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Homeowners, You Don’t Want To Read This

Last Sunday, Kevin Hall from McClatchy Newspapers (the third largest newspaper company in the United States) talked about the direction of the U.S. housing market. He wrote:

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson have suggested over the past year that an end is in sight. But with each prediction, things have grown worse. For many homeowners, the deep housing slump feels like a drop off a skyscraper. Every time another 15 floors have passed, there seems to be more room to fall.

Most of Hall’s piece focused on research by Mark Vitner, a senior economist for Wachovia, and Mark Zandi, chief economist for Moody’s Economy.com. Vitner told Hall:

I don’t think we get strengthening in the housing market until late 2011 or 2012… I think we’re somewhere between halfway and two-thirds of the way through the correction.

The Wachovia economist, who closely studies U.S. home price trends/sales and released a report back on July 14 entitled “How Far Will Housing Prices Fall,” predicts that prices will fall 22% to 29% on average from their peak before a bottoming out occurs. The median home price has lost about 11% since peaking in October 2005.

The housing forecast from Mark Zandi, chief economist for Moody’s Economy.com, is not much better. Zandi said:

My view is that we are two-thirds through the housing downturn, at least as measured by house price declines. The price declines began in late spring 2006 and will more or less come to an end in late spring 2009. The Fannie-Freddie debacle may push this out into the summer or even fall of 2009.

Zandi believes that unless the chaos in the financial sector is resolved, his forecast of a bottom in 2009 “will prove too bright.”

Identifying the bottom is even more trickier when historical trends no longer apply to a housing market that’s experiencing an unprecedented decline. Hall wrote:

Until the current downturn, median home prices had declined more than two months in a row only once, in 1990. But the decline now has lasted 22 straight months.

Don’t hold your breath though. Someone will be waiting in the wings ready to give anyone who’ll listen an unhealthy dose of jawboning about how a housing recovery is just around the corner.

Source:

“Housing prices haven’t hit bottom yet”
Kevin G. Hall
McClatchy Newspapers, July 20, 2008

Quote For The Week

The folks who sat on the sidelines, they should feel legitimately annoyed that the more speculative folks who bought homes they couldn’t afford are going to be bailed out or helped by the federal government… And these other folks [who] acted responsibly and didn’t get in over their heads and decided they didn’t want to buy
the home, they’re not getting any benefit.

-Edward Leamer, senior economist at the University of California and director of the prestigious UCLA Anderson Forecast, on government efforts to bail out homeowners struggling to avoid foreclosure.

Crash Prophet Gary Shilling Predicts Nosedive In Consumer Spending

Back on June 13, 2007, I wrote a post entitled “Crash Prophets” and spoke of economist/investment advisor Gary Shilling. Dr. Shilling, who was twice ranked as “Wall Street’s top economist” by polls conducted by Institutional Investor magazine, said last summer that the United States was fast approaching a financial storm. From that post:

He notes, “An unusual confluence of five forces in recent years created a virtual world of financial speculation that departed spectacularly from the real economic world, the ‘grand disconnect’ we’ve called it.” The five forces… are:

1. Global liquidity.
2. Investors’ misguided belief in “20% annual returns each and every year.”
3. Risk desensitization due to recent low volatility and the belief the Fed will “bail them out.”
4. Rampant, aggressive speculation.
5. American consumer spending, highlighted by instant gratification and the inability to save.

And what will trigger the meltdown? According to Farrell, Shilling still sees the subprime debacle as the catalyst.

A year later, and the “crash prophet” is providing his latest financial storm forecast. Yesterday, the president of A. Gary Shilling & Co was the subject of a Newsmax.com piece. According to the Internet news site:

The U.S. is already in a recession that’s unfolding in four stages — and it’s going to get a lot worse, investment advisor Gary Shilling says.

“We’re between the second and third stages right now,” Shilling told a Bloomberg interviewer.

“The first phase was the collapse in housing market, led by subprime slide last year; the second phase was Wall Street, where there was a tremendous amount of over-leverage and investment in assets of questionable if not unknown value and highly illiquid.”

Shilling believes the third phase — a big nosedive in consumer spending — is about to unfold.

Yesterday, Bloomberg reported that prices paid by U.S. consumers jumped in June by the most since 2005 on spiraling costs for fuel and food. The cost of living soared 1.1% after a 0.6% gain the prior month, the Labor Department said. Fed Chairman Ben Bernanke, testifying before Congress Wednesday as part of his semi-annual report on the U.S. economy, warned that consumer spending is “likely to be restrained over coming quarters,” and businesses are “likely to be cautious with their spending in the second half of the year.”

Dr. Shilling told Newsmax:

Once people work through their tax rebates, they’ve run out of borrowing power. Their home equity has disappeared. They’ve been relying on that and on income growth that isn’t happening. With high energy bills and maxed out credit cards, I think consumers are about to go off the cliff….

I look for the biggest decline in consumer spending since the 1930s.

Next up? Phase four, where recession spreads throughout the world.

Oh joy…

Sources:

“Gary Schilling: U.S. In Recession Now”
Newsmax.com, July 16, 2008

“U.S. Consumer Prices Climb by the Most Since 2005 (Update1)”
Shobhana Chandra
Bloomberg, July 16, 2008

ARM Resets Hit Peak

Well, it seemed like a good idea at the time. During the summers of 2005 and 2006, wannabe homeowners opted for adjustable-rate mortgages with smaller initial payments scheduled to reset two to three years out. Now those ARMs are resetting, and many are watching to see if higher monthly payments will add more stress to an already troubled housing market in the United States. The Washington Post’s Renae Merle wrote in the Chicago Tribune yesterday:

The number of homeowners facing an increase in their subprime adjustable-rate mortgage payments will peak this summer, testing the efforts of lenders and others to keep those people out of foreclosure and stabilize the housing market.

The timing reflects the height of subprime lending in the summers of 2005 and 2006, when many borrowers secured loans scheduled to adjust in two or three years. For many, an adjustment means their interest rate will go up 2 to 3 percentage points.

Photo by svilen001, stock.xchng

Mark Fleming, chief economist for research firm First American CoreLogic told Merle:

The next six months, the industry, all of the folks that are out there trying to solve this problem, they are going to be very busy. There are a lot of people facing their resets right now. A good share of them don’t have the refinance option.

Merle noted that more than 300,000 such loans will adjust this summer. She wrote:

Lenders, federal officials and housing counselors have worried that borrowers will not be able to afford the higher payments after the reset and will quickly fall into foreclosure. Declining home prices have made it impossible for many of these homeowners to refinance.

It will not be clear for months how many will lose their homes, Fleming said. “A lot of those are resetting now,” he said. “We may not see the impact in foreclosures until the middle of 2009.”

RealtyTrac, an online marketer of foreclosed properties, told CNN Money last week that during the first six months of 2008, 343,159 Americans lost their homes, up 136% from 145,696 recorded during the same period in 2007.

Sources:

“ARM resets to hit peak this summer”
Renae Merle
Chicago Tribune/Washington Post, July 13, 2008

“Six months, 343,000 lost homes”
Les Christie
CNN Money, July 10, 2008

U.S. Senate Passes Housing Bailout Legislation

“Progress” continues to be made on the next major bailout. According to Bloomberg tonight:

The U.S. Senate passed a $300 billion plan to help thousands of Americans keep their homes and tighten regulation of Fannie Mae and Freddie Mac in an effort to ease the worst housing slump since the Great Depression.

The legislation, approved 63-5 today, would let an estimated 400,000 struggling homeowners avoid foreclosure by refinancing their subprime mortgages into fixed-rate loans backed by the government. The measure also offers tax incentives to potential homebuyers and sets aside $4 billion to help communities buy foreclosed properties.

Chicago’s Mayor Daley moonlighting as a real estate agent? Yeah, I guess I can see it…

“‘Got House?’ Oh, I’ll give you house!”

Source:

“Senate Approves $300 Billion Plan to Stem Housing Foreclosures”
Brian Faler
Bloomberg, July 11, 2008

New Study: Housing Bust Causing Massive Losses In Household Wealth

Just wanted to share a press release with you from the think-tank of our old friend, Dean Baker:

Housing Market Meltdown Will Cause Massive Losses in Household Wealth

Plummeting house prices will leave millions of homeowners dependent almost exclusively on Social Security in their retirement

For Immediate Release: July 9, 2008
Contact: Alan Barber, (202) 293-5380 x 115

WASHINGTON, DC- As Senators McCain and Obama fine-tune their plans for Social Security in preparation for the 2008 presidential election, a new report from the Center for Economic and Policy Research (CEPR) shows that, due to the collapse of the housing bubble, the vast majority of Americans have accumulated little or no wealth. This means that they will be almost completely reliant on Social Security and Medicare to support them in their retirement years.

The study, “The Impact of the Housing Crash on Family Wealth,” analyzed the wealth holdings of families in all age cohorts in 2004 and projected the wealth of these families in 2009. The findings are presented by income quintile under three scenarios- real house prices remain at current levels, real house prices fall by an additional 10 percent, or real house prices fall by an additional 20 percent. In all three scenarios, the vast majority of these families will have little or no housing wealth in 2009.

“This extraordinary destruction of wealth will have tremendous implications for millions of families,” said report co-author Dean Baker. “Coupled with a very low personal savings rate, this means that many people, especially those near retirement will only have Social Security and Medicare to rely on once they leave the workforce.”

The report projects that if house prices stay the same through 2009, the median household headed by a person between the ages of 45 and 54, those in their prime earning years, will have 24.7 percent less wealth than did the median household in this age group in 2004. These households will have accumulated just $113,268 in net worth in 2009, barely $15,000 more than their counterparts in 1989, whose net worth totaled $97,600.

If real house prices fall 10 percent, the median household in the 45 to 54 cohort will see a 34.6 percent loss in wealth compared with the median in 2004 while families in the 18 to 34 cohort will lose of 67.6 percent. If prices fall by 20 percent, the most pessimistic scenario, families in the 55-64 cohort will experience a loss of 49.6 percent of their wealth compared to the same cohort in 2004.

This analysis should also prompt serious re-examination of policy proposals to cut Social Security and Medicare for near retirees. Baker commented, “policies that perhaps could have been justified at the peak of the housing bubble make much less sense now that tens of millions of near-retirees have just seen most of their wealth disappear.”

In analyzing wealth holdings for these families, the authors used data from the Federal Reserve Board’s 2004 Survey of Consumer Finance. The authors also used the S&P 500 and the Case-Shiller 20-City Composite Index to adjust for equity values and home price changes between 2004 and 2009.

###

The Center for Economic and Policy Research is an independent, nonpartisan think tank that was established to promote democratic debate on the most important economic and social issues that affect people’s lives. CEPR’s Advisory Board of Economists includes Nobel Laureate economists Robert Solow and Joseph Stiglitz; Richard Freeman, Professor of Economics at Harvard University; and Eileen Appelbaum, Professor and Director of the Center for Women and Work at Rutgers University.

Source:

“Housing Market Meltdown Will Cause Massive Losses in Household Wealth”
Press Release
Center for Economic and Policy Research, July 9, 2008

Housing Bailout Bill To Rescue Lenders?

I first heard of Dean Baker, co-director of the Center for Economic and Policy Research in Washington, DC, back in 2004. Believing that the housing boom was about to end, in May of that year Baker sold his two-bedroom condominium in the Adams-Morgan neighborhood for $445,000, clearing $270,000 after taxes and commissions. He then rented a two-bedroom condo just two blocks away. While his monthly outlay of $2,200 was about the same as what he was paying in mortgage, taxes, and maintenance at his former place, he invested the remainder of the money in corporate bonds paying about 7% annually in interest. He said at the time, “I’m just much better off renting.” And sure enough, the housing bust came…

I happened to come across a piece by Baker in TPMCafé from July 6 that pointed out some potential problems with the housing bailout bill making its way through Congress. The economist wrote:

The Congressional Budget Office (CBO) is not terribly optimistic about the success of the housing bailout bill going through Congress. They project that 35 percent of the homeowners “helped” under the plan, or 140,000 families, will find themselves again facing foreclosure. The reason for the pessimism is that the lenders get to decide which loans enter the program. Naturally, they will pick homeowners who they think will be the least likely to make it.

I wonder what the folks who support this bill will tell those 140,000 families? Many of these families will struggle to make their mortgage payments for 2 or 3 years, sacrificing health care, child care and other necessary expenses in a hopeless effort to hang onto their home. At their end of their struggling, they will end up out on the street, foreclosed a second time.

That is what Washington policy wonks call “asset building.”

That is what I would call “half-assed.”

While the CBO is pointing out the possibility of 140,000 second foreclosures, they also note that lenders may receive $680 million with the passage of this bill. Baker wrote:

As a result, we see Congress rushing to push through a bill that CBO projects will hand $680 million to lenders. Yes lenders — you know, the folks who issued predatory mortgages on an enormous scale to low and moderate income families in the last few years. Given the structure of the program (it does nothing to prevent loans from being issued at prices that are still inflated by the bubble), it is questionable how much any homeowners will actually be helped.

Sounds like it’s the lenders, not homeowners, who are being rescued by this bill.

Source:

“CBO Projects Housing Bailout Program Will Send 140,000 Families Into Second Foreclosure”
Dean Baker
Talking Points Memo Café, July 6, 2008

Smart Money: U.S. Home Prices To Keep Falling

Les Christie, a CNN Money staff writer, talked about U.S. home prices this afternoon and spoke of Nicholas Perna, of the economic consulting firm Perna Associates. According to Perna, the smart money is betting on U.S. home prices to keep on falling. Christie wrote:

He finds it especially significant that the smart money, investors in the S&P Case/Shiller Home Price Index, are still buying futures as if they expect prices to continue to plummet.

The index, which tracks the sale price of specific homes as they are sold and resold over the years, is considered to be one of the most accurate home price indicators.

“The people who are putting their money where their mouths are,” said Perna, “are betting on more losses.”

What kind of bets was Perna referring to? Christie wrote:

Specifically, Case/Shiller investors are betting that Las Vegas prices will fall an additional 22% by November 2009. Los Angeles futures predict a further loss of 24.2% through November 2009, while investors expect to see Miami down another 21.6% by then.

Mind you, this is in addition to price declines already suffered by homeowners from these U.S. cities…

Source:

“Housing: It’ll get worse”
Les Christie
CNN Money, June 12, 2008

No End In Sight For U.S. Banking Crisis

The Wall Street Journal, with a little bit of help from federal regulators, managed to torpedo hopes earlier today that the United States was approaching an end to a banking crisis brought on by the housing bust. Michael Corkery, Jonathan Karp, and Damian Paletta wrote:

Until now, most of the damage to banks from the housing crisis has come from homeowners defaulting on their mortgages. But amid a dismal spring sales season for new homes, loans to home and condo builders are looking increasingly shaky. Banks have begun to dump them at what will likely be steep discounts, setting the stage for billions of dollars in fresh losses.

At a Senate Banking Committee hearing Thursday, Federal Reserve Vice Chairman Donald Kohn said:

As long as the housing market is on a downward path, as long as those prices continue to fall, I think there’s a risk that the losses could continue to mount on a variety of loans.

Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair added at the same hearing that banks which aren’t diversified, or those with significant exposures to residential construction and development, are of particular concern. Bair said:

That’s where we are really seeing the delinquencies spike.

With no end in sight to the banking crisis, the health of the larger economy is at serious risk. Corkery, Karp, and Paletta explained:

The health of the economy is heavily dependent on the willingness of banks and other financial institutions to lend to consumers and businesses. Many banks have already taken substantial losses, and either will have to pare their lending or raise new capital to rebuild their safety nets. The Federal Reserve and Treasury Department have been pressing banks to raise capital so as not to further reduce lending.

The Journal referenced a report sent to clients Thursday by housing research firm Zelman & Associates which forecasts that over the next five years, U.S. banks could “charge off” as bad debt between 10% and 26% of their loans tied to residential construction and land assets, amounting to $65-$165 billion. During the last housing downturn of the late eighties-early nineties, charge-offs totaled around 10% ($31.6 billion, adjusted for inflation) of construction-related bank assets. Ivy Zelman, chief executive of Zelman & Associates, warned:

We believe this period of procrastination is nearly over.

It’s interesting to note that when looking at state percentages of total bank loans tied construction and development, Arizona has 36% of total loans tied to construction and development, Georgia has 34%, North Carolina is at 28%.

Zelman added that construction and development loans, as a percentage of total loans, are at their highest levels since at least 1975.

Oh my.

Source:

“Real-Estate Woes of Banks Mount”
Michael Corkery, Jonathan Karp, Damian Paletta
Wall Street Journal, June 6, 2008

U.S. Home Prices Fall 18 Percent In Real Terms Over Past Year

“America’s house prices are falling even faster than during the Great Depression.” Talk about a headline that would make any American homeowner stop dead in his or her tracks. According to the May 29 online edition of The Economist (UK):

The latest S&P/Case-Shiller national house-price index, published this week, showed a slump of 14.1% in the year to the first quarter, the worst since the index began 20 years ago. Now Robert Shiller, an economist at Yale University and co-inventor of the index, has compiled a version that stretches back over a century. This shows that the latest fall in nominal prices is already much bigger than the 10.5% drop in 1932, the worst point of the Depression. And things are even worse than they look. In the deflationary 1930s house prices declined less in real terms. Today inflation is running at a brisk pace, so property prices have fallen by a staggering 18% in real terms over the past year.

Source:

“Through the floor”
The Economist (UK), May 29, 2008

FHA Chief Shoots Down Housing Bailout Bill

Here’s another great piece that was suggested to me. As you may have heard already, the U.S. House of Representatives passed a bill last week that would enable struggling mortgage holders to refinance into more affordable loans guaranteed by Uncle Sam. The legislation, spearheaded by House Financial Services Chairman Barney Frank, would require a significant expansion of the Federal Housing Administration (FHA). Well, according to Luke Mullins of U.S. News & World Report, FHA Commissioner Brian Montgomery is a bit leery of the proposal (understatement of the year). Mullins wrote yesterday in “FHA Chief Criticizes Rescue Plan”:

Montgomery expressed his opposition to the legislation recently passed by the House:

As one colleague described it, it is “on steroids” because it throws sound underwriting out the window. It moves us toward a federalization of the mortgage market, forces taxpayers to pay for bad loans, and doubles FHA’s portfolio, adding hundreds of thousands of risky loans in a Byzantine process that will take years to sort out and create a regulatory nightmare.

Besides risking the wrath of the powers-that-be in our nation’s capital, I must admit that I’m impressed that he said this within a room full of real estate agents at the National Association of Realtors Midyear Legislative Meetings and Trade Expo. I haven’t seen an obit for him, so besides a few claw marks, I’m assuming Montgomery survived the ordeal.

You can access Mullins’ piece here.

Housing Bailout Latest

This morning I received an e-mail from the powers-that-be behind Stop The Housing Bailout! According to STHB:

• Readers against a housing bailout should contact U.S. Senator Richard C. Shelby. He can be reached by telephone at (202)224-5744, and by e-mail at Senator@shelby.senate.gov. STHB stated, “He is going to run the show from the Republican side of the aisle.”

• You may want to check out the Wall Street Journal article “Democrats Face Rescue Backlash.” According to STHB, “A nice little piece about the Bailout Backlash!”

President Bush is vowing to veto a bill the U.S. House of Representatives passed last week that would, among other things, allow certain homeowners to refinance loans through a government agency if lenders agree to take less than the full amount borrowed. The U.S. Senate is expected to take up the issue this week.

Signs Of The Time, Part 14

Baseball. Once America’s national pastime (before suing anything with a pulse became all the rage). Who would have ever thought that the sport, in any way, would be connected to the ongoing housing bust here in the United States? According to Reuters’ Jill Serjeant yesterday, former baseball star Jose Canseco said on Thursday he had lost his California mansion to foreclosure. Apparently, Canseco, now 43, told the celebrity television show “Inside Edition” that it did not make financial sense to keep his 7,300 square-foot home in Encino, a Los Angeles suburb. The show said it had foreclosure documents showing that the six-time all-star owed a bank more than $2.5 million on the house. Canseco said:

I do have a judgment on my home and it to me is very strange because it didn’t make financial sense for me to keep paying a mortgage on a home that was basically owned by someone else.

Sound familiar?

The Reuters reporter wrote:

Canseco said the foreclosure was not a difficult issue emotionally. But he sympathized with the millions of other Americans who have already lost, or face losing their homes, because of soaring interest rates on sub-prime loans.

“I decided to just let it go, but in most cases and most families, they have nowhere else to go,” he said.

According to Serjeant, Canseco said a good portion of the money he earned during his time in the major leagues went to pay for his divorces. “I had a couple of divorces that cost me $7 or $8 million,” the two-time World Series champion said.

Source:

“Baseball star Canseco loses home to foreclosure”
Jill Serjeant
Reuters, May 1, 2008

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