This week’s numbers on the housing market are the starkest reminder yet that we are facing no ordinary, run of the mill recession. We are facing the worst economic conditions since the Great Depression.
Americans’ percentage of equity in their homes has fallen below 50 percent for the first time on record since 1945, the Federal Reserve said Thursday.
Homeowners’ percentage of equity slipped to a revised lower 49.6% in the second quarter of 2007, the central bank reported in its quarterly U.S. Flow of Funds Accounts, and declined further to 47.9% in the fourth quarter – the third straight quarter it was under 50%. That marks the first time homeowners’ debt on their houses exceeds their equity since the Fed started tracking the data in 1945.
The total value of equity also fell for the third straight quarter to $9.65 trillion from a downwardly revised $9.93 trillion in the third quarter.
Home equity, which is equal to the percentage of a home’s market value minus mortgage-related debt, has steadily decreased even as home prices jumped earlier this decade due to a surge in cash-out refinances, home equity loans and lines of credit and an increase in 100% or more home financing.
Economists expect this figure to drop even further as declining home prices eat into the value of most Americans’ single largest asset.
Moody’s Economy.com estimates that 8.8 million homeowners, or about 10.3% of homes, will have zero or negative equity by the end of the month. Even more disturbing, about 13.8 million households, or 15.9%, will be “upside down” if prices fall 20% from their peak.
The latest Standard & Poor’s/Case-Shiller index showed U.S. home prices plunging 8.9% in the final quarter of 2007 compared with a year ago, the steepest decline in the 20-year history of the index.
This is an economic disaster unprecedented in scope and scale. There will be no soft landing. The equity market is hemorrhaging hundreds of billions of dollars a quarter. The dollar is at record lows against other currencies and commodities like oil and wheat are at record highs. All of these are reinforcing factors that will combine to plunge America into a very dark time.
The result is the jingle mail tsunami. Millions of homeowners are walking away from their homes at record foreclosure rates.
U.S. mortgage foreclosures rose to an all-time high at the end of 2007 as borrowers with adjustable-rate loans walked away from properties before their payments increased, the Mortgage Bankers Association said today.
New foreclosures jumped to 0.83 percent of all home loans in the fourth quarter from 0.54 percent a year earlier. Late payments rose to a 23-year high, the organization said in a report today.
“We’re seeing people give up even before they get to the reset because they couldn’t afford the home in the first place,” said Jay Brinkmann, vice president of research and economics for the Washington-based trade group.
The Bush administration is urging lenders to avert foreclosures by modifying mortgage terms amid the worst housing slump in a quarter century. The Federal Reserve has slashed its benchmark interest rate twice this year to try to avert the first recession since 2001. The central bank yesterday said the net worth of U.S. households decreased by $532.9 billion during the fourth quarter as home values fell.
The share of all home loans with payments more than 30 days late, both prime and fixed-rate loans, rose to a seasonally adjusted 5.82 percent, the highest since 1985, the bankers’ group said in today’s report.
This is bad. It’s only going to get worse. The Ambac Bailout isn’t going to work, and the nuke is primed.
Hard-hit bond insurer Ambac Financial Group’s plans to raise at least $1.5 billion in new capital are not enough to fix its capital adequacy problem, analysts at Goldman Sachs and J.P. Morgan Securities said.
“Our analysis of expected losses suggests that Ambac
needs to raise $2.5 billion instead of the $1.5 billion announced,” Goldman analyst James Fotheringham said.
Which of course is a lie. How is an extra billion going to save a company facing tens or hundreds of billions of insured defaults they’ll have to make good on? It won’t, but that doesn’t matter. Hundreds of billions in equity and credit market vehicles are vanishing overnight and it’s going to take a lot of us with it.
New capital would give Ambac more funds to cover billions of dollars of claims it could face after insuring subprime mortgage bonds and other risky debt.
Following Ambac’s announcement on Wednesday, rating agencies Standard & Poor’s and Moody’s Investors Service said the company may hang on to the “AAA” ratings of its bond insurance arm if the plans to raise capital were successful.
“Although S&P and Moody’s have signed off that the completion of this deal will get Ambac off negative watch at both agencies, we believe it is likely that another round of capital may be required this year to avoid a downgrade,” JP Morgan analyst Andrew Wessel wrote in a note to clients.
Another round of capital, printed up by the government press. Just like the billions poured into Iraq. Just like the billions poured into the coming bailout. And all the while each dollar gets more and more worthless until it explodes.
And the really bad news is we’re rapidly approaching the status where confidence in the Fed is shot. When that happens, markets collapse. The credit default swap market is approaching the collapse point now.
Credit trading models used by Wall Street have gone haywire, raising company borrowing costs even as Federal Reserve Chairman Ben S. Bernanke cuts interest rates.
General Electric Co. is one of five U.S. companies rated AAA by both Standard & Poor’s and Moody’s Investors Service, making its ability to repay debt unquestioned. Yet when the Fairfield, Connecticut-based firm sold 2.25 billion euros ($3.35 billion) of five-year bonds last week, its annual interest payment was $17 million higher than on a sale nine months ago.
Borrowers from investor Warren Buffett’s Berkshire Hathaway Inc. to Germany’s HeidelbergCement AG face the same predicament. Yields on $5.12 trillion of corporate bonds tracked by Merrill Lynch & Co. average 2.05 percentage points more than U.S. Treasuries, the most since at least 1997.
The higher costs are an unintended consequence of securities that allow investors to speculate on corporate creditworthiness. So-called correlation models used to value them have become unreliable in the fallout from the U.S. subprime mortgage crisis. Last month some showed the odds of a default by an investment- grade company spreading to others exceeded 100 percent — a mathematical impossibility, according to UBS AG.
“The credit-default swap market is completely distorting reality,” said Henner Boettcher, treasurer of HeidelbergCement in Heidelberg, Germany, the country’s biggest cement maker. “Given what these spreads imply about defaults, we should be in a deep depression, and we are not.”
Not yet. But considering the entire Bush Boom was built on an illusion, the intercession of harsh reality after 7 years will only serve to knock the market so far off its pilings that it may not be able to recover, leading to systemic failure.
Reality is bearing down on the market hard. It’s time to start treating it as such. The status quo won’t survive, and harsh, painful changes are coming soon for a lot of Americans.
The sooner we realize that, the faster we can start working towards picking up after the disaster.
