The bond market rallied this week and long-term rates fell, unfortunately in response to lousy economic news. Lowest-fee mortgages fell to 5 percent, and the 10-year Treasury note has approached its next key level: 3.6 percent.
Every item in this grim litany was forecast to improve, and none did. The Conference Board’s measure of consumer confidence in February collapsed to present-conditions 19.4, the worst since 1983.
New claims for unemployment insurance jumped again, now almost back to 500,000 weekly. New mortgage applications fell 8.5 percent, now to 1997 activity. January orders for durable goods fell 2.9 percent, excluding volatile transportation and military sectors.
January sales of new homes suffered an 11.2 percent cave-in (the lowest rate of sales since 1963), and sales of resale homes dropped 7.2 percent.
Thursday morning’s business channels broadcast striking visuals: Federal Reserve Chairman Ben Bernanke on split-screen left, asserting "nascent recovery"; President Obama on split-right, nouveau Roman emperor Nero, obsessed with health care fiddling; and from the screen-top data stream the sad data listed above drifted down in little red embers.
As births go, this recovery is in the intensive care unit, but the Fed dares not say so. Just keep its rate at zero and visit the chaplain.
The health care summit collected a most unfortunate cast of clashing politicians in modern recollection: House Minority Leader John Boehner, R-Ohio; Republican Whip Rep. Eric Cantor, R-Va.; House Speaker Nancy Pelosi, D-Calif.; and Senate Majority Leader Harry Reid, D-Nev., among them. Obama appears to have law-school moot court competition confused with governing.
Good grief, people: the economy. The economy.
Now 18 months past Lehman, trillions in spending and tax-cut stimuli, support for financial markets and mortgage-backed securities purchases, the Fed easiest-ever … why no real recovery?
In a recession different from all prior, find explanation by hunting for the most uniquely different element in the overall pattern. One stands out. Never before have households taken such a hit to net worth, and never at such a sensitive spot: home.
We have had awful housing markets before, notably ’79-’82, when mortgage rates reached 18 percent and unemployment 11 percent. However, that was a time of very high inflation: a house worth $100,000 at the outset often still was at the end, the loss to the owner inflicted by inflation. …CONTINUED
That quirk of inflation meant that equity remained stable, nominal value vs. mortgage, thus in those years there was no plague of underwater houses.
In the later 1980s, the total of American mortgages outstanding divided by the value of all homes led to an aggregate loan-to-value ratio (LTV) in the 32-38 percent range (all data here from the Fed’s Z-1 Flow of Funds reports).
From 1990-2000, LTV crept to 42 percent. At the peak of the bubble, in 2006, overall LTV was still only 45 percent: $22.9 trillion in value versus $10.4 trillion in mortgages of all kinds, first and second. The nation’s homeowners held $12.5 trillion in home equity.
Then the catastrophe: By first-quarter 2009, mortgages outstanding were still about the same, but aggregate home values fell to $15.7 trillion. Seven trillion dollars in home equity wiped out, which amounts to one-third of total value but two-thirds of equity. In two brutal years, aggregate LTV shot up to 66 percent.
Now the bad part.
Only 70 percent of U.S. homes have mortgages. If the total value of homes is about $16 trillion, the 70 percent with loans is worth about $11.2 trillion.
The loans total $10.8 trillion today. Of course, many homes — maybe 20 million — are underwater.
A great many mortgaged homes have a lot of equity, especially in the huge, bubble-free heartland from Colorado to Texas to the Dakotas. However, on average, 70 percent of American homes have no equity.
Bye-bye consumer.
Instead of more toothpaste-back-in-tube mitigation, how about an effort to support modestly rising home prices? And to absorb the millions of mothballed foreclosures?
Either restore adequate credit, or stay in this.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.
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