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Merrill Lynch, Morgan Stanley Issue Recession Warnings

At a conference yesterday in Singapore, New York City-based financial services giant Merrill Lynch warned the U.S. economy is in a recession that will become more apparent as the year drags on. According to Channel NewsAsia yesterday:

Merrill Lynch said the world’s largest economy is already in a recession, and it expects to see a prolonged L-shaped recovery. This means the US may take a longer time to emerge from the economic doldrums….

Merrill Lynch said a key indicator of a recession is a slump in the housing market. It added that it expects the housing market in the US will see another 15-20 percent downside.

Staff from the firm said that government efforts to provide stimulus to the economy will only temporarily stem a fall in consumer spending, according to Reuters’ Kevin Lim. Merrill Lynch’s North American economist David Rosenberg told conference attendees yesterday:

I still maintain the business cycle is bigger than the government.

Rosenberg also predicted inflation in the United States would slow as consumer spending weakens, and that the Federal Reserve would cut interest rates to fight the recession. The economist warned:

No asset class security is priced today for a recession scenario.

Adding their two cents, economists from Morgan Stanley are concerned that the recession in the United States could rival the “the big five,” according to David Gaffen from the Wall Street Journal’s Market Beat blog today. Gaffen explained the “big five” were large-scale financial crises that resulted in a long-term underperformance in the respective economies. He wrote:

The long-term declines the firm looks at includes Spain in 1977 and Norway in 1987, and most recently Japan in 1992 – which they define as the worst, resulting in Japan’s so-called lost decade. Whether the current U.S. economic decline matches one of these situations, or looks more like the recent U.S. recessions “holds the key for risky asset prices,” they write.

However, Morgan Stanley economists do not agree with their Merrill Lynch counterparts when it comes to the topic of inflation. From the Market Beat post:

Morgan Stanley economists say that in this instance, inflation may not automatically recede as U.S. growth recedes. They say as a result that bonds may sell off if growth recovers in the U.S. and monetary policy remains loose, fueling price gains… “We believe that the Fed’s focus on keeping the financial crisis from sending the economy down the path of the Big Five will succeed, but lower rates and surging money growth will spill over into inflation. Bond yields are likely to follow inflation higher,” they write.

Sources:

“Merill Lynch says US in recession, but Asia to remain strong on consumer spending”
Channel NewsAsia (Singapore), May 14, 2008

“Tax rebate won’t stem U.S. recession: Merrill”
Kevin Lim
Reuters, May 14, 2008

“Regular Recession, or a Larger Disaster?”
David Gaffen
Wall Street Journal (Market Beat blog), May 15, 2008

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No Property Tax Relief In Sight

More bad news, American homeowners. Just when you thought there might be a silver lining to declining home prices in that property taxes would be lower, the Wall Street Journal is reporting that local governments throughout the United States are raising property tax rates to compensate for revenue shortfalls. These taxes serve as a major source of funding for municipal governments, accounting on average of about 40% of general revenue, according to the Census Bureau.

The Journal’s Conor Dougherty wrote on April 24:

…flat assessments and rising rates add up to higher bills for many. Arlington County, Va., recently raised its property-tax rate 4% in part to cover retiree health benefits. Portland, Maine, has a proposal to raise the property-tax rate 3.7%, and lay off city workers. Oak Ridge, Tenn., near Knoxville, is preparing to raise its rate 5%, in part to cover the rising cost of items, such as gasoline for police cars and asphalt to resurface streets…

Some cities and states are dropping plans to roll back or eliminate property taxes. Arizona Gov. Janet Napolitano, a Democrat, recently vetoed a bill that would have repealed the state property tax. The tax, which had been suspended for the past two years, will be back in effect next year.

Despite revenue shortfalls, a number of local governments continue to increase spending. Dennis Cauchon of USA Today wrote yesterday that state and local governments have run deficits for the last nine months, according to Commerce Department reports. While tax collections went flat in the middle of 2007, he noted that local government expenditures continue to grow. In fact, federal, state, and local governments are hiring new workers at the fastest pace in six years, Cauchon reported yesterday. Federal, state, and local governments added 76,800 jobs in the first quarter of this year, according to the Bureau of Labor Statistics. States added 16,000 jobs while municipalities hired 47,000 employees. The USA Today reporter wrote:

But the job expansion could later cause financial problems for governments that are spending too much.

“More hiring has nothing to do with good government or economic policy,” says economist Kenneth Brown, research director at the Rio Grande Foundation in Albuquerque. “It has everything to do with government being slow to react to economic change.”

Ain’t that the truth…

Sources:

“Rising Property Taxes Fill Gaps, Pinch Homeowners”
Conor Dougherty
Wall Street Journal, April 24, 2008

“Hiring leaps in public sector”
Dennis Cauchon
USA Today, April 29, 2008

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Despite Falling Prices, Homes Are Still Unaffordable

Yesterday, the newswires were reporting that the decline in U.S. home prices accelerated in February, falling a record 12.7% in the past year for 20 key cities, according to the Case-Shiller home price index released Tuesday by Standard & Poor’s. David M. Blitzer, chairman of the index committee at Standard & Poor’s, went so far as to say:

There is no sign of a bottom in the numbers.

Despite the recent drop in prices, homes are still unaffordable for the average American family. Craig Guillot for Bankrate.com wrote back on April 17 that:

…the median price in many markets is still out of reach for a median-income family, according to “Paycheck to Paycheck: Wages and the Cost of Housing in America,” a study by the Center for Housing Policy, or CHP, in Washington, D.C.

Comparing housing costs in 210 metropolitan areas with the wages earned by workers in 60 occupations, the study found that homeownership is often unaffordable for workers in each of the five-fastest growing occupations — registered nurses, retail salespeople, customer-service representatives, food-preparation workers and office clerks. Registered nurses, who typically have high salaries, were unable to purchase a median-priced home in 108 of the markets.

“Even with the housing downturn, the drop in prices still just isn’t enough for many workers in traditional backbone occupations to afford houses,” says Rebecca Cohen, a CHP research associate.

Guillot noted:

Between 2000 and mid-2007, the median home price soared 64.9% to $229,200. The median income, meantime, rose just 16.6%. For would-be buyers, the math doesn’t work.

Back on April 16, Peter Hong of the Los Angeles Times talked about a recent study conducted by Chapman University’s Anderson Center for Economic Research which forecast further double-digit declines for Southern California home prices. Hong wrote:

A typical Los Angeles County family would have to spend 48.6% of its annual income on mortgage payments and property taxes to afford a median-priced home, the Chapman study concluded. Historically, the mean expenditure for a home in L.A. County has been 35.7% of income.

For affordability to return to that historic mean, home prices in Los Angeles County would have to fall more than 20% further, said Anderson Center director Esmael Adibi…

Sources:

“Home prices fall record 12.7% in past year, Case-Shiller say”
Rex Nutting
MarketWatch, April 29, 2008

“Average Joe still can’t afford a home”
Craig Guillot
Bankrate.com, April 17, 2008

“Foreclosure glut further depresses housing prices”
Peter Y. Hong
Los Angeles Times, April 16, 2008

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When Juries Actually Work

Ever serve on a jury? I have, and didn’t enjoy one particular experience that took place in 1996. That year, I was picked to serve on a traffic court jury for Cook County, Illinois. The case was about a man who was arrested for drunk driving when he was stopped at a Chicago Police Department roadblock. According to witnesses, police officers at the roadblock motioned for the man to come forward with his car. Seeing that there was no response, one of the officers walked up to the vehicle and discovered the defendant incapacitated, his car wreaking of alcohol, and a nice, big bottle of booze by the man’s side. Police officers turned the vehicle off for the driver, helped him out of his car, and informed him of his arrest. However, the arresting officers turned their back on the man for one moment (big mistake), at which point he declared, “Well, if I’m going to jail, I might as well have another drink.” The motorist then proceeded to grab his bottle and down the remaining contents. After hearing the case, my fellow jury members decided to ignore the breathalyzer results, as the procedure was administered shortly after he chugged the bottle. And the rest of case? Open and shut, right? Wrong. A number of jury members started to feel “sorry” for the man, and argued that he wasn’t really drunk, he was just “scared” of the big, bad, policemen (which, they rationalized, would explain why he didn’t pull forward at the roadblock when he was instructed to). Never mind that he was a pile of crap at the roadblock, his car stunk of alcohol, and the smoking gun was on the seat right next to him. To make a long story short, the trial ended up in a hung jury, and a mistrial declared.

I often wonder if someone lost their life down the road because jury members felt “sorry” for this individual.

Well, I recently read something in the North County Times that helped restore my faith in juries… a little. You may have heard of Marty and Vernon Ummel, who sued their real estate agent because, they argued, the $1.2 million they paid for their Carlsbad home in 2005 could not be justified when other houses on the street were selling for much less at the time. The Ummels claimed their agent failed them and thus owed the couple $150,000, the amount they felt they overspent.

Well, on April 10 it took a jury less than two hours to unanimously clear the real estate agent, Mike Little. According to the North County Times’ Teri Figueroa:

After about a week of testimony at the Vista courthouse, the panel of 10 women and two men rejected Marty and Vernon Ummels’ arguments that they overpaid $150,000 for their home near the Four Seasons Resort Aviara…

“Mr. Little did what he was supposed to do,” jury forewoman Wendi Brick said. “The bottom line is that you (as a buyer) are responsible when you sign a contract and purchase something.”

Now, if only those who are pushing for a mortgage bailout could grasp this simple concept…

Source:

“CARLSBAD: Jury clears real estate agent”
Teri Figueroa
North County Times, April 10, 2008

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WSJ Sees Continued Downward Pressure On Housing

Earlier today, the Wall Street Journal released a great interactive chart entitled “Where Housing Is Heading.” It is the result of the Journal’s quarterly survey of housing market conditions in 28 major metropolitan areas. They concluded that we will see continued downward pressure on home prices across most of the United States.

So much for a housing bottom…

Source:

“Where Housing Is Headed”
Wall Street Journal, April 24, 2008

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Housing Pain To Continue?

Even though there’s more talk of a bottom in the U.S. housing market these days, I’m still not sold. I just haven’t seen any evidence out there which indicates a turnaround. However, I’m not the only one that sees further deterioration in the residential real estate market. Diana Olick, CNBC’s real estate reporter, made some good points yesterday regarding the continued weakness in homes sales. She wrote on her Realty Check blog:

The trouble is that there are a lot of factors working against sales right now — factors that are deteriorating, not improving. Number one is house prices. Sales may be bumping, but prices continue their slide down, and most of the “experts” I talk to think prices have a lot further to go, because foreclosures are mounting, as are inventories.

Then there’s the whole economy thing: We’ve said throughout this housing downturn that it’s unique because usually we see housing recessions in times of economic recession, and this housing downturn came before recession — and may have actually caused one.

Last year, we were still seeing job growth as housing faltered, but now we’ve seen 300,000 private-sector jobs lost in just the past four months. Add that to the credit crunch, and it doesn’t spell recovery for home sales…

In other words, I think we have a ways more to go.

Photo by Rene Asmussen, stock.xchng

On the topic of U.S. home prices, on Tuesday Yale University economist Robert Shiller said there’s a good chance prices will fall further than the 30% drop experienced during the Great Depression of the 1930s. During a speech at the New Haven Lawn Club yesterday, the founder of the Standard & Poor’s/Case-Shiller home-price index said, “I think there’s a good chance we’ll exceed that this time,” according to the Hartford Courant’s Eric Gershon. Home prices in the largest metropolitan areas across the nation have already dropped 15% since their peak in 2006. But, Shiller noted that real estate cycles typically take years to correct. Talk of the bursting of the housing bubble and subsequent turmoil it has produced led Shiller to warn:

This is the biggest financial crisis since the Great Depression.

Sources:

“Making Sense of Sales (Maybe)”
Diana Olick
CNBC, April 22, 2008

“Yale’s Shiller: U.S. Housing Slump May Exceed Great Depression”
Wall Street Journal (Developments Blog), April 22, 2008

“Home Prices Seen Falling Further”
Eric Gershon
Hartford Courant, April 23, 2008

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Fannie And Freddie Meltdown Could Cost Up To $1.1 Trillion

Here’s something to think about. According to CNN Money yesterday, credit rating agency Standard & Poor’s recently estimated that a financial meltdown at mortgage financing giants Fannie Mae and Freddie Mac could require a taxpayer bailout costing $420 billion to $1.1 trillion. CNN Money senior writer Chris Isidore noted that this staggering amount dwarfs the cost ($250 billion in today’s dollars) of the savings and loan crisis bailout. S&P added that saving Fannie and Freddie might cost so much that the AAA credit rating of the U.S. government might even be jeopardized. Should this happen, all federal government borrowing would become more expensive.

Victoria Wagner, a S&P credit analyst who worked on the report, told CNN Money’s Isidore that she and other analysts are concerned about more problems in the mortgage market because both Fannie Mae and Freddie Mac “have become increasingly important to the health of the industry.” Wagner pointed out that at the end of January, 82% of all mortgages in the United States were backed by one of these firms, up from only 46% in the second quarter of 2007. And the roles of both in the mortgage and real estate markets are likely to grow, as Congress recently allowed them to back larger mortgages (up to $729,750), up from the previous limit of $417,000. The Office of Federal Housing Enterprise Oversight (OFHEO), which regulates both firms, also recently lowered the capital requirements for Fannie and Freddie in an effort to pump $200 billion more into the credit markets. Isidore wrote:

The new loan limits will increase the risks and losses for Fannie and Freddie, said Wagner and other experts. The high priced markets where homeowners and buyers need larger loans are now the ones seeing steep home price declines. And the default rates on larger loans are greater than the smaller loans that had previously been the core of their business.

Fannie Mae posted a $2.1 billion loss in 2007, while Freddie Mac lost $3.1 billion last year.

Source:

“The trillion-dollar mortgage time bomb”
Chris Isidore
CNN Money, April 21, 2008

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And Now, Some Financial Advice From Benny Hill

I’ll bet you didn’t see this coming. Andrew Edwards, for the Wall Street Journal’s Real Time Economics Blog, reported yesterday that delinquencies on home-equity lines of credit issued in 2005 and 2006 shot up last month, according to Standard & Poor’s. Edwards wrote:

S&P said that 9.19% of lines issued in 2005 and 11.45% of loans issued in 2006 are delinquent, up 6.49% and 6.51% from February. Serious delinquencies, where lines are 90-days plus overdue or in foreclosure, shot up 8.83% and 8.75% for 2005 and 2006, respectively, representing 5.3% and 6.34% of the years’ total issuance…

Delinquencies on lines issued in 2007, which have the worst record of cumulative losses in the credit crisis so far, fell 9.06% to 4.72% of the aggregate. S&P said 3.5% of year-old lines issued in 2007 have been booked as losses - more than three times the rate for year-old 2006 lines. Seriously delinquent 2007 lines were flat at 2.64%.

During the heady days of the housing market run up, home-owners took cash out of their houses in the form of higher mortgages - under the assumption that values would continue to rise…

As the English comedian Benny Hill once said in a skit, you should never ASSUME, or else you might make an ASS out of U (and ME)…

Source:

“Delinquencies Rise on Home Equity Lines of Credit”
Andrew Edwards
Wall Street Journal (Real Time Economics Blog), April 21, 2008

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So Cal Housing Market Report

Crash and burn
All the stars explode tonight
How’d you get so desperate
How’d you stay alive
Help me please
Burn the sorrow from your eyes
Oh, come on be alive again
Don’t lay down and die

-Hole, “Malibu” (1998)

I think Courtney Love best described the Southern California housing market these days. The reports coming out of there are SO BAD, I just had to talk about it. On Wednesday, the L.A. Times’ Peter Hong wrote:

The traditional spring home-buying season is off to its worst start in 20 years, data released Tuesday show, with sales so weak that foreclosures now account for more than one-third of all market activity…

The median price for a Southern California home fell below $400,000, to $385,000. Homes are now typically selling for what they fetched in April 2004, with the median price 20% below the market peak of $505,000 last year.

“…with the median price 20% below the market peak of $505,000 last year.” Truly disturbing.

With all this going on, Hong noted that So Cal homeowners are STILL living in la-la land when it comes to how much they believe their properties are worth. And by la-la, I don’t mean Los Angeles. He wrote:

Homeowners who aren’t facing foreclosure, meanwhile, often cling to outdated notions of what their properties are worth, real estate agents say.

David Emerson, a Lakewood real estate broker, said he was still able to quickly sell houses when owners priced them realistically.

The L.A. Times reporter uncovered some dismal forecasts for those who believed the worst had passed. He wrote:

Emerson also believes the worst is yet to come. “There are just too many foreclosures coming down the pike,” Emerson said.

Natalie Neith, a Beverly Hills real estate agent, has also seen a modest pickup in open-house traffic and sales recently, but like Emerson she sees more foreclosures coming…

“When I talk to sellers now, I say you need to reduce your price. You have the prospect of thousands of foreclosures coming. That’s going to be your competition,” Neith said.

California foreclosure filings were up 106% in March from a year ago, according to Irvine-based RealtyTrac on Tuesday.

Hole, “Malibu” (1998)
YouTube Video Link

Source:

“Foreclosure glut further depresses housing prices”
Peter Y. Hong
L.A. Times, April 16, 2008

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Housing Porn

I’ve been meaning to write something for a while now on the television-based “housing porn” that blossomed during the U.S. housing boom earlier this decade. Unfortunately, James Poniewozik of Time beat me to the punch. I’m glad he did, because he nailed the phenomenon right on the head. Poniewozik wrote in “Pimp My Real Estate Market!” (April 21 issue) that:

Early this decade, TV both profited from and stoked the obsession with real estate. TLC’s Trading Spaces became a phenomenon. Real estate magnate and ‘80s relic Donald Trump reinvented himself as a prime-time star on The Apprentice. HGTV went from being an obscure channel to being one of the most popular destinations on the dial.

With the change in the psychology of home-owning– from the house as shelter to the house as investment, retirement vehicle and personal ATM– came a shift in home shows’ focus. Out of fashion went renovation programs like This Old House, about restoring details and loving a home for its character. In came playing the real estate market. Sell This House!, My House Is Worth What? and many more flattered the smug certainty of homeowners and speculators that their home equity would shoot endlessly up like shares of Google. HGTV, TLC and their ilk may not have created the real estate bubble, but they certainly supplied some of the hot air.

With the U.S.’s boomiest burgs going bust, these shows already seem as dated as wall-to-wall shag carpeting. Watching a rerun of House Hunters shot two years ago is like opening a time capsule. The sellers are swaggering; home prices are rising by the minute; the buyers are under pressure to decide!, decide!, decide! before another house flies off the market. Who are these confident sellers and brokers, you wonder, and what prosperous, optimistic nation do they live in?

You’d think that with the onset of the housing bust, Americans would finally understand that homes are places to live, not financial instruments, right? No way. Poniewozik wrote:

So many Americans still fixate on the dollar value of their homes– we’re literally too invested in them not to– and most of HGTV’s top-rated shows are still about buying and selling.

He concluded:

You’ll know that the bubble-besotted housing culture has really changed when the home channels stop focusing on houses as commodities to flip, invest in or date and start looking at them as places to live in.

Source:

“Pimp My Real Estate Market!”
James Poniewozik
Time, April 21, 2008

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