Housing Bubble Bursting?

[moh malekpour]

Economic growth slowest in four years

http://money.cnn.com/2007/04/27/news/economy/gdp/index.htm?cnn=yes

The growth was the weakest since the 1.2 percent rate in the first quarter of 2003, and was even far weaker than the 1.8 percent growth seen in the fourth quarter of 2005 after the damage done to the economy by Hurricane Katrina

"We didn't think housing was going to be as much of a drag as it was," said Jeoff Hall, chief U.S. economist for Thomson Financial.

Spending by consumers grew at a 3.8 percent rate in the quarter, down from the 4.2 percent in the fourth quarter. Strauss said he expects it will slow further in coming quarters.

 

[Randolph Kinney]

Prices here are still headed down

I have reported on this property in my neighborhood before. It looks like values are going to slide down again. One particular home in my neighborhood was put on market in September 2006 as a short sale for $575,000. The original purchase price was $585,000 in August 2005. The price was lowered in steps to $510,000. No sale. Finally, this home went to foreclosure. It is now back on market now at $490,000 - a bank owned property.

It appears that banks were not rushing to foreclosure last year. Maybe with more price declines and losses on loans, they will be cutting off the tolerance. I can't wait to see the second quarter of 2007 statistics on foreclosures in California.

 

[Randolph Kinney]

New Record: 2.2 million unoccupied homes were for sale at end of quarter

http://www.marketwatch.com/news/story/home-vacancy-rate-rises-record/story.aspx?guid=%7B26D8A226%2D055D%2D477C%2DAB93%2D81EBF739C9A3%7D

WASHINGTON (MarketWatch) -- The vacancy rate for owner-occupied homes rose to a record 2.8% in the first quarter from 2.7% in the fourth quarter, the Commerce Department reported Friday.


A year ago, the vacancy rate for homes typically occupied by their owner was 2.1%, a record at the time. The median asking price was $185,200.
The vacancy rate for rental homes rose to 10.1% from 9.8%, the highest in two years. The median asking rental price was $659 a month.


Of 127.3 million housing units in the United States, 17.6 million were vacant at the end of the quarter, including 2.2 million vacant units that were for sale, 4 million for rent and 4.2 million seasonal homes. The number of vacant homes for sale has increased by 599,000 in the past year, up 38%.


Compared with a year ago, the housing stock increased by 1.9 million, with vacant units rising by 1.5 million and occupied units increasing by 415,000.


The homeowner vacancy rate increased the most in cities, rising to 4% from 2.5% a year ago. In suburbs, the vacancy rate rose to 2.4% from 1.8% a year ago. In rural areas, the vacancy rate remained at 2.2%.


The vacancy rate increased in all four regions, led by the South increasing to 3.2% from 2.3%. The vacancy rate rose to 1.9% in the Northeast, 2.6% in the West and 2.9% in the Midwest.


The seasonally adjusted homeownership rate dipped to 68.6% from 68.7%, a statistically insignificant change, the government agency said. Of families earning less than the median income, 52.1% lived in their own home, little changed over the past five years. Of those making more than the median income, 83.3% lived in their own home.

 

[Blue1]

Thanks Randolph.....Will the FED provide any relief?

 

[Austin]

http://appraisersforum.com/redirector.php?url=http://biz.yahoo.com/ap/070427/dollar.html?.v=5

Dollar Distances Itself From Euro

Euro Hits All-Time High Against Dollar As U.S. Economy Slows
FRANKFURT, Germany (AP) -- The euro climbed to an all-time high against the dollar Friday as weak U.S. growth figures reinforced fears of a widening economic disparity between Europe and the United States

The U.S. dollar has been pressurized significantly by softer U.S. growth, concerns over the housing market, and the increased possibility that the Fed will cut interest rates later this year," he said. If the Fed starts cutting interest rates from the current level of 5.25 percent while other regions are still raising theirs, capital movement into the U.S. could suffer, Archer said. This is potentially worrying for the dollar," he said.

How do you lower interest rates when all of the capital is moving out of the country? One more quarter like this one we are in recession and one more quarter after that spells some degree of depression at the same time the stock market and corporte profits are booming. How do you explain that? I call it deflation pure and simple.

 

[Randolph Kinney]

Thanks Randolph.....Will the FED provide any relief?

No. Not any time soon. Even though GDP growth has weakened to 1.3% (inflation adjusted), the price index rose at an annual rate of 4 percent, the most since 1991, compared with 1.7 percent in the fourth quarter. Before adjusting for inflation, the economy expanded at a 5.3 percent annual pace.

So the FED has the worst of both worlds; inflation rising showing the effects of energy and the weak dollar (imports) while economic growth is slowing showing the effects of the housing slowdown and lower consumer spending.

Depending on inflation going forward, the FED may increase its overnight rate to 5.5% even as the economy continues to slow. The stock markets are showing excess liquidity, as they continue to reach new highs, mega purchases of companies, no interest rate rise on debt issues, etc.

 

[Randolph Kinney]

Wages up by largest amount in six years

http://www.marketwatch.com/news/story/us-employment-costs-rise-08/story.aspx?guid=%7B48AD9572%2DAD4C%2D4438%2DBDF0%2D841B24F03C93%7D

WASHINGTON (MarketWatch) -- U.S. employment costs continued to rise in the first quarter, the Labor Department reported Friday.

Wage costs rose much faster than benefits in the first quarter. Wages and salaries climbed 1.1% between January and March, the largest increase since the first quarter of 2001. Benefit costs inched up 0.1%, the slowest pace since the first quarter of 1999.


Calculated out over the past year, employment costs have increased 3.5% compared to a rise of 2.8% in the comparable period ended in March 2006. This is the fastest year-over-year growth since the first quarter of 2005. Employment costs rose 3.3% in the fourth quarter.


Wage and salary have increased 3.6% in the year ended March 2007, up from growth of 2.7% in the year ended March 2006.


Employment costs are a major cause of worry for the Fed, which theorizes that inflation can only be sustained if workers force their bosses to pay higher compensation, which is then passed on to customers in the form of higher prices.


Employment costs had been trending lower in 2004 and 2005 but the downward trend ended last year.


The rise in employment costs is a "warning flag" for the Fed, said Mike Moran, chief economist at Daiwa Securities. "It reinforces the view of Fed officials that unemployment is low enough to start to influence wages," Moran said.

 

[Randolph Kinney]

Credit Suisse Sued by Insurer Over Losses on Subprime Mortgage Securities

http://www.bloomberg.com/apps/news?pid=20601087&sid=aZaQD9Ig971w&refer=worldwide

April 27 (Bloomberg) -- Credit Suisse Group was sued by a Florida insurer that says it lost money on investment-grade bonds backed by subprime mortgages sold by the bank.


The suit, filed in Florida by Bankers Life Insurance Co., is ``one of three to five in the pipeline'' involving securitizations by Credit Suisse, Switzerland's second-largest bank, said Dale Ledbetter of Ledbetter & Associates P.A., one of two law firms representing the Bankers Financial Corp. unit.


``We suspect that once people understand what occurred here, there's going to be a lot more,'' Ledbetter said. A total of $302.6 million of bonds were originally issued in the deal.


Bankers Life, based in St. Petersburg, is seeking to recover about $1.3 million to make up for losses of principal, interest and market value on about $1.4 million of the 2001 bonds it bought in 2004, Ledbetter said. Other investors considering suits will probably seek between $500,000 and $3 million each, he said.


Credit Suisse units caused Bankers Life to lose money by overstating how much of losses after foreclosures on the loans insurance would cover; accepting ``shoddy, inferior'' loans; failing to buy back fraudulent ones; and covering up delinquencies, according to a complaint filed April 23 in Tampa. Payments were being advanced on borrowers' behalf to ``maintain the illusion'' defaults weren't occurring, Bankers Life claims.


Wall Street and other mortgage-bond issuers have been misleading investors about how much protection from losses they have, Ledbetter said. The suit also named mortgage insurer Triad Guaranty Inc. and trustee Bank of New York as defendants.

Oh them chickens are coming home to roost now.

 

[Randolph Kinney]

Washington Mutual Alters Subprime Loans to Restore Profit at Mortgage Unit

http://www.bloomberg.com/apps/news?pid=20601208&sid=aBdt5dkuVM5c&refer=finance

April 27 (Bloomberg) -- Washington Mutual Inc., the biggest U.S. savings and loan, will cut back on terms that make subprime home loans more likely to default and step up ``Alt-A'' lending to restore profit at its mortgage unit by year-end.

The company, which lost $113 million on home mortgages in the first quarter, is making fewer loans that don't document a borrower's income and cutting second mortgages, executives told fixed-income investors at an invitation-only event in New York today. The Seattle-based thrift also plans to avoid ``layering'' easy qualification terms on top of each other to help borrowers win approval, a practice that may have increased risks.


Washington Mutual said April 17 that subprime mortgages contributed to a 20 percent drop in first-quarter profit. Like rival lenders including Countrywide Financial Corp., the thrift's profits were hurt by rising defaults on subprime loans granted to people with weak credit ratings. U.S. subprime loans went sour at the highest rate in four years during the last quarter of 2006.

Though Alt-A loans are considered less risky, some lenders including IndyMac Bancorp, the biggest U.S. purveyor of Alt-A mortgages, and Capital One Financial Corp. reported higher defaults and lower first-quarter profits from those loans.


``The issue we see really affecting the subprime market isn't really one of individual underwriting standards, it's the layering of risk,'' Chief Financial Officer Thomas Casey said.


Washington Mutual hired 150 people to help collect on delinquent loans and perform other tasks to curb losses in its mortgage portfolio, said David Beck, head of capital markets.


Warren Kornfeld, co-head of residential mortgage-backed securities at Moody's, has said performance of subprime loans with ``layered risks'' has been surprisingly bad. The phrase describes loans that offer small down payments along with no documentation of income to people with limited credit histories.

The company expects subprime lending for the entire industry to drop 45 percent to $350 billion this year from 2006. Washington Mutual estimates it will originate $8 billion in subprime loans this year, a 70 percent decrease from last year.


Washington Mutual ranked 11th last year among U.S. subprime lenders and fifth in Alt-A loans, according to Inside Mortgage Finance, a trade journal.

 

[Greg Bell]

Grantham says watch out...The BIG WORLD BUBBLE is about to pop..




Jeremy Grantham: All the World's a Bubble


"The bursting of [this] bubble will be across all countries and all assets, with the probable exception of high-grade bonds," Grantham warned. "Since no similar global event has occurred before, the stresses to the system are likely to be unexpected. All of this is likely to depress confidence and lower economic activity."

Ouch.

Grantham sees two big potential catalysts that might turn this bull market into a bear: a surge in inflation, leading to higher interest rates, and a squeeze on profit margins, which are currently running way above long-term averages.

As for timing, he concedes that's impossible to predict. But here's the kicker: Even Grantham thinks you probably need to be bullish right now. The reason? Most bubbles, he notes, go through a short but dramatic "exponential phase" just before they burst. Like Japan in 1989 or the Internet in early 2000.

"My colleagues," wrote Grantham, "suggest that this global bubble has not yet had this phase and perhaps they are right. ... In which case, pessimists or conservatives will take considerably more pain."