NEW YORK (Reuters) - U.S. mortgages in foreclosure climbed to a record high in the first three months of 2003 as job losses and personal bankruptcies forced more people out of their homes, a mortgage industry group said on Friday.
Home loans in the process of foreclosure climbed to 1.2 percent of all mortgages in the first quarter, beating the previous high of 1.18 percent set in the fourth quarter of 2002, the Mortgage Bankers Association of America said.
Mortgages entering the foreclosure process rose in the quarter to 0.37 percent from 0.35 percent in the fourth quarter.
The percentage of all loans for one- to four-unit homes that were delinquent -- at least 30 days overdue -- slipped to 4.52 from 4.53 in the fourth quarter.
The housing market has been a pillar of strength for the sluggish U.S. economy. Ultra-low interest rates have fueled record home sales and an unprecedented mortgage refinancing boom that has freed up billions of dollars in cash for consumers to pay down debt, save or spend.
While benefiting from the lowest borrowing costs in more than four decades, Americans have been straining to meet their mortgage payments and credit card bills.
In fact, the first-quarter increase in foreclosures was driven by the rise in foreclosed home loans owed by homeowners with blemished or "subprime" credit histories, Mortgage Bankers Association chief economist Doug Duncan said in a conference call on its latest loan study.
Until the economy improves and companies hire again, more Americans will default on their debt, economists say, and if defaults gain and the increase in home values slows, this will hamper economic growth.
"It will be more difficult to work out trouble loans," Duncan said.
Economists and the financial markets have been hopeful that the economy will pick up steam in the second half of the year, boosted by money from refinancings, the latest round of tax cuts and an anticipated rate cut by the Federal Reserve.
If economic growth accelerates in the second half, Duncan said the average rate on 30-year mortgages, held by most U.S. homeowners, would rise to 5.5 percent at the end of the year from the current 5 percent.
Duncan expects the Fed to lower short-term rates by a quarter point at its meeting next week.
Foreclosure rates rose in the Northeast, the North Central region and the South, but held steady in the West.
In the first quarter, more homeowners fell behind on their mortgage payments in the South and North Central region, while fewer in the Northeast and West were late on their payments.
Foreclosures and mortgage delinquencies in the Midwest were higher than the national average in the first quarter due to heavy job losses in the manufacturing sector, Duncan said.
Among the 50 states, Indiana posted the highest foreclosure rate, at 0.68 percent, and Mississippi had the highest delinquency rate, at 6.73 percent.
At the other end of the spectrum, New Hampshire had the fewest home loans in foreclosure, at 0.17 percent, and South Dakota had the lowest percentage of homeowners behind on their mortgage payments, at 2.26 percent.
Alert: Tax Rates and Federal Revenue Move Together
From Angry Bear, this graph of Federal Revenue by year, on a deflated and per capita basis. To derive this, I took annual Tax Revenue (all sources) for 1980-2000, converted to constant 1996 dollars using the GDP deflator rather than the CPI, and then divided the constant dollar numbers by the U.S. population in each year. This should represent federal revenue over time, controlled for inflation and population growth.
A few observations leap out: (1) Revenue declined after the 1981 tax cut. (2) Revenue did start increasing after 1983 (reflecting two things: first, some taxes were raised in 1983 and after; second, 1983 was when the first year shown in the graph without a recession. (3) After Clinton raised taxes, in 1993, federal revenue took off. This partly reflects the boom, but that didn't really get into full swing until 1996.
So, on balance, it looks like when you raise federal tax rates, federal tax revenue goes up (at least for rates under 50%), and vice-versa. Stunning. (click to enlarge)
Just as a matter of clarification for reporters on economics. A bubble in a good or asset is where its price exceeds the rise of the income required for purchase over a long time period. As a result, to afford the same quantity of the good or asset an individual will either need to divert more of their income away from other goods or borrow more to finance the higher price. It has nothing to do with a judgement over whether purchases are done for "speculative" reasons or not. It also has nothing to do with demographics or whether perceived "demand" for the asset or good is sustainable for the rest of creation.
From August 1982 to the peak in March 2000 stock prices as measured by the S&P 500 rose by a 15.5% annual rate while personal disposable income in current dollars rose at a 6.2% annual rate. As a result, if all the $2.429 trillion in August 1982 disposable personal income was used to buy S&P 500 shares at $119.51, we could have purchased 12.5 billion "shares" of the S&P 500. By March 2000, we could only use all of our disposable income to buy about 2.9 billion shares of the S&P 500. Bubbles cannibalize their own demand over time because of this basic principle and are thus unsustainable. But bubbles can go on for a long time, far longer than you can remain solvent, to paraphrase Keynes.
For a good economic analysis of the housing bubble, I'll refer you to Dean Baker at CEPR. I'd like to add to Mr. Baker's analysis that since housing is leveraged three or four times to disposable personal income, a 5% increase in housing prices is equivalent to a 15-20% rise in disposable personal income. This magnifies the effect on borrowing from the bubble (and hence why mortgage lending will probably top $4 trillion this year). Since there is no way for an individual to devote the extra income towards home purchases, the money must be borrowed. This in turn, requires the interest rate to keep falling in order to sustain housing demand.
For a time, everyone can extract profits from higher home prices and lower mortgage rates. New buyers can join the game as lower rates make more house affordable. Existing buyers can extract endless amounts of equity from their rapidly appreciating homes and lower the monthly payments on the constant value of their mortgage as long as rates fall more than the cost of fees and taxes. Mortgage lenders can refinance even faster than you can, with banks borrowing at the bank's deposit rate (1% or less for money market accounts and virtually zero for savings) or at the GSE preferred rate (Fannie and Freddie borrow at 1-1.5% cheaper than you). Their profits depend greatly on volume, so $4 trillion of volume at a 1% spread is better than $1 trillion at a 2% spread. In addition, volume shrinks their bad loan percentage and in the case of foreclosure the lender may even get a house that is worth much more in resale than the amount of the bad loan. (In 2000, lenders were recording an average profit on foreclosures according to the MBAA!) Mortgage brokers proliferate, hiring any warm body that comes along in order to process the record mortgage refinancing activity and grab the several thousand dollars in fees.
The problems will come when rates can no longer fall. This will cut into housing demand and limit further appreciation. Soon, lenders can no longer make up bad loans on volume and may start to raise lending standards. This will further cut demand and soon housing prices to fall. Much like stock options when the market crashed, new buyers may soon find themselves "under water" with their loan value greater than the value of their house. With so many owners putting 5%, 3% or even 0% down, this will take much less deflation than a decade ago.
Things won't go well for lenders either. They won't be able to roll over their existing borrowing at lower rates, and their lending spread will decrease along with their volume, as their bad loan percentage starts to rise. Most mortgage lenders who borrow short (selling bonds with maturities as short as 30 days) and lend long (the average mortgage duration is around 29.5 years) need to cover interest rate risk with derivatives. While the lenders may be protected, let's hope their derivative counterparties can stay solvent if interest rates back up a couple of percent and refinancing drops to nil.
In March of 2000, a number of Internet companies that were burning through cash at the rate of billions per year revealed two pieces of information. First, they were not getting greater profits despite large growth rates in "sales" and "hit counts". Second, they were going to require more cash infusions for the foreseeable future in order to stay in business. A number of these companies crashed in value along with the Nasdaq and were out of business by the end of the year. The large tech companies that had made lots of money through "vendor financing" and "revenue swapping", as well as lenders that had financed IPO's for these bankrupt entities lost money and abruptly curtailed their lending, resulting in another swath of companies going out of business who could not get new financing. As a result, we learned very quickly just how much of the fundamental "demand" for cell phones, servers, processors, switches, laptops, and so forth was dependent on the bubble. Who could complain about CEO's who all of a sudden found their "visibility" on future demand was "impaired"?
Because there is no income to service the borrowing needed to keep the bubble going, the stock bubble eventually collapsed when lenders' perceptions changed. As soon as lenders change their view on the profitability of making low interest rate loans on homes rising faster than the incomes of increasingly unemployed and financially strapped homeowners, their perceptions will change too. Then we will find out how much of housing demand is fundamental and sustainable.
Until then, you should be suspect of any news report that interviews only home builders, GSE officials, mortgage brokers, housing analysts and similar parties who say there is no housing bubble. It is certainly not in these individuals financial interest to cast doubt on the sustainability of a housing bubble. We've certainly seen what has happened to the reputations of stock analysts, CNBC commentators, tech company CEOs, and brokerage firms since the stock bubble burst. We also saw the futility of those authors of "The Great Crash of 1995", "The Depression of 1996", and "The Collapse of 1997".
The mind boggles that Americans can get into the same collective frenzy in purchasing housing so soon after a bursting stock bubble destroyed trillions of their wealth. Or maybe it isn't so surprising given the recent rally in the stock market, the fourth official "bull market" of 20% gains or more since March 2000. Hope is not based on reality, and always springs eternal.
Now I wouldn't go so far as to discourage people from buying a house (and in the spirit of full disclosure I personally bought a house in March and am already refinancing) if they need a place to live. Nor would I have discouraged purchasing stocks in March 2000 if a person were buying companies for the long term that they truly believed were profitable and could appreciate from their current level. Nor should this be construed as advice supporting the buying or selling stocks or houses (to cover my proverbial a$$).
However, I really hope from what I think will be the upcoming financial fiasco that economists will learn enough to recognize and prevent bubbles before they get out of control. If the housing bubble pops, the financial security of millions of Americans approaching retirement age will be dealt a second multi-trillion dollar blow, because like their 401k's, a lot of people are depending on selling their house in the next decade to finance their retirement. While our current Federal Reserve Chairman has repeatedly admitted he can't recognize a bubble until after it bursts, maybe his successor will learn from Al's mistakes or from Japan. Or maybe even read Kindleberger. The old saying is that those who don't learn from their mistakes are doomed to repeat them.
From the home state of 11th Circuit Court Nominee-who-must-be-stopped, Bill Pryor, also comes a plan to increase Alabama's overall state taxes by 14%, progressively. To wit, the proposed property tax "would mean an extra $93 a year in state taxes for the owner who lives in an $85,000 house, which is about the average value for Alabama; and an extra $706 for the owner who lives in a $300,000 house. The owner of a house worth $50,000 or less would pay no state property tax." Alabama's current tax system, based mostly on sales and property taxes, is very regressive, so it's unclear whether the new taxes would actually make the state's system progressive or just less regressive.
Oh, and Alabama Governor Bob Riley is a Republican. Still, he got the bill through the Alabama House and Senate by basically arguing that the alternative was massive cuts in programs, including education (the proposed plan will apparently cover the shortfall and increase education funding). Needless to say, Riley's party isn't happy with him. Riley's tax plan goes to the voters on September 9th, should be fun to watch.
And, of course, there is a blogger who is following this issue: Michael from A Minority of One.
As I argued here, there is a historical connection between how open a society is and the rate of technological progress and economic growth. So I'm cross-posting this here, even though it may seem off topic.
This guy should really be kept far, far, away from the 11th Circuit Court, or any other Federal bench. Signorile's got a great overview of Pryor's views. In a nutshell, Pryor's view is that we need God--the Christian God--everywhere...In schools, courts, federal buildings, your office, your car, and, especially, your bedroom. The "so- called separation of church and state" must be eliminated. And, if you are having sex, stop it. Oh, and women have no choice on the issue of abortion. Gays? "A constitutional right that protects ‘the choice of one’s partner’ and ‘whether and how to connect sexually' must logically extend to activities like prostitution, adultery, necrophilia, bestiality, possession of child pornography and even incest and pedophilia." I'm just guessing here, but he's probably not real big on minorities and women outside of the kitchen.
Given the nominees this administration keeps putting up (Owens, Pryor, Pickering, Estrada), about the only thing that would surprise me--and it wouldn't surprise me that much--is for Rehnquist to resign and Bush to nominate Ken Starr to the Supreme Court.
For more on Pryor go here and to see what you can do to oppose confirmation of this would-be theocrat, go here.
At least it is getting that way in terms of employment.
From the February 2001 peak, employment has fallen 1.8%, or 2.5 million, in the past 28 months. At this point the 1974-75 recession was over and employment had been expanding for a year. At this point the 1981-82 recession was over and employment had recovered to the July 1981 peak. Even in the "jobless recovery" that followed the 1990-1991 recession, after 28 months the recession was over and 600,000 jobs had been added.
The longer employment remains stagnant, the worse the economy is going to look versus these benchmarks. If the present economy doesn't add 2.5 million jobs in the next six months, the 2001-???? recession will be the worst in terms of employment since the Great Depression.
There are no economic indicators that suggest a pickup in employment soon. Help wanted advertising is at the lowest point in the history of the series. Industrial capacity is nowhere near levels that would require more workers to increase production. The most recent Manpower survey is the worst since 1991. Almost two-thirds of the 16,000 employers surveyed do not expect to add any jobs in the next twelve months, and another 10% expect to lay off workers. These indicators need to show sustained improvement for the employment picture to get any brighter.
This suggests that the impact of the recently passed Bush tax cuts will be zero. The administration had kept their goals modest by only assuming 1.4 million jobs would be created under their plan, but this number is still an artificial creation of plugging numbers into a not-terribly-sophisticated model with loads of optimistic assumptions. It is interesting to note that in the CBO's analysis of the President's Budget Proposal (scroll to Table 17) the effect on employment is almost entirely due to cyclical contributions. This means that the economy has to grow faster than it is currently growing (+2.0% apr) in order for employment to increase. Without the contribution of a faster growing economy, the impact of the budget plan on employment is virtually nonexistant.
The U.S. economy needs to add about 200,000 jobs a month just to keep up with civilian population growth. Otherwise, either the unemployment rate will rise or potential employees will have to look for alternative pursuits to work: dropping out of the labor force, additional schooling, or various states of underemployment. When one adds the jobs not created to the jobs lost since February 2001, the economy has accumulated a shortfall of 8.1 million jobs - 2.5 million lost and 5.6 million not created. Every month that employment fails to increase by this amount is going to increase the attention on this sector of the economy.
While unemployment counts remain high, it is hard to distinguish this number from the normal job turnover in the U.S. economy. The increasing dearth of jobs, and the difficulty of obtaining them, is a much more immersive experience for the average American. With very little sustained improvement on the employment front expected for the near future, it is going to be much more difficult to distract Americans from a poor image of the economy under the Bush administration. The Republicans' questionable commitment toward the less fortunate in the economy will only compound their re-election problems.