Capital Markets Update

By Louis S. Barnes Friday, January 6th, 2012

It is an election year. In addition to the distorted economic "analysis" offered by the ever-cheerful stock-market channels, CNBC and Bloomberg, all year long this year political interests will add their garbled gabble.
Today's reports of 200,000 new jobs in December and unemployment down from 8.7% to 8.5% were greeted with happy bugles from the usual suspects. Ignore that and watch the markets themselves. Interest rates rise on legitimate good news; today's 10-year T-note yield has fallen to 1.94%, and mortgages are near 4.00% again. The stock market rises on good news, and today it is flat to down.
200,000 jobs is good news, but year-over-year earnings have risen only 2.1%. A few back to work, but not the job that it was. And even if employment growth persists at that level, and new unemployment claims stay down as they were in December from 400,000 weekly, it's not enough to dent the job losses since 2007.
Part of the tepid response from markets today is derived from ongoing concern for Europe. Perhaps the best indicator for markets this winter will be the pace of recession onset in Europe. But, here, genuine economic turn depends on housing. Many self-deceiving financial-market types in the last weeks have announced discovery of a housing turn; although there is none in the actual market, there is one in public policy.
The Fed is very reluctant to lecture politicians (because of its perpetual political peril), but has done so this week. Mr. Bernanke shot a very well done paper at Congressional committee chairs, laying out damage by insufficient credit, by pinched and self-destructive attitude at the regulators of Fannie and Freddie, and by exposing the total absence of administration policy. www.federalreserve.gov/publications/other-reports/files/housing-white-paper-20120104.pdf. Today Bill Dudley, Prez of the NY Fed fired off another: www.newyorkfed.org/newsevents/speeches/2012/dud120106.html.
The President and Treasury Secretary have been so completely detached from housing that even a blast from the Fed may not get their attention. But I can hope.
We have 4.2 million homes in terminal delinquency, not yet foreclosed, and another 600,000 REO. The annual rate of sale of existing homes is a little over 4 million, one-third of that distressed resales, barely moving the newly distressed, no net gain. That absorption conundrum is bad, but masks a tough and unusual phenomenon in the ordinary non-distressed market, an odd freeze descending.
Here in my Denver backyard, the listed for-sale inventory dropped by one-third last year, ordinarily the precursor of rising prices. Maybe that will happen here -- we led the nation in foreclosures way back in 2004 -- but there is another force in play.
Down payments. Where to get one? The most common source is rolling over the equity in a current home to buy a new one. Right. Roger that. Although we do not have the under-water inventory that silly-Zillow fantasizes, with local prices roughly the same as 2001, price-appreciated equity a memory, there are fewer and fewer owners both wanting to move and with equity to roll, thus fewer and fewer listings.
Other than appreciating value, nothing but loan amortization builds equity. See entry for "glacial", and kids google Rip Van Winkle.
If you're not an owner, down payments come by saving money. Good, healthy discipline. However, in prior times your savings earned something. Even in a bank. In the 1990s the stock market might have doubled your savings every other year.
Another reliable source of down payment: bonuses. As I ask clients about that, today I get a lot more wry chuckles in response than happy answers. Same for stock options, proceeds of IPOs, or growing commission income. And sad answers to the prospect of help from tapped-out families.
If mortgage credit began to flow on reasonable terms, and somebody running for office told the American people that modestly rising home prices are in the national interest, and we got a 5% or 10% rise in prices, we would unlock the entire economy.
Might ask a nearby politician about that.