation that values can only increase, trust can be a very fragile thing.

“One little blip and everything started to unwind,” Johnson said. “The particulars are different, but the basics are familiar.”

Trust, however, seems to be coming back, according to Johnson. If people are cautious and not spending money, the government and financial industry must take action to encourage capital liquidity. During the first half of 2009, this is exactly what they have been doing. And if the effects have not been as immediate as some would like and others needed, at least their efforts are beginning to take effect.

Why does Johnson believe trust is returning? He points to the Volatility Index, or VIX, which measures investors’ expectations of how volatile the stock markets will be. The VIX reached all-time highs in 2008.

“People think of it as the fear gauge,” Johson explained. “it’s encouraging that the VIX, though still high be historical standards, is down about 60 percent from what it was at its peak in November.”

Other, more recent, signs that trust is being rebuilt in the American housing/real estate markets and the financial industry include:

USA Today reports that while the construction market remains weak the housing market may be improving slightly. Residential construction reportedly dropped to the lowest level since December 1995. Pending homes sales increased slightly in May, according to the National Association of Realtors (NAR).
Proposed legislation to create a Consumer Financial Protection Agency is making progress at the federal level, according to the Washington Post. The Post reports that the Treasury Department’s proposal for a new federal agency to consolidate the plethora of state and federal regulators responsible for overseeing the lending industry arrived on Capitol Hill on Tuesday.
At the end of June, Fannie Mae, which is still under the conservatorship of the federal government, reported its mortgage portfolio grew at a compound annual rate of more than 35 percent in May. A report from Dow Jones appearing in the Wall Street Journal indicates a large jump in the issuing of mortgage-backed securities offset continued rises in single-family and multi-family mortgage delinquencies.

Notes of caution, however, are also being heard. Yale University economist and co-founder of the S&P/Case-Schiller home-price index, Robert Schiller told Bloomberg: “At this point, people are thinking the fall is over. The market is predicting the declines are over.” At the same time he is “not optimistic that we’re going to see any sharp rebound.”

Johnson agrees with Schiller.

“It’s still a risky market,” Johnson stresses. “This is the first time in history that you’ve been better off if you’d put your money under a mattress 10 years ago. But hopefully, this indicates that the financial markets are returning to normal.”

Of course this doesn’t mean the housing market or the financial industry will be returning to the halcyon days of pre-mortgage crisis days anytime soon. It doesn’t matter how badly investors, bankers, consumers, lenders, the government or the world at large want it.

“There’s no easy fix,” Johnson concluded. “We have to take our medicine. It took 20 years to create the over-leverage and it will take time to undo that.”

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Recovery? Mortgage apps down, prime delinquencies up

Constantine von Hoffman — Wed, 01 Jul 2009 14:33:17 +0000

Today is the day the recovery starts, at least according to those peering into the rosiest-colored crystal balls. The Wall Street Journal dug up these great examples:

Most forecasters seem to expect growth to be weak for a few quarters, but then rebound back to trend in the second half of 2008… –Lehman Brothers research note, Dec. 12, 2007

What is shaping up as the deepest and longest recession since the 1930s will end in the second half of 2009. –Wells Fargo press release, Dec. 19, 2008

And what news did we wake to on this glorious July 1?

First, mortgage application dropped 30% last week. The report from the Mortgage Bankers Association says this is a the lowest the rate has been at in seven months. Biggest reasons for this are people’s concerns about their jobs and mortgage rates. Currently the 30-year fixed is averaging 5.34%.

Second, delinquency rates for the LEAST RISKY MORTGAGES more that doubled in the first quarter compared to the same period in ‘08.

Prime mortgages 60 days or more past due climbed to 2.9 percent of such loans through March 31 from 1.1 percent at the same point in 2008, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said today in a report. First-time foreclosure filings on the loans rose 22 percent from the fourth quarter, the report said.

(Hat tip to Implode/Explode)

These are just the latest evidence of the new wave of foreclosures. A month ago Mark Hanson of the Field Check Group wrote that the price-collapse we have been seeing in low- to mid-priced homes is now spreading to the mid- to high-priced sectors.

Mid-to-high end [Notice of Disclosure] and foreclosure counts stand between 35% and 40% of total counts but account for only about 20% of total sales. This means that foreclosure-related pipeline supply is 100% greater than demand in this segment. This is a major supply/demand imbalance that will bring serious trouble to this market over the near-term. Especially considering that this particular foreclosure related supply only makes up approx 10% of total mid-to-high end supply with Ma and Pay Organic homeowner once again making up the rest.

(Hat tip to the Financial Armageddon blog.)

Given Mr. Hanson’s impressive track record I am inclined to believe his predictions and wonder why Lehman Bros., Wells Fargo, et al., can’t do as well. Probably has something to do with his lack of a vested interest.

So the much vaunted recovery continues to recede farther into the distance. Surprise, surprise, surprise.

Constantine von Hoffman is a veteran business journalist and social media consultant. He write the blog CollateralDamage, a satirical look at marketing and business.

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Roubini: No confidence in government exit strategy

Morgan — Wed, 24 Jun 2009 22:34:58 +0000

In this Bloomberg segment Dr. Nouriel Roubini shares his thoughts on why pundits proclaiming the stabilization of the housing market are wrong and why the current policy path is unsustainable and likely to have a messy exit. My favorite part? The idea of our debt ballooning from 40% GDP to 80%. Lovely. Can you say bust?

Definitely worth watching:

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No “green shoots” in employment

Morgan — Sun, 21 Jun 2009 21:52:15 +0000

Unemployment rose in nearly every state in the nation in May, with many reaching record unemployment levels not seen since 1976. So much for green shoots. If 70% of our economy is driven by consumer spending, and more and more consumers are out of work, how exactly are we coming out of this mess? Where is the driver going to come from? Even with the government doing everything it can to keep the printing presses pumping out money there isn’t a viable way to easily replace that massive consumer spending. I’m no economist, but the common sense in me says that an umemployed consumer doesn’t spend like one with a job and a house-sized ATM.

The top hardest hit states in terms of unemployment are: Michigan, Oregon, South Carolina, Rhode Island and California. (Image courtesy of CNN.com)

When you’ve got the nation’s most populous state in the top 5 in unemployment, a budget deficit of $20+ billion and new taxes going in left and right (not to mention a whole slew of Option ARM resets coming down the pike) it’s rather silly to be talking of recovery at this stage in the game.

What do you think?

Some more images of doom from CNN:

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Don’t bet on the consumer

Morgan — Wed, 17 Jun 2009 15:40:02 +0000

All this green shoot talk and pronouncements that the worst is over fails to take into account the sorry state of the US consumer. Sure indicators may be turning (are they really?) but the fact remains that the US consumer, the same people responsible for 70% of our nation’s GDP are still in a world of hurt. Below are an amazing set of graphs that show how much of the consumer-class wealth was eliminated over the last year and a half (22%) and how much debt the consumer is carrying (128% debt-to-income ratio).

These factors don’t portend a speedy or vibrant recovery. When 70% of the economy is still fundamentally hurting, the rest of the economy can’t do much in terms of coming around.

And there isn’t really any clear path out of this. Wages are dropping, total employee compensation is dropping, the average consumer isn’t earning enough to keep up with their debt load.

Until the consumer issues of debt are resolved we will have no recovery.

See more incredible graphs from the Huffington Post (all graphs from HuffPo):

When economist David Rosenberg left Merrill Lynch to head back to his native Canada, he gave a nod to Bob Farrell’s Ten Rules To Remember by penning his own. They are both keepers. Among the most important of the rules Rosie laid down, in my opinion, is #12: Get the US consumer right and everything else will take care of itself. The reason is fairly simple: The U.S. consumer has the biggest balance sheet on the planet. The U.S. consumer represents 70 percent of our GDP and about 18 percent of global GDP.

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Student loans make living with debt a harsh reality for college grads

Morgan — Mon, 15 Jun 2009 07:18:24 +0000

Great visualization of the average student loan debt carried by students coming out of college across the country. Amazing that most states’ averages are more than $15,000 per student. It’s tough to bash people for not saving enough when going to school automatically puts you in the hole as you enter the workforce.

It will be interesting to see how the secondary education bubble deflates over the next few years as students can’t turn to parents’ home equity loans and 401k’s etc. to fund overpriced college tuitions.

Image and h/t Brazen Careerist:

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California Foreclosure Prevention Act goes into effect tomorrow

Morgan — Mon, 15 Jun 2009 05:36:31 +0000

The state of California is imposing a 90-day moratorium on all foreclosures as part of the new California Foreclosure Prevention Act that goes into effect tomorrow. The law requires that lenders prove they tried to modify a borrower’s loan before initiating foreclosure proceedings.

From the San Jose Mercury News:

The law is expected to make lenders try harder to keep borrowers in their homes. Loan companies must prove they tried to modify the delinquent loans before they can begin foreclosing.

But supporters acknowledge the California Foreclosure Prevention Act won’t stop thousands of foreclosures from eventually happening. There have been more than 365,000 foreclosures in California since early 2007, with many more already scheduled.

The highlights of the law are (from California Assembly Member Ted Lieu’s site):

1. Imposes a 90 day foreclosure moratorium to allow distressed homeowners time to work out loan modifications with their lenders.

2. Allows lenders to avoid the moratorium if they have a comprehensive loan modification program based, in part, on criteria set forth by the Federal Deposit Insurance Corporation. Loans may be modified several ways, including interest rate reductions, extension of the loan term, or principal reduction.

3. Provides oversight and accountability by requiring regular reports to the legislature on loan modifications and foreclosure reductions, and coordination with appropriate state regulators.

We have some real rocket scientists up in our state legislature. At least I’m not the only one who thinks this is completely idiotic. From Mish:

This bill is no more likely to work than a bill declaring poverty to be illegal or the sky to be green.

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Largest Bankruptcies in History

Morgan — Sun, 14 Jun 2009 20:52:09 +0000

GOOD Magazine has a great graphic representation of the biggest bankruptices in history. (click link for bigger size) Check out Lehman bro’s $691 billion BK, more than 7 times the size of GM’s recent bankruptcy. (h/t Boing Boing for the image)

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