It's Not All Bad!

From today's Wall Street Journal:

Don't Panic About the Credit Market
By DAVID MALPASS
August 7, 2007; Page A11

Equity markets have recently lost over $2 trillion in the U.S. and even more globally -- many times the likely amount of mortgage and corporate debt losses in the foreseeable future. This is in part a correction from the sharp global equity run-up through mid-July. Current prices still signal growth ahead.

Another aspect of the market disruption is a dramatic stand-off between bond buyers and sellers: Buyers in both housing and debt markets are using the market discontinuity to claw prices and terms back to Earth. The slowdown talk weighing on equities also reflects the Wall Street view that debt, mortgage and takeover businesses have replaced General Motors as the economy's bellwether. According to the bears: As goes the credit market, so goes the economy.

Fortunately, Main Street is not that fickle. Housing and debt markets are not that big a part of the U.S. economy, or of job creation. It's more likely the economy is sturdy and will grow solidly in coming months, and perhaps years.

Unlike the 1998 seizure in credit markets to which many are now drawing comparisons, reservoirs of global liquidity are full to overflowing, not empty as they were that year. The deep 1997-1998 Asian crisis has been replaced with an all-cylinder boom. Unemployment rates are falling all around the world, while China's equities have continued hitting new highs.

Yet the hyperventilation over the coming U.S. economic slowdown matches the aftermath of Hurricane Katrina -- as if the recent widening of credit spreads from record lows to more normal levels and the hiatus in takeover activity are as bad as that real-world catastrophe. To assess the debt problem, many may be double counting the losses by adding the real economic costs of the mortgage defaults to the financial division of the losses among investors. When a customer breaks a china plate in a shop, for example, the loss can be realized by the customer or by the store, but not both. There is only one loss.

After Katrina, talk TV demanded that the Fed cut interest rates or risk dire consequences. Instead, it hiked rates each meeting as strong growth continued. Today, we are hearing the same demands. But the primary effect of the rate-cut talk is to further submerge the dollar, driving liquidity toward foreign economies, their currencies and gold.

U.S. growth has endured other waves of equally loud pessimism -- over high gasoline prices, low (pre-revision) estimates of job growth, a supposedly negative personal savings rate (revised to positive on July 27 by the Commerce Department) and even the 2003 tax cut on labor and capital. Remember the argument that tax cuts would put the economy on a path toward fiscal collapse and recession? Now, the U.S. deficit is set to fall below $150 billion by Washington's September fiscal year-end, thanks to strong tax receipts.

While it's frowned upon to look for a silver lining when markets tumble and painful losses accumulate, the housing- and debt-market corrections will probably add to the length of the U.S. economic expansion. Overly low interest rates in 2004-2006 channeled economic activity into housing and debt financing. Corporate bond yields fell relative to Treasurys, causing leveraged investments. This artificial allocation of U.S. capital now looks like it will be corrected before inflation kicks in (CPI will likely top 4% later this year) and higher tax rates bite (the massive increase scheduled for 2011 when the Bush tax cuts expire).

The bearish view is that Americans live, breathe and spend their houses and mortgages. Yet the July 31 consumer confidence survey by the Conference Board jumped to 112, the highest in the six-year expansion. Data and theory show clearly that houses are not the be-all and end-all of the economy. Jobs matter more. For many, the value of future employment is much greater than their home equity. The low jobless claims and unemployment rate -- clear signs of a strong labor environment -- raise confidence and likely future wages. This outweighs changes in wealth, whether from declines in house prices or the stock market, especially for lower-income workers.

Neither the economy nor job growth has been dependent on housing. Residential construction declined to 4% of GDP in the second quarter -- right on the 1990s average -- having boomed excessively in 2004 and 2005 and subtracted heavily from GDP in 2006. But strength in commercial construction more than offset the weakness in residential construction, allowing overall construction to add to GDP for the first time in a year.

Concerns about high inventories of unsold homes are exaggerated. At 537,000 per the Commerce Department, the June inventory equals 7.4 months of 2007's average sales. This is only a bit above the 6.7 months average inventory from 1980-1995. The leaner inventories in the 1996-2005 "sellers' market" resulted in part from the super-low interest and mortgage rates earlier this decade, and the 1997 cut in the capital-gains tax on houses.

Those overstating housing's impact on jobs often use dates spanning the 2001 recession, as in the widely quoted calculation that 37% of the net new jobs were in housing. That was true only between March 2001 and September 2005, because housing jobs grew in the recession while other jobs shrank. A fairer picture of the role of housing in the expansion is to start counting from any month after the recession. From the end of 2003 through present, jobs from residential construction plus real estate and mortgage brokers created only 3.6% of the net new jobs, 5.3% if all credit intermediation jobs are also included.

Nor has consumer spending been dependent on "cashing in" on the housing boom. The increase in mortgage equity withdrawals in 2004 and 2005 funded big net additions to household financial assets, while consumption growth remained steady. Mortgage equity withdrawals slumped throughout 2006, yet consumption growth was particularly fast in the fourth quarter of 2006 and the first quarter of 2007.

Why haven't swings in the mortgage market had much effect on consumption? Fed data shows that the surge in mortgage growth in 2004 and 2005 was accompanied by an equal surge in household additions to net financial assets. Inexpensive home financing helped households increase their Treasury and equity purchases, and their checking accounts, while slowing the growth in auto and credit card debt. Rather than hitting consumption, the 2006-2007 mortgage slowdown has caused these other household balance-sheet practices to return to normal.

In the long list of worries about consumption, the threat of mortgage-rate resets is providing the latest fixation. It shouldn't. Payments on some $500 billion of adjustable rate mortgages are scheduled to go up in 2007. If the mortgage rate is adjusted upward by an average two percentage points, that's $10 billion in added payments. To put this in perspective, wages for nonsupervisory workers increased by $296 billion over the last 12 months. The July 27 revision alone added $130 billion to the last year's total U.S. personal income, raising it to $11.5 trillion, reflecting the hard-to-track dynamism of the U.S. economy.

The constant warnings of a housing-related collapse in domestic consumption overstates the importance of housing in the economy, while understating the importance of jobs and economic growth, both of which have been solid. Of course, sellers of both houses and bonds would like more froth in their markets. But buyers, and likely the economy as a whole, will probably benefit over time from the wrenching return to more normal market conditions.

Mr. Malpass is chief economist at Bear Stearns.


Yes, 100% loans may no longer be available, and yes, mortgage companies are tightening their belts and requiring borrowers to be more financially stable than three years ago, but homes are still selling and buyers are still buying. Yes, the time it takes to sell your home may take a little longer, but I have never seen a home that wouldn't sell sooner or later. Compared to the 1980's, interest rates are low! We were very lucky to have these past few years be exceptional years for Real Estate, but all is not lost. A home is the largest investment a person may make in his/her lifetime. Yes, we will see a market correction, but homeowners, along with Mortgage companies, do not want to see anything bad happen to their investments. Hang in there!

Loey

Well, Loey,


I know you are a realtor... and your livelihood depends on believing "all is good and better in the US housing market"... but check this thread out on GLP today.


The mainstream media is telling everybody the same thing you are (look only to the light and good news)... but *reality* is quite a different thing.


YMMV, but it is my strong feeling that realtors like you do people a great injustice by not telling them the truth... just to keep yourself and those like you afloat.


The GLP thread is called "TIME TO POST ALL THE DEAD & DYING LENDERS - HERE":


http://godlikeproductions.com/bbs/message.php?messageid=421223&mpage=1&showdate=8/7/07&forum=1


To the very end, realtors will be urging the gullible public to "buy, buy, buy"... and the stock market will be bringing-in-the-sheep with "invest, invest, invest".


Wake up time.

This is true, Wasayo! I am a Realtor, but I am also concerned for my own home, not just my clients. I personally purchased a home along with millions of others, though not under the 100% loan program. I am just trying to shed some light on a topic we all knew was coming sooner or later. Things were bound to change, it could not have kept going to way it was. I will read the post at GLP and take heed. Thank you. I am thankful I do not live in a large city like LA or Chicago. I received the following e-mail this morning.


From an e-mail I received today:


YESTERDAY’S MARKET NEWS HAS PROMPTED MANY CALLS. THIS WAS A VERY SPECIFIC GROUP OF PRODUCTS WITHIN THE NATIONAL CITY HOME EQUITY GROUP OF LOANS, IT DOES NOT ANNOUNCE SUSPENSION OF ALL LOANS.


"In response to market conditions, NHE has suspended approvals of new home equity loans and lines of credit. The move by NHE does not impact National City's Retail Bank, which continues to offer home mortgage and equity lines and loans directly to customers through its 1,300 branch network in eight states.

"The suspension of NHE's approval of new home equity loans and lines is one of a number of steps National City has taken in recent weeks to help ensure that mortgage origination strategies are in line with existing and anticipated market conditions. The company continues to closely monitor the market and take the appropriate steps to respond to changing conditions."

SOURCE National City Corporation
NHE Regional Sales Manager

Dear Loey,


Thanks for posting this. You are a very good person, and you and your family are in my prayers and thoughts... along with the livelihoods and welfare of millions of others.


Loey, here is another thread from GLP, connecting the dots (same topic):


http://godlikeproductions.com/bbs/message.php?messageid=421402&mpage=2&showdate=8/7/07&forum=1


These are tuff times. :shock:

Thank you, Wasayo!

I am sure I could use all the prayer I can handle! I, personally, am trying not to let fear lead the way! As with all things, I am counting on the Universe and God to do what needs to be done, whatever that path may be. If I am not in Real Estate after this, so be it, though it has been a good ride!! I can remember complaining to Nat City when their underwriters were so strict over the last few years, but now I think that may be what saves many of us. I read where Wells Fargo raised their interest rates. Here is the e-mail I received from Nat City in the last 2 minutes:







RATES SHEET FOR AUGUST 6, 2007



30 YEAR FIXED RATE 6.625%

20 YEAR FIXED 6.500%

15 YEAR FIXED RATE 6.250%

INTEREST FIRST FIXED 6.750%

40 YEAR FIXED RATE 6.625%

97 FLEX – NO M.I. 7.500%

5/1 ARM 6.250%

ILLINOIS ASSI$T BOND 6.720%

RURAL DEVELOPMENT 6.875%

VA/FHA 6.875%

MY COMMUNITY 100% 6.995%

100% CONVENTIONAL 7.125%

IHDA FIXED RATE 30 YR 6.490%

PRIME RATE 8.250%

Thanks for keeping us all updated, Loey!


I'm still trying to connect the dots on all this. Here is a link to another excellent website, called "The Mortgage Lender Implode-O-Meter"... "Tracking the housing finance breakdown - a saga of corruption, stupidity, and government complicity":


http://www.ml-implode.com


It's a good thing Buddha is no longer working at Wells Fargo doing subprime loans. His wife is there now... or at least as long as Wells Fargo is still in the lending bizz.


Saturn in Leo biting hard. :shock:

I called Nat City and said, "Hey, those are yesterday's rates. What is going on today?" I received this:

No Rate Increase Announced!!







RATES SHEET FOR AUGUST 7, 2007



30 YEAR FIXED RATE 6.625%

20 YEAR FIXED 6.500%

15 YEAR FIXED RATE 6.250%

INTEREST FIRST FIXED 6.750%

40 YEAR FIXED RATE 6.625%

97 FLEX – NO M.I. 7.500%

5/1 ARM 6.250%

ILLINOIS ASSI$T BOND 6.720%

RURAL DEVELOPMENT 6.875%

VA/FHA 6.875%

MY COMMUNITY 100% 6.995%

100% CONVENTIONAL 7.125%

IHDA FIXED RATE 30 YR 6.490%

PRIME RATE 8.250%