Archive for December, 2010
Home prices are expected to drop another 20% before hitting bottom, according to economists at A. Gary Shilling & Co., raising the risk that 40% of borrowers will walk away from their home in a strategic default.
The firm reported in its December Investment Insight that home prices are already 30% below their peak in the first quarter of 2006 and fell 2% between the second and third quarters of 2010.
Essentially, the economists wrote, things will get worse before they get better.
"Housing normally spurs economic growth early in recoveries as this interest rate-sensitive sector responds to earlier rate cuts by the Fed," the report said. "This time, it's been a dud due to the collapse in prices."
According to Pew Research, 36% of Americans said it is acceptable to stop making mortgage payments. Underwater borrowers are more likely to walk away from their mortgage, or strategically default, because they lack incentive to make the payments.
Economist Nouriel Roubini, of Roubini Global Economics, echoed the Shilling economists' sentiment when he told CNBC this week that he believes the housing market is currently experiencing a double dip.
"It's pretty clear the housing market has already double dipped," Roubini told CNBC, citing the recently released Case-Shiller Index which dropped 0.8% in October. "[E]ven a 5% fall in home prices will push an extra 8 million in negative equity with risk of millions walking away from their home."
The Shilling economists said home prices are dropping because of excess inventory, "the mortal enemy of prices." According to the report, there is a 1.6 million surplus of housing inventory. There are currently 4.1 million homes on the market, compared to the 2.5 million that is considered the normal working level.
"That’s a lot considering the average home construction of 1.5 million annually over time," the report said.
The economists added that a category in the Census Bureau's U.S. housing inventory data called "vacant units held off the market for other reasons" (such as homeowners pulling their home off the market in hopes of a better price) has grown to 3.6 million from 2.6 million since the housing bubble burst.
Roubini attributed the drop in home prices to the expiration of the homebuyer's tax credit and the ongoing chaos with mortgage documentation.
Write to Christine Ricciardi.
In October, Gary Shilling of A. Gary Shilling & Co., predicted that house prices would fall another 20%.
In the two months since, house prices have resumed their decline. Below, Gary outlines why he thinks the recent drops are just the beginning…
"Last spring, many believed that not only was the housing collapse over but that a robust rebound was underway. Investors were crowding into foreclosed house sales and bidding up prices in California, often the bellwether state for new trends. The tax credit of up to $8,000 for new homebuyers that expired in April spurred buyers and promised to kick-start housing activity nationwide. TheHomeAffordable Modification Program was trumpeted by the Administration to help 3 million to 4 million homeowners with underwater mortgages by paying lenders to reduce monthly payments to manageable size and then paying homeowners to continue to make those payments."
The foreclosure crisis that erupted four years ago has claimed more than five million American homes—about 10% of all homes with a mortgage. It began in lower-income neighborhoods and has spread to some of the most exclusive addresses in the U.S.
The seeds of the crisis were planted a decade ago when banks, discovering the high returns from selling bundles of securitized mortgages, relaxed lending standards and originated millions of adjustable-rate subprime mortgages. Such loans were designed to allow just about anyone to get a home loan.
When interest rates on the adjustable-rate mortgages finally climbed, many borrowers began falling behind on their payments, leading to the first wave of delinquencies and defaults.
Japanese regulators have made a list of the top 60 "too big to fail" financial institutions, with Deutsche Bank ranked at the top followed by Goldman Sachs and JPMorgan Chase, Japan's Mainichi newspaper reported on Wednesday.
The list, compiled by Japan's Financial Services Agency and the Bank of Japan, includes several Japanese institutions.
It ranks Nomura Holdings at 19th, Mitsubishi UFJ Financial Group 24th, Mizuho Financial Group 36th and Daiwa Securities Group 48th, the paper said without citing sources.
American International Group Inc., the bailed-out U.S. insurer, failed to report $18.7 billion of policyholder guarantees at two property-casualty subsidiaries in 2008, a Pennsylvania regulator said.
National Union Fire Insurance Co. of Pittsburgh and American Home Assurance Co., which issued the guarantees to bolster other AIG units, had contingent liabilities tied to the promises of $157 billion on Dec. 31, 2008, compared with the $138.3 billion disclosed at the time, Robert Pratter, the state’s acting insurance commissioner, said today in a report.
When shopping for a new home, many people don't think about who their neighbors could be and how that could affect their living experience. But if they had the choice, most of the people surveyed would like to live next to Sandra Bullock.
According to Zillow's Celebrity Neighbor Survey, 26% of respondents chose Bullock as the most desirable neighbor. Thirty percent of women voted her the most desirable neighbor, as did 22% of men.
Personally, that doesn't surprise me. Bullock has always had that cute, lovable, do-gooder image, from protecting pageant queens in "Miss Congeniality" to reconnecting with her childhood in "Divine Secrets of Ya-Ya Sisterhood." She showed her strong, womanly independence after her public break up with Jesse James, and I'm sure after everyone saw "The Blindside," they were hopeful Bullock would take them into her $2.25 million mansion in New Orleans and feed and cloth them.
Yeah, living next to Sandra Bullock would be peachy; however, 26% of Americans said living next to the cast of Jersey Shore would be less than desirable. Again, I'm not surprised. With all the money they spend on tanning and booze, they probably wouldn't be able to afford their mortgage.
If they can't afford their mortgage, they go into default. If they go into default, they could potentially go into foreclosure, be evicted, drive down neighborhood property values and perpetuate the vicious cycle that is driving our current economy. Plus they get into fights almost every time they walk home from the bars … such a pleasant neighborhood that would be.
It appears Snookie and Pauly D don't have alliances in their own region, as 33% of Northeasterners voted them the least desirable neighbors. My guess is they're speaking from personal experience.
Other celebrities that got the vote for most desirable neighbor include Sarah Palin (10%), Ellen DeGeneres and Portia DeRossi (9%), the Obamas (8%) and Conan O'Brien (7%). Others voted least desirable neighbor include the Obamas (15%), Sarah Palin (13%), Kanye West (11%) and Mel Gibson (10%).
I think it's safe to say that politics plays a role on how you are viewed on a personal level. Perhaps it's sheer coincidence neither The White House nor anyone in Alaska has neighbors.
Write to Christine Ricciardi.
Tags: Jersey Shore, least desirable neighbor, most desirable neighbor, Sandra Bullock, Zillow
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