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HomeEconomic Update: Housing and Retail Sales
Posted by Larry Doyle on May 13th, 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.
Increased Foreclosures: An Equal and Opposite Reaction
Posted by Larry Doyle on April 15th, 2009 11:53 AM |
There are tremendous cross currents in residential housing. Over the course of the last few months we have seen the following:
-an uptick in housing starts
-an uptick in new home sales
-a decline in home prices as indicated by the S&P/Case-Shiller Index
Do not forget, though, that Uncle Sam had Freddie Mac and Fannie Mae postpone the foreclosure process over the course of the last few months. Additionally, Congress compelled certain of the larger mortgage originators, such as JP Morgan Chase, Citi, and Wells Fargo, to also postpone foreclosures.
While the postponing of foreclosures allows for a delay in that process, regrettably it does not negate it. As the WSJ reports today, Banks Ramp Up Foreclosures.
The Federal Reserve knows that increased supply in housing in the face of rising unemployment will further depress home prices. In fact, just yesterday the Fed made a statement indicating it believes housing prices may overshoot to the downside much as they overshot to the upside earlier this decade. That scenario seems to be the equivalent of a physics principle – for every action, there is an equal and opposite reaction.
The subsequent impact of this increased foreclosure activity is an increase in chargeoffs by banks holding the mortgages. While certain banks, such as Wells Fargo, reported surprisingly strong 1st quarter earnings, be mindful that many analysts criticized Wells for not reserving more against future chargeoffs.
Over and above this impact on bank earnings, do not forget that the model used for the Bank Stress Tests incorporated an unemployment rate of 10.3% as the absolute worst case scenario.
That rate is now commonly accepted as a very strong likelihood.
LD
