Who should you believe? Jim "THE SHILL" Cramer or John Mauldin and Mike Shedlock. Jim's analysis consists of throwing a dart at a board and then changing his mind ten times so he can declare that he was right when anything happens. It is now June 2009. Jimmy Boy declared this the bottom of the housing market. We shall see. Below is info from John Mauldin's latest letter and the charts are from one of Mike Shedlock's latest posts. Both men saw the downturn coming and properly warned anyone who was listening to get out of the way. Both do their homework and base their advice on hard facts. Examine the charts with my analysis and read John's analysis, and decide whether the housing bottom has arrived.
Looks like Americans may have overextended themselves just a tad. Equity in our homes has declined from 85% in 1945 to 45% today. Government solution is to provide more mortgage debt. Yeah, that's going to work.
Look at all the toxic slime issued between 2004 and 2007. Without the issuance of this toxic slime, the housing boom wouldn't have occurred. These are the "assets" now sitting on the taxpayer's balance sheet at the Fed. The slime didn't disappear. You are paying for it through TARP and the massive inflation coming our way from the Fed printing presses.
The mortgages created by the Wall Street wiz kids make up only 15% of all mortgages but account for 51% of all delinquencies. You can't tell me this wasn't the greatest fraud in history and no one has gone to jail. Mind boggling. Also, remember that we own Fannie, Freddie and Ginnie. We lose billions every quarter as Barney Frank and his band of merry men force them to continue to make bad loans.
Does the chart below indicate a bottom? Delinquency comes before foreclosure. Foreclosure means more homes for sale. More homes for sale means lower prices. Lower prices means more delinquencies. And so on. And so on. Bottom is 2 years away.
% of All Mortgages in Delinquency
The CNBC pundits describe this crisis as the Subprime crisis. Wrong again morons. The subprime part is just about complete. Round 2 is the Alt-A mortgages. Guess what? Alt-A loans are just as toxic as the subprime loans.
OUCH!!! This next chart really hurts. There are $2.4 trillion, with a T, Alt-A loans out there. The resets on these horrific loans will accelerate in 2010 and not peak until 2013. Alt-A mortgages are characterized by borrowers with less than full documentation, lower credit scores, higher loan-to-values, and more investment properties. Sounds like a recipe for huge bank profits.
This brings us to my favorite loan of all. The old Option ARM.
An "option ARM" is typically a 30-year ARM that initially offers the borrower four monthly payment options: a specified minimum payment, an interest-only payment, a 15-year fully amortizing payment, and a 30-year fully amortizing payment.
Guess which option the vast majority of our zombie like American citizens chose? You guessed it, the minimum payment, which makes the mortgage balance grow. $750 billion of these pieces of shit were written at the top of the market.
Option ARM Originations
If you think Arnold has problems now, wait until these babies start resetting. Is California the most delusional place on the planet? Mike Shedlock points out that Wells Fargo has the vast majority of these wonderful California loans on their books. Sounds like a buy to me.
Option ARMS By State
If you don't think Option ARMs are a big problem, just take a momentary glance at the chart below.
Option ARM Delinquencies
OMG. This chart shocked even me. Guess what people were doing with their fake home equity? They were buying BMWs and Mercedes with that equity. Nationwide, 2 million of the 16 million new cars sold in 2007 were bought with home equity loans. Yes, people were buying depreciating assets with home equity that has now evaporated. Again, good old California led the way. They always like to be #1.
Diana Olick, the very on-top-of-it CNBC real estate reporter, had the following to say (emphasis mine).
"That's going to mean a new phase of the current housing recession. So far we've seen the 'correction' of a boom market that was driven by faulty, exotic loan products, investors looking to make a quick buck, and average Americans using their homes as ATMs. Now the losses are being driven by traditional economic factors and by sweeping price drops across the nation.
"Yesterday Fitch ratings estimated that up to 75 percent of the modifications now being done through the administration's Making Home Affordable program will re-default in six months to a year. I'm not talking about the old modifications, which were largely repayment plans that could actually raise monthly payments. I'm talking about the new mods, which lower monthly payments to 31 percent of a person's income. I couldn't understand Fitch's reasoning, so I called them.
"Diane Pendley, managing director at Fitch, said the problem is not on that "front-end" ratio, but on the back end, which is all of the borrowers other debt (credit cards, car loans, student loans, etc.). She said that in talking with servicers, she's hearing other debt is so high that most of today's troubled borrowers cannot afford any loan payment at all, even at a very modest debt-to-income ratio. 'Just getting the house payment done doesn't mean their lifestyle is sustainable,' she said.
"Another problem is that with home prices continuing to fall, more and more borrowers, who are essentially just renting their mortgages now because they will never see any home equity, are walking away. Even if the mortgage payment is low, the property taxes and home maintenance costs are padding that payment, and without an upside to the investment, there's simply no reason to pay. Suffice it to say, the foreclosure crisis, on the high and low ends, is not getting any better."
And it gets worse.
More Prime Foreclosures In Our Future
The Mortgage Bankers Association noted that a record 12%, or 1 in 8 homeowners, in the US are now behind on their payments or in foreclosure. 10.6% of the mortgages in Florida are now somewhere in the process of actual foreclosure. (My seatmate here on the flight says the prices on the condos where he lives are now back to 1998 levels. It would be scary, he said, if you had to sell. There are new developments that only have 10% actual occupancy, as the bulk of the condos were bought for speculation. Now those 10% of buyers are having to shoulder all the fees for upkeep. Nobody will buy, because the upkeep costs can be more than the mortgage. It is a vicious cycle.)
In Nevada foreclosures are 7.8%, Arizona 5.6%, and California 5.2%. 25% of subprime loans are now in foreclosure, 14% of FHA (government, taxpayer-guaranteed) loans and a growing 6% of all prime loans are now in foreclosure. (Note: the seasonal adjustments may overstate the actual numbers, as we are in new territory in terms of actual foreclosures.) Quoting from the MBA press release:
"In looking at these numbers, it is important to focus on what has changed as well what continue to be the key drivers of foreclosures. What has changed is the shifting of the problem somewhat away from the subprime and option ARM/Alt-A loans to the prime fixed-rate loans. The foreclosure rate on prime fixed-rate loans has doubled in the last year, and, for the first time since the rapid growth of subprime lending, prime fixed-rate loans now represent the largest share of new foreclosures. In addition, almost half of the overall increase in foreclosure starts we saw in the first quarter was due to the increase in prime fixed-rate loans." (emphasis mine)
How could so many prime loans be in foreclosure? These were people with good credit and jobs. The answer is the very deep and lengthy recession, coupled with high and rising unemployment. The number of foreclosures will not abate until unemployment starts to fall. And even optimistic forecasts assume unemployment will keep rising into 2010. As I have written for a long time, I think it is quite likely that we will see unemployment rise to over 10%.
32 Comments
Davido
Thank you Mr. Quinn, Mauldin, and Shedlock Useful info, well organized, clearly presented.
jlounsbury59
Jim - - -
The rate of decline in housing prices will slow for the rest of the year. You will hear and read that the bottom in housing has arrived. This is another second derivative misinterpretation effect. Pundits will say that the "mustard seeds" of recovery have arrived.
In the parts of the country where I have lived, there is a weed called wild mustard, which is a pesky eyesore. I would suggest that too many shills don't know the difference between wild mustard and the cultivated kind.
I agree that it will probably take 1 to 2 years to actually reach the bottom, on a national average, but the 18% +/- annual rate of the past 1 - 2 years will not be repeated. My speculation is another 7 -10% for the rest of 2009 and 3 - 6% for 2010. The bottom in housing prices will arrive long after the peak in unemployment. If we have a moderately strong economic recovery (unlikely, in my opinion), the bottom in housing prices could occur within a year of the month that peak unemployment is reached. If the economic recovery is weaker, the bottom in house prices will probably lag by 1-2 years.
All of the above comment is just my opinion, but it is completely consistent with the data you presented and with your opinion.
I am scheduled to write another housing market review this month. I'll be referencing your work.
Jake4Constitution
Great work as always Jim!!
We all live in a time of what I like to call Governomics.
Question for you: what is your best guess at when the government's band-aids will fail? Immediately as in this summer or can it be postponed? It's OK if you are wrong, but as you have all this knowledge in your head, I thought I 'd ask your opinion.
ptownman
I am right here in Florida, smack dab in the middle of the housing bust. Had a birds eye view of the boom and now I have a hawks eye on the bust. I will be the first to let you when the bottom is in. At least another year before we can give it any real hard thought. Housing takes big credit for a purchase and easy credit is gone for an extended period of time. It will come back in about 15 years. American memories are very short and so are the bankers. It was only 18 years between the S&L crisis and this banking crisis.
Question everything
15 year recovery? What will be left of our dollar? It will have been replaced. Hell, i'd expect a different currency within the next 3-5 years. This is unsustainable.
TheHousingGuru
Jim, it would be laughable if it weren't so depressing. Not only is the end of the housing crisis not here, it's not in sight. As someone intimately connected to the housing business, (40 years experience) I know that the "green shoots" some think they have seen, is nothing more than mold growing on the mountain of foreclosures we've accumulated. There can be no stabilization until we resolve the foreclosure problem; and, as your numbers point out, we're not close.
And, in order for housing to recover, we'll have to create "new" jobs. Not only are we not creating new ones, we're still losing them at a record pace. Furthermore, any "recovery" we do experience will not resemble the boom of the past few years. We'll probably not experience that in my lifetime.
Debt is the killer. The American consumer, following the lead of our kindly and omnipotent government, has accumulated more debt than they can pay. As a nation, we're drowning in debt and cannot recover until we restore fiscal responsibility, both individually and collectively. The bottom line is: We're doomed.
Jake4Constitution
Thanks for the Hussman link Jim! I havent heard of it.
tbessi
I tend to agree with a good many of the posts above. I lean more to Ptownman's comment on 15 years to recovery. I believe that 15 years is optimistic unless we have some serious immigration reform to go with the econimic reform. Just looking at the Demographics in the USA population its going to be hard to fill the void left by the Baby boomers and those with credit too bad to once again become homeowners. On top of that college kids are coming out of school with tremendous debt, pour job opportunitys, rising interest rates. Who does the current administration think is going to fill these empty houses? We hear talk of cutting education? This is craziness we need to be reforming education. Top of the list in education needs to be teaching these highschool kids how to save and good fundamental economics so they can become homeowners sooner.
Interesting times we live in? All I see is lack of direction & innovation currently!
Great article, thanks! Your membership is coming up with some great articles for debate! Keep up the good work.
safariman
Great work as always, Jim. Thanks for your tireless contributions.
Unfortunately, it seems that the majority of even well educated, frequently well employed professionals, who clearly should know better would rather believe the many Keynesian shill proclamations that all will be well. Seems impossible. But they want to believe the illusion and live the dream. They're mostly undeterred for the moment.
mjs034
http://economic-undertow.blogspot.com
Excellent post, "It's Deja Vu All Over Again" on the effects of rising mortgage rates.
In the words of Bluto Blutarsky, "Holy Shit, Holy Shit"
therooster
The Debt:Equity ratio is far too high to create any real demand for a while.
GeithnerCrook
Worst of all , the fed & geithner are trying to inflate ANOTHER bubble. just appalling
timeisrunningout
Great analysis Jim. Here are a couple of other datapoints that lend further support to your conclusion:
Southwest Florida, specifically, Fort Myers Beach. My parents who have been snowbirds for many years pass along info to me regarding properties as I was tempted to buy last year and held off. (Thank God!). Most the properties on their street were bought in the past 4-5 years by flippers. Many were real estate agents who bought the properties before they listed, fixed them up and then put them back on the market in 6-9 months. This worked for a while. As an example, the property across from my parents was purchased in 2005 for about 450K then flipped in 2006 for 575K after investing around 50K in the place. A house 6 houses down the street was sold in less than 8 hours, sight unseen. Many buyers were foreign (German) and had taken advantage of the weak dollar over the past few years. On their street now, about 1/4 of the appx. 40 houses are on the market. They start out at anywhere between 750K and 1.2M and have been reduced in price at about 100K a pop and still not selling. Many of them are being re-possessed and going through the short sell process. These are not shabby homes either. These are 3 -4 bedroom houses, between 15-35 years old with a built in pool, nice landscaping and have a seawall / canal in the back with boat access through the Back Bay to the Gulf of Mexico. There are entire development units (Condos) that were partially built on the beach (Fort Myers, Bonita Beach, Naples) that the developers left abandoned half completed.
Far Northwest Suburbs, McHenry County Illinois
Local banker tells me that the refinancings have slowed tremendously since the rates upticked in the last few weeks. The folks that qualified and wanted to refinance have already taken advantage of the situation. The rest no longer qualify (with the tighter standards) and therefore the mortgage banker sits idle most of the day. (Harris Bank, N.A. Owned by Bank of Montreal). Houses bought 2-3 years ago are coming in 30-50 % below purchase price. My appraisal was better than expected, but I;ve been in the house for 15 years and owe very little on the balance. There are folks that just lost their job within the past 3 months that are bleeding off the cash reserve and are just now starting to fall behind on payments. This will be the next wave of foreclosures to hit in 3-6 months. My take is that we won't see the bottom until the economy starts adding jobs (that pay decent) and then it may be a couple of quarters until people feel comfortable enough with the economy that they would want to take on a mortgage again. I think we're at least a year away (best case) and that's without a second crash that may happen or without a unexpected terrorist event.
Anonymous
Minniecon:
"Jim, you are great, but you will destroy all of your good work by the looking at the theoretical and not seeing the reality."
So True.
I heard there was a 'special class' ..."Basic Reality 101" started up by Da Boys. But now! I see it is censored.
Whatever happen to the 9/11 Discussion that Jim and Rotmo started?
Anonymous
Jimmy Q:
Your...
PATHETIC !!! {def: exciting pity or sympathetic sadness.}
You and Rotmo1....Two peas in a pod.
therooster
mini --> What the hell does this denote ? --> "next week where they will decide what to try and do about our future."
Does this imply that you expect the Bider-burglers to have a solution for you and me ? Your paradigm is stuck in the top-down structure of "save us from on high". This is the the age where the "bad guys" are on top. This is why Christians refer to this age as the "age of grace". It's framed in forgiveness.
What have YOU done ? Do you own gold ? Do you have gold as money loaded in a payment system for the sake of global liquidity ? These are the answers and you can bet that the powers that be will not utter such things in plain language for the sake of rate of transition. They cannot. They are helpless on the basis that their audience is far too large and too greatly influenced by their message. Their only role is to motivate by using "the stick". They carry it well .....very well and have played their part with an Oscar merited performance.
Have we, on the demand side of the scales, lost faith as to our own roles ?
The shift to real-time commodity money is one person at a time ....... quietly.
We must be as wise as serpents yet as gentle as doves. Get with the message , my friend. The messenger can be sacrificed.
thewho
GOVERNMENT IS ONLY AS HONEST AS ITS MONEY ...
So next time when you hear someone compare the US government to ENRON, you'll know why. More to the point you'll know where ENRON got all their ideas from! Yet the S&P gives out their AAA rating ... AAA is virtually worthless in my opinion, but then again I am not CHINA or the millions of people out there sitting in cash on the sidelines using Treasuries or FDIC accounts. By the way the US government even borrows from a trust fund entitled "Deposit Insurance Fund". Hummmmmm??? I wonder if that is related to the FDIC.
When was the last time any of this was discussed in the SITUATION ROOM or on SQUAWK BOX or on OPRAH? Nobody wants to know the real truth and even after going on 60 MINUTES, David Walker walked away completely convinced that the US CONgress is just that ... a CON!
None of this data supports a STRONG DOLLAR.
Strangely enough it all comes from the same criminal entity that Tim Geithner heads, the US TREASURY.
Gold is the only durable hedge against this enormous monetary fraud of the irredeemable currency Ponzi scheme.