The fed's attempts to save the housing market have come to nothing. Risk has returned with a vengence. Banks have remembered how interest rates should properly reflect default probabilities.
Feb. 29 (Bloomberg) -- Consumers like Valerie Jacobsen aren't getting much of a break on borrowing costs even after five months of interest rate cuts by the Federal Reserve. Jacobsen, 30, wants to refinance her 7.25 percent first and 8.5 percent second mortgages into one loan at a lower cost. To cut the payments enough to recoup her $3,000 in closing costs, she needs a rate well below 6 percent. She wasn't ready when costs dipped in January and now they're back at levels that make her plan too expensive, the Austin, Minnesota, resident says.
``Rates I'm seeing aren't really mimicking what the Federal Reserve is doing,'' said Jacobsen. ``I'm wondering why that is.''
Trying to spur lending and avert a recession, the Fed has chopped 2.25 percentage points off its benchmark rate since September. Wariness among lenders and fears of inflation are keeping mortgage and auto loan rates close to or above levels before the central bank began easing, while credit-card issuers are tightening their standards.
The slippage between the Fed's rate cuts and consumers' ability to borrow or reduce loan costs is weakening the central bank's ability to stimulate the biggest part of the economy, consumer spending. It accounts for more than two-thirds of goods and services output and stalled for the second consecutive month in January after adjusting for inflation, the Commerce Department said today.
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The fiscal bust is just a few years ago - medicare, social security, the national debt - just give it ten more years.
December 4, 2005 (WLS) -- For years, every generation of twenty-somethings has had nicknames. Generation X and Y come to mind. But the latest phenomenon is well-educated, well-financed and not eager to pay dues. Employers, sociologists and even the media have dubbed them "the entitlement generation." They are images of desire, and they are everywhere. And many times they are expensive. In a world of instant communication and instant gratification, having it all can't wait. In the working world these people are known as the entitlement generation.
"Yes, there's an entitlement generation we are seeing a little bit more of," said Debbie Bougdanos. Bougdanos would know. She works at the world renowned advertising firm Leo Burnett and is in charge of recruiting for the creative department. Plenty of portfolios come across her desk. Many of the applicants think they are ready for the prime assignments, but she says, most assuredly, they are not.
Things are never as we expect. Who would have imagined that people would just walk away from the overvalued homes. No wonder the ratings agency models have had nervous breakdowns.
Fitch Ratings, while telling investors last Friday to expect additional "widespread and significant downgrades" on $139 billion worth of subprime loans, has cited a new factor in their "worsening performance."
"The apparent willingness of borrowers to 'walk away' from mortgage debt," the analysts noted, "has contributed to extraordinary high levels of early default" on loans issued during the 18 months before the mortgage bubble burst. It expects losses to reach 21% of initial loan balances for subprime mortgages issued in 2006 and 26% for those issued in early 2007.
Such behavior, where not precipitated by willful fraud, shows that American homebuyers supposedly duped by their lenders aren't so dumb. They're perfectly capable of acting rationally without political interference.
US homebuilder confidence is at a 16 year low. The industry isn't short of misery; rising inventory, falling sales, rising defaults, falling profitability, rising interest rates, and falling prices. Who could hold a happy face after that litany of problems?
June 18 (Bloomberg) -- Confidence among U.S. homebuilders fell this month to the lowest since February 1991 as interest rates climbed and delinquencies surged. The National Association of Home Builders/Wells Fargo index of sentiment declined to 28 this month from 30 in May, the Washington-based association said today. Readings below 50 mean most respondents view conditions as poor. Economists surveyed by Bloomberg News forecast the gauge to stay unchanged this month.
Homebuilders including Hovnanian Enterprises Inc. are losing money as they cut prices to stem a slide in sales amid stricter standards for getting mortgages. Builders have scaled back projects to work off bloated inventories, a sign housing construction will weigh on growth for the rest of the year, economists say.
The median forecast of 35 economists surveyed by Bloomberg was for the index to stay at 30. Predictions ranged from 28 to 32. The group's measure of single-family home sales fell to 29 from 31. The index of traffic of prospective buyers slipped to 21 from 22. A gauge of sales expectations for the next six months declined to 39 from 41.
Federal Reserve policy makers last month acknowledged that the housing recession will hold down growth longer than they had anticipated. At the same time, officials have kept their outlook for ``moderate'' growth in the overall economy as consumer spending gains and manufacturing accelerates.
Some reports in recent weeks pointed to reviving demand for homes. The Mortgage Bankers Association's index of applications for mortgages to purchase homes rose an average 5 percent in May from the prior month and was up 6 percent from a year ago. Purchases of new homes unexpectedly jumped in April by the most in 14 years from April, the government reported last month.
Still, a large stock of unsold homes means that builders are reducing their projects. Inventories in April equaled 6.5 months' worth of sales, down from a record high of 8.1 months' worth in March.
Building permits, which signal intentions of starting projects, fell in April to the lowest since June 1997. The Commerce Department may say tomorrow that housing starts fell last month to an annual rate of 1.473 million, from 1.528 million in April, according to the median forecast. The housing market also must deal with the burdens of rising mortgage rates and tighter lending standards.
Thirty-year mortgage rates at the end of May averaged 6.37 percent, rising further to an average 6.74 percent at the end of last week, according to Freddie Mac, the second-largest purchaser of U.S. mortgages.
The number of U.S. homeowners who face possible eviction because of late mortgage payments rose to an all-time high in the first quarter, led by subprime borrowers, the Mortgage Bankers Association said in a report last week. U.S. foreclosure filings surged 90 percent in May from a year ago, RealtyTrac Inc., which monitors foreclosures, said June 12. The failure of at least 50 subprime lenders, who make loans to consumers with poor or limited credit history, raised concern homes will be thrown back on the market as foreclosures rise.
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We have a bubble in foreclosures. We are seeing growth rates so high, that we could be forgiven for thinking that foreclosures have "departed from fundamentals". In April, foreclosures were up a staggering 62% over the same month last year. According to RealtyTrac, a total of 147,708 home will put into foreclosure. If the housing market continues to add this number of foreclosures for 12 months, then we will see overall 1.7 million homes being dumped into an already bloated inventory of unwanted homes for sale.
Inevitably, we are forced to use similar language that was previously used to describe the housing bubble. These kind of growth rates simply cannot continue. The foreclosure rate will stabilise. We'll have a soft landing in foreclosures.
So where are the foreclosure bubble cities and states. Colorado is top of the list. Currently the state is suffereing one foreclosure filing for every 314 households. Connecticut is also making a strong showing..The state reported 4,207 foreclosure filings during the month, more than twice the national average. Other states with foreclosure rates ranking among the nations 10 highest in April were California, Ohio, Georgia, Florida, Arizona, Illinois and Michigan.
Californian pending sales took another major hit in market. According to a new report from Hanley Wood Market intelligence, sales fell by almost 4 percent between February and March. Compared to the same month last year, pending sales are down almost 40 percent. Throughout the state in March, around 5,775 pending sales were agreed. During March last year, buyers agreed to purchase 9,160.
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Where did all this housing inventory come from? Just 18 short months ago, realtors were blathering on about the lack of supply pushing up housing prices. Today, housing inventory is exploding. Local MLS listings are bursting, and realtors are finding it difficult to keep up with the daily intake of listings from desperate sellers.
According to ZipRealty, in April housing inventory increased by 7 percent in the nation's 18 largest metropolitan areas. Moreover, in some cities, inventory increases reached double digits; San Francisco, up 19 percent; Washington, 17 percent; Orange County, Calif., 15 percent; and Seattle, up 14 percent.
With Lereah gone, the NAR are gradually coming to terms with the new housing reality. It lowered its forecast, predicting that sales of previously occupied homes will total 6.29 million, down 2.9% from 2006.
Despite these shocking increases in inventory, prices have for the most part remained flat or have only fallen slightly. However, in the face of growing signs of market saturation, denial is no longer an option for home sellers. Without radical and desperate price reductions, inventory is going to remain high for a long time to come.
Deflation is not yet beaten in Japan. After ten months of mild inflation, consumer prices fell 0.2 percent in February. The data was particularly bad news for the Japanese central bank, who had been trying to raise interest rates and after several years of free credit, restore monetary policy to something closer to normality. Unfortunately, February’s data suggests that the recent interest rates hike was premature.
Japan continues to act as a warning to others about the dangers of speculative bubbles. The long cold winter of deflation followed on from an extraordinary asset bubble from the late 1980s. Speculation was quickly followed by a recession, a banking crisis and higher unemployment. The government’s repeated attempts to kick start the economy with higher fiscal expenditure have largely failed and led to rising public sector indebtedness.
Roger Cole, director of banking supervision and regulation, told the Senate today, that the Fed "could have done more sooner" to anticipate a subprime market downturn.
Despite this limited admission of guilt, complacency still rules at the nation’s banking regulator. Mr. Cole does not believe that the problems of the sub-prime sector will spill over to the wider mortgage market or the banking sector.
In an impressive performance, Senator Christopher Dodd said "Our nation's financial regulators were supposed to be cops on the beat yet they were spectators for far too long," Another Senator warned of a "tsunami of foreclosures" while another complained that a "sort of frenzy gripped the markets. Many brokers and lenders started selling these complicated mortgages to lower-income borrowers, many with less than perfect credit."
For the sake of the country, let us all hope that Roger Cole is right. Some of us are old enough to remember the S&L disaster. Banking crises are amongst the ugliest economic disasters that can befall a country. Typically, such crises are followed by deep and sustained recessions, unemployment and misery.
Unfortunately, the Fed’s performance up to this point should make us fearful. It has been obvious since at least 2003 that lending standards have deteroriated, and they did nothing about it. It is late, and for some subprime borrowers, it is too late, but the Fed should immediately tighten lending standards. It should limit the use of exotic loans such as interest-only loans, ARMs and no-doc mortgages. These actions would help restore confidence in the Fed’s capacity to regulate the market, It will begin to restore confidence in the nation’s financial regulator.
The world is drowning in personal debt. This story from Bloombergs illustrates just how serious the situation has become:
"Deng Yijun, a cargo freight agency manager in Shanghai, faced a dilemma last December. “I needed a car, but I didn't want to use up my savings as the stock market was booming,'' she says. “So I used credit cards.''
Deng, 32, was eyeing a Ford Focus that cost about 200,000 yuan ($25,815), roughly equal to her savings. Maxing out three cards, she put 140,000 yuan on plastic and gained 56 days of interest-free credit. She paid the rest herself. Most of her remaining cash went into stocks, including Sichuan Swellfun Co. - a distiller whose share price more than tripled in the past year.
Deng says she was able to buy the car for three times her annual salary and purchase stocks after card issuers Bank of Shanghai, China Merchants Bank Co. and China Construction Bank Corp. gave her credit over the phone."
Think for a moment about the implied risks; Deng's personal net worth; and lending standards in Chinese banks.
Deng starts with sufficient savings to buy this car and be debt free. However, she avoids the safe option and entangles herself in high levels of personal debt in order to maintain her over-inflated and risky investments. She would be well advised to sell her shares and pay down her debt. However, those rising stock prices are just too tempting; greed wins over financial prudence.
So she goes into debt, and she isn't thinking small. The debt to income ratio implied by this transaction is on the high side. After some arithmetic, it is clear that Deng has credit card debt equivalent to 2.1 times annual income.
The interest payments will take up a large chunk of Deng’s disposable income, because interest rates on credit cards are always extortionate. Therefore, she has to be anticipating that the return on her equity portfolio is higher than the interest payments on her credit cards.
Furthermore, Deng’s personal balance sheet looks decidedly risky. On the asset side, she has a car, which is always a depreciating asset, along with some overvalued Chinese equity. It would only take an unfortunate collusion in the rush hour and a substantial correction in the stock market, and poor Deng would be seriously upside down. In other words, she would be all liabilities and no assets.
In sum, there is a high probability that Deng will default on this debt. If there are enough Deng's out there in China, then the banks that own that credit card debt have some serious issues to resolve.
But what about the banks that allowed Deng to open herself up to these massive risks? They allowed Deng to accumulate such an enormous debt simply by talking to her on the phone. At the risk of understatement, lending standards do seem to be a little lax in China at the moment.
Unfortunately, Deng is a worldwide phenomenon. The names might change, and the transactions might be different, but across the planet, ordinary people are being encouraged to take on huge amounts of debt that they can barely service. For the most part, this debt is financing over-priced real estate. However, it is also financing unsustainable levels of consumption.
Unfortunately, this spend fest can not continue indefinitely. The easy way out of this mess would be for central banks to hike interest rates. It will be painful, and too late to save Deng, but at least it would discourage other people from being buried in debt.
However, central banks are always cowards. They will wait, and wait until it is too late. It will not be a hike in interest rates that will stem the flood of toxic debt; it will be a rise in defaults. Suddenly, commercial banks will remember that there is such a thing as credit risk, they will stop financing the Dengs of this world. There will be no more Ford Fiestas financed with credit cards; consumption will crash and the world will fall into a recession.
Oh misery, misery when will the housing market recover?
Sales of existing homes plunged again in December. The National Association of Realtors reported that sales were down 0.8 percent last month. For the year, sales fell by 8.4 percent, the biggest annual decline since 1982.
What happened to the once high-flying housing market. For five straight years, prices increased at record levels. Today, the market is slipping into the abyss.
It is going to get worse, I tell ya, much worse.
Hey! You've won a ride back to the top
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