Archive for January, 2010
What will the financial news headlines read on January 29? Dollars to doughnuts, I’d expect more than a few screaming headlines about economic growth—next Friday is when the U.S. Department of Commerce rolls out its advance estimate for GDP in the fourth quarter of 2009. But all will likely not be as it seems, if so.
A number of analysts have been sounding the warning bell as of late about the dreaded “blip”—that is, GDP growth that they expect to be eye-poppingly good, but largely both transitory and (for lack of a better word) fake. Over at Goldman Sachs, the call now is for 5.8% headline GDP growth in the last quarter of 2009; and that’s up from their earlier prediction of 4.0%.
End of the Great Recession? Perhaps only statistically.
The fact remains that housing is hurting, and job growth is (for now) nowhere in sight. Goldman’s analysts noted as much, as well, and made clear the case for the upcoming “blip”—suggesting that as much as 2/3rds of the headline GDP number would come from a “sudden stabilization in inventories.” Final demand will only contribute roughly 2% to the predicted headline GDP figure—tepid recovery, to say the least.
Both Paul Krugman and Calculated Risk have spent some time discussing this issue, but what’s not been discussed in depth is the potential for future economic shocks during such a vulnerable time for the U.S. economy.
The Fed’s Yellen, for example, has noted this vulnerability, arguing recently that “the gradual expansion gathering steam will remain vulnerable to shocks. The financial system has improved but is not yet back to normal. It still holds hazards that could derail a fragile recovery.”
One of the largest such hazards is real estate, which so far may be head-faking nearly every economist and pundit attempting to assess economic direction.
Total delinquencies, excluding foreclosures, stood at nearly 10 percent of all mortgages by the end of November 2009, according to Lender Processing Services (LPS: 16.78 +1.39%) data. Add in foreclosures, and that number jumps to 13.2 percent.
Where do you think those numbers have gone since then, in December and the first half of January? (That’s a rhetorical question: the answer is they’ve gone up.)
Most analysts expect a so-called “jobless recovery,” too—and there is no truer connection in the servicing business than the loss of a job and the inability to pay the mortgage. Worse yet, it’s taking out-of-work consumers longer than ever to find a new job: according to the Commerce Department’s latest stats for December 2009, 4 in 10 unemployed workers were jobless for 27 weeks or longer.
All of which means that the ability of homeowners to make good on their mortgage commitments seems only more likely to come under pressure as we roll through 2010. It matters little, too, whether we see this distressed inventory enter the market as a short sale or in the form of REO, bank-owned real estate—both methods of liquidation tend to exert downward pressure on home prices.
The mess of delinquencies continues to grow, too, despite a tax credit program that by all accounts has been a dynamic shot-in-the-arm for the origination and realtor crowd (groups that generally tend to care little about defaults, so long as there is another loan to make). It’s no mistake the tax credit program was extended until June 2010, and extended to a wider audience than just first-time homebuyers.
But the long-term problem with the tax credit is easy to see: it siphons demand from future periods, and brings it into the present period. That’s why the number of contracts on pending home sales filed in November fell an alarming 16 percent, according to the National Association of Realtors, when the original credit was set to expire. As a result, I wouldn’t expect to see the traditional spring sales bounce this year—because we’ve already seen it.
To prove that point, we’re already seeing listing prices fall as we roll into the New Year, according to data from Altos Research. Listing price data is often a strong leading indicator of what we’ll see a quarter from now in well-known repeat-sales HPI like the Case-Shiller—so enjoy those nominal price gains while they last, folks.
Oh, and did I mention that the Fed is set to exit mortgage markets in a few short weeks, too? Most analysts expect a rise in interest rates, as a result, and the issues here have been the subject of numerous in-depth reports here at HW.
So let’s review: Increasing delinquencies, tied to a jobless recovery, leading to increased distressed property sales, providing downward pressure on home prices. Expiration of the tax credit, reducing buyer demand, and providing downward pressure on home prices. Fed exiting mortgage markets, driving up mortgage rates, which drive down buyer demand, providing downward pressure on home prices.
Can someone remind me: how many homeowners in the U.S. are already underwater on their mortgage, again? Because they're about to get plenty of new neighbors.
Some recovery, indeed.
Paul Jackson is the publisher of HousingWire.com and HousingWire Magazine.
You've probably heard that the economy is recovering, that consumers are more optimistic, and that companies might soon begin hiring more workers than they're firing. Hooray. We'll all be thrilled when the economy stops quivering. The only problem with an upbeat prognosis is that large chunks of the U.S. economy remain addicted to financial painkillers or dependent upon dysfunctional institutions like Fannie and Freddie, and we've never gone through the kind of withdrawal that's set to take place this year. If all goes well, we'll avoid messy complications, such as these:
With the world watching and waiting for Wall Street to pay out record bonuses and the populists and free market forces waging an unending war of words over banker compensation, it's time to think about how government pays itself.
Pretty, pretty, pretty good, I'd say, echoing Larry David, pretty, pretty, pretty good!
But first let me say I thought surely I would never say a word about the banker compensation controversy. Stigmatized by having worked on Wall Street all those years, I thought anything I could say would be discounted up front.
For one thing, I don't expect main-streeters to appreciate that research and females tended to be a ways down on the food chain, or that adjusted for the cost of living in NYC, the absence of company retirement benefits and the extreme variability possible from one year to the next, total comp for worker bees wasn't all that plush. They just see the sensationalized bonus numbers in the press and go ballistic.
And for another, having had a birds' eye view of two subprime market collapses (the first, in 1998, was largely the consequence of the liquidity crisis) and the manufacturing- housing-loan-securities crash (that dress rehearsal for the recent neutrino bomb subprime cataclysm was the outcome of greedy sloppy underwriting plain and simple), I am not shy about telling people that performance bonuses to "producers" (the guys at the top of the food chain) reinforced the behavior that generated the disaster. If you pay people more to sell trash than to sell sturdy, new stuff, they will sell more trash. And the more you pay them, the more they will sell. The next thing you know you're paying people enough to buy a new Porsche every year (and junior producers to buy the used ones), to stock their ponds with trout, and build new extra houses both in Park City and the Hamptons. And they're making trash loans faster than the Chinese can add value to plastic, wood or metal.
As you see, compensation is something I can only annoy someone talking about. But last Christmas eve my financial advisor tipped me to a post on government pay at Bill Bonner's Daily Reckoning (his other Christmas gift was a little more bad news about what I had once called "my portfolio.").
Quoting data from the Cato Institute, the site complained that average federal pay and benefits are double those of employees in the private sector. This is "why Washington and suburbs are the highest priced housing in the country." (If you were wondering, there's the real estate tie in! And there might be another reason for metro D.C. home prices and sprawl: the armies of lobbyists earning even more than the government can pay them, all requiring domicile. But I digress!)
(Lest you think I am covertly tea-bagging, let me explain that I express my patriotism in simple acts of citizenship like obeying traffic and litter laws, voting and paying taxes. Pretty sure my advisor feels similarly. There are things government can do for us.)
Let's give DR's numbers fresh internet exposure: the gap between average total compensation between the government and private sectors grew rapidly over the last decade, from 66% more at the start of the decade to 100% more. (And I checked on the website of the Bureau of Economic Analysis, the government agency that collects this data: the numbers of federal, state and local workers has increased as well!)
In addition to Cato numbers, DR quoted USA Today analysis that "the number of Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants during the recessions' first eighteen months." That does included overtime pay and, yes, bonuses!
Best paid – the Department of Defense civilian employees. The number earning $150,000 or more went from 1,868 in 2007 to 10,100 in June 2009. When the recession started just one person in the Transportation Department earned $170,000 or more, but eighteen months later, 1,690 employees earned more than $170,000.
I couldn't find the post my advisor sent me, but I did find the apparent source of the federal data on Cato's site. Go there for easy-on-the-brain graphics of average wages and average total comp, see with your own eyes the growing gap between government and private. Says Chris Edwards, author of the Cato post, "The George W. Bush years were very lucrative for federal workers."
How could it happen? Edwards explains, Members of Congress who have large numbers of federal workers in their districts relentlessly push pay raises for them.
Interestingly, Edwards provides links to several updates to the original posts as well as BEA and other data, and websites with furious comments from federal employees. To which he responds to claims that he distorted the data somehow, Edwards responded that it comes straight from BEA, and the most he does is divide total compensation by the number of employees receiving it.
However, he notes that this data "is usually overlooked by the media because I don't think the BEA puts out a press release on it." (Think dear readers how much of what you receive as "news" is simply press releases hashed by dead-line harried reporters.)
Critics complained that federal employees are highly educated, doing more sophisticated tasks than the average private sector employee. True, responds Edwards, but that's why he focuses on the long term trend. Did the composition of the federal workforce change enough between 2000 and 2008 to justify such a big gain in compensation relative to the private sector? Plus, the "voluntary quit rate" in the federal government is a third or less that in the private sector. That says Cato's Edwards, is a "market test" of how attractive government compensation is. In other words, if federal employment did line up – apples to apples – with private sector, the quit rates should be more or less equal.
Edwards took another stab at the complaint "federal workers aren't burger flippers" in a subsequent post. First of all, some do perform highly professional work and should be more highly paid. But consider the U.S. Department of Agriculture, with about 100,000 workers, whose main work is to administer farm aid, food stamps and other subsidy programs.
Check Edward's retort. It has a great chart of average compensation, 2008, by industry. Workers in 6 categories did better than federal civilian employees: securities and investment, funds, trusts and investments, oil and gas extraction, pipelines transportation and management of companies. The rest – including those in utilities, the military, computers and IT, legal services, performing arts and pro sports, etc etc, on average received less for their labor.
Can we hold a hearing and call Congress to task for inflating the federal payroll? (And to go rogue relevant, can we summon the testimony of lawmakers who enabled the deregulation all the way back to the Clinton Administration?)
NOTE: Linda Lowell writes a regular column, called Kitchen Sink, for HousingWire magazine.
Editor’s note: Linda Lowell is a 20-year-plus veteran of MBS and ABS research at a handful of Wall Street firms. She is currently principal of OffStreet Research LLC.
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