Looking back, it should have been obvious. As predictable as the Bears over the Patriots in the 86 Super Bowl, or UNLV over Duke in the 1990 NCAA title game or Tiger Woods over everybody in the 2000 U.S. Open. We're talking of course about the Credit Crisis that took hold in the summer of 2007. At the time it seemed perfectly reasonable for rapidly growing mortgage originators, such as New Century Financial, to be making loans to every pulse-bearing, "credit-challenged" individual they could coax through their doors (remember Ninja loans? No Income No Job/Assets). And why not, they were using those funds to speculate in the safest market of them all, real estate, and as any loan officer could have told you in early 2007, "historically the real estate market has only appreciated". Oh how times have changed. A year later, let's review the status of U.S. housing and credit markets (with some help from Nirvana's Nevermind):
Don't, tell me what I want to hear, afraid of never knowing fear – Nirvana (Lounge Act)
The Federal Reserve has cut rates 3.25% over the past year and that has made credit cheaper, but it hasn't necessarily made it more available. This is reflected in the Fed's quarterly Senior Loan Officer Survey, which measures the supply of, and demand for, bank loans to businesses and households over the past three months. In short, U.S. banks have sharply tightened their lending practices in the wake of the credit crunch. The numbers go like this: close to 58% of banks have tightened lending standards on loans to large businesses; 65% have tightened lending standards for small businesses; and 74% have tightened lending standards on prime home mortgages (sub-prime is closer to 86%). In fact, the survey reveals that banks' willingness to lend to consumers has hit its lowest level since 1980. Along with tighter lending standards, the vast majority of banks have increased the spreads that they charge on the loans that they do make. To make matters worse, by and large lenders expect conditions to continue to tighten over the second half of 2008 and the first half of 2009. So let's step back and look at the big picture: credit is tight and getting tighter, employment and wage growth is decelerating, energy and food is taking a bigger bite out of disposable income (see "I'd buy that for a $1"... well, maybe $1.055 - May 30th), and the housing market has been incredibly weak (see below). Taken together, we would expect that a U.S. consumer-led recession has become a far more likely possibility than we have seen since the early 90s.
Get away, get away, get away, get away, away, away from your home – Nirvana (Breed)
It may be more illiquid, more exciting, and ultimately, more emotional than other markets, but in the end real estate is a market like any other and is subject to the same supply and demand forces. Lately, those forces have not been particularly kind. Optimists point to nationwide price declines that seem to have started decelerating and existing home sales that have stabilized around the 5 million unit mark, but beneath even these apparently positive indicators lurk some unsettling realities. First off, the number of existing homes on the market (i.e. inventory) has risen to 4.67 million units, representing 11.2 months of supply, the highest level on record. Secondly, of those homes that are being sold, it is estimated that close to 20% of them are properties that are being sold as a result of bank foreclosures. Thirdly, the unknown (although likely negative) variables are the number of homes that sellers are holding off the market right now as they wait for a better pricing environment and the impact that rising monthly payments will have on properties that are financed by adjustable-rate, interest-only and negative amortizing mortgages. Pessimists would suggest that given this data, and the credit conditions described above, the housing market will at best stabilize and at worst decline another 15-20% over the next several quarters.
Just because you're paranoid, doesn't mean they're not after you – Nirvana (Territorial Pi**ings), also attributed to Catch-22 the motion picture
As our regular readers know, we do not have high hopes for the U.S. Government-sponsored-enterprises Fannie Mae and Freddie Mac (see Fannie, Freddie and the Seven Stages of Grief - July 18th). As if our condemnation were not enough, in recent weeks the venerable Barron's magazine has sounded the death knell on the pair, while no less than Warren Buffet has declared that the two companies "don't have any net worth" and that "the game is over" as independent companies. So given that these two are TBTF (too big to fail), it seems likely that the Treasury will have to intervene with taxpayer money to keep the two afloat. In this campaign season it will be interesting to see how the Presidential candidates spin this situation as anything other than a massive taxpayer-financed bailout. Stay tuned.
In other news...
The Olympics are over, so now it's time to look at the numbers behind the games. For stats freaks like us it's really not enough just to enjoy the competition and fortunately Fourth Place Medal has provided 36 facts about the Olympic medal count. Purists might find their calculation of the "real" medal tally interesting as it eliminates all events that rely on judging to decide the winner. Enjoy.
Nirvana? We haven't reached it yet...