Topic: US Economy: News & Discussion

[AJ93]

My only quibble here is the use of the term "artificial."  Just like I think it's a "natural" market result at the moment with banks slowing down taking delinquent properties to sheriff sales, I don't think it would be "artificial" if they chose to speed up tomorrow, unless they were doing it in response to government compulsion.

IMO, that would largely be the reason banks decided in unison to unload inventory - regulatory pressure, or outright legislative mandate. Former is more likely than the latter. Much of the actions banks are 'encouraged' to undertake are interpretations of the regs relayed through the audit process. Those interpretations can become more flexible or more rigid depending on the 'mood' of the regulatory agencies (OCC, OTS, Fed, etc.)

[327]

While each bank is obviously a separate entity, their interests on this matter are pretty tightly aligned.  None of them want plunging values to hurt their capitalization so it's rational, from their perspective, to do whatever it takes to prop up prices.  That hasn't changed since the bubble days.  Banks prefer higher home prices and the bigger loans that accompany them.  And to the extent that they're holding inventory, they're doubly concerned with keeping prices up.

It isn't hard to discern what's in the banks' individual and collective self-interest.  Clearly they're acting with that in mind, as is proper.  The question then becomes what external effects arise from their behavior, and how those effects are evaluated.  Individual homeowners would also take a bath if prices dropped, while potential buyers would benefit.  But there are other externalities to consider, like the condition of our neighborhoods, and the effect that has on economic development in general.  There comes a point when the self-interest of the current owner of a given property, or of ten thousand properties, is not the only issue. 

[Hts121]

And I second Hts' point, which was part of my own point that I should have been clearer about.  The banking industry may be more concentrated than the aggregate market of individual prospective sellers, but it's not exactly monolithic. 

You think that is "clearer"?

[AJ93]

^^ I guess the question then is the demand for homes high enough to absorb this inventory if it was released into the market. There's been a lot of conversation on this board, and elsewhere, about how home ownership may not be the ideal for the next generation(s) for a variety of reasons. If we're going to put every available house on the market, what's the absorption rate going to be. Is it going to take years, decades? And is the economic development that arises from this churn sufficient to offset the drop in valuations for the remaining home owners?

I don't know the answers to those questions.

[Gramarye]

I think, in line with what StrapHanger said, that if that many houses went onto the market in a rapid liquidation, dramatically increasing quantities and dramatically reducing prices, the largest buyers of the inventory would likely be other institutional buyers, e.g., private equity.  I don't know if I'd consider that a good thing, a bad thing, or an essential non-event.  How much difference would a real-life neighborhood resident care if many bank owners were replaced with private equity owners?  Well, if the private equity firms were more inclined to fix properties up and rent them or re-sell them, or demolish derelicts and start over, then that would be encouraging and a real-world development that people outside the world of finance would actually see.  I'm not sure why PE would necessarily be more inclined to do that, though.  They might be more inclined to just sit there and hope that a broad-based market turnaround (or just inflation) in the 3-5 year window lifts the value of their hard asset investment without them having to do all that much more with it.  I honestly don't know.

[327]

I would guess that demand isn't there for homes at propped-up prices... but the gist of market theory is that if prices are allowed to float, they will find a natural balance with wages, and then there won't be so much unused inventory.  Then regardless of who snatched them all up, be it private equity or the Chinese or the Klingons, their asset would be a lot more liquid.  Eventually homes would find their way to individual owners.  Corollary effects would be the repopulation of neighborhoods, as well as a possible uptick in demand for paint.

[StrapHanger]

FWIW, probably 30-50% of sales out of REO (which have been sizable) have already been going to non-owner occupants, including some private equity, but mostly to small scale investors.  The disconnect between homeownership and REO liquidation has already been underway for a few years now. Single family homes are already a major component of the nation's rental housing stock.  It's not good or bad thing, it's just a thing.

[327]

Indeed, there will probably be more rented s-f homes going forward.  That's the reality of an economy demanding more flexibility from everyone.  But at least if they're rented, they're not sitting idle.

[ragerunner]

Without weighing in one way or the other, I would note that the "banking industry" is not a single entity

I have no proof that banks are working together to control the flow of foreclosures onto the market to maintain a certain level of pricing. I have posted and read many articles that hint that this is happening, but no proof. I can tell you that people in the re industry that do foreclosures sales act like banks have organized the release of the 'shadow market' to maintain higher values of this inventory.

I think both opinions discussed here have their place. It's very much like having a discussion about oil. If oil prices drop then oil companies start reducing the supply of oil in an effort to maintain certain prices points. Unfortunately the end user is the one getting hit with the 'artificially' created price.

The difference/problem with banks trying to maintain certain prices points is that in general most residential prices are still not historically in line with incomes in America (no more than 30% of income going to housing). Thus, more people are purchasing homes that are requiring more than 30% of their income to cover the cost or being shut out of home buying (there are many opinions on this). This means more households have less room to take in financial 'shocks' when they come.

[ragerunner]

One item missing from this discussion is that banks received significant taxpayer 'bailouts', cheep money at the fed discount window, and QE+ that were intented to cover there loses from failing prices on their balance sheets related to foreclosures. So are the banks double dipping by taking the 'bailouts' and trying to re-inflate the price of their foreclosure balance sheets as well?

[Gramarye]

Many banks have already realized a significant portion of the losses from the housing collapse.  Remember, the collateral is nice, but from the bank's perspective, the real asset they want to have is the performing loan.  When the loan stops performing, I'm pretty sure that the bank has to recognize some hit (not 100%, of course) to their portfolio then, not just years later when they finally sell the underlying collateral and apply the proceeds to the loan balance.  Likewise, even if they pursue the borrower for the deficiency judgment for the two years that Ohio permits such deficiencies to be pursued, I'm pretty sure they still have to recognize some losses even before then.

[ragerunner]

I think it is still early to call the end of the european union, but things currently continue to get worse.

The end of the road for Europe
"After two years of "kicking the can down the road," Europe seems to have now come to the end of the road."

"Here are the recent developments in this fast moving saga:

1. Thursday's and Friday's European summit in Brussels will be another pivotal event in the ongoing debt crisis as leaders try to get a handle on the rapidly deteriorating situation across the European Union. Italian Prime Minister Mario Monti last week said that Europe has a week to save the euro zone, and we can expect more volatility as the meeting approaches."
(see all 12 items on this list at)
http://www.marketwatch.com/story/the-end-of-the-road-for-europe-2012-06-25

[StrapHanger]

Many banks have already realized a significant portion of the losses from the housing collapse.  Remember, the collateral is nice, but from the bank's perspective, the real asset they want to have is the performing loan.  When the loan stops performing, I'm pretty sure that the bank has to recognize some hit (not 100%, of course) to their portfolio then, not just years later when they finally sell the underlying collateral and apply the proceeds to the loan balance.  Likewise, even if they pursue the borrower for the deficiency judgment for the two years that Ohio permits such deficiencies to be pursued, I'm pretty sure they still have to recognize some losses even before then.

And lest we forget, most of these "bank-owned" homes are actually NOT owned by banks.  The GSEs own a big chunk, HUD owns another (as a result of FHA/VA defaults), another big chunk is owned by securitization trusts (the beneficial ownership of which is diffusely held by banks and plenty of non-bank investors).  The only REO properties owned outright by banks are the result of loan put-backs by the GSEs and previously portfolioed loans, which, during the height of the booms, was well less than half of all mortgage originations.  This is why, with all due respect to people on seller side of the real estate industry, I don't think they know as much as they think they know.  They deal with servicers that have their own incentive structures which often do not line up with those of the beneficial owners of the loans/REO properties.

[ragerunner]

Lower expectations drag down consumer confidence
"WASHINGTON (MarketWatch) — U.S. consumer confidence has declined for a fourth month, with gloomier views in June on future business conditions and income, the Conference Board reported Tuesday."
http://www.marketwatch.com/story/lower-expectations-lead-consumer-confidence-down-2012-06-26


We had month over month gains last year that happened during the main selling season. Year over year prices are still falling.

U.S. home prices jump 1.3% in April: Case-Shiller
"WASHINGTON (MarketWatch) — U.S. home prices shot up in April to post the first monthly gain since last autumn, according to a closely followed index released Tuesday.
The S&P/Case-Shiller 20-city composite index gained 1.3%, with 19 out of 20 cities registering gains, to take the year-on-year drop from 2.6% to 1.9%."
http://www.marketwatch.com/story/us-home-prices-jump-13-in-april-case-shiller-2012-06-26


EU’s fiscal union road map gets cool reception
"FRANKFURT (MarketWatch) — A document outlining a path to tighter fiscal integration across the euro zone and a European banking union got a cool reception from Germany and economists on Tuesday as European leaders prepare for a summit meeting later this week."
http://www.marketwatch.com/story/eus-fiscal-union-road-map-gets-cool-reception-2012-06-26

[ragerunner]

Maybe he should give Bernanke some honestly lessons.

Recovery still five years away, Mervyn King warns
"The British economy will not get back on track until at least 2017, the Bank of England Governor has warned in his bleakest outlook for the recovery yet.
Sir Mervyn King’s comments, which extended his previous prediction for a fully-fledged recovery by three years, reflected the scale of problems in the eurozone as well as his fears for the global recovery.
Addressing MPs at the Treasury Select Committee (TSC), Sir Mervyn said: “When this crisis began in 2007, most people did not believe we would still be here. I don’t think we’re halfway through this. I’ve always said that and I’m still saying it.
“We have to regard this as a long-term project to get back to where we were, but we’re nowhere near starting that yet. We’re in a deep crisis with enormous challenges.”
http://www.telegraph.co.uk/finance/economics/9356628/Recovery-still-five-years-away-Mervyn-King-warns.html
 

[GCrites80s]

Psssst -- sometimes when I have a few extra copies of Mario 3 at work I hide some of them rather than lower their price.

You didn't hear that from me.

[Gramarye]

The housing industry should do what college professors do: Put out a new, barely-revised edition of their tract every 2-3 years so that people who can't afford it are forced to upgrade to the latest version and older editions lose a large amount of their secondary market value, even if they might still have been perfectly serviceable.

Oh, wait ...

[327]

Psssst -- sometimes when I have a few extra copies of Mario 3 at work I hide some of them rather than lower their price.

You didn't hear that from me.

And you can do that.  It only becomes an issue when the whole market is affected.  With all due respect, that's probably not an option for you. 

Restricting supply is also a core purpose of unions.  They're actually allowed to affect their whole market, as a counterbalance.  Well, not so much anymore, but that's the general idea behind it. 

[Gramarye]

I'm still not really seeing the "restricting supply" paradigm here.  Am I restricting the supply of used 2001 Altimas by not listing mine on Craigslist?  Why does it make any qualitative difference if I had 5,000 used 2001 Altimas and was refusing to list them, or was only listing them in batches of 50 so as not to flood the market at once?  If I'm willing to pay the upkeep costs on the other 4,950 and watch them depreciate, isn't that a legitimate economic choice (regardless of its wisdom)?

[GCrites80s]

Psssst -- sometimes when I have a few extra copies of Mario 3 at work I hide some of them rather than lower their price.

You didn't hear that from me.

And you can do that.  It only becomes an issue when the whole market is affected.  With all due respect, that's probably not an option for you. 

LOL, don't I wish it was!

[327]

I'm still not really seeing the "restricting supply" paradigm here.  Am I restricting the supply of used 2001 Altimas by not listing mine on Craigslist?  Why does it make any qualitative difference if I had 5,000 used 2001 Altimas and was refusing to list them, or was only listing them in batches of 50 so as not to flood the market at once?  If I'm willing to pay the upkeep costs on the other 4,950 and watch them depreciate, isn't that a legitimate economic choice (regardless of its wisdom)?

That example of the Altimas is a lot smaller than what we're talking about, and I find it hard to believe you're unfamiliar with these concepts.  Is this some sort of Columbo thing?  The whole of the banking sector acting in concert, whether orchestrated or not, is a large enough player to alter a national market.  A used car distributor probably isn't, although 5k 2001 Altimas is an impressive figure.  But it's just one model year of one car, and we're talking about homes generally.  Now, something on the scale of Cash-4-Clunkers can and did impact the used car market.  That was done to serve (questionable) political ends.  But if a private actor took millions of cars off the market for its own purposes, eyebrows would be raised to say the least.

[ragerunner]

U.S. orders for durable goods climb in May
First increase in three months led by aircraft, heavy machinery
"Durable-goods orders rose a seasonally adjusted 1.1% last month, the Commerce Department said. Economists surveyed by MarketWatch had expected orders to be unchanged.
The increase was led by the commercial-aircraft sector, whose orders rose 4.9%. Orders for motor vehicles increased by 0.5%.
Excluding the transportation segment, orders rose a smaller 0.4%.
While the increase in May is a positive sign, the manufacturing sector has clearly fallen off last year’s rapid pace. In the first five months of 2012, durable-good orders have fallen 5.7%, the worst performance since the end of the last recession."
http://www.marketwatch.com/story/us-orders-for-durable-goods-climb-in-may-2012-06-27


Pending home sales climb to two-year high in May
"Pending home sales climbed 5.9% in May, with an index reaching 101.1, the National Association of Realtors said Wednesday. The index matched the best level since the initially planned expiration of the home-buyer tax credit and was 13.3% above May 2011 levels."
http://www.marketwatch.com/story/pending-home-sales-climb-to-two-year-high-in-may-2012-06-27?link=MW_story_insert

[ragerunner]

Here is another proven 'conspiracy' moment related to the banking industry and it looks like Barclay was not the only one involved. Just another day for the world banking organizations. Of course no one is going to jail for this and it will probably be like many of the other articles that are in the MSM about the banks illegal actions, in the news for one day and then gone.

Bob Diamond forgoes bonus as Barclays fined for Libor manipulation
"Barclays took part in an international conspiracy that could have meant customers paid millions more than they should have to borrow money from banks.
The British and US authorities said they had found evidence Barclays had attempted to manipulate a key borrowing rate for years, meaning that home owners could have paid millions more in mortgage payments than they might otherwise have had to.
Traders at the bank were discovered to have engaged in regular attempts to determine the London Interbank Offered Rate (Libor) from as early as 2005.
The manipulation of Libor saw the bank make submissions to the setters of the rate that they knew to be wrong as they attempted to influence the level at which it was fixed.
Barclays also attempted to suppress Libor, which means that savers could have potentially lost out on millions in interest due to the rate being lower than it should otherwise have been."
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9359362/Bob-Diamond-forgoes-bonus-as-Barclays-fined-for-Libor-manipulation.html

[ragerunner]

Actually the two week total went up by 4,000, there was no decline.

U.S. jobless claims remain near 2012 high
Applications for benefits top 380,000 mark for fifth straight week
"Initial claims declined by 6,000 to a seasonally adjusted 386,000 in the week ended June 23, the Labor Department said. Economists surveyed by MarketWatch had projected they would fall slightly, to 385,000.
Yet claims from two weeks ago were revised up to 392,000 from an original reading of 387,000, based on more complete data collected at the state level."
http://www.marketwatch.com/story/us-jobless-claims-remain-near-2012-high-2012-06-28


Something tells me it will get deeper.

Britain's recession deeper than feared
"Britain's second recession in four years is deeper than originally feared as figures showed a sharper decline in the economy during the final quarter of last year."
http://www.telegraph.co.uk/finance/economics/9361353/Britains-recession-deeper-than-feared.html

[Hts121]

Something tells me it will get deeper.

Britain's recession deeper than feared
"Britain's second recession in four years is deeper than originally feared as figures showed a sharper decline in the economy during the final quarter of last year."
http://www.urbanohio.com/forum2/index.php?action=post;topic=17905.3780;last_msg=628005

FINALLY, a reliable and unbiased source for your updates!

[Gramarye]

Seriously?  Have you been to that site?  You will never find a more wretched hive of scum and villainy.

[ragerunner]

I agree, way to much gloom and wild talk at that link. Glad a different link has now been added. 

[ragerunner]

Manufacturing activity shrinks in June, ISM says
First sub-50% reading since July 2009

"WASHINGTON (MarketWatch) — Manufacturing activity shrunk in June for the first time in three years as new orders dried up, according to a key report released Monday that points to a deteriorating U.S. economy.
The Institute for Supply Management’s manufacturing index fell to 49.7% from 53.5% in May, in the first reading below the 50% line indicating expansion or contraction since July 2009."
http://www.marketwatch.com/story/manufacturing-activity-shrinks-in-june-ism-says-2012-07-02


Recession now much more likely
Commentary: Factory sector stalls on doubts about Europe, fiscal cliff

"Typically, a large drop in the ISM index comes from a large shock to the economy. We haven’t had a large shock this time, just a slow erosion of consumer and business confidence stemming from doubts about the global economy and about the fiscal cliff that looms at the beginning of 2013 in the United States.
And for both of those problems, there’s no sign of resolution in sight."
http://www.marketwatch.com/story/recession-now-much-more-likely-2012-07-02

[ragerunner]

What a shocker. All these fine outstanding institutions would never do such things?

Barclays rate-fixing scandal could wash up on American shores
“This is very serious,” Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, told CNBC Monday. He noted that the rate is used as a “wholesale” rate between the largest and most sophisticated banks in the world. The rest of us have to pay a “retail” rate on top of it."
"Other banks that have disclosed that they are under investigation for LIBOR manipulation include big U.S. banks, such as Citigroup and JPMorgan Chase, and also HSBC, Deutsche Bank and the Royal Bank of Scotland, according to The Wall Street Journal."
http://marketday.msnbc.msn.com/_news/2012/07/02/12527226-barclays-rate-fixing-scandal-could-wash-up-on-american-shores?lite

[ragerunner]

Between last month and this month factory orders end up at 0. No growth.

May U.S. factory orders rise 0.7%
"WASHINGTON (MarketWatch) -- Orders for goods produced in U.S. factories rose 0.7% in May, the Commerce Department reported Tuesday. Economists surveyed by MarketWatch had expected orders to rise by 0.1%. Factory orders fell a revised 0.7% in April, compared with a prior estimate of a 0.6% drop. Orders for durable goods -- products meant to last at least three years - rose 1.3% in May. Orders for nondurable goods rose 0.2%."
http://www.marketwatch.com/story/may-us-factory-orders-rise-07-2012-07-03

[AJ93]

^ The one thing I'd caution you on viewing month to month numbers is that there is always a slowdown in production during the summer months. Typically new orders remain flat or drop through summer months, then pick back up in the fall. Part of the natural rhythm of the annual manufacturing cycle.

I'm more concerned about the drop in commodities prices as an indicator of global demand. Anectdotally, a lot of my client bases' success over the last couple years has been either directly, or indirectly, attributed to export sales.

[ragerunner]

^ The one thing I'd caution you on viewing month to month numbers is that there is always a slowdown in production during the summer months. Typically new orders remain flat or drop through summer months, then pick back up in the fall. Part of the natural rhythm of the annual manufacturing cycle.

I'm more concerned about the drop in commodities prices as an indicator of global demand. Anectdotally, a lot of my client bases' success over the last couple years has been either directly, or indirectly, attributed to export sales.

I think commodities can clearly be an indicator to a certain extent (they have been flashing recessionary for a while now). They are best used when their prices are related to supply and demand. They can be a false indicator when other external factors kick in. Example, oil is rising currently not because the world economy is recovery (supply and demand), but because of concerns over access to supply do to middle east unrest.

[ragerunner]

US risks tepid recovery turning into recession, IMF warns
"America's politicians risk turning a tepid recovery into a recession next year if they fail to reach agreement on how quickly to cut the US deficit, the International Monetary Fund has warned."
"As it stands, the expiration of George W Bush's tax cuts on December 31, and the start of more than $1 trillion in spending cuts in January, mean the US is facing a severe fiscal headwind just as growth is slowing.
Fears are increasing in the US and beyond that Republicans and Democrats will fail to reach agreement over how to temper the pace of the deficit reduction in 2013, alongside delivering a long-term plan on the country's $15 trillion of debt.
"It is critical to remove the uncertainty created by the "fiscal cliff" as well as promptly raise the debt ceiling, pursuing a pace of deficit reduction that does not sap the economic recovery," the IMF said in its annual survey of the US."
http://www.telegraph.co.uk/finance/economics/9373240/US-risks-tepid-recovery-turning-into-recession-IMF-warns.html


I am going to put on my 'conspiracy hat' and go out on a limb. I think more than just the UK FED and Barclay was involved with manipulating Libor. Remember, Libor was huge in keeping US housing loan cost low and keeping refinancing rates for ARMs, etc. from going up in the core of the housing crisis. If Libor had not remained low the housing bust would have been much bigger. I remember mulitiple headlines during the peak of the housing bust talking about how Libor rates were going to go up and crush the ARMs, I/O loans holders, but it magically never happened. Maybe now we know why?

Bob Diamond claims BoE's Paul Tucker told Barclays 'to lower' Libor rate
"Barclays has released an internal email sent by former chief executive Bob Diamond offering his account of a conversation with the Bank of England that led to the bank offering false Libor submissions."
“Bob Diamond did not believe he received an instruction from Paul Tucker or that he gave an instruction to Jerry del Missier. However Jerry del Missier concluded that an instruction had been passed down from the Bank of England not to keep LIBORs so high and he therefore passed down a direction to that effect to the submitters,” said the bank.
Discussing the email on a conference call following its release, Marcus Agius, chairman of Barclays, laid the blame with Mr del Missier.
"Jerry was the most senior officer who gave instructions to lower Libor rates,” said he said."
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9373506/Bob-Diamond-claims-BoEs-Paul-Tucker-told-Barclays-to-lower-Libor-rate.html

[ragerunner]

Another one of our trusted banks?

Morgan Stanley Got S&P to Inflate Ratings, Investors Say
"Morgan Stanley successfully pushed Standard & Poor’s and Moody’s Investors Service Inc. to give unwarranted investment-grade ratings in 2006 to $23 billion worth of notes backed by subprime mortgages, investors claimed in a lawsuit, citing documents unsealed in federal court."
http://www.bloomberg.com/news/2012-07-02/morgan-stanley-pushed-s-p-to-boost-ratings-investors-say.html

[ragerunner]

U.S. jobless claims fall 14,000 to 374,000
Initial filings for unemployment benefits at lowest level in six weeks
"The level of claims is a rough gauge of whether layoffs are rising or falling. Until the latest drop, first-time claims had totaled 380,000 or higher for five straight weeks, a worrisome sign after new applications fell in February to a four-year low of 361,000.
Also Thursday, the Labor Department said initial claims for jobless benefits two weeks ago were revised up to 388,000 from an original reading of 386,000, based on more complete data collected at the state level."
http://www.marketwatch.com/story/us-jobless-claims-fall-14000-to-374000-2012-07-05-81035446


U.S. June services activity slowest since Jan. '10
"WASHINGTON (MarketWatch) -- U.S. services activity slowed in June to the weakest level since January 2010, according to data released by the Institute for Supply Management on Thursday. The ISM services index fell to 52.1% from 53.7% in May, which was worse than the 52.9% than economists expected. Of key components, the production index dropped 3.9 points, the new orders component fell 2.2 points, while the employment component rose 1.5 points."
http://www.marketwatch.com/story/us-june-services-activity-slowest-since-jan-10-2012-07-05


China’s central bank cuts lending, deposit rates
"HONG KONG (MarketWatch) — China’s central bank on Thursday unveiled a surprise interest rate cut, lowering borrowing and deposit rates while also enabling banks greater leeway in setting their own lending rates at a discount to the benchmark."
http://www.marketwatch.com/story/chinas-central-bank-cuts-lending-deposit-rates-2012-07-05-81034410


National retailers report tepid sales for June
"Shoppers, worried about jobs and the overall economy, pulled back on spending in June, resulting in tepid sales for many retailers.
The results raise concerns about Americans' ability to spend during the back-to-school season, which is the second-biggest shopping period of the year and starts later this month."
"These are disappointing results," said Ken Perkins, president of RetailMetrics, a research firm. "The consumer is slowing down and becoming increasingly more cautious as the economic backdrop is deteriorating. This doesn't set up particularly well for back-to-school."
http://www.ibj.com/national-retailers-report-tepid-sales-for-june/PARAMS/article/35362