Tuesday, June 19, 2007

Mortgage Rate Rise Pushes U.S. Housing, Economy to `Blood Bath'

nothing really new but a nice summray. from "home sweet home" to "blood bath" in 24 month....always good to remember that this cover is just 2 years old and marked the peak....

nichts richtig neues aber eine erstklassige Zusammenfassung der aktuell trüben Lage. Das inzwsischen brühmte Cover im Sommer 2005 hat ziemlich genau das Top im Markt getroffen...

The worst is yet to come for the U.S. housing market.

The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, according to the National Association of Realtors. ...

Confidence among U.S. homebuilders fell in June to the lowest since February 1991, according to the National Association of Home Builders/Wells Fargo index released this week.

Housing starts declined in May for the first time in four months, the Commerce Department reported yesterday. New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession. `Economic Recession'
``It's not just a housing recession anymore, it looks more and more like an economic recession,'' said Nouriel Roubini, a Clinton administration Treasury Department director and economic adviser who now runs Roubini Global Economics in New York.

Goldman Sachs Group Inc., the world's biggest securities firm, and Bear Stearns Cos., the largest underwriter of mortgage-backed securities in 2006, said last week that rising foreclosures reduced their earnings. Bear Stearns said profit fell 10 percent, and Goldman reported a 1 percent gain, the smallest in three quarters. Both firms are based in New York.

The investment banks, insurance companies, pension funds and asset-management firms that hold some of the U.S.'s $6 trillion of mortgage-backed securities have yet to suffer the full effect of subprime loans gone bad, said David Viniar, Goldman's chief financial officer. Subprime mortgages, given to people with bad or limited credit histories, account for about $800 billion of the market.
Homebuilder Stocks
Homebuilding stocks are down 20 percent this year after falling 20 percent in 2006, according to the Standard & Poor's Supercomposite Homebuilding Index of 16 companies. Before last year, the index had gained sixfold in five years.

``There isn't a recovery about to happen,'' said Ara Hovnanian, chief executive officer of Hovnanian Enterprises Inc., the Red Bank, New Jersey-based homebuilder. The company's stock tumbled 42 percent this year through yesterday.

The share of people taking out all types of adjustable-rate home loans averaged 29 percent during the past three years, compared with the 17 percent average of the prior three years, according to data compiled by Mclean, Virginia-based Freddie Mac.

Higher fixed mortgage rates and stricter lending standards mean some of those borrowers won't be able to refinance into fixed-rate loans. Many of them have seen their home's value drop even as their interest rates adjust higher.

`Millions of People'
``When all these people see their mortgage payment and it's up 40 or 50 percent, they're going to say, `We can't stay in this house,''' Pimco's Kiesel said. ``And there are millions of people in this situation.''

The average U.S. rate for a 30-year fixed mortgage was 6.74 percent last week, up from 6.15 percent at the beginning of May, according to Freddie Mac, the second-largest source of money for home loans. That adds $116 a month to the payment for a $300,000 loan and about $42,000 over the life of the mortgage.

The recent increase in mortgage rates is the biggest spike since 2004. The change means buyers can afford 8 percent less house than they could five weeks ago, Kiesel said.

``Prices are going lower,'' he said.
The housing sector will push the U.S. economy into recession unless the Federal Reserve cuts its benchmark rate at the first surge in unemployment, said Kiesel, who expects the Fed to reduce rates.

Home Equity Loans
In addition to their primary mortgages, homeowners had $913.7 billion of debt in home equity loans in 2005, more than double the $445.1 billion in 2001, according to a paper by former Federal Reserve Chairman Alan Greenspan and James Kennedy on equity extraction issued by the Fed three months ago.

About a third of that money, extracted as home values surged 53 percent from 2000 to 2005, was used to buy cars and other consumer goods, according to the paper. The interest rate on those loans doubled to 8.25 percent in 2006 from 4 percent in 2003.
If the Federal Reserve lowers the rate it charges for overnight lending to banks, that would cut the prime rate that moves in tandem with it and reduce the interest on many types of adjustable home loans, including home equity mortgages.

Boom and Bust
Homebuyers who got an adjustable-rate mortgage, a so-called ARM, in 2004 have seen their rate climb by about 40 percent. That's enough to add $288 to the monthly payment for a $300,000 mortgage. The average adjustable rate last week was 5.75 percent, an 11-month high, according to Freddie Mac.

Roubini predicts the decline in U.S. home sales will last at least another 12 months, reducing the median house price by 5 percent this year and next. That would take home prices back to 2004, when the national median was $195,200.

The primary cause of the 1990 to 1991 recession was a real estate boom and bust similar to the past seven years, Roubini said. A real estate ``bubble'' in the mid-1980s led to speculative buying and lower credit standards that resulted in widespread foreclosures, he said. The defaults triggered a credit crunch that turned into an economic recession in the spring of 1990, said Roubini, who is an economics professor at New York University's Stern School of Business.

He put the chance of a recession this year at ``50-50,'' above former Fed chief Greenspan's 33 percent estimate. A recession is a decline in gross domestic product for two consecutive quarters.

A Fed survey of senior loan officers issued in April said that 45 percent of lenders had restricted ``nontraditional'' lending, such as interest-only mortgages, and 15 percent had tightened standards for the most creditworthy, or prime, borrowers. More than half had raised standards for subprime borrowers, according to the survey.

The median U.S. price for a previously owned home fell 1.4 percent in the first quarter from a year earlier, the third consecutive decline, according to the National Association of Realtors. Before the third quarter of 2006 prices hadn't dropped since 1993. The quarterly median may dip another 2.4 percent in the current period, the Chicago-based industry trade group said in its June forecast.

Increase in Foreclosures
The share of mortgages entering foreclosure rose to 0.58 percent in the first quarter, the highest on record, from 0.54 percent in the final three months of 2006, the Mortgage Bankers Association said in a report last week. Subprime loans going into default rose to a five-year high of 2.43 percent, up from 2 percent, and late payments from borrowers with poor credit histories rose to almost 13.8 percent, the highest since 2002.
thanks to http://www.recharts.com/rt/RT_1.html

Prime loans entering foreclosure increased to 0.25 percent, the highest in a survey that goes back to 1972. That's a sign that even the most creditworthy borrowers are being squeezed, Roubini said.

``We have a lot of people, even prime borrowers, who are at the edge because they either bought with no equity, they have an ARM that's seen a rate spike, or they used their house like an ATM and turned their equity into cash,'' Roubini said. ``Many of those people are under water today, and if they have to sell, it's going to drag down values in their neighborhood.''

Adjustable Rates
Some owners are selling their homes at ``fire sale'' prices to avoid foreclosure after seeing their adjustable mortgage rates spike, said Lawrence White, an economics professor at the Stern School of Business.

``Prices will continue to soften for as long as we have distressed sellers,'' White said. Some regions of the U.S. could see price declines of 10 percent in the next six to 12 months, he said. The slump probably won't cause a recession, he said.

``It's not going to be the 1929 stock-market disaster, with people jumping out of buildings, but there is going to be widely dispersed pain for the next few quarters,'' he said.

The biggest problem is volatile home prices, said Gary Shilling, head of A. Gary Shilling & Co., an economic forecasting company in Springfield, New Jersey. Shilling put the chance of a recession this year at 75 percent.

``A lot of people went out on a limb to pay the record high prices for homes, and they're in trouble now,'' he said.

`Exploding ARMs'
Borrowers who got loans with so-called teaser rates are in the biggest bind, according to Shilling. Prices surged a record 12 percent in 2005, spurring buyers to ``stretch'' to qualify for bigger loans by using interest-only ARMs or so-called option ARMs with low introductory payments.

Some have payments based on interest rates as low as 1 percent. At the end of an introductory period, the rate can more than quadruple, leading them to be called ``exploding ARMs,'' he said. Some loans allow borrowers to choose how much they want to pay, with the balance added to the loan's principle, making it possible to owe more than the home's purchase price.

``Homeowners with adjustable-rate mortgages are getting squeezed on all sides,'' said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. Real estate taxes have surged along with home prices, and many U.S. homeowners saw their property insurance double after Hurricane Katrina ravaged Louisiana and Mississippi, she said.

disclosure: short several hombuilder, lender
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Anonymous Anonymous said...

`When all these people see their mortgage payment and it's up 40 or 50 percent, they're going to say, `We can't stay in this house,''' Pimco's Kiesel said.

But this is the ordinary foreclosure scenario -- people who, for whatever reason (zB ARM reset), can no longer afford to make their mortgage payment. No question there will be more of that, and at an increasing rate (not characteristic of a bottom, I would say).

But when you add negative equity to this (caused by falling home prices), then some people who could otherwise afford to pay are going to walk away. Or ask to do a short sale. Regardless of how this may affect their credit. This sort of thing will definitely push the numbers of up. How much is still a question.

5:13 AM  
Blogger jmf said...


as i´ve said before.

every time i try to explain to a German what kind of financing is/was available in the us they wouldn´t believe me.

in know a few that are in business of real estate financing in Germany and they were stunned to hear things like negative amortisation etc.

unfortunately this has to end in a disaster of epic proportions...

6:16 AM  

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