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Wednesday, 19 March 2008
A relief rally, but is this another bear trap?
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(Reuters) - Merrill Lynch (MER.N: Quote, Profile, Research) is the riskiest major broker after Bear Stearns (BSC.N: Quote, Profile, Research), with gross exposure to subprime collateralized debt obligations of $30.4 billion, 3.3 times the sector average, Wachovia Capital Markets said.
Merrill also had the worst liquidity ratio at 52 percent, compared to Goldman Sachs Group Inc (GS.N: Quote, Profile, Research) and Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research), and now has the highest leverage in the industry at 31.9 times, analyst Douglas Sipkin said.
Shares of Merrill Lynch rose 7 percent to $44.05 in morning trade, after upbeat earnings from Goldman Sachs and Lehman Brothers led to a rebound in financial stocks.
Sipkin, however, said fears about the ability of U.S. investment banks to continue as going concerns are misguided.
"While liquidity conditions are more challenging than at any time in recent history, the failure of BSC was more a management issue than a market issue in our opinion," the analyst wrote in a note to clients.
Liquidity markets are clearly stretched, but the reputation and capital position of all other brokers will continue to be superior to that of Bear Stearns, he said.
JPMorgan Chase & Co (JPM.N: Quote, Profile, Research) on Sunday agreed to buy Bear Stearns, slammed by a sudden cash crunch, for just $2 a share -- more than 90 percent below its Friday close.
The analyst upgraded Goldman Sachs to "outperform" from "market perform" partly on its superior capital position relative to competitors and as it would likely benefit more than any firm from Bear Stearns' problems.
He said liquidity measures at Lehman Brothers look "reasonable."
"The loss of Bear Stearns triggered immediate fear and uncertainty amongst the group. However, if Lehman can survive, we believe it will by default gain material market share in mortgages now and especially in the future if the business turns," Sipkin said.
Wachovia issued the research note before Goldman Sachs and Lehman reported quarterly results.
Cautious investors tempted by CDSs By Sarah O’Connor and Robert Cookson
Published: March 18 2008 21:53 | Last updated: March 18 2008 21:53
Traditionally cautious investors are tentatively entering the highly-stressed credit default swap market, analysts said on Tuesday, in a sign that spread levels are now so high that they are tempting even normally conservative funds.
In recent months, “real money” investors such as pension funds and insurance companies have stayed away from a market in the grip of a vicious cycle.
The unwinding of highly leveraged credit instruments has been driving spreads ever higher. This put the threat of heavy mark-to-market losses at the forefront of investors’ minds, reducing the incentive to sell credit protection using credit default swaps.
With few sellers and lots of buyers, the cost of protecting corporate debt against default has soared to record highs, with the iTraxx Europe tripling since the start of the year to reach more than 160 basis points this week. This means anybody selling five-year protection on €10m of the index would earn €160,000 a year, far more than needed to compensate for the expected level of defaults.
Now, a brave few are making the decision that the potential gains from selling credit protection at these spreads outweighs the possible short-term losses.
Soren Willemann, structured credit strategist at Barclays Capital said: “What we’re seeing now is real-money investors stepping into the market.”
In the past few weeks, the cost of protecting the safest slice, or “tranche”, of the index has begun to fall relative to the riskiest.
Analysts say the falling spreads indicate that new investors are selling protection on these “super senior” tranches.
Etienne Varloot, strategist at UBS, said several “sophisticated” pension funds were doing this trade. He said: “With the iTraxx hitting 150 basis points, selling protection on super-senior became so lucrative that it made sense to start doing it”.
He added that while the amount of activity from real money investors was relatively small, it was affecting spread levels.
Neil McLeish, credit strategist at Morgan Stanley, said new money was entering other areas of the credit markets, from CDS to cash to leveraged loans.
ECB adds an extra €25 billion to its normal weekly refinancing operation
The Associated PressPublished: March 18, 2008
FRANKFURT, Germany — The European Central Bank on Tuesday allocated an extra €25 billion (US$39 billion) in liquidity to the banking system during its regular weekly refinancing operation, an attempt to curb fresh anxiety on money markets.
The amount suggests the ECB itself isn't overly concerned about higher money market rates, since it offered about the same amount of extra liquidity last week.
But market anxiety was clearly signaled by strong demand for the funds — the auction brought in the highest number of bidders and amount bid for a weekly operation so far this year. There were 336 bidders, with total bids amounting to nearly €296 billion (US$466.79 billion), the central bank for the 15-nation euro zone said in a statement.
Interbank money-market rates are elevated this week, amid caution among European banks following news over the weekend that Bear Stearns, pushed to the brink of collapse by the mortgage crisis, agreed to be sold to JPMorgan Chase & Co. for the fire-sale price of US$2 (€1.27)a share, or about US$236 million (€150 million).
The ECB's auction followed moves by the Bank of Japan, the Reserve Bank of Australia, and the Bank of England to pump additional funds into money markets Monday, after the U.S. Federal Reserve cut its discount rate a quarter percentage point to 3.25 percent and offered to lend money to brokers on a broadened selection of collateral.
Accepted bids on Tuesday's allotment ranged from 4.16 percent to 4.30 percent, well in excess of the ECB's 4 percent policy rate, with an average weighted allotment rate of 4.20 percent — higher than the previous operation's average 4.16 percent.
Market watchers had said they had expected an extra allotment of around €20 billion (US$31.54 billion), while acknowledging that amount wouldn't be adequate to pull down interbank rates. Interbank rates are the rates banks use to lend to one another.
In Germany, interbank overnight rates edged higher following the auction, and were quoted at 4.06 percent to 4.16 percent, up from 4.02 percent to 4.12 percent in early morning trade, while one-week rates were quoted between 4.13 percent and 4.25 percent, slightly above the early trading range of 4.11 percent to 4.23 percent.
During previous episodes of the liquidity crunch, which has kept markets on edge since August, the ECB said it would allocate funds above estimated liquidity needs, and would provide liquidity to financial markets as needed.
Market watchers say European money traders are aware the ECB is willing to provide extra liquidity if the tensions worsen.
The refinancing is effective Wednesday and expires March 26.
Since the onset of the liquidity and credit crunch last summer this column has been arguing that monetary policy would be impotent to address such a crunch because, in part, of the existence of a non-bank “shadow financial system”. This system is composed of conduits, SIVs, investment banks/broker dealers, money market funds, hedge funds and other non bank financial institutions.
All these institutions look similar to banks because they are highly leveraged and borrow short and in liquid ways and invest or lend long and in illiquid ways. This shadow financial system is, like banks, subject not only to credit and market risk but also to rollover or liquidity risk, i.e. the risk deriving from having a large stock of short term liabilities (relative to liquid assets) that may not roll over if creditors decide to withdraw their credits to these institutions.
Unlike banks this shadow financial system does not have access to the lender of last resort support of the central bank as these are not depository institutions regulated by the central banks. What we are now observing – with the case of Bear Stearns and the recent disaster among SIVs, conduits, run on a number of hedge funds and money market funds is a generalized liquidity run on this shadow financial system.
The response of the Fed to this run has been radical and in the form of the extension of the lender of last resort support to non bank financial institutions. Specifically, the new $200 bn term facility allows primary dealers – many of which are non banks – to swap their toxic mortgage backed securities for US Treasuries; second, the Fed provided emergency support to Bear Stearns and following the purchase of Bear Stearns by JPMorgan, is now providing a $30 bn plus support to JPMorgan to help the rescue of Bear Stearns; finally, now the Fed is allowing primary dealers to access the Fed discount window at the same terms as banks.
This is the most radical change and expansions of Fed powers and functions since the Great Depression: essentially the Fed now can lend unlimited amounts to non bank highly leveraged institutions that it does not regulate. The Fed is treating this run on the shadow financial system as a liquidity run but the Fed has no idea of whether such institutions are insolvent. As JPMorgan paid only about $200 million for Bear Stearns – and only after the Fed promised a $30 billlion loan – this was a clear case where this non bank financial institution was insolvent.
The Fed has no idea of which other primary dealers may be insolvent as it does not supervise and regulate those primary dealers that are not banks. But it is treating this crisis – the most severe financial crisis in the US since the Great Depression – as if it was purely a liquidity crisis. By lending massive amounts to potentially insolvent institutions that it does not supervise or regulate and that may be insolvent the Fed is taking serious financial risks and seriously exacerbate moral hazard distortions. Here you have highly leveraged non bank financial institutions that made reckless investments and lending, had extremely poor risk management and altogether disregarded liquidity risks; some may be insolvent but now the Fed is providing them with a blank check for unlimited amounts. This is a most radical action and a signal of how severe the crisis of the banking system and non-bank shadow financial system is. This is the worst US financial crisis since the Great Depression and the Fed is treating it as if it was only a liquidity crisis. But this is not just a liquidity crisis; it is rather a credit and insolvency crisis. And it is not the job of the Fed to bail out insolvent non bank financial institutions. If a bail out should occur this is a fiscal policy action that should be decided by Congress after the relevant equity holders have been wiped out and senior management fired without golden parachutes and huge severance packages.
ATLANTA (Reuters) - After years of living large, U.S. households are finally learning what financial experts thought they never would: to live within their means.
Economists have long warned that the U.S. consumer was on an unsustainable spending frenzy and that savings rates were dangerously low. Now, families are being forced into financial responsibility by the housing downturn and a weakening economy.
"For many years people on Wall Street have refused to believe that American consumers could ever change their spending habits," said David Rosenberg, North American economist at Merrill Lynch. "But it's happening."
"Frugality is in, extravagance is out," he added.
Consumer spending accounts for 70 percent of the U.S. economy and, according to Rosenberg, 30 percent of that is discretionary spending -- that is, buying stuff you can live without.
Theresa Parks is a case in point. Parks, 36, paints lines on roads and highways for the city of Atlanta for a living. She bought a home in 2006 for herself and her three daughters in the suburb of Riverdale, but fell behind with her $669 monthly payment.
Her lender agreed last September to a repayment plan that required an additional $188 a month through to June 2008.
"We had to cut eating out at restaurants and we had to stop shopping," Parks said. "That was the hardest part for my teenage daughters because they love to shop. But I sat them down and we agreed we'd do anything to keep our home."
Regina Grant of the Atlanta Cooperative Development Corp helped Parks rework her budget and said most of her clients require help managing their spending.
"None of them have ever prepared a budget, but they have to now if they want to keep their homes," she said.
Just a few miles away, Ozell Brooklin, director of nonprofit Acorn Housing tells a room of some 15 struggling borrowers that if they want their banks to lower their interest rates or even forgive some of their debt, they must prioritize spending.
"Your first priority will be your mortgage, then food, then utility bills then one family car if you need it for work," he said, standing at a lectern and counting off those priorities on his fingers. "Everywhere else we're going to cut spending because your lender won't make a deal with you if they think you have money to spare for luxury items."
Some 700 miles further north, in Cleveland, Ohio, Mark Seifert of nonprofit East Side Organizing Project says counseling stricken borrowers means telling them harsh truths.
"We get home owners coming to us in trouble, but then we look and see they have only make $50,000 a year and yet they own an Escalade," he said, referring to a Cadillac sport utility vehicle that sells for about $55,000. "And you have to ask them 'What on earth were you thinking?"'
As the U.S. housing crisis deepens, many more Americans will be forced to budget to avoid foreclosure, with serious implications for an economy teetering on the brink of recession.
"This is going to take a bite out of consumer spending and is an ominous sign for the economy," said University of Maryland business professor Peter Morici. "We are in a recession that was manufactured on Wall Street by the major banks."
BACK TO BASICS
One of the hallmarks of the recent property boom was that buyers could get into a home with little or no money down. Those days are apparently over.
"What we're seeing a lot of is people with good income who haven't put any money aside and now have to save for a deposit on a home," said Van Johnson, president of the Georgia Association of Realtors. "When people like that don't spend, restaurants and retailers suffer and it tends to slow the economy down."
"There will be pain in that correction," he added.
Terry Kibbe of Washington, DC-based nonprofit group the Consumer Rights League -- which is campaigning against any form of government "bailout" for banks or borrowers -- said that higher down payment requirements are a natural consequence of the excesses of the boom years.
"The real estate boom was not going to last forever and it is becoming more difficult to buy a home," she said. "But the market will correct itself and this is part of that process."
There are already signs that American consumers are "trading down" in the search for bargains, with February same-store retail sales showing customers favoring discounters like Wal-Mart Stores Inc over higher-end retailers.
Merrill Lynch's Rosenberg said that in the fourth quarter of 2007, Americans' household debt almost equaled 140 percent of their after-tax income and that they were spending 14.3 percent of their after-tax income paying down that debt.
"Simply put, that means Americans are spending more on servicing their debt than they do on food," Rosenberg said. "This is not just affecting stressed-out or soon-to-be-foreclosed home owners. This hurts everybody."
Rosenberg predicted Americans will start saving more, which he said will shave 1 percentage point off annual U.S. consumer spending growth for years to come.
"It is hard to say how bad things will get," Rosenberg added. "We're in unchartered territory at this point."
As for Theresa Parks of Atlanta, she says that her days of loose spending are over.
"When I catch up with my mortgage, I aim to save every penny I can and plan for my daughters' future."
5 comments:
(Reuters) - Merrill Lynch (MER.N: Quote, Profile, Research) is the riskiest major broker after Bear Stearns (BSC.N: Quote, Profile, Research), with gross exposure to subprime collateralized debt obligations of $30.4 billion, 3.3 times the sector average, Wachovia Capital Markets said.
Merrill also had the worst liquidity ratio at 52 percent, compared to Goldman Sachs Group Inc (GS.N: Quote, Profile, Research) and Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research), and now has the highest leverage in the industry at 31.9 times, analyst Douglas Sipkin said.
Shares of Merrill Lynch rose 7 percent to $44.05 in morning trade, after upbeat earnings from Goldman Sachs and Lehman Brothers led to a rebound in financial stocks.
Sipkin, however, said fears about the ability of U.S. investment banks to continue as going concerns are misguided.
"While liquidity conditions are more challenging than at any time in recent history, the failure of BSC was more a management issue than a market issue in our opinion," the analyst wrote in a note to clients.
Liquidity markets are clearly stretched, but the reputation and capital position of all other brokers will continue to be superior to that of Bear Stearns, he said.
JPMorgan Chase & Co (JPM.N: Quote, Profile, Research) on Sunday agreed to buy Bear Stearns, slammed by a sudden cash crunch, for just $2 a share -- more than 90 percent below its Friday close.
The analyst upgraded Goldman Sachs to "outperform" from "market perform" partly on its superior capital position relative to competitors and as it would likely benefit more than any firm from Bear Stearns' problems.
He said liquidity measures at Lehman Brothers look "reasonable."
"The loss of Bear Stearns triggered immediate fear and uncertainty amongst the group. However, if Lehman can survive, we believe it will by default gain material market share in mortgages now and especially in the future if the business turns," Sipkin said.
Wachovia issued the research note before Goldman Sachs and Lehman reported quarterly results.
Cautious investors tempted by CDSs
By Sarah O’Connor and Robert Cookson
Published: March 18 2008 21:53 | Last updated: March 18 2008 21:53
Traditionally cautious investors are tentatively entering the highly-stressed credit default swap market, analysts said on Tuesday, in a sign that spread levels are now so high that they are tempting even normally conservative funds.
In recent months, “real money” investors such as pension funds and insurance companies have stayed away from a market in the grip of a vicious cycle.
The unwinding of highly leveraged credit instruments has been driving spreads ever higher. This put the threat of heavy mark-to-market losses at the forefront of investors’ minds, reducing the incentive to sell credit protection using credit default swaps.
With few sellers and lots of buyers, the cost of protecting corporate debt against default has soared to record highs, with the iTraxx Europe tripling since the start of the year to reach more than 160 basis points this week. This means anybody selling five-year protection on €10m of the index would earn €160,000 a year, far more than needed to compensate for the expected level of defaults.
Now, a brave few are making the decision that the potential gains from selling credit protection at these spreads outweighs the possible short-term losses.
Soren Willemann, structured credit strategist at Barclays Capital said: “What we’re seeing now is real-money investors stepping into the market.”
In the past few weeks, the cost of protecting the safest slice, or “tranche”, of the index has begun to fall relative to the riskiest.
Analysts say the falling spreads indicate that new investors are selling protection on these “super senior” tranches.
Etienne Varloot, strategist at UBS, said several “sophisticated” pension funds were doing this trade. He said: “With the iTraxx hitting 150 basis points, selling protection on super-senior became so lucrative that it made sense to start doing it”.
He added that while the amount of activity from real money investors was relatively small, it was affecting spread levels.
Neil McLeish, credit strategist at Morgan Stanley, said new money was entering other areas of the credit markets, from CDS to cash to leveraged loans.
Copyright The Financial Times Limited 2008
ECB adds an extra €25 billion to its normal weekly refinancing operation
The Associated PressPublished: March 18, 2008
FRANKFURT, Germany — The European Central Bank on Tuesday allocated an extra €25 billion (US$39 billion) in liquidity to the banking system during its regular weekly refinancing operation, an attempt to curb fresh anxiety on money markets.
The ECB allotted €202 billion (US$319 billion) — €25 billion (US$39.4 billion) above estimated liquidity needs of €177 billion (US$279 billion).
The amount suggests the ECB itself isn't overly concerned about higher money market rates, since it offered about the same amount of extra liquidity last week.
But market anxiety was clearly signaled by strong demand for the funds — the auction brought in the highest number of bidders and amount bid for a weekly operation so far this year. There were 336 bidders, with total bids amounting to nearly €296 billion (US$466.79 billion), the central bank for the 15-nation euro zone said in a statement.
Interbank money-market rates are elevated this week, amid caution among European banks following news over the weekend that Bear Stearns, pushed to the brink of collapse by the mortgage crisis, agreed to be sold to JPMorgan Chase & Co. for the fire-sale price of US$2 (€1.27)a share, or about US$236 million (€150 million).
The ECB's auction followed moves by the Bank of Japan, the Reserve Bank of Australia, and the Bank of England to pump additional funds into money markets Monday, after the U.S. Federal Reserve cut its discount rate a quarter percentage point to 3.25 percent and offered to lend money to brokers on a broadened selection of collateral.
Accepted bids on Tuesday's allotment ranged from 4.16 percent to 4.30 percent, well in excess of the ECB's 4 percent policy rate, with an average weighted allotment rate of 4.20 percent — higher than the previous operation's average 4.16 percent.
Market watchers had said they had expected an extra allotment of around €20 billion (US$31.54 billion), while acknowledging that amount wouldn't be adequate to pull down interbank rates. Interbank rates are the rates banks use to lend to one another.
In Germany, interbank overnight rates edged higher following the auction, and were quoted at 4.06 percent to 4.16 percent, up from 4.02 percent to 4.12 percent in early morning trade, while one-week rates were quoted between 4.13 percent and 4.25 percent, slightly above the early trading range of 4.11 percent to 4.23 percent.
During previous episodes of the liquidity crunch, which has kept markets on edge since August, the ECB said it would allocate funds above estimated liquidity needs, and would provide liquidity to financial markets as needed.
Market watchers say European money traders are aware the ECB is willing to provide extra liquidity if the tensions worsen.
The refinancing is effective Wednesday and expires March 26.
A Generalized Run on the Shadow Financial System
Nouriel Roubini
Mar 17, 2008
Since the onset of the liquidity and credit crunch last summer this column has been arguing that monetary policy would be impotent to address such a crunch because, in part, of the existence of a non-bank “shadow financial system”. This system is composed of conduits, SIVs, investment banks/broker dealers, money market funds, hedge funds and other non bank financial institutions.
All these institutions look similar to banks because they are highly leveraged and borrow short and in liquid ways and invest or lend long and in illiquid ways. This shadow financial system is, like banks, subject not only to credit and market risk but also to rollover or liquidity risk, i.e. the risk deriving from having a large stock of short term liabilities (relative to liquid assets) that may not roll over if creditors decide to withdraw their credits to these institutions.
Unlike banks this shadow financial system does not have access to the lender of last resort support of the central bank as these are not depository institutions regulated by the central banks. What we are now observing – with the case of Bear Stearns and the recent disaster among SIVs, conduits, run on a number of hedge funds and money market funds is a generalized liquidity run on this shadow financial system.
The response of the Fed to this run has been radical and in the form of the extension of the lender of last resort support to non bank financial institutions. Specifically, the new $200 bn term facility allows primary dealers – many of which are non banks – to swap their toxic mortgage backed securities for US Treasuries; second, the Fed provided emergency support to Bear Stearns and following the purchase of Bear Stearns by JPMorgan, is now providing a $30 bn plus support to JPMorgan to help the rescue of Bear Stearns; finally, now the Fed is allowing primary dealers to access the Fed discount window at the same terms as banks.
This is the most radical change and expansions of Fed powers and functions since the Great Depression: essentially the Fed now can lend unlimited amounts to non bank highly leveraged institutions that it does not regulate. The Fed is treating this run on the shadow financial system as a liquidity run but the Fed has no idea of whether such institutions are insolvent. As JPMorgan paid only about $200 million for Bear Stearns – and only after the Fed promised a $30 billlion loan – this was a clear case where this non bank financial institution was insolvent.
The Fed has no idea of which other primary dealers may be insolvent as it does not supervise and regulate those primary dealers that are not banks. But it is treating this crisis – the most severe financial crisis in the US since the Great Depression – as if it was purely a liquidity crisis. By lending massive amounts to potentially insolvent institutions that it does not supervise or regulate and that may be insolvent the Fed is taking serious financial risks and seriously exacerbate moral hazard distortions. Here you have highly leveraged non bank financial institutions that made reckless investments and lending, had extremely poor risk management and altogether disregarded liquidity risks; some may be insolvent but now the Fed is providing them with a blank check for unlimited amounts. This is a most radical action and a signal of how severe the crisis of the banking system and non-bank shadow financial system is. This is the worst US financial crisis since the Great Depression and the Fed is treating it as if it was only a liquidity crisis. But this is not just a liquidity crisis; it is rather a credit and insolvency crisis. And it is not the job of the Fed to bail out insolvent non bank financial institutions. If a bail out should occur this is a fiscal policy action that should be decided by Congress after the relevant equity holders have been wiped out and senior management fired without golden parachutes and huge severance packages.
Households face the unthinkable: budgeting
By Nick Carey
Mar 18, 2008
ATLANTA (Reuters) - After years of living large, U.S. households are finally learning what financial experts thought they never would: to live within their means.
Economists have long warned that the U.S. consumer was on an unsustainable spending frenzy and that savings rates were dangerously low. Now, families are being forced into financial responsibility by the housing downturn and a weakening economy.
"For many years people on Wall Street have refused to believe that American consumers could ever change their spending habits," said David Rosenberg, North American economist at Merrill Lynch. "But it's happening."
"Frugality is in, extravagance is out," he added.
Consumer spending accounts for 70 percent of the U.S. economy and, according to Rosenberg, 30 percent of that is discretionary spending -- that is, buying stuff you can live without.
Theresa Parks is a case in point. Parks, 36, paints lines on roads and highways for the city of Atlanta for a living. She bought a home in 2006 for herself and her three daughters in the suburb of Riverdale, but fell behind with her $669 monthly payment.
Her lender agreed last September to a repayment plan that required an additional $188 a month through to June 2008.
"We had to cut eating out at restaurants and we had to stop shopping," Parks said. "That was the hardest part for my teenage daughters because they love to shop. But I sat them down and we agreed we'd do anything to keep our home."
Regina Grant of the Atlanta Cooperative Development Corp helped Parks rework her budget and said most of her clients require help managing their spending.
"None of them have ever prepared a budget, but they have to now if they want to keep their homes," she said.
Just a few miles away, Ozell Brooklin, director of nonprofit Acorn Housing tells a room of some 15 struggling borrowers that if they want their banks to lower their interest rates or even forgive some of their debt, they must prioritize spending.
"Your first priority will be your mortgage, then food, then utility bills then one family car if you need it for work," he said, standing at a lectern and counting off those priorities on his fingers. "Everywhere else we're going to cut spending because your lender won't make a deal with you if they think you have money to spare for luxury items."
Some 700 miles further north, in Cleveland, Ohio, Mark Seifert of nonprofit East Side Organizing Project says counseling stricken borrowers means telling them harsh truths.
"We get home owners coming to us in trouble, but then we look and see they have only make $50,000 a year and yet they own an Escalade," he said, referring to a Cadillac sport utility vehicle that sells for about $55,000. "And you have to ask them 'What on earth were you thinking?"'
As the U.S. housing crisis deepens, many more Americans will be forced to budget to avoid foreclosure, with serious implications for an economy teetering on the brink of recession.
"This is going to take a bite out of consumer spending and is an ominous sign for the economy," said University of Maryland business professor Peter Morici. "We are in a recession that was manufactured on Wall Street by the major banks."
BACK TO BASICS
One of the hallmarks of the recent property boom was that buyers could get into a home with little or no money down. Those days are apparently over.
"What we're seeing a lot of is people with good income who haven't put any money aside and now have to save for a deposit on a home," said Van Johnson, president of the Georgia Association of Realtors. "When people like that don't spend, restaurants and retailers suffer and it tends to slow the economy down."
"There will be pain in that correction," he added.
Terry Kibbe of Washington, DC-based nonprofit group the Consumer Rights League -- which is campaigning against any form of government "bailout" for banks or borrowers -- said that higher down payment requirements are a natural consequence of the excesses of the boom years.
"The real estate boom was not going to last forever and it is becoming more difficult to buy a home," she said. "But the market will correct itself and this is part of that process."
There are already signs that American consumers are "trading down" in the search for bargains, with February same-store retail sales showing customers favoring discounters like Wal-Mart Stores Inc over higher-end retailers.
Merrill Lynch's Rosenberg said that in the fourth quarter of 2007, Americans' household debt almost equaled 140 percent of their after-tax income and that they were spending 14.3 percent of their after-tax income paying down that debt.
"Simply put, that means Americans are spending more on servicing their debt than they do on food," Rosenberg said. "This is not just affecting stressed-out or soon-to-be-foreclosed home owners. This hurts everybody."
Rosenberg predicted Americans will start saving more, which he said will shave 1 percentage point off annual U.S. consumer spending growth for years to come.
"It is hard to say how bad things will get," Rosenberg added. "We're in unchartered territory at this point."
As for Theresa Parks of Atlanta, she says that her days of loose spending are over.
"When I catch up with my mortgage, I aim to save every penny I can and plan for my daughters' future."
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