The Ugly Reality Of Lowering Debt By Default
Home Prices To Take Hit Next Year In Many Markets
Walking Away With Less
By Caroline Valetkevitch | 29 September 2010
- Consumer confidence index falls to 48.5 in Sept
- S&P/Case Shiller home prices declines 0.1 pct in July
- CEO Economic Outlook Index dips to 86 in 3rd qtr (Updates with U.S. market closing prices, adds gold prices)
"With unemployment at a 26-year high, confidence among consumers remains weak. This decline in sentiment will give the Fed a stronger reason to increase stimulus in November," said Kathy Lien, director of currency research at GFT in New York. The Federal Reserve said last week it was prepared to put more money into the economy, if needed, to stimulate the recovery and avoid deflation.
The Conference Board's index of consumer attitudes fell to 48.5 in September from a revised 53.2 in August, pressured by a weak labor market and environment for companies. That was below the median of forecasts from analysts polled by Reuters, which was for a September reading of 52.5. The August reading was revised down slightly from an original 53.5. The report also showed inflation expectations eased slightly, even with the Fed's stance on the economy. Last Friday the Thomson Reuters/University of Michigan's preliminary September reading on U.S. consumer sentiment was worse than expected and at the weakest level in more than a year.
U.S. stocks .SPX initially extended declines following the confidence data, but ended the day higher as investors snapped up some of the month's better-performing sectors. Though weak stock market prices weighed on consumer morale, the benchmark Standard & Poor's 500 index is on track to rise 9.4 percent in September after a 4.7 percent decline last month. "Consumer confidence is being sapped by high unemployment, low equity prices and now a renewed decline in house prices. This all suggests that the outlook for consumption growth remains ominous," said Paul Dales, a U.S. economist at Capital Economics in Toronto.
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The Ugly Reality Of Lowering Debt By Default
By Nin-Hai Tseng | 29 September 2010
September 28, 2010: 2:35 PM ET
FORTUNE— There have been at least a few seemingly positive signs of progress during this anemic economic recovery: U.S. households are spending less. They're saving more. Debt is steadily falling.
But don't be fooled by the cheery headlines. The trend toward fiscal discipline might sound uplifting, especially at a time when many have learned all too painfully that they spent too much in the years leading up to the financial crisis. But dig a little deeper and you'll find that even the best economic news is masking something ugly.
It turns out that many households aren't exactly tightening their wallets and using all their saved cash to pay down debts. They're simply defaulting on them. Total household debt fell by $77 billion during the three months ending in June, but nearly half of that decline stemmed from bank charge-offs of residential mortgages, credit cards and other consumer loans, according to Capital Economics Group. In a recent report, the London-based economic research consultancy found that this isn't necessarily a new development. Household debt has fallen every quarter since the beginning of 2008, leaving it $473 billion below the peak, which is the equivalent of reducing debt at every household by $4,200.
Shedding away debt— however it's done— is critical to the overall health of the economy. But the wave of households de-leveraging by default is worrisome. And many Americans are using their new savings to buy up U.S. Treasuries instead of devoting it all toward paying down debt. During the past year, households bought 42% of the new Treasury debt issued, equal to about $616 billion and far more than the $432 billion absorbed by foreign investors.
This will probably prolong the de-leveraging process further, say analysts at Capital Economics. Until households can meaningfully shed off debt, it will likely be one of the key factors stalling economic growth and the job market as many companies wait for GDP to pick up significantly before hiring more workers.
Cutting Plastic Or Cutting Credit Card Bills?
The wave of defaults on mortgage loans is no surprise, given the rise in foreclosures and the fall in housing prices. But perhaps even more troublesome is the increase in consumer defaults on credit card debt. It's been widely reported that debt levels on credit cards have fallen— at one point surprisingly dropping below the level of outstanding student loans, according to an August story in The Wall Street Journal.
But consumers haven't exactly discovered a newfound sense of frugality. In 2009, outstanding credit card debt dropped by about $93.2 billion compared with the previous year, according to a report from CardHub.com, a credit card comparison website. This might sound like good news, but the reality is that the majority of the drop— $81.6 billion— is due to Americans defaulting on their debt.
So the 'real' decrease is much smaller— about $11.6 billion— and much of that came during the first quarter when many people used tax returns to pay down card debt. At this rate, CardHub.com predicts consumers in 2010 will actually accumulate at least $26.2 billion more in credit card debt over last year. "It's alarming," CardHub.com CEO and founder Odysseas Papadimitriou says. "We cannot revert to pre-recession debt levels."
Household debt might generally be falling, but at what cost? Those who default, depending on the size of the loan, take sizeable hits to their credit background, which could impact the terms of future loans. So while consumers' debt burdens might technically be less today than they were just a few years ago, at least on paper, the burden is still quite heavy on the minds [[and ability to borrow: normxxx]] of a significant number of consumers.
The 30-year Treasury yield fell nearly 7 basis points to 3.66 percent, its lowest in about three weeks, while the dollar slumped against the euro. At the same time, gold rose to a fresh record high as reports fueled views the central banks would stimulate the economy with new liquidity. The Standard & Poor's/Case-Shiller data showed U.S. home prices declined in July.
The index of 20 metropolitan areas was down 0.1 percent in July from June on a seasonally adjusted basis, as expected in a Reuters poll. But it followed a 0.2 percent June rise, which was revised down from a 0.3 percent increase.
Business Outlook Weakens
In another sign of concerns over the outlook for the U.S. economy, a U.S. Business Roundtable survey found the number of CEOs who expect their companies' sales and U.S. headcount to rise over the six months declined in September. The Business Roundtable's CEO Economic Outlook Index declined to 86 in September from 94.6 in June. In contrast to U.S. sentiment indicators, overseas data Tuesday showed the consumer mood in Germany and Italy improved and French consumer spending rose during the summer. President Barack Obama, who is travelling across the United States this week to try to drum up voter enthusiasm ahead of the November U.S. congressional elections, signed a $30 billion small business lending bill into law on Monday.
With worries about the economy in the forefront, opinion polls suggest the Nov. 2 mid-term elections could result in the Republicans wresting control of Congress from the Democratic Party.
Home Prices Up Versus Year Ago
S&P, which publishes the home price indexes, also said home prices in the 20 cities index rose 3.2 percent from July 2009, a slower annual pace than the 4.2 percent increase in June. Data last week showed new home building rose in August and sales of previously owned houses crawled off a 13-year low. Analysts have been watching for signs of stability in the housing market after declines seen with the end of a tax credit for home buyers in April.
"People are still waiting to get a set of numbers that has absolutely none of the government incentive in it for home buyers. From what I was able to gather, we are a couple of months away from that," said Peter Jankovskis, co-chief investment officer at Oakbrook Investments LLC in Lisle, Illinois.
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Home Prices To Take Hit Next Year In Many Markets
By Alan Zibel and Janna Herron | 29 September 2010
WASHINGTON— Don't take the latest snapshot of U.S. home prices too seriously. The Standard & Poor's/Case-Shiller 20-city index released Tuesday ticked up in July from June. But the gain is merely temporary, analysts say. They see home values taking a dive in many major markets well into next year.
That's because the peak home-buying season is now ending after a dismal summer. The hardest-hit markets, already battered by foreclosures, are bracing for a bigger wave of homes sold at foreclosure or through short sales. A short sale is when a lender lets a homeowner sell for less than the mortgage is worth.
Add high unemployment and reluctant buyers, and the outlook in many areas is bleak. Nationally, home values are projected to fall 2.2 percent in the second half of the year, according to analysts surveyed by MacroMarkets LLC. And Moody's Analytics predicts the Case-Shiller index will drop 8 percent within a year. Among the areas likely to endure big price drops, according to Veros, a real estate analysis company:
- Port St. Lucie, Fla., and Reno, Nev., where prices could fall 7 percent over the next year.
- Orlando and Daytona Beach, Fla., which face price drops of at least 6 percent.
- Las Vegas, which led all declines in the latest report, is also expected to post a 6 percent drop. Home values there have already tumbled 57 percent from their peak four years ago.
Las Vegas has been hit by foreclosures and the loss of tourism and construction jobs. More than 70 percent of homeowners there owe more on their mortgages than their homes are worth, according to real estate data firm CoreLogic. And the city's unemployment rate is nearly 15 percent, one of the highest for major U.S. markets.
The outlook in Orlando is also grim. More than half of borrowers owe more on their mortgages than their properties are worth. The unemployment rate there is nearly 12 percent.
This year, about 2 million, or 41 percent, of the 5 million homes sold will be distressed sales, predict analysts at John Burns Real Estate Consulting in Irvine, Calif. 'Distressed sales' include foreclosures and short sales. For next year, that figure is on pace to hit 2.4 million homes, or 45 percent of all sales. Distressed sales are projected to make up at least a quarter of the market for the next four years. In healthy housing markets, distressed sales typically make up only 6 to 7 percent of annual sales.
A much brighter outlook is forecast for some areas of the country, especially major cities that never experienced an outsized housing boom— and bust. Major cities in Texas, for example, have relatively healthy economies and low levels of foreclosures. Dallas home prices fell only 11 percent from their peak in 2007 and bottomed out last year. They have since rebounded about 8 percent. Houston and Dallas are projected to rise about 3 to 4 percent over the next year.
Those markets "don't have the huge supply of homes that a lot of the coastal markets have," said Eric Fox, vice president of economic and statistical modeling at Veros. Houston and Dallas both have jobless rates of under 9 percent, below the national average of 9.6 percent. And in both cities, fewer than 15 percent of borrowers owe more on their homes than their properties are worth.
Nationally, prices have risen nearly 7 percent from their April 2009 bottom. Yet they remain nearly 28 percent below their July 2006 peak. Most experts predict about 5 million homes will be sold this year. That would be in line with last year and just above 2008, the worst sales performance since 1997.
The latest changes in the Case-Shiller national index represent a three-month moving average— for May, June and July. Sales in May and June were inflated by government tax credits that have since expired. July was the worst month for home sales in 15 years. August wasn't much better. The record number of foreclosures, job concerns and weak demand from buyers have combined to weigh down prices. "The market, at best, is weak, and starting to decline," said Michael Feder, chief executive of Radar Logic Inc., which tracks the housing market.
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Walking Away With Less
By Dina Elboghdady and Dan Keating, WP | Sunday, 26 September 2010
Click Here, or on the image, to see a larger, undistorted image.
Manassas homeowner frustrated over short sale delays
For more than two years, single mom Monica Valladares has been trying to sell her home on a street that has had more than 10 short sales since May 2009. Launch Photo Gallery
A new wave of distressed home sales is rippling, more quietly this time, through American cities and suburbs. Its unsettling effects are playing out here in Manassas, along Brewer Creek Place, a modest, horseshoe-shaped street lined with 98 brick townhouses. Several years after the U.S. foreclosure crisis erupted, the U-Hauls are back.
The last time, banks seized nearly every fourth house on the street through foreclosure. This time, homeowners are going another route: a short sale. "I love this house, but I just have to leave," said Leanna Harris, 27, the owner of a corner unit that used to be the builder's model, with a stone path in the yard and a gourmet kitchen. "I'm at peace with it now."
The original owner bought the home for $400,714 in 2006; Harris and her husband, both bartenders, paid what seemed to be a bargain price, $289,000, in 2008. But they have fallen behind on their mortgage payments, in part because her husband was out of work. Now they have a $246,000 offer for the home, and the balance on their mortgage is more than that. They want to accept the offer. All they need is their bank's okay.
That kind of deal is called a short sale, and it's sweeping the country. In these deals, a lender allows a troubled borrower to sell a home for less than what's owed on the mortgage. Completed short sales have more than tripled since 2008, and 400,000 of these deals are projected to close this year, according to mortgage research firm CoreLogic.
The giant mortgage financier Fannie Mae approved short sales on 36,534 home loans it owned in the first half of the year, nearly triple the number in 2007 and 2008 combined. Freddie Mac, its sister company, approved 22,117 in the first half of 2010, up from a mere 94 in the first half of 2007. Distressed homeowners are being drawn to short sales in large part because they can help protect a borrower's credit rating and thus the chance of buying another home later on.
"I worked hard for a long time to keep my credit score close to perfect, and I know a foreclosure would be much worse for my credit than a short sale," said Harris, who listed her Brewer Creek Place home as a short sale about a month ago. "If there's a chance we can avoid foreclosure, we'd rather do that". In a short sale, homeowners must get the go-ahead from the mortgage lender. Sometimes that happens before the property is put on the market, and other times before the deal closes.
In some areas of the country, including the Washington region, lenders can later pursue borrowers for the difference between the proceeds collected from the short sale and the amount owed on the mortgage, also called a deficiency. But lenders say they only do so if they conclude the borrowers skipped out on a loan that they could afford. For lenders, short sales are less expensive than foreclosures to handle and help ensure that homes transfer in good shape.
And for the wider real estate market, these sales could help shore up the floor under housing values because homeowners— unlike with foreclosures— have a vested interest in getting the best price. That's because the higher the offer, the more likely the lender will approve the sale. But short sales are prone to maddening delays and often fall through because they require the approval of many, often-competing parties— including the primary mortgage lender and in some cases the holders of second and third liens.
Across the Washington region, short-sale listings now far outpace the number of foreclosures available for sale, according to RealEstate Business Intelligence, a subsidiary of the local multiple listing service. About 14 percent of area homes for sale are short sales, more than double the figure for foreclosures, with some of the greatest volume in Prince George's and Prince William Counties, where the drop in housing prices has been especially pronounced. Brewer Creek Place, which wraps around the back end of the Independence subdivision south of the Prince William Parkway, was first developed five years ago on the eve of the housing market meltdown. Most of the residents bought their townhouses at a time when mortgage lending standards were especially lax, leaving some borrowers saddled with staggering debts when the home-loan market collapsed.
Yet along the street, there are few signs of the turmoil. Kids zip around on scooters. Neighbors primp their flower beds. But from her driveway, Brenda Holliday has watched the crisis spread. Taking a break from hosing down her convertible PT Cruiser on a recent Saturday, she pointed to the three homes to her right. Each had sold as a foreclosure since 2008.
Then she pointed to the door to her immediate left with a lock box hanging on it. "That's a short sale," she said. She nodded to the corner unit further down the block. "I think that's a short sale, too". To Holliday, 60, her townhouse seemed ideal when moved in four years ago shortly after she was widowed. She's been renting the place from the owner with half of each monthly payment credited toward her eventual purchase of the home, which she initially agreed to buy for $365,000.
Leanna Harris may have been the first on the street to buy a home as a short sale. When she did, in early 2008, such deals were so rare that Prince William County hadn't even started to track them yet. "I wanted this house really bad," said Harris, who went to settlement on the home the day after their baby girl was born. "It is my dream house."
But before long, she and her husband were looking at a short sale from the other side. The Harrises fell behind on their payments and never regained financial footing, she said. The couple received temporary relief for six months from Bank of America. But Harris said the bank ultimately rejected them for a permanent loan modification and threatened foreclosure unless they immediately made up the $10,000 in payments that had been deferred, including interest and fees, or sold the house.
Harris said she felt tricked. But she listed her home as a short sale because it seemed to offer a relatively painless way out. She said she doesn't expect the bank's approval to come quickly. Lenders readily acknowledge that they are overwhelmed with the volume of short sales coming their way. "It has taken considerable effort to build up the capacity to do these [short sale and modification] processes and also to connect them together," said David Sunlin, a senior vice president at Bank America. "We're adding staff and vendors and technology".
The Obama administration, meanwhile, has been seeking to encourage even more short sales as a way of reducing the nation's inventory of vacant and abandoned properties. In April, the administration launched a program that financially rewards lenders and borrowers for successfully negotiating a short sale if the borrower's loan could not be modified through the federal government's year-and-a-half-old foreclosure prevention effort. Lenders receive $1,500 and borrowers another $3,000 for moving expenses. Under the initiative, all eligible borrowers must be notified of the option to sell their homes short before their loans are referred to foreclosure.
The Treasury-run program also sweetens the deal for borrowers by relieving them of any obligation to repay a deficiency. Clearing the way for a short sale has often proved cumbersome because there can be so many parties to a potential deal. Aside from lenders, transactions may also have to be green lighted by investors who own the mortgages, local tax authorities, appraisal firms, escrow companies, homeowners associations, mortgage insurance companies and subordinate lien holders.
That's why the administration cannot simply order a lender to approve a short sale, said Laurie Maggiano, policy director at the Treasury Department's homeownership preservation office. "We have to give servicers discretion to make intelligent business decisions as to which properties are likely to be successful short sales, rather than say everybody has to get one," she said. It can also be difficult to persuade mortgagees to participate, because of the risk that approval will fall through.
According to Frank McKenna, a vice president at CoreLogic, the industry is on track to incur about $310 million of unnecessary losses on these transactions every year.
Monica Valladares, 29, has been trying to offload her home on Brewer Creek Place for more than a year. She bought it new for $329,000 in 2006. Keeping up with her mortgage payment was easy when her three roommates— her grandmother and two cousins— were chipping in. But the arrangement fell apart, the family scattered and Valladares, a single mom, said she could not afford the home on her salary as a researcher for a telecommunications company.
In early 2009, Valladares listed the townhouse as a short sale for the first time. The home, overlooking a wooded lot and playground, quickly attracted multiple offers. The highest was $220,000, she recalled. She moved out, thinking the turnaround would be quick. But her agent could not get the bank to review even the most lucrative contract, she said.
When the potential buyers dropped out about six months later, Valladares applied to Bank of America for a loan modification that would reduce her payments. A few months later, Valladeres was told she did not qualify, she said.
Desperate, Valladares tried the short-sale route again. "I don't know what else to do, what else to try," Valladares said during a recent visit back to the vacant town home. "This house is damaging my credit big time". Within days, she received a $220,000 offer.
When she called her primary lender to get approval for the deal, however, the bank said she wasn't eligible for a short sale because she had been enrolled in a loan modification program after all, Valladares recalled. Straightening out the confusion took weeks. The lender finally agreed to the sale. But there were more obstacles. For one, the homeowners association said Valladares must pay $4,000 in dues and late fees before it will clear the sale, she said, adding she doesn't have the cash.
Yet another problem is that Valladares had taken out a second mortgage to help her finance the original purchase of her townhouse. The lender on that second loan has yet to approve the short sale, said Roger Derflinger, her current real estate agent. "The offers come quick," Valladares said. "It's the bank that's slow."
But as she's grown older, the stairs have gotten harder, she said, and now she feels a bit trapped. If she leaves, she loses the money she put toward the purchase. If she stays, she'll have to pay about $150,000 more than the townhouse is worth. Its value has been eroded by the steady stream of nearby foreclosures and short sales.
Holliday squeezed the garden hose full throttle. "A moving van pulls up and another family is gone— that's all I know," she said. "It's plain sad."
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Normxxx
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The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.
ߧ
Normxxx
______________
The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.
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