According to the article below, US Home Foreclosures for residential real estate reached a record for the 2nd consecutive month in May. This is “big news” in the sense that we’ve been told that the economy has turned the corner. Why is this?
The mainstream media typically applies “Management of Perspective Economics” while certain economic laws are unavoidable, regardless of what we wish for.
You can’t simply believe what you read. Always ask: What is the objective of the news source? Ben Bernanke sat before Congress in 2006 and 2007 and said that he believed housing was contained. It doesn’t matter whose fault the housing market is. But it does help to be able to think rationally and to look at the facts and data as they play out. Often times the information you read has been “spun” so many times that when these stories come out it’s a “surprise”. This story is very significant news yet it is hardly being talked about.
Things To Consider (These are closer to Economic Laws)
-The Federal Reserve’s Mandate is to protect it’s member banks, not the US Consumer.
-Without a recovery in the housing market, it’s hard to build the case for a sustainable recovery in the economy.
-The Law Of Diminishing Returns – Stimulus via debt, has an end game as all debt has to be paid back with interest. Each “new” layer of debt is marginally less effective towards creating GDP than the previous one.
-When an secular asset bubble bursts it takes years for recovery. For evidence of this, see the NASDAQ (which is still 50% below it’s 2000 high, or more recently, the DOW Jones which has simply treaded water the last 10 years) If you want the most obvious proof of this see the Japanese Stock Market (Nikkei) which is still considerable below it’s peak reached around 1991.
-Government efforts to stimulate eventually become fruitless. In 2007, when housing peaked and unraveled, it was the equivalent of dropping a nuclear bomb into the framework of the banking structure. This will not recover for years and years.
-The Good News is that there will be real estate deal after real estate deal in the years ahead in the form of REOs for the next 15-20 years. Anyone, telling you that you’d better run out and buy real estate now because rates are going to rise doesn’t understand the inverse relationship with rates and prices. This is known as Interest Rate Risk.
The banking and home finance market (in terms of available money) is about 10% of where it was in 2007. Housing price appreciation requires a healthy lending sector. That is a long time away. Don’t be in any rush.
-Foreclosure is what counterparty risk is about, default. Gold is doing very well the last 10 years because it has no counterparty risk for the investor who takes delivery. Here is the article:
According to RealtyTrac Inc.
Bank repossessions climbed 44 percent from May 2009 to 93,777, the Irvine, California-based data company said today in a statement. Foreclosure filings, including default and auction notices, rose about 1 percent to 322,920. One out of every 400 U.S. households received a filing.
“We’re nowhere near out of the woods,” Rick Sharga, RealtyTrac’s senior vice president for marketing, said in a telephone interview. “We’re likely to set a quarterly record for home seizures if June is anything like May.”
Lenders are completing the “inevitable progression” of taking properties from homeowners who stopped paying, Sharga said. He predicted last month that another 5 million delinquent mortgages will end in foreclosure in addition to properties that had already been repossessed.
Almost 3.1 million properties have been seized by banks since April 2005, Daren Blomquist, RealtyTrac’s marketing communications manager, said in an interview today.
“The second quarter won’t be the peak,” Sharga said. “I’m not even sure 2010 will be.”
The previous record for seizures was 92,432 in April. Last month was the first in which every state had an increase in repossessions from a year earlier, according to RealtyTrac.
Unemployment Rate
U.S. private payrolls rose by 41,000 in May, Labor Department data showed last week. The hiring of temporary census workers boosted overall payroll growth to 431,000. The jobless rate fell to 9.7 percent, from 9.9 percent in April.
Almost a quarter of the nation’s mortgage holders owed more than their homes were worth in the first quarter, Zillow.com said last month. Bank sales of foreclosed properties accounted for more than a fifth of all U.S. home transactions in March, the Seattle-based real estate data provider said.
Wells Fargo & Co. and Bank of America Corp., the two largest U.S. home lenders, are cutting principal on some mortgages in an effort to keepwners in properties and get them to pay at least part of what they owe. Bank of America said in March it was reducing principal for some borrowers who owe more than 120 percent of what their homes are worth.
“Marginal people, those types that were working as laborers, are most affected by foreclosures,” said Albert Kyle, a finance professor at the University of Maryland’s R.M. Smith School of Business in College Park. “A lot of foreclosures are occurring in modest houses.”
Default Notices
The number of homes that received default notices last month was 96,462, down 7 percent from April and 22 percent from a year earlier, RealtyTrac said. A default notice is the first stage in the foreclosure process. They peaked at 142,064 in April 2009.
A foreclosure auction, the second stage in the process, was scheduled on 132,681 properties, down 4 percent from April and about 1 percent from May 2009. The record was 158,105, reached in March.
Nevada had the highest foreclosure rate for the 41st straight month. One in every 79 households got a notice, more than five times the national average. Filings fell almost 12 percent from the previous month and 16 percent from May 2009.
Arizona had the second-highest rate, at one in 169 households, or more than twice the U.S. average. Filings fell 5 percent from a year earlier. Florida ranked third at one in 174 households, and California was fourth at one in 186.
Rise in Michigan
Michigan ranked fifth at one in 223 households, with filings up 6 percent from April and 46 percent from a year earlier, RealtyTrac said. Georgia, Idaho, Illinois, Utah and Maryland also ranked among the 10 highest rates.
Ten states accounted for more than 70 percent of all U.S. filings, led by California’s 72,030. Filings in the most populous state rose 3 percent from April and declined 22 percent from a year earlier.
Florida ranked second with 50,685 filings, up 5 percent from April and down 14 percent from a year earlier. Michigan was third at 20,322, followed by Arizona at 16,097.
Illinois had 15,061 filings, up 38 percent from a year earlier, and Nevada had 14,346.
Georgia, Texas, Ohio and New Jersey rounded out the top 10, said RealtyTrac, which sells default data from more than 2,200 counties representing 90 percent of the U.S. population.
To contact the reporter on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net.
Last Updated: June 10, 2010 14:02 EDT
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