According to DSNews.com a new study released by First American CoreLogic Tuesday, more than 11.3 million residential properties were in negative equity at the end of 2009. That equates to 24 percent of all homes in the United States with mortgages, up from 23 percent, or 10.7 million homes, at the end of last year’s third quarter. All told, the nation’s homeowners are a combined $801 billion underwater. First American says an additional 2.3 million mortgages were approaching negative equity at the end of last year, meaning they had less than five percent equity. Together, negative equity and near-negative equity mortgages accounted for nearly 29 percent of all residential properties with a mortgage nationwide. As of the end of last year, Nevada had the highest percentage negative equity, with 70 percent of all of its mortgage properties underwater. It was followed by Arizona (51 percent), Florida (48 percent), Michigan (39 percent) and California (35 percent).
Among the top five states, the average negative equity share was 42 percent, compared to 15 percent for the remaining states. In numerical terms, California (2.4 million) and Florida (2.2 million) had the largest number of negative equity mortgages accounting for 4.6 million, or 41 percent, of all negative equity loans. “Negative equity is a significant drag on both the housing market and on economic growth. It is driving foreclosures and decreasing mobility for millions of homeowners,” said Mark Fleming, chief economist with First American CoreLogic. “Since we expect home prices to slightly increase during 2010, negative equity will remain the dominant issue in the housing and mortgage markets for some time to come.”
Freddie Mac loses $6.5 billion
Government-owned mortgage financing firm Freddie Mac lost $6.5 billion in the fourth quarter, up from a loss of $5.4 billion a year ago. The company lost $21.6 billion for the year, an improvement from 2008 losses of $50.1 billion. Freddie said it ended the quarter with a positive net worth of $4.4 billion, which means that for the third straight quarter it did not need another injection of government cash. Net worth compares a company’s assets to the value of its liabilities. A year ago Freddie needed $30.8 billion in federal cash as mounting foreclosures on the mortgages Freddie owns or guarantees hurt the company’s finances. Since the start of the conservatorship Freddie has received $50.7 billion in taxpayer dollars, while Fannie has received $60.9 billion. Together, Fannie and Freddie own or guarantee almost 31 million home loans worth about $5.5 trillion. That’s about half of all mortgages. The two companies loosened their lending standards for borrowers during the
real estate boom and are reeling from the consequences. Nearly 4% of Freddie’s borrowers have missed at least three payments.
Consumer confidence down
The Conference Board, a New York-based research group, said its Consumer Confidence Index fell to 46.0 in February from 56.5 in January. According to a Briefing.com consensus survey, economists expected the index to fall slightly to 55.0 from 55.9. The index, which is based on a survey of 5,000 U.S. households, is closely monitored because consumer spending drives two-thirds of the nation’s economic activity. The overall index remains at historically low levels and is the lowest since April 2009. A reading of above 90 indicates a stable economy, while 100 or greater is an indication of strong growth. February’s present situation index, which indicates how consumers feel about current economic conditions, hit a 27 year low of 19.4, according to the Conference Board. That means that consumers feel things are worse now than they were during the throes of the financial crisis in the fall of 2008. Expectations for the future also took a turn for the worse in February.
The expectation index, a measure of consumer outlook over the next few months, fell to 63.8 from an upwardly revised 77.3 in January. Only 16.7% of consumers expect to see an improvement in business conciliations over the next 6 months, down from 20.7%. Some 15.3% of those surveyed expect business conditions to get worse over the next six months. The outlook for the labor market was even more bleak. The percentage of those who expect fewer jobs to become available jumped to 24.6% from 18.9% in January. And only 9.5% of those surveyed anticipated an increase in their incomes, compared to 11.0% in January.
Mortgage rates to rise?
The Fed has been buying mortgage-backed securities since late 2008. But next month it plans to finish its purchase of $1.25 trillion in mortgages, and that could be bad news. There is wide agreement that the removal of this support will mean higher mortgage rates, which could hit housing prices and sales hard. Some even worry that it could cause the broader economic recovery to stall. The program was the largest single injection of cash into the economy by the Fed during the financial crisis, and it will be the longest-lasting source of funds as well. Even though the Fed intends to stop buying mortgages, few people expect that the central bank will start selling them to private investors any time in the next few years. even if the Fed holds onto the mortgages it has already purchased, the act of no longer buying additional mortgages is likely to raise mortgage rates in the coming weeks.
Experts say a jump of at least a quarter to a half percentage point is likely. San Francisco Federal Reserve President Janet Yellen warned of higher rates in a speech Monday. Fed Chairman Ben Bernanke is likely to take questions about the Fed’s mortgage program when he testifies about economic conditions on Capitol Hill Wednesday and Thursday. The worries about the Fed pulling back support for housing are compounded by the end of up to $8,000 in tax credits for home buyers. To qualify, buyers face an April 30 deadline to sign a sales contract. Dean Baker, co-director of the Center for Economic and Policy Research, argues that the Fed’s program and tax credit for home buyers “ended the free fall in home prices.” But he thinks that the removal of this support could mean that home prices could start to drop by as much as 1% a month again. He also thinks mortgage rates could climb by as much as a percentage point in the coming months.
Banks not lending
While top-tier banks are recovering at a faster clip, last year the rest of the industry posted their sharpest decline in lending since 1942, suggesting that the industry’s continued slide is making it harder for the economy to recover. According to a quarterly report from the Federal Deposit Insurance Corp, banks fighting for survival, especially those plagued by losses on commercial real estate, are less willing to extend loans, siphoning credit from businesses and consumers. FDIC Chairman Sheila Bair said banks are “bumping along the bottom of the credit cycle” and that the number of bank failures in 2010 will likely eclipse the 140 recorded last year. The struggling U.S. banking industry remains a problem for policy makers eager for banks to lend again. Lawmakers on Capitol Hill and administration officials have pushed banks to lend, particularly in light of the billions in taxpayer aid injected into the financial industry over the past two years. Banking groups and th
eir members counter that they’re under pressure from regulators to be more prudent and that demand from struggling consumers and businesses isn’t there. Initiatives such as the Obama administration’s $30 billion small-business lending program will rely on banks making loans at a time when many of those same firms are wrestling with a rising tide of commercial real estate problems or being told to add to their reserves by regulators. The FDIC said that the decline in loan balances in the quarter hit all major categories—from construction to commercial loans and residential mortgages—with the exception of credit card loans. It remains unclear whether the sharp decline in loans outstanding stems from banks’ tightening standards and a fear of lending or from weak demand from potential borrowers spooked by the downturn. Another cause could be banks actively reducing the size of their loan portfolios, creating a natural decline.
MBA – mortgage applications down
The Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending February 19, 2010 decreased 8.5% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 7.3% compared with the previous week. The Refinance Index decreased 8.9% from the previous week. The seasonally adjusted Purchase Index decreased 7.3% from one week earlier, putting the index at its lowest level since May 1997. The unadjusted Purchase Index decreased 3.6% compared with the previous week and was 13.4% lower than the same week one year ago. The four week moving average for the seasonally adjusted Market Index is up 1.6%. The four week moving average is down 2.1% for the seasonally adjusted Purchase Index, while this average is up 3.2% for the Refinance Index. The refinance share of mortgage activity decreased to 68.1% of total applications from 69.3% the previous week. The adjustable-rate mortgage (ARM) share of activity increased t
o 4.7% from 4.4% of total applications from the previous week.
NAR – No commercial real estate recovery before 2011
According to the National Association of Realtors (NAR), fallout from the recent recession continued to negatively impact commercial real estate sectors in the fourth quarter, and things are not going to get better anytime soon. “With the job market expected to turn for the better later this year, we’ll see rising demand for office and warehouse space, but that isn’t likely before 2011,” said Lawrence Yun, NAR chief economist. Yun notes that commercial vacancy rates remain high in most market areas and are depressing rents. The Society of Industrial and Office Realtors, in its SIOR Commercial Real Estate Index, an attitudinal survey of more than 700 local market experts, suggests a flattening level of business activity in upcoming quarters with 55% of members expecting the market to improve in the second quarter. The SIOR index rose 0.2%age point to 35.5 in the fourth quarter, compared with a level of 100 that represents a balanced marketplace. This is the first ga
in following 11 consecutive quarterly declines. Although some indicators show that a decline in commercial property values is beginning to flatten, 86% of respondents report prices are below replacement costs. Nearly nine in 10 survey participants said new commercial development is virtually nonexistent in their market areas, and rent concessions are reported almost everywhere.
Now on to our real estate investing educational section…
Fiscal Survival of the Fittest
Survival of the fittest applies to economics as well as biology – in fact, some would argue the concept is better applied to the financial arena than any other area of study. Unfortunately, it’s a fact few Americans want to face head on…it goes against the steady diet of “American ingenuity” and the (false) belief that any child born in the good old USA can grow up to be anything they want. While there are exceptions to every rule, survival of the fittest is an economic trend currently undergoing the equivalent of an ice-age extinction as one era gives rise to an entirely new one. Research by consulting firm McKinsey found a few unsettling statistics that demonstrate the depth of the problem:
Over 70 percent of currently employed Americans work in jobs for which there is low or declining demand. This includes both blue collar and white collar. Competition for jobs that cannot be shipped overseas (healthcare for example) has created high competition which is driving down wages and promoting part-time, per diem and other “job sharing” situations.
Mainstream stores are doing double-takes as consumers shift spending habits. Not only are brick and mortar stores under heavy competition from online retailers like Amazon but the bleak economy is finally taking a toll. Violating one of the core marketing principles ‘never undercut your own product’, heavy weight’s ranging from Proctor & Gamble to Macy’s are rolling out discount versions of their more expensive popular items. Cost of Tide got you down? Don’t worry, you can now buy Tide Basic…a discount version. Research shows 1/2 of Americans have already reduced spending and 1/3 plan to do so permanently with 18 percent of consumer switching from name brands to generics in the past two years alone.
So, how are Americans spending their money both today and into the near future?
1. Nearly 34 percent of the average household income goes toward housing. Expect this trend to continue as people downsize into affordable housing options.
2. Just over 19 percent goes toward entertainment and/or miscellaneous items…however, as a discretionary item this is subject to volatility.
3. Roughly 17 percent goes toward transportation – a number experts expect to hold steady as people opt for more affordable options.
4. Just under 13 percent goes toward food; a necessity to be sure but one that is subject to “replacement” purchases as people opt for hamburger instead of steak during tough times.
5. Approximately 11 percent on retirement and personal insurance.
6. Nearly 6 percent on healthcare.
Even a precursory look at where Americans spend their money tells the average investor where to spend theirs…housing, entertainment, transportation, food, financial products and healthcare. Those are the big six that run the American economy. Now stop and consider which are available to the average “little guy” investor…stocks and bonds for healthcare, insurance and finance have been decimated in recent years. The auto industry?
Please! Now that’s it’s been nationalized you can count on the same efficiency that brought you the driver license office to run the auto industry. Food is notoriously volatile and forget direct intervention unless you have an unusual level of gardening know how. No, the answer remains the same today as it did 100 years ago…real estate. It’s not easily outsourced, it’s not subject to the market manipulations of stocks and bonds nor is it entirely dependent upon your ability to work yourself into an early grave. It simply requires a willingness to adapt to the new economic environment like all other species that learn to thrive or barely survive.
