Monday, April 02, 2007

'Where's the Fuel That's Going to Keep the Fire Going?

From Inman News:
The quarterly Anderson Forecast, produced by the Anderson School of Management at University of California, Los Angeles, reports, "Put bluntly, the credit crunch in the subprime mortgage market will likely trigger a second leg down in the housing market in terms of output and prices."

Edward Leamer, forecast director and a professor of economics and statistics at UCLA, said the severity of the subprime meltdown was a surprise since the last forecast was produced.

"This thing started in the Midwest, where jobs were weak and prices were weak," he said, and has since mushroomed to national scale. Foreclosures are on the rise, but the more critical issue for the economy is the ability for consumers to purchase homes.

"There are sad individual stories about people who got into homes they couldn't afford. I think the real story is not what's happening to the people who own homes -- it's what happens to prospective buyers who might be buying a home soon. The energy of the market, a lot of it is in the subprime, low-income homes. You need new money in the market in order to fuel the price appreciation. A lot of the new home buyers have been at the lower end -- start-up, entry homes. If you pull that out of the market, where's the fuel that's going to keep the fire going?"

He added, "The economy overall is going to be impacted by the inability to provide fuel to drive housing forward."
...
Shulman's report states that the housing market may take many years to recover, and "will look like the protracted decline that took place in Southern California from 1989-96."
...
"Although we continue to believe that our no-recession, soft-landing thesis for the economy remains intact, we are becoming increasingly nervous about the economic outlook as the period of below-trend growth grinds on," Shulman states.

A separate report that tracks the California economy predicts "a significant slowing of the California economy in 2007, as the double whammy from construction and mortgage finance creates a drag on the rest of the economy."

Foreclosure notices have been on the increase in California, with the biggest increases in the San Francisco East Bay area and in the Sacramento, Bakersfield, Ventura and Riverside areas. "This list ... may sound familiar from previous California reports: these are the counties where new homes account for a substantial share of total home sales and also the counties which have seen the most weakness in median sales prices," according to the report by Ryan Ratcliff, an economist for the forecast.

This may be due to "a combination of overextended first-time buyers and builders offering overly aggressive financing in order to close deals," according to Ratcliff's report.
From the AP:
"We suspect the problem in the subprime area is just the tip of the iceberg for the mortgage market as a whole," Shulman wrote. "For all practical purposes, the subprime market is in the process of shutting down."
From the Sacramento Bee:
"We still expect to see the pattern of deepening real estate losses combined with a slowdown in the rest of the economy -- now it's just the first half of 2007 instead of the second half of 2006."

The main culprit: the recent meltdown in subprime lending.

"The drying up of subprime credit suggests that home sales in California will be stagnant for some time to come," he [Ratcliff] wrote.

Construction employment will turn negative this year, he said in an interview, and the financial sector will become a drag on the economy as well. And while the rest of the economy is likely to remain fairly healthy, "there's no sector that's all of a sudden going to shift into overdrive" to compensate for construction losses, he said.

12 comments:

peterbob said...

Foreclosure notices have been on the increase in California, with the biggest increases in the San Francisco East Bay area and in the Sacramento, Bakersfield, Ventura and Riverside areas.

According to realtytrac, foreclosures increased by 33% in a two week period in Humboldt County.

peterbob said...

"This thing started in the Midwest, where jobs were weak and prices were weak," he said, and has since mushroomed to national scale. Foreclosures are on the rise, but the more critical issue for the economy is the ability for consumers to purchase homes.

What no one seems to point out is that during any type of bubble, the economy gets out of alignment, since absurdly high prices funnel resources into less productive endeavors. In the case of the housing bubble, more people became realtors, more built houses, and more took positions in mortgage companies than they should have because they were lured by the high housing prices.

The best thing for the economy is for prices to fall to fundamental levels so that people can make better decisions about resource allocation.

Diggin Deeper said...

Christian E. Weller (Center for American Progress Senior Fellow) Testified to the House Education and Labor Committee Jan. 31, 2007

Here's an excerpt:

"America’s middle class families are caught in an unprecedented crunch. Despite a growing economy, their incomes have been stagnant or flat. And because prices for big ticket items, such as housing and health care, have gone through the roof, families were not able to put away a rainy day fund. Instead, middle-class families have had to take on more debt to maintain their basic needs and could not save anything for a rainy day, Taken together, these trends have left families increasingly vulnerable to the impact of an economic emergency, such as unemployment or a medical emergency."

http://www.americanprogress.org/issues/2007/01/pdf/weller_testimony.pdf


The American middle class of 2007-

Too much consumer debt ($2.4 Trillion), stagnant real income, inflation high and moving higher, negative savings, and no cushion to break a fall. Add in prime and subprime mortgage resets ocurring over the next few years and the middle class will be under tremendous pressure. Not a real rosy picture for being able to afford housing at the present pricing levels.

rocklin renter said...

"There are sad individual stories about people who got into homes they couldn't afford."

See, now I disagree.

There is nothing SAD about that AT ALL!

(I'm a heartless sob)

Jeff said...

What's sad is if the govt bails these morons out and they get to keep their homes, the rest of us foot the bill even though we were responsible enough not to get into something over our heads.

Diggin Deeper said...

Jeff

If government doesn't bail out the masses, the attorney's will swoop in and charge lending with "predatory lending practices". We'll foot that bill too as they will probably be in the form of class action suits. A favorite way for attorney's to inflate their costs, give pennies to the plaintiffs, and reap huge rewards for the firm.
If the govt does bail out the crowd it just adds inflationary fuel to the fire as those costs will be on us and we will have to move more dollars away from our ability to pay the mortgage in order to allow Joe Sixpack to keep a home he didn't belong in anyway.

Patient Renter said...

"What's sad is if the govt bails these morons out and they get to keep their homes, the rest of us foot the bill even though we were responsible enough not to get into something over our heads."

EXACTLY. This is the message that needs to be communicated to the lawmakers considering a bailout.

To put it another way, it's simply unfair that individuals and companies sought to make money from the bubble, but when it busts they want to be bailed out by the taxpayers, basically having their cake and eating it too. Dean Baker called this privatizing profit and socializing losses.

anon1137 said...

"America’s middle class families are caught in an unprecedented crunch. Despite a growing economy, their incomes have been stagnant or flat. And because prices for big ticket items, such as housing and health care, have gone through the roof, families were not able to put away a rainy day fund. . . .

This sounds like a lot of BS to me. America's middle class hasn't put away anything for a rainy day fund for 30 or 40 years. While their homes were appreciating in value during the last 5-10 years, America's middle class was draining their equity to buy new cars, boats, vacation cruises, and big screen TVs. I don't have any sympathy for them.

Diggin Deeper said...

anon1137

You're right, it is BS because as you said, its a well known fact. But the middle class plays the dominant role in the real estate market and the economy. When they could'nt afford to buy... they bought anyway using "free money" exploding "to good to be true" loan products. Now anyone holding an ARM, hybrid, or IO loan is in for a financial shock over the next several years, regardless of whether it was prime, subprime, or Alt-A borrower. Shame on them! This basically will take a certain percentage (mabe as high as 20-25%) out of the buying mix. Try taking that same percentage range out of the overall economy. We'd be in a recession for many years to come.

anon1137 said...
This comment has been removed by the author.
anon1137 said...

DD - I hope your prediction is right re: a recession in housing but we shouldn't count our eggs before they hatch. As others have pointed out, subprime loans are still being made today, and as far as exploding ARMs go, many of these mortgages will be refi'd before they explode. The number that can refi depends on the economy (esp. wages and interest rates) and housing prices (and their effect on appraisals).

Many RE agents are putting out the message that the slowdown in housing is all psychological. This article made me laugh:

Marin Realtors launch PR blitz, say market is strong
http://www.marinij.com/marin/ci_5580783

. . . Association officials [Marin Association of Realtors], concerned about the media's recent portrayal of the market as weak based on "snapshot" data, are making the rounds to Rotary clubs, chambers of commerce, community groups and others across Marin hoping to spread the word that business is good.
. . .
"We hope it will lower the temperature, quite frankly," Segal said. "Journalism is a rough draft of history. That's why we want to provide the other side of the story" using "... facts and figures, not one or two months but over 30 years."
. . .
"We're much better off than the media would have you believe," she said.

Diggin Deeper said...

anon1137

Very true about refi's for those prime borrowers who have enough equity and can qualify at new the lending standards. There will be a percentage who don't and won't.

People seem to think that the problem is isolated to subprime and Alt-A. Unfortunately, the prime market has its share of "liar loans", IO's, and ARMS (particularily over the last two years) that will reset as well. Any appreciation since 2006 has turned negative. The 2005 appreciation is waning. This will add to whatever problems the sub FICO 600's create. We can't just limit the problem to poor credit borrowers. Good credit borrowers who used poor judgement, at the wrong time, will add to the problem.