Double Dips Coming Everywhere
Respected banking analyst Meredith Whitney dropped a bomb on CNBC at the beginning of the week by saying, “Unequivocally, I see a double-dip in housing. There’s no doubt about it . . . prices are going down again.” Whitney warned as foreclosures and short sales go north, bank profits head south. She said, “You look at the non-performing loans on bank balance sheets and they have doubled in one year alone . . . so you’ve got this massive rotting pool of assets on the bank balance sheets.” (Click here to see her CNBC two part interview.) When asked if there was going to be a “double-dip” in the overall economy, all she would admit to is “better than a one percent chance” of that happening.
I want to show you this simple chart from Credit Suisse. I have used this chart before in posts such as “Real Estate at a Bottom . . . Not!” This chart was updated by Credit Suisse in March of this year. It is clear and predictive as to the future of residential real estate. It shows the adjustable rate mortgage resets for Sub-Prime, Prime, Payment Option Arms and Alt-A loans. Just take a look at how the chart is a roller coaster ride that ends with a giant crescendo at the end of 2011 and beginning of 2012. After than the reset mess does not bottom until around September of 2012. Let me remind you, this chart is just for residential real estate. Commercial real estate is another disaster altogether.
Many people will not be able to afford the higher payments and will just walk away from the home. That’s the trend we have been seeing, and it will continue. The bottom in residential real estate will not happen until the reset mess is cleared out.
There is only “better than a one percent chance” of a double-dip in the overall economy? You have got to be kidding. Even the Federal Reserve is worried about a slowing economy. Comments from its April meeting released this week said, “Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Not only is the Fed concerned about a double-dip in the U.S., but it is concerned Europe is also heading into the tank. (Click here for the complete Fed press release on the April meeting.)
I have been telling you for months there is a 100% chance of a double-dip recession and so has John Williams of shadowstats.com. In his latest report, Williams says, “What appears to be happening in the sudden “unexpected” weakening of a number of business statistics is a combination of reporting catch-up and a re-intensification of the economic downturn.” Please let the last few words of that sentence sink in—“a re-intensification of the economic downturn.” Williams also sees housing in a downward spiral as the latest new home sales are down “40.5%.” That is a new record low.
Williams also notes an employment recession is coming back as temporary census workers are being laid off because they’re no longer needed. He says, “I would look for an outright contraction of June payrolls, net of temporary census impact. Such would mean an aggregate monthly loss in excess of 250,000 jobs. . . . Looking ahead, there still are 330,737 temporary census hires that will lose their jobs in the next couple of months, depressing reported payroll change in July and August, etc.” Also, state and local governments are in the process of laying off 2 million workers because more than 32 states are in deep financial trouble. There are about a million people who are now completely out of unemployment benefits, and there is no job creation engine (at least in the private sector) in sight.
To sum things up: the banks have a “massive rotting pool of assets,” we are losing jobs again, and housing prices are going to take another hit. So, double- dips are coming to all parts of the economy in the second half of the year. To combat the flagging economy, the government will pour more money on the problem. Already, Congress is bringing back the home buyer tax credit. Maybe there will be another cash for clunkers program too? I am sure there is going to be continued bailout money for the states because it is an election year. I would not be surprised to see another stimulus program, although it will be called something else.
Meanwhile, President Obama is encouraging all members of the G20 to print money and worry about inflation tomorrow. I say prepare for inflation now because with the out of control debt and spending, the dollar could suddenly sink and cause inflation to spike.
I am and have been in the mortgage industry for almost a decade and can tell you with absolute certainty that people are being sold a bill of goods in now “being a great time to buy”. Rates are at an all time low as of this week. 30 year fixed rates in the low 4.0% range which is unheard of. I would like to illustrate how warped our mentality has become on home purchasing.
This week rates dropped to an all time low. The previous all time low in rates was 1971. During the mid and late 70s we saw a huge jump in inflation followed very quickly by a sharp jump in interest rates. In the early 80s rates went up into the high teens. Fast forward to today. If you are buying a $200,000 home and putting 10% down at an interest rate of 5.00% then you have a P&I payment of $966.28. If we just see a jump in interest rates to 8.0% then your new P&I payment on $180,000 is $1,320.78. That jump in payment combined with the continued loss of jobs spells doom for the housing market.
There are 2 points to this example. The first an obvious point is that rates must go up which means home prices must come down so people can afford the payment. The second and less obvious point is the mentality of the American public that this is a good time to buy because of low rates. They are equating low rates with low payment and not realizing that they are buying a home with a sales price that must be repaid. If you take this into consideration the best time to buy is at a point where interest rates are high so home prices are low to accommodate the increased payment. Then when rates drop you will gain equity. Buying right now is a losing proposition and will become more obvious when rates start climbing.
The tax credit is another idiotic subsidy that encourages people who should not be buying houses to purchase. They can drain their savings to get the 3.5% down, have the seller pay closing costs knowing they are going to get $8,000 back. No skins in the game. Housing drops again and they can/will walk away since they have nothing in the transaction. It only moves first time home buyer inventory and creates a false sense of demand.
We need rates to go up and the credits to go away before we find a legitimate housing bottom. The current policy is prolonging our pain.
P.S. 85% of the people that were in the business when I started are no longer in the mortgage business.
On January 1, 2013, a 3.8% real estate tax will go into effect (it was on page 42,734 of the health care bill — perhaps some of you overlooked it). That should fix everything.
I think I’ve seen our future: Maruchan ramen noodles. And maybe some Hormel spam if we’re lucky. But at least we’ll have homes, because banks won’t even bother trying to kick us out to repossess a dead asset.
Sometimes I think we need to hit rock bottom to build this country back up the way it was meant to me.
I worked in the mortgage business from 1992 until 2006. I saw the business morph into giant ponzi scheme. Starting in the mid 1990’s credit underwriting standards were systematically loosened. By the mid 2000s anyone, and I mean anyone could get a mortgage. The entire lending scheme was based on rising collateral values. So long as there was little risk of loss as prices rose the risk of default was meaningless. That was until prices began to fall and the entire risk model blew up. As a result house prices began to reflect the availibility of credit rather then personal income gains which have been basically non existant for quite some time.
I am in total agreement with Stephen that prices need to fall. A better way to put it would be to say prices need to fall and/or incomes need to rise. The bottom of the RE market will be a function of those two items over a time interval that is probably longer than most people think. Everything the gov’t does in an effort to fix the housing market prevents exactly that from happening. There are a lot more delinquent mortgages out there then what is being revealed with regard to agency loans.
After all the supposed R.E. bailout is really just a bank bailout and that bailout will come at the expense of the RE market rather than in favor of it. Taxpayer money should have gone to setup new banks with clean balance sheets. Such a bank could actually make loans because they would be risk negative, and thats a rare thing these days. The legacy banks are so laden with risk that they are paralyzed and take the free money to buy treasuries in an effort to reduce their risk profile. This stimulates nothing. They will have to do this for years before they will even begin to look sound. While these banks claim they don’t hold these loans they lent out billions to others to buy them, which is even worse. When a mortgage defaults it takes a team of lawyers and derivative scientists to figure out who takes the haircut. It’s a real mess and I am beginning to wonder if a solution actually exists and if it does I’m certain no one is going to like it.
Stephen and Greg: Regarding Stephens comment about home prices needing to come down.
Here is my personal experience with this. As a potential buyer, me, my husband and my 2 boys have been looking since January to purchase a home. I believe my story is playing out all over our country in one way or another.
I live in Buffalo, NY, which is sort of a depressed area to begin with, never mind the recession. Yet it’s amazing to me that most people selling their homes around here still want to get 2007 prices for them. The average salary in Buffalo is 30k. Me and my fiancé make 30k each. We are both well educated and working at great companies. Taxes in the “burbs” here are between 3,500 to 4,800 for a 95k and up home. Folks, that’s already $400 added to your monthly payment and that’s not counting your mortgage. Thank god for Zillow.com because I can actually see what people who are selling their homes now paid for them back in 1999 and 2000. What most people aren’t getting with this Great Recession is that we need to come down to 2000 prices on homes. Banks aren’t going to lend to just anyone anymore and realistically most people can’t afford a 130k and up price tag with $400 tacked on for taxes each year. And you know taxes will keep going up not down. You see, me and my husband plan to do this mortgage thing right and only base it on 1 income instead of 2. We both have solid jobs but we don’t want to be heavily in debt or work to pay for our mortgage. A realistic mortgage would be around $700-800 a month. Do the math, If we try to buy a home for $120k with say 25k down , that’s 95k but remember, I still have another $300 a month to add on for taxes (which most people don’t realize adds a lot to a mortgage payment and will increase every year) . So we are looking at over 1,000 mortgage payment every month. (we both make 30k a year – so total 60k) That doesn’t leave a lot left over for expenses, a modest vacation once year, birthday parties, holidays, maybe some home improvements or if something breaks down (car) or what have you.
Most folks are in the exact spot we are all over America. Middle class just trying to be financially responsible. If we are to get this country back on track financially, we all need to think a lot smarter… I feel bad for all the people who bought over-priced inflated homes back during the boom but we have to change our ways and change course… or it’s just going to get worse for everyone… ok, I’m off my soap box now…
Yeah, yeah, I know…. can’t I think of anything “new and improved” to say? No, I can’t, so here it is for the umpteenth time:
Stand back, and better yet, do EVERYTHING YOU CAN to hasten the FINAL COLLAPSE. The FASTER the COLLAPSE can be made to happen, the SOONER the rebuilding of a REAL NEW ECONOMY can begin.
I will continue to increase my hoard of silver…….I see rough years ahead as well 🙁
Absolutely Spot ON article–I have been sending the “Credit Suisse” chart around since Late 2008–To other analysts and to all the CNBC shills and as many Bloomberg writers as I could reach–virtually no one will publish in a major venue available to the small investor as a warning—60 Minutes did a story, but it was turned down by Nightly Business Report.
We are not in a “recovery.” European contagion is occuring now…Housing Crash 2 is also happening as we speak and according to Mark Hansen [King World News] will be painfully obvious to everyone and undeniable when the July 2010 numbers come out. Add the Commercial RE problems, and that should take out the Equity and Bond markets—as Mark Faber said:”Gold is all that is left!”
Very Best Regards,
Pat Kelly, Retired Analyst
You need to watch the interview with Meredith again. She was being sarcastic when she agreed to the 1% chance. Obviously, she feels it is much greater by stating it “Unequivocally”. Watch again.
As a mortgage professional I can tell you that rates must go up from their current levels which means prices will come down further to offset the increase in payment. If you are still strongly considering buying a home knowing that you are likely to lose 10-20% of it’s value over the next few years with no recovery in sight then go ahead and purchase. Don’t buy as an “investment” or a “starter home” because those days are gone. Buy a home to live in it and be okay with possibly owning it for 30 years or more.
I just heard that the government is not extending unemployment benefits and will let the tax credit expire this time instead of extending that as well. This means more foreclosures and a smaller buyer pool which will also lead home prices downward. This doesn’t even mention the shadow inventory of homes that are bank owned but not on the market to keep prices up. When commercial paper takes a dive the banks will be forced to liquidate these assets as well. Much more inventory and a much smaller buyer pool will bring prices down without rates even going up.
Just want you to make an informed decision.
It’s more about location of these homes . What state, what city. But what was said before about buying a home for the long haul is the smart move.
Think about this: If there is no limit to the amount of money Washington can print and throw into the economy then there is no limit to where Gold and especially Silver can go!
Great article. These times are very confusing. I follow European and American blogs on this subject and one usually contradicts the other. Deflation is the problem to be avoided at all costs according to Euro economists. Inflation on the other side of the Atlantic is the other picture being painted. Those of us trying to plan are being whipsawed by those whose agenda is very different.
It will be interesting to see what happens at the G20 (inflated from G7) in the case of leftist demonstrators. Will they be there this time?
Angela Merkel is being severely criticized for German moves towards austerity. Yet in the US austerity is being recommended. The bottom line seems to be that in the case of government austerity citizen austerity will follow thus depressing economies more. The USA debt is breezily ignored as a Bush inheritance by the European press. The President maintains his messianic hold on Europe; but not in his “homeland”.
The printing of money is dismissed as a problem because “money if not spent is merely stacks of paper.” This failure to see the “stacks of paper” unspent potential is what makes Keyensian economics fail.