March numbers are out for wholesale prices and forclosure numbers, and they are dismal indeed. The foreclosure numbers show yet another increase in foreclosures.
U.S. foreclosure filings jumped 57 percent and bank repossessions more than doubled in March from a year earlier as adjustable mortgages increased and more owners gave up their homes to lenders.
More than 234,000 properties were in some stage of foreclosure, or one in every 538 U.S. households, Irvine, California-based RealtyTrac Inc., a seller of default data, said today in a statement. Nevada, California and Florida had the highest foreclosure rates. Filings rose 5 percent from February.
About $460 billion of adjustable-rate loans are scheduled to reset this year, according to New York-based analysts at Citigroup Inc. Auction notices rose 32 percent from a year ago, a sign that more defaulting homeowners are “simply walking away and deeding their properties back to the foreclosing lender” rather than letting the home be auctioned, RealtyTrac Chief Executive Officer James Saccacio said in the statement.
The news is bad indeed, but the interesting part of the article is the rather frank analysis in the text.
“We’re not near the bottom of this at all,” said Kenneth Rosen, chairman of Rosen Real Estate Securities LLC, a hedge fund in Berkeley, California and chairman of the Fisher Center for Real Estate at the University of California at Berkeley. “The foreclosure process will accelerate throughout the year.”
Rising foreclosures will add more inventory to an already glutted market, keep home prices down through at least next year and thwart efforts by Congress and President George W. Bush to help homeowners avoid default, Rosen said in an interview.
What a change from just a few months ago, when this was considered a “near-recession” or “mild recession”. The housing depression fueling this mess will continue into 2009 at the minimum, and people are starting to finally admit that we’re in a world of hurting here.
About 2.5 million foreclosed properties will be on the market this year and in 2009, Lehman Brothers Holdings Inc. analysts led by Michelle Meyer said in an April 10 report. U.S. home price declines will probably double to a national average of 20 percent by next year, with lower values most likely in metropolitan areas in California, Florida, Arizona and Nevada, mortgage insurer PMI Group Inc. said last week in a report.
Borrowers who owe more on their mortgages than their homes are worth may be buffeted by increasing job losses in a “very substantial recession,” Rosen said. About 8.8 million borrowers had home mortgages that exceeded the value of their property, Moody’s Economy.com said last week.
“At least 2 million jobs will be lost because of this recession, so we’ll get a cumulative negative spiral,” Rosen said. “A normal recession is 10 months. We think this one may be twice as long.”
A 20 percent drop in home prices equals a 20 month-long recession. Makes quite a bit of sense to me, actually. Call it Rosen’s Law there, one month per percentage price drop in real estate numbers. In places where equity will drop more than the average, the recession will be longer and messier. But again, just the admission that we may be looking at a recession deep into 2009 is certainly eye-popping. If Rosen’s Law holds true, places like Rust Belt Ohio, South Florida and Las Vegas could be looking at 2 year plus recessions, if not longer. Likewise, in some places the recession won’t be quite as bad.
As I’ve said before the housing depression is deflationary in nature. Trillions in equity will be lost by the time all is said and done, taken directly out of the economy’s value. We’re seeing an increasingly nasty deflationary pressure from this.
On the other hand, we’re also seeing a major inflationary pressure from the falling dollar and rising prices.
Inflation at the wholesale level soared in March at nearly triple the rate that had been expected as the costs of energy and food both climbed rapidly.
Separately, the New York Federal Reserve reported a gauge of manufacturing in New York stablized in April after tumbling to a record low in March, and the Treasury Department said net overall capital flows into the U.S. rose.
The Labor Department reported Tuesday that wholesale prices rose by 1.1 percent last month, the second largest increase in the past 33 years, exceeded only by a 2.6 percent rise last November. Analysts had been expecting a much more moderate 0.4 percent rise in wholesale prices for the month.
Core inflation, which excludes energy and food, was better behaved last month, rising by just 0.2 percent, down from a worrisome 0.5 percent rise in February.
For the past 12 months, wholesale prices are up by 6.9 percent and core inflation is up by 2.7 percent, the biggest year-over-year increase in nearly two years.
That core inflation rate is rather tame because it’s being crushed by the housing depression. The actual rate is much higher because food and energy prices are so far skyrocketing. Again, with gas prices going up, demand will start to fall. So far the inflationary pressures of the weak dollar and oil at a record $113 a barrel and rising are topping the housing depression, but that will change as the recession wears on long enough to bring down demand for energy and food as Americans cut spending.
When that happens, the economy tips into a deflationary spiral. This is being repeated across the world as housing markets are collapsing worldwide in developed countries.
The result? Businesses go out of business, employees are laid off and even more pressure is put on remaining jobs as demand for goods and services drop. We’re already seeing the leading edge of the wave of business bankruptcies.
U.S. corporate bankruptcies are accelerating as the economic slowdown compounds the end of easy credit.
The filing by Frontier Airlines Holdings Inc. April 11 followed those of three other airlines and companies in restaurants and retailing this year. Increased levels of distressed corporate debt signal that failures will accelerate, says Lynn LoPucki, a professor at the University of California, Los Angeles law school who studies bankruptcies.
The amount of distressed corporate bonds jumped to $206 billion April 11 from $4.4 billion in March 2007, according to a Merrill Lynch & Co. index of bonds yielding at least 10 percentage points more than Treasuries. The share of leveraged loans considered distressed was 16 percent at the end of March, the highest since 1997, says Standard & Poor’s, based on loans trading below 80 percent of their face value.
“Money was so easy, companies that should have failed were kept alive,” said Rick Cieri, a bankruptcy lawyer at Kirkland & Ellis in New York. He said bankruptcies will include businesses “with severe operational problems” and too much debt. “Companies may well be sicker when they enter Chapter 11.”
A company bankruptcy isn’t just a sign of a weakening economy, LoPucki says. There is an economic effect.
“It is a disruption of the use of resources, and the costs of redeploying them are huge,” said LoPucki, who keeps a Web site and wrote the 2005 book, “Courting Failure: How Competition for Big Cases is Corrupting the Bankruptcy Courts.” “People need to look for new jobs. Someone needs to take physical assets and recycle them. All the organizational work that went into the construction of the enterprise is lost.”
Not to mention that the first thing to go these days in our “at-will employment” world are jobs. Layoffs are always the answer to save a floundering company, but in this case it’s the slitting the throat of the golden goose.
The truth of the matter is we’ve been in a recession since January and will remain in one well into 2009. It’s affecting the entire planet, global food riots are just getting started and while this is a preview of the resource wars, Iraq has already proven to be the first battlefield in that long war and it will only get worse.
The real question is will one of the many worst-case scenarios break out and throw us into a depression? The recession we’re in is bad, but it’s not fatal in and of itself. But whether it’s the Monoline Nuke, the dollar collapsing, a massive oil spike, or a war with Iran (or a combination of all four) I’m becoming increasingly convinced that the US will come out of this mess a much different country, and that we will not be the world’s “hyperpower” anymore, but a humbled country with a much lower standard of living and a lot of lessons harshly learned.
Of course, we could elect McCain, in which case all of the above only without the lessons learned part. But I’m sure the new war will be nice.
Be prepared.
