Friday, August 03, 2007

A Combination Of Anxiety and Loathing

The economic news today is pretty bad. First the housing news from the Wall Street Journal:

Lenders Broaden Clampdown on Risky Mortgages

• The Trend: Nervous home-mortgage lenders are returning to more-conservative practices and are raising interest rates and cutting back on a category of loans between prime and subprime.
• The Issue: The worsening credit situation threatens to put more pressure on the housing market, where prices are flat to declining in much of the country.
• What's Next: Economist Thomas Lawler said he expects the credit squeeze will make "the late summer home-sales season even worse than the dismal spring season."

As a result of tightening lending standards, lenders are "raising rates like crazy." Wells Fargo, for instance, is charging 8% for a prime jumbo 30 year fixed-rate loan that carried a 6 7/8% rate last week. Bonddad offers his analysis of the situation and doesn't like what he sees:

1.) This is a really big bump in rates on a week to week basis. This is not good news.

2.) Also remember that new and existing home inventories are at very high levels. This means that demand is now dropping off at a time when supply is massively high.

3.) Decreasing demand + massive supply = lower prices.

As a side note, building permits for new homes increased in June, meaning home building companies are still looking to add to inventory in the coming months. The already massive supply of unsold new and existing homes on the market will increase, which means so will the glut. Expect lower home prices to continue, further pressuring the real estate and mortgage markets.

Now the Financial Times looks at the current state of the mortgage industry:

Pressure mounts on US mortgage groups

Shares in US mortgage lenders remained under pressure Thursday amid concerns about their ability to fund their operations as problems in the subprime sector spread to less risky loans.

Accredited Home Lenders, a subprime lender in the process of being sold, saw its shares fall by a third after warning that it could face bankruptcy


Meanwhile, Countrywide Financial, the largest US mortgage lender, issued a statement denying that it faced liquidity problems


This week, shares in American Home Mortgage Investment collapsed after it said it could no longer fund home loans. The company, which had a book value of more than $20bn at the end of the first quarter, is expected to close down after its banks cut off its funding. American Home’s problems were particularly worrying to investors because it specialises in Alt-A borrowers, who have better credit ratings than subprime borrowers.

For a long time we were told that problems with subprime mortgages were well-contained, but clearly the markets are being pressured by all this:

City bankers are beginning to sound like doctors treating gastric disorders. “It is a serious case of indigestion. There will be a lot of pain. But it will pass. Come back and see me in September, when things should have cleared up,” a senior investment banker said this week.

The indigestion he was referring to is the nervousness spreading through debt markets, triggered by the US subprime mortgage crisis, pulling the rug out from some planned buy-outs and leaving banks facing losses upon financing for others.

The latest victim is Mitchells & Butlers’ sale of a stake in 1,300 pubs to Robert Tchenguiz, the billionaire property magnate, ditched on Thursday because of rising debt costs.

Elsewhere, banks have taken the pain on buy-out deals that have already been underwritten. At Alliance Boots, lenders have been stuck with much of the £9bn of debt issued to fund a takeover by Kohlberg Kravis Roberts, the private equity firm.

Last week, Cadbury Schweppes delayed a £7bn sale of its US drinks division, blaming “extreme volatility” in debt markets after two private equity consortia lining up bids found financing much harder to come by.


Analysts are concerned two other pending media deals – possible sales of Virgin Radio and Emap – could be derailed by a sustained credit crunch, or that sellers may have to settle for lower prices than they had hoped.

So far Wall Street has bounced back from volatile trading and huge losses last week and earlier this week connected to debt market fears, but now the job numbers for July have just been released and the news is not so good for future economic growth:

WASHINGTON -- U.S. employment growth slowed and the jobless rate ticked up last month as job losses in manufacturing, construction and government offset healthy gains in many services industries, suggesting that the economy started the third quarter on a softer note after robust growth in the second quarter.

Nonfarm payrolls increased just 92,000 in July, down from 126,000 in June and 188,000 in May, the Labor Department said Friday. Previous reports showed job growth of 132,000 in June and 190,000 in May. Monthly job growth has averaged 136,000 so far this year.

The unemployment rate rose 0.1 percentage point to 4.6%.

Average hourly earnings increased $0.06, or 0.3%, to $17.45. That was up 3.9% from a year earlier, suggesting tight labor markets still aren't putting much pressure on labor costs -- further confirmation that the noninflationary unemployment rate is much lower than once thought.

The July payroll gain was came short of Wall Street expectations of a 130,000 rise, though many economists had braced for a lower number following a weak report Wednesday from Automatic Data Processing and Macroeconomic Advisers that attempts to track the government figure. Forecasters had expected a 4.5% unemployment rate and 0.3% rise in hourly wages.

U.S. gross domestic product advanced just 0.6% in the first quarter but recovered to a 3.4% pace last quarter. A key question heading into the second half of 2007 is which quarter, the first or second, better reflects the economy's underlying state.

The latest employment report -- coupled with other data like the Institute for Supply Management's July manufacturing index which signaled continuing, though softer, factory growth as well as tepid auto sales reports -- suggest the trend is somewhere in the middle. Economists generally expect the economy to grow around 2.5% in the second half of the year, slightly below its noninflationary potential.

While economists and the investor class may be reassured by the job numbers that the economy will not be rolling into recession later this year, the rest of America - you know, the ones who work for a living - are not so sure. According to the latest WSJ/NBC News poll released earlier this week, more than two-thirds of Americans believe the economy is either in recession now or will be later this year or early next year. The Wall Street Journal says that Americans are feeling very gloomy about economic conditions, have little-to-no confidence in the preznut, the Congress, or economic leaders to help alleviate their fears over health costs, energy costs, job insecurity, and the increasing wealth gap between rich and poor. Money quote:

"They're ambivalent about the current economy but pessimistic about the future," said Republican pollster Neil Newhouse, who conducts the Journal/NBC survey with Democratic counterpart Peter Hart. One consequence is anger at leading economic actors, who respondents believe are failing to protect ordinary Americans' interests.

"There's a combination of anxiety and loathing," Mr. Hart said. "There's a sense that every single one of these institutions is totally out for their own betterment, versus the public they serve."

That really sums it up for me. The Bushie shills on CNBC are crowing about how good things are after the "benign" job numbers were released. But when you look closely at the jobs created last month, you can see why so many Americans are so depressed:

-- Education/Health and Leisure and Hospitality accounted for 61,000 of the 92,000 or about 2/3 of the jobs created. These are considered low paying jobs.

Interest rates are up, home prices are tanking, job creation weak, and wage increases non-existent.

Anxiety and loathing indeed.

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