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Economic Update: Housing and Retail Sales

Posted by Larry Doyle on May 13, 2009 8:39 AM |

Ultimately, all economic roads lead back to the housing market. The breakdown in the integrity of housing finance led us into this economic mess and any self-respecting economist (or financial commentator) will tell you that a healthy housing market will lead us out. Let’s check the patient.

The Fed has supported housing by effectively “overpaying” for refinancings. Mortgage rates relative to rates on U.S. government debt are at 17 year narrows. This development is great for homeowners who can and have refinanced. However, the pool of eligible homeowners is finite and seems to have run its course for now as recent data indicates that refinancing filings have declined while purchase activity has been unchanged. This data is reflected in the U.S. MBA Mortgage Applications Index Fell 8.6% Last Week, as reported by Bloomberg.
  
How about new supply of homes coming onto the market? Well, certainly home building has come to a virtual standstill with over a year’s worth of homes currently on the market. As new housing starts occur this supply can be gradually absorbed. Thus, we once again are back to the concept of needing time for the patient to heal. However, are we subject to another bout of housing sickness to hit our economy? I believe we are. Why? Two reasons:

   1. government programs forestalled but did not eliminate a number of “sick” mortgages. These mortgages would likely have defaulted with banks forcing foreclosures a few months ago.

   2. a large supply of adjustable rate mortgages will soon reset to a considerably higher rate leading to payment problems for homeowners and likely foreclsoures. Data indicating increased rates of delinquency (late payments) clearly points to increased foreclosures.

In fact, foreclosure filings just hit a record level of 342k  as reported by RealtyTrac which monitors this data nationwide. Foreclosure activity also seems to be spreading from California, Florida, Nevada, and Arizona to other parts of the country.  In fact, Idaho has recently had a surge in foreclosure activity as the unemployment rate in and around Boise has spiked.

What about home prices? The declines in home prices have certainly sparked renewed interest in prospective homebuyers. Will they enter the market at this stage? Data indicates prospective buyers continue to be patient as Bloomberg reports, Home Prices In U.S. Drop Most On Record In Quarter.

When may consumers feel confident enough to enter into the market and purchase a home? The largest factor in that decision is consumer’s confidence in their employment situation. In my opinion, with the rate of unemployment nationwide likely to hit double digits by year end, housing will remain under pressure. 

On a separate economic note, the retail sales figures for April were just released and declined .4%, and excluding auto sales, declined by .5%. The market expected April retail sales to be unchanged. This report is a clear indication the economy remains on life support. Not surprising to me, March retail sales were revised even lower from a decline of 1.1% to a decline of 1.3%.

With all due respect to credible journalists, analysts, and financial commentators, I personally do not see enough green shoots in the midst of reviewing the entire economic landscape.    

The equity markets are moving sharply lower on this news.

LD

P.S. Sense on Cents welcomes feedback. Let us know what you are seeing in your local economies.

  • Ballyhack

    I agree that we are set for another hit of housing sickness. My day to day consists of examining the financial condition of many private banks, and one of the most important items we look at is the amount of ARM repricing set to go off within the next 3, 6, 9-12 months. I have seen a number of banks who hold 30-40% of their total loan portfolio in these ARMs that are repricing within the year, which is pretty scary. Most of these banks also seem to be located in the troubled areas i.e. Florida, California and Arizona. These banks also seem to cross-market other types of credit to the same people who are holding those ARMs further compounding the problem. Some of these banks were also asked to withdraw their TARP applications, even though the requested amounts were relatively small compared to the banks size. I think that this is a huge red flag and a clear example of why another wave of housing sickness is soon to come.






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