Friday, July 29, 2011
Capital Markets Update
By Louis S. Barnes Friday, July 29, 2011
We interrupt this political soap opera for a brief message from reality.
The Treasury bond market is doing fine, the 10-year a new 2011 low, 2.85%. How could this be so, news media and officials chanting, "Default, default, DEFAULT..."?
Treasury bonds are doing fine because the United States will not default on them. The Treasury has quietly assured investors that interest will be paid on time, maturing debt paid by issuing new bonds under the limit. The cash required to do so is relatively trivial, perhaps $25 billion in August versus tax revenue near $170 billion.
However, short-term markets are stressed. If this soap opera falls apart altogether, tax revenue will fall short of other August spending commitments by $130 billion or so, which we otherwise would have maintained by borrowing. In August alone. Furloughing half the government for even a week or two would guarantee a new recession.
The Treasury market is fine for another reason: Europe is falling apart (again), their latest grand fix lasting less than a week. Spanish and Italian long-term bond yields are rising back to pre-crisis levels, both nations too big to save. Italy's debt is 120% of GDP, and at about 100% any country crosses the black hole threshold.
The Treasury market is fine for a third reason: even before this morning's weak GDP reports (Q2 growth 1.3%, personal spending only .1%; Q1 GDP revised down to just .4%) markets knew the US economy was is gently sinking. Forecasts for a better 2nd half of 2011... better hurry. June orders for durable goods slid 2.1%.
Treasurys are doing fine despite threats from newly pushy S&P to cut our AAA rating. Hell hath no fury like a rating agency scorned. The rating cut will be embarrassing, but little else. Ratings are useful for bond-issuers difficult to research: Burkina Faso, or new sewer bonds from West Frog Bottom. The entire financial world studies the US open book every day, and reality is what it is, not what S&P says.
Our debt situation is deteriorating, but unless you can find a better-grade issuer off-planet, your choices are limited. We owed $5 trillion in on-the-market debt in 2007, and owe $9.7 trillion now (the $14.5 trillion screeching from every channel includes intra-governmental bookkeeping). At something like a $1.3 trillion deficit each year forward, and a GDP maybe $13.3 trillion, we're less than three years from Italy.
Europe talks and talks and does nothing. Churchill dismissed them in the 1930s as having "All the collective security of a flock of sheep." Here, we yell and scream and fiddle and then DO things. It's not our style to sit while Italy-status draws near. Like climate forcing, structural loading, and straws on camels, the moment that our political system begins to spasm is unpredictable, but we tend to act in time.
The moment came last November, in the biggest switch in House power since 1948. Enough voters became worried about Italy-status to sweep into office a large majority of Republicans, 242 of 435; 87 freshmen, some sensible, many propeller-heads, each sworn a blood oath to balance the budget. That majority is now doing exactly what it was elected to do, a concept eluding the President and his party for nine months.
Now we have a first-class American riot. The new Republicans have arrived like a hatchet-swinging mob of temperance ladies in a saloon full of borrowing-spending addicts. No excuses accepted: "We can stop whenever we want! And -- EEK -- you can't cut us off while we have the shakes! We need to taper off. Leave us enough booze for a couple of years -- don't make us argue again soon. Takes the fun out of the hooch."
Mr. Obama might still break up the temperance mob this weekend by dropping his condescending how-dare-you and explain what a shut-down government would look like. That's what Willy did to Newt. Instead, this accusation that the temperance mob refuses to compromise just eggs them on. They think they have compromised: no demand for a balanced budget right now, they accept new revenue via tax reform, and they know that "$4 trillion over ten years" cuts the deficit by only one-third. They are using the debt limit to force cold turkey because they have no other means.
Their best service: to wake up the nation, and force it to learn and to participate.
The debt-to-the-penny ticker, with excellent historical tables and explanations: http://www.treasurydirect.gov/NP/BPDLogin?application=np
www.CalculatedRiskBlog.com 's splendid graph of today's GDP revisions. We have had some growth from bottom, but no recovery, and the growth we have had is flattening.
We interrupt this political soap opera for a brief message from reality.
The Treasury bond market is doing fine, the 10-year a new 2011 low, 2.85%. How could this be so, news media and officials chanting, "Default, default, DEFAULT..."?
Treasury bonds are doing fine because the United States will not default on them. The Treasury has quietly assured investors that interest will be paid on time, maturing debt paid by issuing new bonds under the limit. The cash required to do so is relatively trivial, perhaps $25 billion in August versus tax revenue near $170 billion.
However, short-term markets are stressed. If this soap opera falls apart altogether, tax revenue will fall short of other August spending commitments by $130 billion or so, which we otherwise would have maintained by borrowing. In August alone. Furloughing half the government for even a week or two would guarantee a new recession.
The Treasury market is fine for another reason: Europe is falling apart (again), their latest grand fix lasting less than a week. Spanish and Italian long-term bond yields are rising back to pre-crisis levels, both nations too big to save. Italy's debt is 120% of GDP, and at about 100% any country crosses the black hole threshold.
The Treasury market is fine for a third reason: even before this morning's weak GDP reports (Q2 growth 1.3%, personal spending only .1%; Q1 GDP revised down to just .4%) markets knew the US economy was is gently sinking. Forecasts for a better 2nd half of 2011... better hurry. June orders for durable goods slid 2.1%.
Treasurys are doing fine despite threats from newly pushy S&P to cut our AAA rating. Hell hath no fury like a rating agency scorned. The rating cut will be embarrassing, but little else. Ratings are useful for bond-issuers difficult to research: Burkina Faso, or new sewer bonds from West Frog Bottom. The entire financial world studies the US open book every day, and reality is what it is, not what S&P says.
Our debt situation is deteriorating, but unless you can find a better-grade issuer off-planet, your choices are limited. We owed $5 trillion in on-the-market debt in 2007, and owe $9.7 trillion now (the $14.5 trillion screeching from every channel includes intra-governmental bookkeeping). At something like a $1.3 trillion deficit each year forward, and a GDP maybe $13.3 trillion, we're less than three years from Italy.
Europe talks and talks and does nothing. Churchill dismissed them in the 1930s as having "All the collective security of a flock of sheep." Here, we yell and scream and fiddle and then DO things. It's not our style to sit while Italy-status draws near. Like climate forcing, structural loading, and straws on camels, the moment that our political system begins to spasm is unpredictable, but we tend to act in time.
The moment came last November, in the biggest switch in House power since 1948. Enough voters became worried about Italy-status to sweep into office a large majority of Republicans, 242 of 435; 87 freshmen, some sensible, many propeller-heads, each sworn a blood oath to balance the budget. That majority is now doing exactly what it was elected to do, a concept eluding the President and his party for nine months.
Now we have a first-class American riot. The new Republicans have arrived like a hatchet-swinging mob of temperance ladies in a saloon full of borrowing-spending addicts. No excuses accepted: "We can stop whenever we want! And -- EEK -- you can't cut us off while we have the shakes! We need to taper off. Leave us enough booze for a couple of years -- don't make us argue again soon. Takes the fun out of the hooch."
Mr. Obama might still break up the temperance mob this weekend by dropping his condescending how-dare-you and explain what a shut-down government would look like. That's what Willy did to Newt. Instead, this accusation that the temperance mob refuses to compromise just eggs them on. They think they have compromised: no demand for a balanced budget right now, they accept new revenue via tax reform, and they know that "$4 trillion over ten years" cuts the deficit by only one-third. They are using the debt limit to force cold turkey because they have no other means.
Their best service: to wake up the nation, and force it to learn and to participate.
The debt-to-the-penny ticker, with excellent historical tables and explanations: http://www.treasurydirect.gov/NP/BPDLogin?application=np
www.CalculatedRiskBlog.com 's splendid graph of today's GDP revisions. We have had some growth from bottom, but no recovery, and the growth we have had is flattening.
Friday, July 15, 2011
Capital Markets Update
By Louis S. Barnes Friday, July 15th
Mid-July is normally the center of the Silly Season news-drought, in which media give front-page treatment to “Man Bites Dog.”
This year, that dog is plumb-near bit to death.
Newsies this week over-read Perfesser Bernanke’s testimony and Fed minutes, finding all sorts of hints that were not there. The Fed is “open to stimulus if necessary,” but so it is, always. At this moment, the Fed is confused, sticking to “better in second half,” its members divided (scattered), and both CPI and PPI core inflation popped to .3% in June. The Fed Chairman must be prepared to fill hours of air time with no content, and the Perfesser rose to the occasion.
The economic data are just above stall speed. The NFIB small-business survey in June was the same as May, at recession threshold, and June retail sales had no gain.
The Treasury borrowed a wad of long-term money for the first time in six months without Fed QE buys, and had no trouble -- perhaps in largest part because Europe’s slow suicide is proceeding. A European bank-on-bank run is spreading, the cost of Euribor loans jumping from 0.6% to 1.47% in one week (post-Lehman: 4%). Banks are the circulatory system for any economy, and shutdown is the cardinal symptom of Bad Stuff. Today’s results of Eurozone bank stress-tests are the blackest of black comedy.
The European economy is far more vulnerable to its banks than we are. The top five banks in France have assets (loans, sovereign bonds...) equal to 3.25 times French GDP, Germany about the same; in Belgium, double; Italy 1.4 times; and Banco Santander by itself is 1.14 times the size of Spain’s GDP. In the US, the top five banks are barely 60% of GDP (source: NYT today). Too big to fail? Too big to save.
Here at home... oh, my. This debt-limit lockup is so yesterday. The entire leadership of China wakes every day to work on competing. Our leadership spends all day in an argument 50 years old: Democrats enacting underestimated future social spending not supported by revenue, Republicans fighting every step of the way, even the spending to which their own constituents feel entitled, plus their military adventures.
Our economy grew fast enough to support continuous growth in revenue all through Reagan-Bush ‘41-Clinton, also supported by the inspired 1986 tax reform; and in combination with Bush ‘41-Clinton spending restraint we did what we are supposed to do: we ran an immense budget surplus in good times. All through those years, and Dubya, debt-limit brinkmanship was silly theater with certain outcome.
The best of that burlesque: in the fall of 1995, Newt Gingrich thought the country would back his plan to balance the budget via shutdown shock therapy. Bill Clinton exposed him (permanently) as Captain Underpants.
Until this week, I thought Mr. Obama could do the same to Eric Cantor, the essence of amoral ambition standing in skivvies. Obama still thinks so. Not so. Not now. In the 16 years post-Newt, these words have been spoken at too many kitchen tables: “Whatever we do, whatever happens to us, we are not going to borrow any more.”
And in those 16 years, the “haves” in this country have had it with the Democrats’ limitless grasping to fund their promises. The top 1% of income earners pay 27% of all Federal revenue, more than ever. The top 20% (inclusive) pay 70%. No sensible person opposes sufficient revenue, but not to be wasted, and not if the demand is open-ended.
Since last November, Democrats in denial, there may be enough votes in the House to enforce a stay-put debt limit. We will not default on Treasury obligations. Federal revenue runs $200 billion per month. Interest costs barely $25 billion, and we can roll over all existing debt within limit. The remainder will just about cover one month’s Social Security, Medicare, Medicaid, and Defense. Maybe air traffic controllers and the FBI, maybe not. If the limit stays put, in another couple of weeks we’re going to find out what we’ve been getting for the $130 billion we’re borrowing each month.
Today, the University of Michigan released the lowest reading for consumer confidence since March 2009, to 63.8 in July from June’s 71.5. Can’t imagine why.
Mid-July is normally the center of the Silly Season news-drought, in which media give front-page treatment to “Man Bites Dog.”
This year, that dog is plumb-near bit to death.
Newsies this week over-read Perfesser Bernanke’s testimony and Fed minutes, finding all sorts of hints that were not there. The Fed is “open to stimulus if necessary,” but so it is, always. At this moment, the Fed is confused, sticking to “better in second half,” its members divided (scattered), and both CPI and PPI core inflation popped to .3% in June. The Fed Chairman must be prepared to fill hours of air time with no content, and the Perfesser rose to the occasion.
The economic data are just above stall speed. The NFIB small-business survey in June was the same as May, at recession threshold, and June retail sales had no gain.
The Treasury borrowed a wad of long-term money for the first time in six months without Fed QE buys, and had no trouble -- perhaps in largest part because Europe’s slow suicide is proceeding. A European bank-on-bank run is spreading, the cost of Euribor loans jumping from 0.6% to 1.47% in one week (post-Lehman: 4%). Banks are the circulatory system for any economy, and shutdown is the cardinal symptom of Bad Stuff. Today’s results of Eurozone bank stress-tests are the blackest of black comedy.
The European economy is far more vulnerable to its banks than we are. The top five banks in France have assets (loans, sovereign bonds...) equal to 3.25 times French GDP, Germany about the same; in Belgium, double; Italy 1.4 times; and Banco Santander by itself is 1.14 times the size of Spain’s GDP. In the US, the top five banks are barely 60% of GDP (source: NYT today). Too big to fail? Too big to save.
Here at home... oh, my. This debt-limit lockup is so yesterday. The entire leadership of China wakes every day to work on competing. Our leadership spends all day in an argument 50 years old: Democrats enacting underestimated future social spending not supported by revenue, Republicans fighting every step of the way, even the spending to which their own constituents feel entitled, plus their military adventures.
Our economy grew fast enough to support continuous growth in revenue all through Reagan-Bush ‘41-Clinton, also supported by the inspired 1986 tax reform; and in combination with Bush ‘41-Clinton spending restraint we did what we are supposed to do: we ran an immense budget surplus in good times. All through those years, and Dubya, debt-limit brinkmanship was silly theater with certain outcome.
The best of that burlesque: in the fall of 1995, Newt Gingrich thought the country would back his plan to balance the budget via shutdown shock therapy. Bill Clinton exposed him (permanently) as Captain Underpants.
Until this week, I thought Mr. Obama could do the same to Eric Cantor, the essence of amoral ambition standing in skivvies. Obama still thinks so. Not so. Not now. In the 16 years post-Newt, these words have been spoken at too many kitchen tables: “Whatever we do, whatever happens to us, we are not going to borrow any more.”
And in those 16 years, the “haves” in this country have had it with the Democrats’ limitless grasping to fund their promises. The top 1% of income earners pay 27% of all Federal revenue, more than ever. The top 20% (inclusive) pay 70%. No sensible person opposes sufficient revenue, but not to be wasted, and not if the demand is open-ended.
Since last November, Democrats in denial, there may be enough votes in the House to enforce a stay-put debt limit. We will not default on Treasury obligations. Federal revenue runs $200 billion per month. Interest costs barely $25 billion, and we can roll over all existing debt within limit. The remainder will just about cover one month’s Social Security, Medicare, Medicaid, and Defense. Maybe air traffic controllers and the FBI, maybe not. If the limit stays put, in another couple of weeks we’re going to find out what we’ve been getting for the $130 billion we’re borrowing each month.
Today, the University of Michigan released the lowest reading for consumer confidence since March 2009, to 63.8 in July from June’s 71.5. Can’t imagine why.
Friday, July 8, 2011
Capital Markets Update
By Louis S. Barnes Friday, July 8, 2011
The most important economic news each month, by far, is the early-month count of jobs created or lost in the prior month. All markets were poised for better figures in this morning's report for June, but the actual was jaw-dropping: only 18,000 jobs gained, April-May revised down 44,000, and hourly earnings fell .1%. The one surprising reaction: the Dow is off only 110 points. Stunned, drunk, or both.
Enough of that. Find some entertainment in deals cooking all over the place.
We're going to get an NFL deal, maybe this weekend. Which is a great thing for those of us stuck with the Colorado Rockies. Even if the Broncos are just as bad, we won't have to face it until September. Sorta like the stock market.
We're going to get a budget deal before the August 2 deadline -- messy, half-baked, but a deal and real progress toward repaired US finances.
There's no deal -- yet -- but the first sensible Fannie-Freddie legislation is in Congress, to preserve and combine them as a public utility like Ginnie, no more "public-private partnership" with stockholders and management running off with the store.
Iceland sold $2 billion in bonds in the open market this week at low interest rates. Back in business less than three years after its banks defaulted on $85 billion in debt, and only three months after telling the UK and Holland to go fish with their claim for $5.8 billion in their citizen's losses on deposits in failed offshore Icelandic banks.
There is life after default and devaluation!
A good thing, because Europe's latest deal to kick the can ahead another year has in one week clunked to a standstill, now leaning precariously against the row of dominoes.
Forgive my schadenfreude (the enjoyment of someone else's misfortune) but it is a German concept. The Greeks saw the inevitable collapse of hubris into nemesis as tragedy. I don't recommend enjoying the European endgame, but I do confess some eager anticipation: a European run to local currencies would slow the global economy, but the flight to the US for safety would drop rates here, a huge help, and would demolish the notion that the Germans have economics figured out and we don't.
The newly failed deal there began as a French proposal to conceal Greek default. Bankers holding Greek debt would agree -- voluntarily -- that instead of being repaid in cash euros, they would accept new 30-year Greek bonds paying 5.6% (10s today yield 17%). It is handy to have banks around that will do what government says, an oubliette into which all sorts of embarrassments can be dropped and forgotten. German banks scurried to agree with their French colleagues.
There is no market for these pretend 30-year Greek bonds, worth perhaps 20 or 30 centimes on the euro, yet French and German banks would carry them at face value. Anything to protect politicians from taxpayer rage, although taxpayers are the depositors and stockholders in these same bag-holding banks.
Then the European Central Bank said no sovereign-debt restructuring of any kind. The ECB holds about $140 billion in Greek debt as collateral for loans to Greek banks, and any loss at the ECB must be borne by Euro-wide taxpayers. If they’ll pay.
This week, in a sequence worthy of Clouseau, S&P and Moody's said the bond swap would still be a default. Then Moody's downrated Portugal to junk. The ECB, holding a wad of Portuguese bonds as collateral from those banks, too, then waived its rules against accepting junk. The best part, that could not be made up: the German finance minister, Wolfgang Schauble, for years lecturing lesser Europeans on the merits of discipline, threatened action against the rating agencies for down-rating Portugal.
German 10s pay 2.83%. Too-big-to-save Italy's 10s blew out of trading range to 5.20%. Irish and Portuguese 10s sold off to a pre-default 13.0% yield.
Before the end of summer, either Europe will join in true union, the taxpayers of the rich picking up at least $600 billion (before Spain and Italy) or the dominoes will go. We'll have some warning, maybe a week or two, like the run-in to Lehman and a Sunday announcement. And I still maintain, beneficial for us, and ultimately for Europe.
The most important economic news each month, by far, is the early-month count of jobs created or lost in the prior month. All markets were poised for better figures in this morning's report for June, but the actual was jaw-dropping: only 18,000 jobs gained, April-May revised down 44,000, and hourly earnings fell .1%. The one surprising reaction: the Dow is off only 110 points. Stunned, drunk, or both.
Enough of that. Find some entertainment in deals cooking all over the place.
We're going to get an NFL deal, maybe this weekend. Which is a great thing for those of us stuck with the Colorado Rockies. Even if the Broncos are just as bad, we won't have to face it until September. Sorta like the stock market.
We're going to get a budget deal before the August 2 deadline -- messy, half-baked, but a deal and real progress toward repaired US finances.
There's no deal -- yet -- but the first sensible Fannie-Freddie legislation is in Congress, to preserve and combine them as a public utility like Ginnie, no more "public-private partnership" with stockholders and management running off with the store.
Iceland sold $2 billion in bonds in the open market this week at low interest rates. Back in business less than three years after its banks defaulted on $85 billion in debt, and only three months after telling the UK and Holland to go fish with their claim for $5.8 billion in their citizen's losses on deposits in failed offshore Icelandic banks.
There is life after default and devaluation!
A good thing, because Europe's latest deal to kick the can ahead another year has in one week clunked to a standstill, now leaning precariously against the row of dominoes.
Forgive my schadenfreude (the enjoyment of someone else's misfortune) but it is a German concept. The Greeks saw the inevitable collapse of hubris into nemesis as tragedy. I don't recommend enjoying the European endgame, but I do confess some eager anticipation: a European run to local currencies would slow the global economy, but the flight to the US for safety would drop rates here, a huge help, and would demolish the notion that the Germans have economics figured out and we don't.
The newly failed deal there began as a French proposal to conceal Greek default. Bankers holding Greek debt would agree -- voluntarily -- that instead of being repaid in cash euros, they would accept new 30-year Greek bonds paying 5.6% (10s today yield 17%). It is handy to have banks around that will do what government says, an oubliette into which all sorts of embarrassments can be dropped and forgotten. German banks scurried to agree with their French colleagues.
There is no market for these pretend 30-year Greek bonds, worth perhaps 20 or 30 centimes on the euro, yet French and German banks would carry them at face value. Anything to protect politicians from taxpayer rage, although taxpayers are the depositors and stockholders in these same bag-holding banks.
Then the European Central Bank said no sovereign-debt restructuring of any kind. The ECB holds about $140 billion in Greek debt as collateral for loans to Greek banks, and any loss at the ECB must be borne by Euro-wide taxpayers. If they’ll pay.
This week, in a sequence worthy of Clouseau, S&P and Moody's said the bond swap would still be a default. Then Moody's downrated Portugal to junk. The ECB, holding a wad of Portuguese bonds as collateral from those banks, too, then waived its rules against accepting junk. The best part, that could not be made up: the German finance minister, Wolfgang Schauble, for years lecturing lesser Europeans on the merits of discipline, threatened action against the rating agencies for down-rating Portugal.
German 10s pay 2.83%. Too-big-to-save Italy's 10s blew out of trading range to 5.20%. Irish and Portuguese 10s sold off to a pre-default 13.0% yield.
Before the end of summer, either Europe will join in true union, the taxpayers of the rich picking up at least $600 billion (before Spain and Italy) or the dominoes will go. We'll have some warning, maybe a week or two, like the run-in to Lehman and a Sunday announcement. And I still maintain, beneficial for us, and ultimately for Europe.
Friday, July 1, 2011
Capital Markets Update
By Louis S. Barnes Friday, July 1, 2011
Markets reversed this week, stocks and rates both rising fast. The immediate cause: Greece back from the brink. Not for long.
Deeper causes: last week stocks stared at the darkness below S&P 1256, a bottom that has held since last Halloween, and have run up to 1331 on the bodies of short-sellers forced to cover. The 10-year T-note bottomed at 2.91% last week after a straight-line drop from 3.60% on April 12; this week's bolt to 3.20% was overdue, ditto mortgages to 4.875%. The coup de grace: the June ISM rose to 55.3, beating forecast.
With Europe on hold again, interest rates will not decline unless the US economy does, and until it becomes clear who will buy $120 billion in net-new Treasurys each month, now that the Fed has stopped QE2.
The newest housing data has showed signs of bottom in price, delinquency, and sales volume. However, three questions apparently too impertinent to pose at the press conferences of either the Fed Chairman or the President:
1. How much distressed housing inventory has accumulated?
2. How fast are distressed homes selling versus new ones arriving?
3. If... if they are selling faster than piling up, but at a rate that will not clear for a decade or two, what are we going to do about it?
Variables are huge. Which will prevail: jobs-first, economy-first, or housing-first? Any of the three? And, given the mass and velocity of the distressed-housing pig leaving the south end of the python, how much damage to bystanders?
CoreLogic reports that shadow distressed inventory not listed fell in April from 1.9 million homes to 1.7, down from the 2.2 million peak in early 2010. Distress is defined as 90+days delinquent, in the foreclosure process, or foreclosed REO.
Meanwhile, LPS says the total distress count, listed and not, is 2 million 90+, and another 2.2 million in foreclosure, plus analysts’ guess at REO ranging 500,000 to 800,000. Conservative totus porcus: 4.8 million. However, LPS says that an astounding 70% of loans in foreclosure process have been there for more than a year, and almost that many 90+ are not yet in foreclosure. If that portion is frozen, the remainder of the distressed inventory is flying on and off the shelf at improbable warp speed.
The National Association of Realtors estimates (hah-hah) annual sales of existing homes at about 4.5 million, and total listed inventory (all kinds) at about 4 million. Given LPS' 4.8 million total distressed, minus CoreLogic's 1.7 million distressed-not-listed, that would leave 3.1 million distressed listed, 77% of all listings.
Nonsense. There must be a hell of a lot of distressed inventory not anywhere near a market. And in expanded distress definition, CoreLogi's underwaters, just those at least 50% OR $150,000 underwater, are another 2 million homes. Some pig.
At what rate are we barbequing the fat off this baby? CoreLogic says 30% of existing homes sold are distressed (two-thirds REO, one-third short sales). Say 1.5 million annually. If nobody else enters hopeless delinquency, or takes a strategic walk from underwater, three-plus years to clear. Realistically, based on declining new rates of delinquency, we are probably net-reducing inventory by a few hundred thousand homes annually, clearing in 2020 or something. Unless badly managed clearing itself caves-in the market some more.
What to do? Old stuff. Do not ever let a big, zombie pig hang around the yard. Only one way to run it off, as HUD began to do regionally in the '80s, and the RTC showed with commercial: modest fix-up, price it to sell, and finance it. Pre-packed financing, no appraisal. If that means Fannie and Freddie to finance REO buyers from servicers who cannot finance buyers (the whole subprime legacy), then do it. If the Fed has to buy those loans, do it. The FHA cleared the oil and S&L patch in two years by offering sweet terms: owner-occupant, $500 down; investor -- no limit on number -- 15% down. Got to qualify, for real. And knock off these pretend mitigations and procedural roadblocks.
Get... this... pig... OUT... of... here!
Markets reversed this week, stocks and rates both rising fast. The immediate cause: Greece back from the brink. Not for long.
Deeper causes: last week stocks stared at the darkness below S&P 1256, a bottom that has held since last Halloween, and have run up to 1331 on the bodies of short-sellers forced to cover. The 10-year T-note bottomed at 2.91% last week after a straight-line drop from 3.60% on April 12; this week's bolt to 3.20% was overdue, ditto mortgages to 4.875%. The coup de grace: the June ISM rose to 55.3, beating forecast.
With Europe on hold again, interest rates will not decline unless the US economy does, and until it becomes clear who will buy $120 billion in net-new Treasurys each month, now that the Fed has stopped QE2.
The newest housing data has showed signs of bottom in price, delinquency, and sales volume. However, three questions apparently too impertinent to pose at the press conferences of either the Fed Chairman or the President:
1. How much distressed housing inventory has accumulated?
2. How fast are distressed homes selling versus new ones arriving?
3. If... if they are selling faster than piling up, but at a rate that will not clear for a decade or two, what are we going to do about it?
Variables are huge. Which will prevail: jobs-first, economy-first, or housing-first? Any of the three? And, given the mass and velocity of the distressed-housing pig leaving the south end of the python, how much damage to bystanders?
CoreLogic reports that shadow distressed inventory not listed fell in April from 1.9 million homes to 1.7, down from the 2.2 million peak in early 2010. Distress is defined as 90+days delinquent, in the foreclosure process, or foreclosed REO.
Meanwhile, LPS says the total distress count, listed and not, is 2 million 90+, and another 2.2 million in foreclosure, plus analysts’ guess at REO ranging 500,000 to 800,000. Conservative totus porcus: 4.8 million. However, LPS says that an astounding 70% of loans in foreclosure process have been there for more than a year, and almost that many 90+ are not yet in foreclosure. If that portion is frozen, the remainder of the distressed inventory is flying on and off the shelf at improbable warp speed.
The National Association of Realtors estimates (hah-hah) annual sales of existing homes at about 4.5 million, and total listed inventory (all kinds) at about 4 million. Given LPS' 4.8 million total distressed, minus CoreLogic's 1.7 million distressed-not-listed, that would leave 3.1 million distressed listed, 77% of all listings.
Nonsense. There must be a hell of a lot of distressed inventory not anywhere near a market. And in expanded distress definition, CoreLogi's underwaters, just those at least 50% OR $150,000 underwater, are another 2 million homes. Some pig.
At what rate are we barbequing the fat off this baby? CoreLogic says 30% of existing homes sold are distressed (two-thirds REO, one-third short sales). Say 1.5 million annually. If nobody else enters hopeless delinquency, or takes a strategic walk from underwater, three-plus years to clear. Realistically, based on declining new rates of delinquency, we are probably net-reducing inventory by a few hundred thousand homes annually, clearing in 2020 or something. Unless badly managed clearing itself caves-in the market some more.
What to do? Old stuff. Do not ever let a big, zombie pig hang around the yard. Only one way to run it off, as HUD began to do regionally in the '80s, and the RTC showed with commercial: modest fix-up, price it to sell, and finance it. Pre-packed financing, no appraisal. If that means Fannie and Freddie to finance REO buyers from servicers who cannot finance buyers (the whole subprime legacy), then do it. If the Fed has to buy those loans, do it. The FHA cleared the oil and S&L patch in two years by offering sweet terms: owner-occupant, $500 down; investor -- no limit on number -- 15% down. Got to qualify, for real. And knock off these pretend mitigations and procedural roadblocks.
Get... this... pig... OUT... of... here!
Subscribe to:
Comments (Atom)