Thursday, March 09, 2006

Ill's of the US economy: Foreclosure rates, US Debt Ceiling, Trade Deficit, IRAN, Nigeria, looming recession

Recent evidence suggests that ARM rate increases are starting to cause financial difficulty for US homeowners. According to the New York Post, Foreclosures Jumped in January.

March 7, 2006 -- Foreclosure rates around the United States are rising from last year as more homeowners are caught in a web of rising interest rates and gimmicky mortgages.

New York City foreclosures jumped 65 percent in January with 2,632 filings this year compared to 1,595 during the same month last year, according to Irvine, Calif.-based RealtyTrac, which watches rates nationwide.

Those who refinanced or bought homes in the last two years using interest-only, adjustable rate or introductory variable rate loans are now much vulnerable to foreclosure.

"Now when people's loans adjust, with the new interest rates they are seeing their mortgages skyrocket 20 to 25 percent," said James Kenney, President of Foreclosures NH, which follows New Hampshire foreclosure rates and brings investors to such homes.

MSN just released an article too--discussing the same topic: More Americans are losing their homes.

Risky borrowing is catching up with a number of homeowners across the U.S. Foreclosures rose 45% in January compared to a year ago, and experts only expect the pace to accelerate.

The number of homes entering some stage of foreclosure -- from notice of default to bank ownership -- increased 45% in January from the same period a year earlier, according to Irvine, Calif.-based RealtyTrac. That was one new foreclosure for every 1,117 U.S. households.

Rising rates squeeze already-stretched borrowers.Typically, analysts say, it’s a job loss or loss of income from a household breadwinner that drives defaults. But rising interest rates are also beginning to play a role.

“You have a lot of people who stretched to get into a house,” said John Tuccillo of Arlington, Va.-based real estate consulting firm JTA Inc.

In the last few years, many buyers took out interest-only, variable-rate loans, and in some cases put no money down to afford a house, said Frank Nothaft, chief economist with government-chartered mortgage giant Freddie Mac. He estimates one out of every three loans issued in 2005 was an adjustable rate mortgage. Now that we’ve seen 14 consecutive interest-rate increases since June 30, 2004, many of these loan rates are bumping up, increasing the size of mortgage payments.

Nothaft estimates that $500 billion in variable rate mortgages will reset, or rise, sometime this year, leaving many with a payment they can no longer afford. “Those would be the candidates for … delinquent status,” he said.

Foreclosures had been at historic lows in the past three years as rapidly appreciating home prices gave financially strapped owners the option to refinance, sell their house at a profit or take out a cheap home equity line of credit. But with the pace of appreciation slowing in many markets and interest rates rising, for many, these avenues have been cut off.

“You’re really out of options,” said Susan Wachter, professor of real estate at the Wharton School at the University of Pennsylvania.

CNN is even reporting: the US Housing Boom is Over.

The five-year housing boom in the United States is indeed over, judging from growing statistical evidence and the performance of some of the nation's leading builders, and the slowdown is already rippling through the economy.

In the last week, the U.S. Commerce Department reported that January sales of new single-family homes fell 5 percent -- the fourth decline in seven months -- and the backlog of unsold new homes hit a record.

And the National Association of Realtors said used home sales slipped 2.8 percent in January, the fourth straight drop and 5 percent below January 2005.

Builders also reported a few hiccups. Upscale Toll Brothers Inc said signed contracts in the November-January period fell 21 percent from a year ago, and KB Home reported more buyers backing out of contracts.

Around the U.S., builders are throwing in incentives ranging from financing help to free upgrades like swimming pools and granite countertops. Some equal 10 percent of the home's list price.

The median price of an existing single-family home has declined since peaking at $219,700 in July to $210,500 in January, according to the National Association of Realtors. Few analysts expect a sharp drop in national averages, although they say there could be further declines in some areas that have been among the hottest markets in recent years.

David Seiders, chief economist for the National Association of Home Builders, said California, Las Vegas, Florida and the Washington, D.C., area "have the largest potential for a price slowdown."
The rising prices in those markets were fed by speculators who bought homes intending to "flip" or sell them for a quick profit, Seiders said. "The biggest fear I have is investor-owned units coming back on the market in large numbers," he said.

Housing has played a major role in the economic recovery since 2001, so even slower growth in home sales and prices could have major repercussions.

Asha Bangalore, an economist for The Northern Trust Co in Chicago, estimates housing created 43 percent of all new jobs from late 2001 until mid-2005. That included the obvious, such as jobs in construction and mortgage services, but also retail and service jobs that were created because consumers tapped their rising home equity to buy more things.

"The housing slowdown that we are seeing is very modest, not alarming, but I think the ripple effects are going to be enormous because of the employment factor," she said.

On a completely different note, the US government STILL has not increased the US Debt Ceiling and the Treasury department is pulling money from the Civil Servant Retirement and Disability fund

March 6 (Bloomberg) -- The U.S. Treasury today took steps to avoid slamming into the government's legal borrowing limit and to make sure the sale of a 10-year note goes ahead this week.

Treasury Secretary John Snow authorized the government to use the $15 billion available in the exchange stabilization fund on March 3 and issued a ``debt issuance suspension period'' to temporarily stop investments in the Civil Service Retirement and Disability Fund. The Treasury also redeemed some of the fund's current investments.

Today's actions by the Treasury provide ``only a few days of additional borrowing capacity, which we expect will be exhausted by mid-March,'' Snow said in a letter to House Speaker Dennis Hastert. ``Treasury has now taken all prudent and legal actions to avoid reaching the statutory debt limit.''

The moves were the second Treasury has taken in the last month to stay below the debt ceiling. They will ensure the Treasury can auction and settle the 10-year-notes scheduled to be sold this week and allow government operations to continue through mid-March. The Treasury said today it will auction $8 billion in 9 year-11 month 4 1/2 percent notes on March 9, and $18 billion in four-week bills at tomorrow's sale of the securities.

Congress needs to raise the debt limit before it goes on recess March 20, Treasury spokesman Tony Fratto said.

``We cannot hostage the full faith and credit of the United States on these other issues,'' he said.
If Congress doesn't act, the U.S. will reach its borrowing limit, Fratto said. He declined to say what Treasury would do if that happens.

Reuters is reporting much of the same-- US Treasury using last debt limit tool

WASHINGTON, March 6 (Reuters) - U.S. Treasury Undersecretary Randal Quarles said on Monday the government had accessed the last of its liquidity tools to stay under its $8.184 trillion statutory debt ceiling.

The treasury said earlier it is auctioning a 6-day cash management bill and suspending new investments of the Civil Service Retirement and Disability Fund. It said it also will likely auction a one-day cash management bill to avoid breaching the ceiling.

Treasury previously dipped into other government pension ane foreign exchange funds and has halted sales of State and Local Government Series securities (SLGS).

"Today we have begun accessing the last one. So we've used all the other tools," Quarles said following a speech to state treasurers.

Quarles, who is in charge of domestic finance, also said the government was "running out of room" under the debt ceiling and it was imperative that Congress act to lift it before the March legislative recess.

Seeing’s how we’re discussing debt, I guess I should point out that the US Trade Deficit hit another record--Trade Deficit Hits Record $68.5B in Jan

The U.S. trade deficit surged to another record as the country's foreign oil bill climbed sharply, auto imports rose and Americans' taste for imported wines helped increase the deficit in food products. The politically sensitive imbalance with China also rose in January, reflecting a flood of Chinese cell phones and clothing. The Commerce Department reported on Thursday that the deficit jumped by 5.3 percent in January to an all-time high of $68.5 billion. The worsening of the deficit exceeded analysts' expectations and was certain to provide ammunition for critics of President Bush's trade policies.

In other economic news, the number of newly laid-off workers filing claims for unemployment benefits rose to 303,000 last week, an increase of 8,000 from the previous week. It was the first time the level of jobless claims has been above 300,000 in eight weeks. America's trade deficit hit a record of $723.6 billion for all of 2005 and many economists believe this year's imbalance will be even worse. The $68.5 billion January deficit in trade in goods and services surpassed the old monthly record of $67.8 billion set last October.

(THIS ONE JUST HAS TO MAKE YOU LAUGH)-- The Bush administration contends that the country's huge trade deficits primarily reflect the fact that the U.S. economy has outperformed the rest of the world in recent years, boosting domestic demand while American exporters have had to battle weak demand overseas.

IRAN is also back in the headlines. Will we see the OIL markets reflect it soon?

TEHERAN : Iranian President Mahmoud Ahmadinejad said on Thursday that the West would suffer more than Iran if these nations continued to try to stop Teheran from developing nuclear technology. Speaking a day after it became clear that the United Nations Security Council will take up Iran's nuclear case, Mr. Ahmadinejad said Teheran would not be bullied or humiliated.
"They (Western countries) know that they are not capable of inflicting the slightest blow on the Iranian nation because they need the Iranian nation," he said in a speech in western Iran.

"They will suffer more and they are vulnerable," the semi-official ISNA students news agency quoted him as saying.

Supreme leader of Iran Ayatollah Ali Khamenei, echoing the sentiments of Mr. Ahmadinejad, urged the government officials not to give in to western pressure. Ayatollah Khamenei said the move to send Iran's case to the Security Council was part of a psychological war masterminded by the United States and aimed at undermining the nation's clerical rulers.

Lets look at NIGERIA next: Militants warn of further violence in Nigeria's oil-producing zone

LAGOS (MarketWatch) -- Ijaw militants fighting for the control of oil and gas resources in the Niger Delta have warned they will wage a "consistent and intensified mass campaign" against Mobil Producing Nigeria Unlimited, a unit of ExxonMobil Corp. (XOM), until the company pays compensation for an oil spill caused by its operations in January 1998.

SO, how are OIL markets responding to IRAN & NIGERIA? -- Oil Rises From 3-Week Low on Concern Supplies May Be Disrupted

March 9 (Bloomberg) -- Oil rose from a three-week low as concern that supplies may be disrupted countered yesterday's decision by OPEC to continue pumping at full capacity.
``The main concern you have is political unrest or uncertainty,'' said Anette Einarsen, an analyst at Nordea Bank AB in Oslo. ``Prices will fluctuate between $55 and $65, depending on what news we get from Nigeria and Iran.''

Violence in Nigeria has cut production in the country by 556,000 barrels a day, easing pressure on OPEC to cut output, said Edmund Daukoru, the group's president and Nigeria's oil minister.
The United Nations' nuclear agency yesterday cleared the way for the Security Council to consider economic sanctions against Iran after three years of inspections failed to prove the Islamic republic's atomic work is being carried out for peaceful purposes. Iran is OPEC's second-biggest oil producer.

With all these factors (and others) in play, why is it our economy is doing so well? I will leave this answer to the folks over at Marketwatch-- Bulls beware

KAHULUI, Hawaii (YF) -- The major stock indexes surged to multi-year highs and despite recent sell-offs, they're still hovering on the high end of the trading range. The market seems to be forecasting a great economy in 2006, and beyond. Well, we must be missing something.

Perhaps, there's something lost in translation. Granted, at this juncture, business activities appear strong and solid. Yet the market is supposed to be a forward-looking mechanism. And economically speaking, we don't like what we see in late 2006 or for 2007.

Even the most bullish economists project growth for the current year to fall to the 3.3% level. This figure compares to the 3.5% increase recorded last year. From any perspective, growth is slowing down. We double checked the math. Yes, the calculator verified the decline.

So if most economists are predicting a 5.7% decrease in growth, then why the multi-year highs in the stock indexes? Remember, these analysts are employed by Wall Street firms. Hence, their estimates tend to be higher, a lot higher. The behind-the-scenes figures are probably much lower than the publicly stated numbers.

The odds are high that business growth could experience a larger drop. We're worried about the shape of consumers. They entered the new year in a very fragile condition. Therein lies the problem. The consumer accounts for two-thirds of the economy.

U.S. household debt reached a record high $11.4 trillion. The increase in debt was the highest in 21 years. And U.S. households spent 13.75% of disposable income on servicing their debt -- another record high. Credit card delinquencies are at their third-highest level ever. Also, the savings rate of the consumer fell to its lowest since the Depression in 1933.

Unfortunately, the consumer can no longer rely on escalating real estate prices to financially bail them out. Due to soaring property prices, consumers have utilized mortgage refinancing, home equity loans and profits from home sales for their spending. Based on a study by the mortgage company, Freddie Mac, $205 billion was taken from home values in 2005. The number compares to $142 billion in the previous year. A huge jump of over 44%. The money from home values alone was worth as much as 8% of total consumer spending.

Record home prices won't provide monetary support to the consumer anymore. Former Federal Reserve Chairman Alan Greenspan stated that the borrowing against these homes contributed $700 billion to consumers' spending power in 2004. Think of the ramifications to the economy if the consumer reduces expenditures in a significant way.

The various indicators point to a slower real estate market. The housing inventory has shot up by nearly 36%. This backlog will hurt future sales. The chief economist of Fannie Mae, David Benson, believes housing activity will decline 8% in the current year. While the National Association of Home Builders predict home starts should decrease by 6%. We suspect the news could be worse. It's our contention that a hard landing is in the cards. Not a soft one.

What concerns us is how 43% of first-time homebuyers across the country bought properties with no-money down mortgages. Plus, what about all those adjustable-rate deals? There have been 14 consecutive interest rate hikes. And additional increases will follow. To be sure, rates did originate from an artificially low level. Still, these types of loans with rising rates place the consumers and the economy in an extremely vulnerable position. In actuality, the combination of those leveraged obligations and the increase in borrowing costs make the level of interest rates much higher than the quoted figure.

Don't forget the elevated price of oil. It's another bite out of consumers' discretionary income. In so many words, the men and women on Main Street continue to get hit in the pocketbook from all angles.

Do not hold your breath, but the smell of a slowdown is in the air... Or an outright recession. It's perfectly normal that every five to six years, a recession occurs. The last one was recorded from March to November 2001. The economy could be due for another recession next year in 2007.
In the meantime, Mr. Market appears to be in the midst of setting up a major trap. To the astute, warning signs exist. Speculative small-caps and the high-tech sector are back in vogue once again. The retail investor has returned in droves. Mergers and acquisitions have surged. And mutual fund cash positions in the U.S. did drop to a record low. All the aforementioned elements are classic characteristics of a late-cycle market move.

I don't know about the rest of you, but I see MAJOR economic problems on the horizon. Hope you all are starting to prepare...


Out at the peak said...

All the oil/gas data leading up to summer is looking worrysome even without considering Iran. We are looking at $66 oil, IMHO. Iran is the $100 wildcard.

People see the stockpile of crude bump up to 9 million barrels. That's about 1/3rd of a day's supply. Don't forget about MTBE throwing a wrench into trading -- I think we got half of the push down from it.

The question is when we enter a recession, will oil come down? Consumers would surely have to curb their use. Or will the consumption from other countries ramp up enough to keep oil prices high? Or will unrest from countries pull down production?

How hard is it for Congress to raise the debt ceiling? You would think someone would write up a proposal and they'd vote it through just like the Patriot Act without a blink. I can't believe the USD has jumped up without resolution to this!

contrarian2day said...


Excellent points! Agree, in a recession, the US consumer will reduce oil consumption (possibly reducing prices). With that said, Higher oil prices in and of itself could be the catylist driving us into recession. Anyway, I believe the biggest issue w/oil right now is the potential for a major supply disruption.

Also agree w/you on the Dollar point--Can't believe the dollar has been rising with no resolution to the debt ceiling.

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