Archive for the 'Economy' Category
More than 14 million borrowers were underwater as of Q1 2010, and with a further 10.8% decline in house prices expected relative to Q4 2009 levels, another 6 million borrowers are likely fall into negative equity by the end of 2011, according to commentary today by Deutsche Bank.
The presence of negative equity goes hand-in-hand with an increased likelihood of strategic default, as borrowers may sometimes not be willing to pay the mortgage when the house has lost substantial amounts of value. The firm noted that, even when strategic default makes economic sense, many borrowers resist on moral and social grounds, as well as from fear of legal consequences. The existence of recourse — when a lender is able to pursue a borrower’s other assets — also acts as a disincentive against strategic default.
Deutsche Bank noted 11 states are considered non-recourse — though not all explicitly forbid deficiency judgments on homes or on purchase loans.
The US Federal Reserve is expected to keep US interest rates at historic lows when it meets later Wednesday, as it tries to keep a languishing recovery on track. The Fed’s top rate-setting body is widely expected to keep its main rate of borrowing at between zero and 0.25 percent to help spur economic growth.
Faced with reams of data showing the recovery is still fragile, the debate over whether the Fed should quickly raise rates to stave off inflation has all but disappeared in recent months. The Fed’s announcement will still be keenly watched as investors look for any hint that a double-dip recession is on the way, or that the worst of the danger has passed.
Jobs growth remains anemic with employers still reluctant to add permanent positions during the fragile recovery. The unemployment rate is expected to hover near 10 percent for quite some time as the economy regroups after the worst downturn since the Great Depression of the 1930s Consumers have been cautious about spending, which normally drives about two-thirds of the activity in the world’s largest economy.
The two large questions on the minds of real estate investors are: when will the economy recover? and when is a good time to reinvest in the housing market? We think the economy has reached the point where aggressive investors can find good opportunities in selected housing markets. Although the national economy will just be creeping along for another couple of years and home prices will be weak, some local markets have enough long-term potential to warrant taking investment chances.
The latest bad news for the housing market is that the fall in home prices in the last four quarters was worse than expected, showing weak demand for housing and competition for real estate rentals from vacant properties. Overall, home prices fell almost 7 percent, whereas the fall for the four quarters of 2009 was 5 percent. Although the biggest drops were in Florida, California and other markets out West, the effect was felt across the country. The good news is that rental vacancy rates seem to have stabilized most everywhere, and are falling in large markets like Atlanta, Chicago and Miami. On balance, we seem to be looking at a housing situation where the downside in some local markets has become quite small.
Even though the economy grew at a 3 percent rate in the first quarter, the job situation has not improved very much, indicating a much longer recovery period. Over a million jobs were lost in the last 12 months, many in construction and manufacturing. We expect job gains during the next year, but in lower-paying areas such as retail trade and health care. And the number of temporary workers will continue to grow.
Our "favorite housing economist" Dr. Bob Shiller thinks the market (especially housing) is already overheated. "We are in a very unusual circumstance," says Shiller, "because of the massive bailouts, the homebuyer tax credits, the Fed’s purchase of mortgage-backed securities – and these things are coming to an end. I don’t trust the trend we have."
"So the question is, are we at risk for even more price increases, and another bubble? I think we are at risk, but I’m not predicting it," says Shiller. "I think it’s more likely we don’t do so well from here," Moneynews reported Shiller telling The Motley Fool.
So is that "a yes, a no, I know, or a maybe?"
Categories are graded from A thru F:
Economic Growth: D+
Spending remains high and income improved, but the unemployment level remains very high. Overall economic growth improved slightly this month, and the results for our economic growth metrics were generally positive. The revised fourth quarter GDP growth rate increased to 5.6%. The pace of job losses eased this month, and the number of mass layoff events is plummeting, but employment has still declined 1.7% year over year.
The unemployment rate was flat this month at 9.7%, but the broader measure of unemployment, the U-6, increased to 16.9%. The length of unemployment in the labor force increased to 31.2 weeks this month, reaching a record high level since the BLS began tracking the statistic in 1948. Personal income improved and has returned to positive year-over-year growth for the second time since December 2008, increasing by 2.0%. The CPI (all items) increased to 2.3% from one year ago, while the Core CPI (minus food and energy) dropped to 1.1%.
Leading Indicators: C+
Overall leading indicators held relatively steady this month, but several individual metrics actually improved. The Leading Economic Index has increased for the past eleven consecutive months. The ECRI Leading Index – an indicator of future U.S. growth – increased 13.9% year-over-year, and has experienced positive year-over-year growth for the past 10 months. Stocks improved once again in March, and all four major indices have now experienced large positive year-over-year growth, ranging from +43% to +57%.
A year after record-setting declines, the slide in national housing prices appears to be nearing an end. CoreLogic projects overall price appreciation of 4.5% over the next 12 months.
National home prices were down less than 1% in January compared to one year earlier, and down 1.9% from the previous month, according to First American CoreLogic’s monthly home price index (HPI).
The 0.7% year-over-year decline in January was better than the 3.4% decrease in December. January’s narrowed decline comes exactly one year after the CoreLogic HPI took its biggest annual decline in the 30-year history of the index.
Excluding distressed sales, prices declined 0.4% year-over-year in January, CoreLogic said. That’s better than 3.3% in December 2009.
CoreLogic projects house prices will continue to decline another 3.7% into the spring before bottoming out in April. After prices begin to stabilize, there will be a modest recovery for the balance of 2010. Excluding distressed sales, prices are projected to decreased only another 0.9%.
Survival of the fittest applies to economics as well as biology – in fact, some would argue the concept is better applied to the financial arena than any other area of study. Unfortunately, it’s a fact few Americans want to face head on… it goes against the steady diet of “American ingenuity” and the (false) belief that any child born in the good old USA can grow up to be anything they want. While there are exceptions to every rule, survival of the fittest is an economic trend currently undergoing the equivalent of an ice-age extinction as one era gives rise to an entirely new one. Research by consulting firm McKinsey found a few unsettling statistics that demonstrate the depth of the problem:
Over 70 percent of currently employed Americans work in jobs for which there is low or declining demand. This includes both blue collar and white collar. Competition for jobs that cannot be shipped overseas (healthcare for example) has created high competition which is driving down wages and promoting part-time, per diem, and other “job sharing” situations.
Mainstream stores are doing double-takes as consumers shift spending habits. Not only are brick and mortar stores under heavy competition from online retailers like Amazon but the bleak economy is finally taking a toll. Violating one of the core marketing principles ‘never undercut your own product’, heavy weights ranging from Proctor & Gamble to Macy’s are rolling out discount versions of their more expensive popular items. Cost of Tide got you down? Don’t worry, you can now buy Tide Basic…a discount version. Research shows 1/2 of Americans have already reduced spending and 1/3 plan to do so permanently with 18 percent of consumers switching from name brands to generics in the past two years alone.
So, how are Americans spending their money both today and into the near future?
Categories are graded from A thru F:
Economic Growth: D+
Overall economic growth was about the same this month compared to last, and the results for our economic growth metrics were mixed. The revised fourth quarter GDP growth rate increased to 5.9% from the preliminary estimate of 5.7%. Much of the growth was still the result of recent government stimulus and an increase in inventories. The pace of job losses also eased this month, although in the last 12 months the U.S. has lost 3.24 million jobs, which is equal to a decline of 2.5% of the total payroll workforce. The unemployment rate remained flat this month at 9.7%, while the broader measure of unemployment, the U-6, increased to 16.8%. The length of unemployment in the labor force declined slightly to just under 30 weeks this month, yet remains the second highest month on record since the BLS began tracking the statistic in 1948. Personal income improved in January and has returned to positive year-over-year growth for the first time since December 2008, increasing by 1.1%. The CPI (all items) decreased to 2.6% from one year ago, while the Core CPI (minus food and energy) also dropped to 1.6%.
Leading Indicators: C
Overall leading indicators held relatively steady this month, but several individual metrics actually improved. The Leading Economic Index 6-month growth rate declined in January to 9.8% from 12.2% last month, and remains very high compared to history. The ECRI Leading Index – an indicator of future U.S. growth – increased in January to its highest level since May 2008. The index increased 21.5% year-over-year, and has experienced positive year-over-year growth for the past 8 months. Stocks improved in February after declining in January, and all four major indices have now experienced large positive year-over-year growth, ranging from +46% to +62%. The S&P Homebuilding Index also improved this month. The spread between corporate bonds and the 10-year treasury fell in January, declining to 160 bps after peaking at nearly 270 bps in March. Since the 10-year treasury is seen as a risk-free investment, the spread between corporate bonds and the 10-year treasury displays the perceived risk of investing in corporate bonds, which has declined recently as Wall Street has become less worried about businesses failing. According to the 4th quarter CEO Confidence Index, CEOs are now much more confident about the economy. Despite the increase, the outlook index remains lower than earlier this decade. Business credit availability remains very poor, but deteriorated at a slower rate in the first quarter of 2010.
The US could be heading for a national housing shortage this year despite the real estate sector struggling with healthy inventories, three million foreclosures, falling values, and rising vacancy rates, it is claimed.
Several leading economists are warning that not enough new properties are being built to keep up with expected population growth. They estimate that only a third of what will be needed is currently under construction.
According to Brian Wesbury, chief economist at First Trust Advisors, the US needs to add 1.5 million housing units per year just to keep up with population growth plus another 100,000 for fires and tear downs. ‘We need 1.6 million or more per year. Right now we’re down to about six and a half, seven months’ inventory, whether you look at new homes or existing homes. Housing starts are now between 500,000 and 600,000 a year,’ he said.
‘I think one of the secret investments, if you will, over the next decade is going to be housing. It is extremely cheap, inflation is on the way. But people are running away from it. You know, it’s that old adage – when there’s blood in the streets, that’s when you invest. And this is the time, I think, for real estate,’ Wesbury added.
It may not be the most widespread measure of housing prices, but if you want to follow a powerful driver, look at rents.
Specifically, it’s the rents Americans pay on condos, apartments or houses that are about the same size, and share the same neighborhood as your ranch or colonial, that in the end determine what your house is worth.
"If you look at the trend in rents to see where housing prices are headed, you’re looking at the right measure," says Yale economist Robert Shiller.
In recent reports, Deutsche Bank demonstrates how steady or even falling rents have pulled down housing prices, to the point where in many markets it costs about the same amount to own as to lease. That’s a golden mean that America hasn’t seen in almost a decade. The DB research also offers convincing evidence that the wrenching adjustment in housing prices is finished for much of the nation, with a bit more pain to come in selected areas.
Before we get to the numbers, let’s examine why rents exercise a kind of gravitational pull over home prices.
Ben Bernanke, "Time Magazine’s Man of the Year".
How about “Dumbass of the Decade?”
You just can’t make this stuff up! This choice by Time Magazine displays the collusion between the government and the main stream media. Bernanke as "Person of the Year" is almost as bad as President Obama receiving the Nobel Peace Prize.
I believe in the next year or so it will become apparent to all the "sheeple" out there, who just gobble up all the BS from the main stream media as the truth, that Ben Bernanke is actually "Dumbass of the Decade" instead of "Man of the Year" when everyone realizes what he actually did with our money. The only true way to find out what he did is to audit the Fed. Unfortunately, if the Fed were audited today we would probably have another stock market crash when everyone realizes where all the money went to.
The Dumbass Bernanke Timeline:
Existing home sales surprised the markets by rising 7.4% to an annual rate of 6.54 million units in November, the highest since February 2007, according to the National Association of Realtors (NAR). That’s only 10% below the all-time peak in 2005.
What’s more is that house prices, as measured by the S&P/Case-Shiller 20-City Home Price Index, rose for the fourth consecutive month in September before stabilizing in October when prices were flat.
The NAR is inevitably convinced that the worst is over and that housing is due for a rapid recovery, and that home prices will take out 2006′s peaks some time in 2011 or 2012.
Not so fast, guys!
The recovery in housing has been boosted by just about every artificial means imaginable:
- Interest rates have been kept historically low at 0% – 0.25% for a very long time.
- Fannie Mae and Freddie Mac, the bankrupt behemoths of housing finance, have been bailed out with what amounts to a blank check from taxpayers.
- The Federal Housing Agency (FHA) went on making mortgages with 3% down payments when nobody else was, thus very likely landing taxpayers with another bill for some large fraction of $1 trillion.
- And the government has been handing out cash subsidies for refinancing houses that were about to be repossessed and $8,000 subsidies for first time buyers – now $6,500 for all homebuyers.
Of course it looks like the housing market has recovered! The question is what happens when some of these subsidies are taken away? Read more »
Categories are graded from A thru F:
Economic Growth: D
The economy remains weak and although some indicators have improved compared to last month, they are improving from very low numbers. The third quarter GDP growth rate was revised downward to +2.8% from the preliminary report of +3.5%. Despite the downward revision, it still marks a great improvement from the second-quarter, and is the first quarterly increase in four quarters.
Job losses have eased slightly compared to last month, yet remain awful compared to history. In the last 12 months the U.S. has lost nearly 4.7 million jobs, which is equal to a decline of 3.4% of the total payroll workforce – representing one of the largest declines in 60 years. The headline unemployment rate surprisingly declined this month, reaching 10.0% in November, down from 10.2% in October.
The U-6, a broader measure of unemployment that covers part-time workers who would like full-time work and those who have given up looking for work, also decreased to 17.2% in November, down from 17.5% in October. Mass layoff events – defined as a cut of 50 or more jobs from a single employer – eased once again in October to 2,127, and marks the first year-over-year decline since August 2007, representing a 3.5% drop compared to last year.
The length of time required to find employment continues to increase, with job seekers taking over twice the normal length of time to find employment. The November CPI (all items) rose to 1.8% from one year ago, while the Core CPI (minus food & energy) remained flat at 1.7%.
Leading Indicators: C-
The U.S. leading indicators took a leg down this month after a run of steady improvements in recent months. In October, the Leading Economic Index 6-month growth rate declined to 10.2%, yet remains one of the largest year-over-year growth rates on record since 1983. Although the ECRI Leading Index, which is a gauge of future economic growth, also declined to 23% since one year ago, it still represents one of the largest growth rates since ECRI began tracking the statistic in 1968.
Stocks continued to perform well throughout November. All four major indices we track have now posted positive year-over-year results, ranging from +17% to +40%, compared to one year ago. The S&P Homebuilding Index inched up in November and has shown a year-over-year improvement for the second time since April 2006. The spread between corporate bonds and the 10-year treasury increased slightly in November, reaching 177 bps. Since the 10-year treasury is seen as a risk free investment, the spread between corporate bonds and the 10-year treasury displays the perceived risk of investing in corporate bonds, which has declined recently as Wall Street has become less worried about businesses failing. CEOs are now much more confident about the economy, according to the CEO Confidence Index.
Affordability: C-
Affordability improved once again this month as home prices and mortgage rates continued to decline. Our housing-cost-to-income ratio has fallen to 26.1%, which is near the lowest level since data for the index began in 1981. Homeownership costs have fallen drastically in the past year, and now owning the median-priced home is just $54 more expensive than renting the average apartment – and in many parts of the country homeownership costs much less. Due to large job losses and government furloughs, household income has fallen 4% year-over-year to $53,293. Despite the decline in incomes, the median-home-price-to-income ratio remains below the historical average, currently at 3.2. The 30-year fixed mortgage rate continued to decline, reaching 4.78% by November month-end, while adjustable mortgage rates fell to 4.35%. The Fed’s overnight lending target rate remains at a range of 0.00% to 0.25%, which is the lowest level on record. The share of ARM applications declined to 4.8% in the last week of November which is a significantly smaller share than the peak level of 35% of total applications in early 2005.
Consumer Behavior: D-
In general, consumer behavior declined compared to last month. Consumer confidence experienced a negligible uptick compared to last month, reaching 49.5, and remains very low compared to history. Consumer sentiment declined in November to 67.4 and also remains well below the historical average. The Consumer Comfort Index increased slightly in November to a monthly average of -46.4. The personal savings rate fell to 4.4%, which is down from a recent peak in May of 6.9%. The U.S. net worth increased nearly $2.7 trillion dollars in the third quarter from the prior quarter. Despite the recent quarterly improvement, the decline year-over-year of $3.4 trillion remains one of the largest on record. The Misery Index – which is based on the unemployment rate and inflation – increased this month.
Existing Home Market: C-
The change from last month in the existing home market was mixed. According to the National Association of Realtors (NAR), seasonally adjusted annual resale activity continued to experience large gains in October, rising to 6.1 million home sales, and improving 10% from last month. The 12-month rolling count of resale sales activity has also improved for four consecutive months. Resale sales have experienced an increase due to the $8,000 federal tax credit that was set to expire November 30th, before it got extended to Spring 2010. The national median price of an existing single-family home fell to $173,100 in October from $175,900 in September, and has fallen 7% year-over-year. The pace of decline in the Case-Shiller national index, which tracks paired sales, improved drastically in the third quarter, and marks only the second time in over three years that the index decline eased. Although the Case-Shiller national index remains down nearly 9% year-over-year, it is a sharp improvement from 19% decline reported in the first quarter. The monthly 10-market and 20-market Case-Shiller indices also remain down year-over-year, yet have experienced month-over-month improvements since May, and the annual declines have eased in recent months. The number of unsold homes declined again in October, and fell to 7.0 months of supply, reaching very close to the historical average. In October, pending home sales volume improved again, increasing almost 32% year-over-year. As of the third quarter, 23% of all homes with a mortgage throughout the U.S. were worth less than the original value of the mortgage.
New Home Market: D
The new home market was mixed this month. Builder confidence declined in December as the Housing Market Index fell to 16. The seasonally adjusted new home sales volume increased in October compared to September, reaching 430,000 transactions – up 5.1% year-over-year. The median single-family new home price increased to $212,200 in October, but has declined 0.5% year-over-year. The inventory of unsold homes fell to 6.7 months, down from 7.4 months last month, and is a large improvement compared to 12.5 months of supply in the beginning of 2009.
Repairs and Remodeling: D-
The conditions for repairs and remodeling remain poor this month. Homeowner improvement activity worsened in the third quarter, representing a decline of 9.4% year-over-year. The Remodeling Market Index improved to 39.8 in the third quarter, and has rapidly rebounded after bottoming in the fourth quarter of 2008. Despite the recent increases, the index remains well below the historical average of 50. The decline in residential construction eased slightly in October, although it has fallen 24% year-over-year.
Housing Supply: F
Housing supply worsened this month. Total completions improved 9% compared to the prior month, reaching 810,000, although they have fallen 25% year-over-year. Seasonally adjusted new home starts increased this month, as single-family starts rose 2% and multifamily starts improved 67% compared to last month. Seasonally adjusted total permits also increased in November to 584,000 units. Total permit activity has fallen 7% year-over-year and over 74% since its most recent peak in September 2005. Although vacancy rates in the U.S. have improved in recent quarters, the majority of the U.S. remains oversupplied compared to history. Just four states in the U.S. are currently undersupplied – Texas, Louisiana, West Virginia and Iowa.
* US Building Market Intelligence™ report is produced by John Burns Real Estate Consulting.
Housing prices have taken a beating over the last few years all around the country. However, a few major cities have finally hit bottom and are on their way back.
The question that some are asking now is whether the rebound is temporary, or a clear sign that those markets have come back from their trough.
Here are ten major cities that are clearly on the mend:
| City / Market | Rebound off the Bottom |
2009 Bottom |
Y/Y Change (Aug ’09) | Monthly Change (Aug ’09) |
| Minneapolis, Minnesota | 12.94% | April | - 14% | 3.2% |
| San Francisco, California | 12.5% | March | - 13% | 2.8% |
| Cleveland, Ohio | 10.9% | March | - 3% | 0.5% |
| Denver, Colorado | 8.19% | February | - 2% | 1.0% |
| Dallas, Texas | 8.10% | February | - 1% | 0.2% |
| Washington, D. C. | 7.79% | March | - 8% | 1.4% |
| Boston, Massachusetts | 6.94% | March | - 4% | 1.0% |
| Chicago, Illinois | 6.75% | April | - 13% | 2.7% |
| San Diego, California | 6.17% | April | - 9% | 1.6% |
| Atlanta, Georgia | 5.82% | March | 11% | 1.0% |
A large percentage of the sales activity today is coming from first-time home buyers and investors. In some markets this activity makes up over 75% of the total sales volume.
Remember that job growth is the primary driver of housing demand. And job growth translates into more people with incomes who can buy or rent homes. These markets have not been affected as much by the high unemployment we see in other parts of the country.
If you are a real estate investor sitting on the sidelines waiting for a bottom then this may be the nudge you need to get up and start investing. There are a large number of prudent real estate investing opportunities available today with historically low interest rates to boot!
Just when you thought foreclosure filings were stabilizing, they hit another all-time high with almost 938,000 homeowners filing in the third quarter, according to Realty Trac. This is a 5% increase from the previous quarter.
Six states account for 62% of the nations foreclosures:
California, Florida, Arizona, Nevada, Illinois and Michigan accounted for 62 percent of the nation’s total foreclosure activity in the third quarter. That accounts for 579,541 properties receiving foreclosure filings in the six states combined.
Although California’s foreclosure activity decreased almost 2% from Q2 there were still 250,054 properties that received a foreclosure filing. That was a 10% drop in default notices but a 4% increase in scheduled auctions and 12% increase in REOs.
