Monday, August 31, 2009
Sunday, August 23, 2009
I have good news and bad news.
The good news is that foreclosure rates on subprime ARM mortgages fell last quarter. Wall Street is rejoicing with a 50% rocket-shot in the S&P since the March lows and everyone believes that the "all clear" has been sounded with the window-lickers on CNBC yammering about "green shoots" nonstop since that time. Yes, the biggest financial calamity in world history was sidestepped by a $700 billion ransom paid to the 22 largest banks in the world. It's a new day and a glorious morning for homeowners on MLK Blvd.
The bad news is the improvement in subprime ARMs was more than offset by fixed rate PRIME mortgages going into default and foreclosure at a steeper pace than the subprime improvement. Now, almost 1 in 7 mortgages in the US are in trouble, with the bulk of that coming in areas known to be financially well-to-do. Sunrise Drive is the new MLK Blvd (but without all the trendy diversity).
What is happening? Well...folks who gambled in the housing bubble used various vehicles to stake themselves at the table. Some folks used subprime instruments with shorter fuses, and other folks had the luxury of gambling instruments with longer fuses. The longer fuses are now going off.
Those longer fuses are attached to MUCH larger explosive charges, and the bankers didn't properly prepare for this eventuality.
Let's go to the charts:
We are between peaks on mortgage resets. This explains why some real estate agents are crowing about how the market has improved over last year. I certainly hope so, but as we can plainly see, the subprime debacle is largely behind us and we are staring at the face of an enormous tidal wave of mortgage resets in the higher quality loans and properties.
Bainbridge Island, this means you.
Put another way...subprime was the trigger charge, and prime/option ARM/ALT-A is the main charge. Subprime killed the banks. Yes, it KILLED the banks. We have stunned them back to life with the bailouts, but the coup-de-grace is coming when Joe Hippen and Mary Trendy of Rolling Bay, Washington default on their 2 acres of Heaven.
The banks have zero chance of surviving this and the bailouts will not work to shock them through this next wave. This one is for real.
Many moons ago, I posited the idea that Bainbridge Island was not immune to the coming crack-up in housing prices. I said that median income is in the low-mid $70K range, but people were living a big, expensive, suburban lifestyle in spite of meager means. How did they do it?
HELOC money. It was all debt. When you make $6000/mo at the daily grind, but your house goes up $5000/mo, you have the potential to spend loads of money on the usual stuff. His/hers Prius, trips to Burning Man, ski trips to St. Moritz, fully stocked wine cellars, fresh prosciutto in every meal, private school, not to mention the perfunctory stainless/granite/bamboo that adorns every home over $500K.
It is probably harder for someone who has lost a $100,000 job to find one quickly than it is for someone making $25,000. The universe of jobs gets smaller as people move up the compensation ladder. Added to that is the fact that prime borrowers had fairly valuable homes, at least at one point. That may have allowed them to borrow relatively significant amounts of money though home equity loans. Many of those loans are underwater, further pressuring owners.Access to credit, via the never-ending mechanism of the Housing Bubble ATM, allowed the illusion to pass for reality - until now. Homeowners are now two years this side of the peak, the banks have cut them off from further refinancing, and the paltry savings they had (outside of their stocks and housing portfolios) has been depleted. They are now in the unfortunate position of sitting on too much house, fending off too much debt, and working extra hard to keep the pink slips at a safe distance. The more fortunate ones are lucky enough to have one house that they rode up and down the real estate roller coaster, and have a good story to tell along with a semi-uncomfortable, but manageable mortgage.
The rest hit the Housing ATM every few months on the way up and have found that the ATM has not been restocked by California equity locusts. The ones with the worst timing were those that upgraded homes two years ago (at the peak) and have suddenly realized that they can not sell either home, both of which they really can not afford.
Anecdotally, the Institute For Economic Reality, Kitsap County's One Man Economic Think Tank, has found that many of these folks with bad timing are now attempting to both sell and lease their vacant homes. The IER has recommended renting for several years, and takes its own advice. In almost every case the IER has explored this summer, the story is the same: the owner got caught on the wrong side of the trade at the peak, denied what was happening, believed the local RE agent (because they are the best source of macro-economic trends and financial advice) and held on for a better market. Now, they are all trying to rent out their home that couldn't sell in this "improved market" in hopes that next Spring will be more favorable to them.
It isn't going to happen. Next year will be an unqualified disaster.
Many will point to the rapidly rising stock market and claim that a 50% improvement in the indicies means that good times are just around the corner. After all, everyone knows that the stock market leads the real economy by 9 months. Right? Just like it did in October 2007, and every bounce along the way.
Let's take a quick look at the S&P.
That's what's called a "Dead Cat Bounce." The giveaway is rising price off a "V" bottom coupled with falling volume. That means this rally was oversold, got goosed (in this case the banks forecasting profits on being staked at the casino by taxpayers), and fewer and fewer people are participating in the rally as it grows. Eventually, we get a passel of bagholders at the peak and not enough interest in new money to keep the rally moving.
Dead Cat Bounces are exactly that - bounces. The term is derived from the idea that if you throw a cat hard enough at the ground, it will bounce. It will be dead, but it will bounce. We will certainly revisit S%P 666 once again, and probably a lot sooner than people think. Where did the money come from to fuel this rally? It came out of your home value. Yes, the money was swept into the equity markets from fixed-income markets, and this happened even as the FED was buying down the yield.
This is the epic fail of the Federal Reserve's "Quantitative Easing," which is a fancy-schmancy term for "paying your VISA off with your MasterCard." The US Treasury is borrowing money at a rate unparalleled in all of human history (seriously) in a failed attempt to keep a bid under its own debt. This, in theory, is supposed to keep interest rates low and all the banks and Boomers in the country will have their asset values high enough to keep Operation Enduring Bubble alive.
As you can see, after the initial announcement of the FED buying bonds, the US Treasury market has sold off from a 2.464% yield on the 10 year bond, to a peak of 4.014% and now is hovering at 3.556%. This would be impressive, but interest rates ARE HIGHER than they were the day before the FED announced that they would be buying down the yield. Throughout this "green shoots" rally, interest rates have risen for all but a short period, which happened to coincide with equity market selling.
How much is this costing us? Well, Bainbridge Island's president just announced that the federal deficit for the next 10 years is going to be somewhere in the neighborhood of $9 trillion. Yes, that is correct. The deficit for the next decade is going to be $30,000 for each man, woman, child, and illegal alien within our borders. That's $120,000 for a family of four. Bainbridge Island's median gross household income is $75,000.
That's not including tax revenues or interest. That's just the amount of principal each breathing human will have to pony-up just for the shortfall in government spending versus revenues. That's provided you actually believe the government can be that fiscally "responsible." At the current borrow rate, we could get that in one year.
Think real hard about that. Think real #$%^ing hard.
Why not? The US Treasury is going to market to borrow (not "print") almost $240 billion per week. As anyone with a brain that hasn't been clogged by 40 years of bong resin would understand, that isn't anywhere remotely sustainable. Private bidders of government debt are getting harder and harder to come by, which means that the "Primary Dealers" (FED's wholesalers of US debt) have to buy. Lately, they have been buying about 3-4X what they normally do and at interest rates around 1/7th of a percent. That means they are either being exorted to buy at those prices, or they (the big bailed out banks) believe that 0.14% is going to be a hell of a deal over the next few months.*
This will end in tears.
20 cents on the dollar by 2010. It's coming. It's unavoidable.
More later when I get my head around this insanity.
-Ernst Stavro Bloviator,
Institute for Economic Reality
*My thanks to Karl Denninger of "The Market Ticker," 8/19/09 for the information on the latest Primary Dealer activity at last week's auction.