Waiting for Bottom
Not the upbeat topic I had been hoping for with my inaugural post here, but it is difficult not to hold a dour view for our economy in the near future considering the current climate, and this raft of recently updated economic indicators does not give much reason for a brighter mood.
On July 29, the updated (and widely reported) S&P/Case-Shiller Housing Index was released for May, revealing a 15.8% drop in home prices across its 20 city index since May 2007, which represents the largest decrease ever for the Case-Shiller. This report is not all bad, however, as the index posted only a 0.9% drop since April 2008, which is one of the smallest decreases ever and may indicate some slowing of the price slide. Seeking Alpha delves into this issue in greater detail, and they highlight that the losses are very much regionally based, as seven of the twenty metropolitan areas actually posted modest gains in home values over the past year. Most losses, which were heavy, were sustained in Los Angeles, Miami, Las Vegas, and other areas of aggressive subprime mortgage lending.
Before we get even cautiously optimistic about the housing market, however, there are a couple more numbers that should be highlighted. In an ominous bit of reporting this morning, the New York Times suggests that a second crest of home mortgage defaults might be approaching, but this time the damage will be focused in realm of prime mortgages, as homeowners with good credit begin to fall behind on monthly mortgage payments:
"The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time." (Chart here)
According to a recent Census Bureau report, rental vacancies are hovering at about 10%, and ownership vacancies are at about 2.8%, which is statistically in line with the second quarter of 2007, but up about 1% since 2005. Considering the excess supply of housing units and current mortgage default and unemployment rates, it would not shock me if the ownership vacancy rate grew in the near term. (And for some reading on one of the unforeseen consequences of all these warm-climate home foreclosures, see here. The hits - or bites, rather - just keep on coming.)
With the pressure to keep up reaching prime mortgage holders (and especially those with ARMs coming due for re-adjustment), the bad news continues, as inflation, boosted by high food and energy prices, grew at a rate of 0.8% last month, outpacing consumer spending growth, which clocked in with a 0.6% gain. Paying the monthly bills is not getting any easier on the average wage earner. On July 31, the Bureau of Economic Analysis reported only sluggish GDP growth of 1.9% over the second quarter, and revised 4Q 2007 numbers downward to show a slight loss. One has to wonder when those $600 stimulus checks will be completely burned out, and to what degree these recent food and energy price increases will reduce the economic benefits of the package.
In testimony Friday before the Joint Economic Committee, Bureau of Labor Statistics officials reported (pdf) that non-farm payrolls lost another 51,000 jobs in July, lifting the unemployment rate from 5.5% to 5.7%. The construction, manufacturing, and employment services sectors took the greatest losses overall.
I'm neither an economist nor an expert, so I'll leave the prescriptive measures for these issues to those who are qualified, but staring these numbers in the face and considering what they might portend, I'm reminded of a quote often attributed (by my former boss, in particular) to Rudi Dornbusch, as follows:
"Things always happen later than you expect, but when they do happen they happen faster than you expect."
For the sake of our economic health, I hope Rudi was wrong, and the upturn isn't too far away.
All in all, one thing remains increasingly clear: once again, the current election will be decided on the economy, stupid. And I don't envy the eventual winner of this race one bit, whoever it may be.
As an aside, Alt-A mortgages were known in the mortgage business as "Liar Loans". That hole in the mortgage lender's foot is self-inflicted.
Something else I found interesting: the housing bailout bill removes special tax breaks on vacation homes. In particular, the old practice of buying two or more houses, living in one of them for two years, moving to another, and then selling the one just-lived-in and keeping up to $250k of capital gains tax-free ($500k if married) is now "out" (well, not quite just yet, but very soon). This will put additional pressure on sales as some vacation homes will have to be sold quickly, and "sitting" on "idle" houses is going to become considerably less profitable.
August 5, 2008 2:43 PM | Reply | Permalink
The fed hopes to keep their friends afloat with cheap money from the discount window. That's tax payer's money by the way. We are seeing an attempt to inflate our way out by pumping more money into the system. This is delaying the inevitable. The lower class is almost tapped out. If the fed succeeds, the actual standard of living will drop for most Americans while the upper's wealth will increase. Just you watch and see.
August 5, 2008 4:34 PM | Reply | Permalink
The housing market has a very long way to go before it hits bottom. Houses in my area have doubled or nearly tripled in price in the last eight years. Menawhile, the stock market was volatile within poles, but essentially stagnant over time. And wages have not increased much at all. Why on earth should a house be worth 250% of what it cost eight years ago? It's all a sham, a house of cards. When people with real jobs can afford to buy homes again, without the ARM and trick financing, then you'll know the market has bottomed out.
August 6, 2008 8:53 AM | Reply | Permalink