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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.
Water Finds Its Own Level
Posted by Larry Doyle on May 6th, 2009 5:15 AM |
If housing led us into this mess and is going to lead us out, then bring an extra pair of boots because we still have a long way to go.
Could the government intervention in the housing market promote short term support but also long term pressure? What do I mean? As I wrote yesterday in Mortgage Magic or Mortgage Mayhem, the government is providing real subsidies in terms of mortgage rates, guarantees, closing costs, and points. These subsidies are generating support to segments of the housing market. That said, housing in general remains under severe pressure in many regions. The higher priced markets with very limited government intervention are virtually stagnant.
Pressure from the higher end is actually prompting some banks to allow for short sales in which the bank absorbs the loss from a home sold below the outstanding mortgage balance. Why would a bank do that? Very simply because the bank believes a sale now, even at a loss, is better than a foreclosure later generating an even greater loss.
I think we will see further downward pressure on prices and a delay in real improvement in housing due to the fact that more homeowners are now under water on their mortgages. The WSJ reports, House Price Drops Leave More Underwater. How many are underwater? Almost a third of American homeowners!!
Government intervention is simply attempting to apply sandbags to this problem. While I fully empathize with the families impacted, these sandbags are no remedy or foundation for a long term fix. In fact, I think these sandbags are potentially causing pools of private capital to refrain from entering the market. Why is that? A market that is being artificially supported will always cause real money to wait in the wings.
As the water finds its own level, the private capital will definitely enter. In so doing, it is very likely the private capital will ultimately push the market to levels even higher than current.
Any market participant knows, though, that a market that is manipulated may stay elevated for a short stretch but will move lower, find its natural clearing level, and then move higher. Housing is no different.
LD
Mortgage Magic or Mortgage Mayhem?
Posted by Larry Doyle on May 5th, 2009 7:02 AM |
Are the largest banks in the land ready to defy the rule of law and self-deal with Uncle Sam’s blessing in the name of providing mortgage relief to homeowners currently strapped by first and second mortgages? The WSJ reports How Big Banks Want To Game The Mortgage Mess.
Is this another game of chance in which Uncle Sam wants to prime the pump in hopes of luring private capital into the economy? No, anything but. In fact, this is no game at all. Uncle Sam is proposing legislation which would protect mortgage servicers from being sued for not performing their duty to protect the property rights of mortgage investors (including pension funds, mutual funds, insurance companies). What does all this mean?
Investors in mortgage securities backed by first mortgages are entitled and expect protection of their capital by the performance of mortgage servicers handling the monthly payment of mortgage principal and interest. In fact, if the mortgage servicers do not perform the investors will and should sue.
The investors or holders of second mortgages will only receive a return if and when the first mortgage is current on its payment.
Will Congress pass legislation which would unintentionally incentivize large banks, which also happen to be large mortgage servicers, to game the mortgage modification process for their own benefit but at the expense of investors holding the first mortgages? The WSJ highlights:
Given the current housing crisis, there is wide support for measures to make it easier for homeowners to modify their mortgages. That is understandable. Nobody likes seeing the wave of foreclosures. Plus, mortgage modifications may help stabilize home values.
But in the rush to do something, Congress is showing a regrettable willingness to adopt constitutionally suspect legislation that runs roughshod over the Fifth Amendment of the Constitution, which prohibits the taking of private property without just compensation. (more…)
Why is George Soros Short the Euro? MUST READ!
Posted by Larry Doyle on March 3rd, 2009 6:10 AM |
In very short order, I have gained a deep respect and regard for our Economic All-Star, John Mauldin. I have come to appreciate that Mauldin and I view the market through the same lens focused on the global economy. While many media outlets focus on the day to day, if not hour to hour trading activity, I believe they are truly missing the forest for the trees.
While I have written twice over the last week about eastern Europe being the weakest link in the world of global finance, Mauldin and his colleague Niels Jensen of Absolute Return Partners provided insights and analysis that is numbing.
Why is George Soros short the euro? Let me provide a synopsis of Mauldin’s and Jensen’s “Europe On the Ropes.” Assuming those visiting Sense on Cents have an interest in the markets and economy, this piece is somewhat lengthy, but a MUST READ!! A link is provided at the end of my review. (more…)
