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Catching a Falling Financial Knife

Double-Dip Recession Deepens as U.S. Housing Market Collapses

Housing-Market / US Housing Sep 03, 2010 - 09:07 AM GMT

By: Mike_Larson

Housing-Market

Best Financial Markets Analysis ArticleThe Double-Dip recession I’ve been predicting for some time is deepening. And nowhere is the emergence of this powerful economic force more clear than in the housing market.

All the fresh economic data confirms that home sales are weakening … home inventories are rising … and home price pressure is building.


Meanwhile, we’re seeing a fresh rise in early-stage mortgage delinquencies after a multi-quarter respite. Credit demand is contracting for real estate and other loans. And bank failures are rising fast.

This can’t be prevented. Neither the Obama administration nor Congress nor the Federal Reserve can fire some magic bullet at the problem to kill it. So as an investor, you can only do one thing: Prepare!

Housing Dip Deepens As Artificial Support Wanes

Last week while I was on vacation, we got a rash of fresh data on housing — none of it pretty. Just consider …

  • New home sales plunged 12 percent in July to a seasonally adjusted annual rate of only 276,000. That’s the lowest level since the Census Bureau began tracking these figures in 1963.
chart Double Dip Deepens as Housing Collapses
  • The median price of a new home slumped 4.9 percent from a year ago to $204,000. That’s the lowest level since 2003.
  • Existing home sales collapsed 27 percent in July to an annual rate of 3.83 million. That was twice as large a decline as economists expected.

Keep in mind that number includes not just single-family home sales, but also sales of condominiums and co-ops. If you use the single-family only figures, which go back decades, you see that sales haven’t been this weak since 1995.

  • The combination of falling sales and rising for-sale inventory is going to torpedo pricing. Heck, we now have 11.9 months of inventory on the market in single family homes, assuming the current sales pace were to hold constant. That’s the worst reading since 1983.

Worse, more and more supply keeps being dumped on the market by banks and other owners of repossessed homes. The Home Affordable Modification Program, or HAMP, was supposed to prevent that from happening. But it has only provided 340,000 permanent mortgage modifications. That’s far short of the four million modifications the Obama administration laid out as a goal when it rolled the thing out more than a year ago.

At the same time, the Mortgage Bankers Association just said that the 30-day late payment rate rose to 3.51 percent of all home loans in the second quarter. That’s the first gain in early-stage delinquencies in more than a year, and a leading indicator of rising future foreclosures.

Look, we’ve already seen 118 banks fail so far in 2010. Plus, the FDIC just revealed that its “problem list” of banks that could fail in the future grew to 829 in the second quarter from 775 a quarter earlier. That’s the highest since 1992.

If mortgage performance deteriorates again, and the double-dip recession drives up losses on other types of loans, we could easily see that list hit the four digits by the end of the year. Is that bullish for banks? For stocks? I sure don’t think so.

Jobs are getting scarce again.
Jobs are getting scarce again.

That’s especially true in light of the fact that we’re now LOSING private sector jobs again …

ADP Employer Services said the economy shed 10,000 jobs in August, worse than the 15,000-job gain forecast by economists. That’s the first time we shed private jobs in six months, and it comes as the government is laying off tens of thousands of Census workers.

More Bailouts Coming? Seriously?

If the Fed had a time machine, it could do what it should've done: Aggressively raise interest rates.
If the Fed had a time machine, it could do what it should’ve done: Aggressively raise interest rates.

In response to the latest round of dismal data, administration officials are flailing around. So are policymakers at the Fed. They’re talking about possibly reviving the home buyer tax credit … giving short-term loans to float mortgage borrowers through a period of unemployment … printing money to buy more assets … and all kinds of other stuff.

Pardon my French, folks, but that’s nuts! They’re essentially planning to do the same things that have already failed once … and expecting a different result.

Here’s the cold, hard reality that Washington won’t share with you: The only thing that can fix today’s problems is a time machine. Then we could go back to BEFORE the credit and housing bubbles got out of control, and do something to stop them.

The Fed should’ve aggressively raised rates. The banking regulators should’ve forced institutions to stop making dumb loans, rather than look the other way. Wall Street should’ve been more effectively policed, and prevented from raising leverage ratios to ridiculous levels.

But none of that happened. So a long, painful bust is preordained. It’s baked in. It’s coming whether we like it or not. We might as well all deal with that reality rather than keep hoping for some magic bullet from D.C.

Until next time,

Mike

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


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Catching a Falling Financial Knife