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Thursday, 7 May 2009
Emerging-Market Stocks May ‘Break Out’ by Year-End, Mobius Says
Emerging-market stocks may “break out” into a bull market at the end of the year as falling interest rates and easing inflation make equities more attractive, Templeton Asset Management Ltd.’s Mark Mobius said.
Emerging-Market Stocks May ‘Break Out’ by Year-End, Mobius Says
Chen Shiyin 4 May 2009
(Bloomberg) – Emerging-market stocks may “break out” into a bull market at the end of the year as falling interest rates and easing inflation make equities more attractive, Templeton Asset Management Ltd.’s Mark Mobius said.
Mobius reiterated that emerging markets are “building a base” for the next rally. Chrysler LLC’s bankruptcy filing and other “short-term risks” may hold back the rally, while speculators may bet stocks will fall, he said.
“We are at the base building period for the next bull market,” Mobius, who helps oversee $20 billion in emerging- market assets at San Mateo, California-based Templeton, said yesterday in an interview in Bali, Indonesia, where he’s attending a conference. “What I see happening is perhaps this continuing till the end of the year, and then a break out.”
Developing markets made up all 10 of the best-performing stock indexes in 2009, led by Peru and China. The MSCI Emerging Markets Index has jumped 17 percent this year, compared with a 2.6 percent retreat in the MSCI World Index.
Since Mobius said on March 23 that the base for the rally is being built, the emerging-market gauge rose 20 percent, outpacing the global measure’s 13 percent advance.
Government stimulus programs from the U.S. to China have prompted Federal Reserve Chairman Ben S. Bernanke to say there’s evidence of “green shoots” in some markets. Reports on consumer confidence and manufacturing in the world’s largest economy last week spurred optimism the worst of the recession may be over.
Growth Outlook
The International Monetary Fund, the Washington-based lender with 185 member nations, said last month the world economy may shrink 1.3 percent this year, compared with its January prediction of 0.5 percent growth.
Short sellers are increasing bets against developing-nation stocks by the most since March 2007, a signal the biggest rally in 16 years may fizzle as profits plunge.
Short interest in the iShares MSCI Emerging Markets Index fund, which tracks equities in 23 developing nations, climbed 51 percent in March, the biggest jump in two years, according to New York Stock Exchange data compiled by Bloomberg. The growth in short sales, where investors borrow stock and sell it on the expectation prices will fall, marks a shift from the last three rebounds in emerging-market stocks. In those cases, traders closed out their bets.
Chrysler, based in Auburn Hills, Michigan, is the latest U.S. company to file for bankruptcy after a group of 20 secured lenders rejected an offer by the government that would have paid them $2.25 billion for $6.9 billion of debt, or 33 cents on the dollar.
‘Green Shoots’
“There are green shoots in the American economy,” Mobius said. “Some companies will declare lower earnings but there are still companies posting rising earnings.”
BNP Paribas Asset Management was also upbeat about the recovery of emerging-market stocks, saying shares in Brazil, Russia, India and China present the best combination for a recovery in economic growth amid continued volatility.
The investment firm turned positive on Russia in March and now holds more shares in the four so-called BRIC markets than benchmark indexes suggest, Martial Godet, who helps oversee the equivalent of $44 billion of assets as Paris-based head of investment management for new markets at BNP Paribas, said in an April 30 interview in Singapore. He said he expects the “outperformance” of the four markets to continue.
Even after the rebound this year, the emerging-market index is valued at 1.58 times book value, lower than its five-year average of 2.1 times. Based on estimated earnings, the measure has a multiple of 13 times.
‘Pretty Cheap’
“If you look at price-to-book value, you see that it’s below the average that we’ve seen for a number of years,” Mobius said. “We are not buying stocks that have a price- earnings ratio of over 10, by and large, with some exceptions, and we look at a five year time frame. Looking five years out, things look pretty cheap.”
Hong Kong-listed Chinese companies will be the best bet when the emerging markets embark on the bull market, with companies that supply commodities and cater to consumers benefiting the most, Mobius said. He also favors shares in Turkey, South Africa and Brazil, he added.
Happy days are here again! Enjoy them while they last...
"Optimism builds," says a headline in the Financial Times.
As predicted, the world markets are enjoying a bounce. People who had no idea there was anything wrong with the world financial system two years ago, now say the problem has been fixed.
Who fixed it? The people who had no idea what was wrong with it, of course.
What did they fix it with? The same thing that caused the problem they didn't see - debt.
Who makes sure it won't break again? The people who didn't notice the wheels coming off the last time.
Yesterday, the Dow rose 214 points. Oil closed over $54. Gold ended the day over $900. And dollar sank to $1.33 per euro.
Most interesting...bond yields, though still pathetically low, are rising. The U.S. 10-year note yields more than 3%. The long bond yields more than 4%.
The longer these trends go on, the more reasons people will find to believe that it is not just a bounce...but another major boom.
New York-based Economic Cycle Research Institute says, "The U.S. is on the cusp of a growth rate cycle upturn," the article explains.
Let's look at whether this optimism is justified.
On the housing front...U.S. houses are down 30% from their highs. The Case-Shiller index of housing prices has fallen for 30 months in a row. Isn't that enough?
Maybe. The latest data shows more sales - of new, as well as existing houses. And there are more housing starts too. But in the former boomiest states - California, Nevada and Florida - about half the sales are of foreclosed properties. These properties are hitting bargain prices...but pulling down the value of the entire housing stock. And there are still lots of houses to sell. So don't expect any major turnaround in prices. If prices have hit bottom - which we doubt - gains are likely to be very small...and they'll come very slowly.
When the housing crisis began, we estimated that prices needed to come down about 40% in order to make the average house affordable by the average person. But that was before the average person's income came down. If the depression continues, as we think it will, house prices should come down a further 10% to 20%.
And don't forget about the second wave of defaults headed our way. The Richebächer Letter's Rob Parenteau tells us that in 2011, the "Option ARM" and "Alt-A" home loans will reset at a higher rate...and some unlucky homeowners could see their mortgage payments as much as double. Millions will see their wealth disappear...and the ripple effect it will have on the banks and economy as a whole will be devastating.
Besides, if the United States is entering the "worst downturn since the Great Recession," who will have the money to buy a house? But that's the issue. Maybe the world is not entering a major downturn, after all. Maybe it was just a case of mass hysteria...a panic, like the Y2K bug...or terrorism...or swine flu. Maybe people are now getting over it...and getting back to business, just like they did before.
Consumers are becoming bolder. Consumer confidence measures are about 20% below the baseline metric of 1985...but that's a big improvement; they had been nearly 40% below the '85 standard.
There is some evidence that consumers are returning to their bad habits, too. Consumer spending is picking up - at least, that's what recent numbers from the discount stores show. They're taking up cheap thrills and necessities again. But luxury shops are still reporting drops of about 20% per year.
Major stock markets have rebounded 20% and more. But the real excitement has come in emerging markets. A few months ago, it looked as though China would be unable to decouple from the developed world. They were stuck, said analysts, like a rusty sink drain. The Middle Kingdom was headed towards recession just like everyone else. But then those clever Chinese seem to have found a wrench big enough to pop the joint. Almost unbelievably, China seems to have pulled off the much desired "V-shaped recovery." Instead, of contracting, China's figures show it expanding at a more than 8% rate.
China might be lying, of course. It seems very unlikely to us that China could have recovered so quickly. This is not a recession, we keep saying. It's a depression. And depressions demand structural changes - the kind that takes time.
Besides, eyewitness reports tell a story that sounds like a cross between "Grapes of Wrath and a repeat of Mao's Long March." That is Elliot Wilson's description after a recent trip into the heartland of the communist giant.
"Once-bustling malls are now empty," Wilson continues. "Plaza 66 in Shanghai, owned by Hong Kong-listed Hang Lung Properties, is a case in point. On a Friday afternoon, the 51,700 square meters of high-end retail space boasted exactly 11 customers...
"Everywhere's the same. I talk to the concierges of Shanghai's leading hotels, always men in the know. At the JC Mandarin, occupancy is at 40 percent in early February, against 80% a year ago. At the vast JW Marriott, it's even worse; just 25%..."
Office complexes too are "empty, empty, empty...Gemdale... 50 floors of office space completed last summer are all empty..."
But what the heck? Maybe we're wrong. Maybe China is already recovering. It may be a structural depression - but only for the developed countries, particularly the United States. Maybe it's only a recession for China. And maybe it's over. Seems almost unbelievable...but now, with so many wonders to wonder about we wonder why we bother to wonder at all.
Besides, other developing economies are reporting the same things - increases in exports after a catastrophic collapse at the end of the last year. You can measure the collapse easily just by looking at the Baltic Dry Index - which keeps track of bulk shipping rates. It fell by more than 90% last year. From its low, it's doubled - up 100%. But that still leaves it down 80% from a year ago.
Stock markets in emerging markets show similar increases. Brazil's stock market is up almost 90% from its low. South Korean stocks are up 71%. And Chinese stocks - those listed on the Shanghai exchange - have gained 50%.
Apparently, someone thinks the worst is over. Maybe that person is right. But we doubt that this rebound is the sign of a new, healthy boom. Credit expanded for half a century. The Bubble Epoch at its end caused trillions of dollars worth of errors. Many of those errors have already been corrected. But the economy the bubble built remains unreconstructed. Same mismanaged companies...same mismanaged regulators...same mismanaged banks. Exporting nations had gotten into the habit of earning net sales from the U.S.A. of $2 billion per day. Those earnings provided much of the speculative capital that created the Bubble Epoch prices. But that money has all but disappeared. And there's not much chance that it will return anytime soon.
Instead of a healthy new boom, our guess is that the world is enjoying a sick echo of the old one. Governments, led by the U.S.A., attempt to reinflate the bubble with guarantees and giveaways equal to an entire year's annual output of the world's largest economy. Since every penny of this money is borrowed, it makes sense that every penny will have to be withdrawn from the world economy at some point.
In fact, economists are already looking ahead to the moment when deflation fears give way to inflation fears.
"Inflation Nation," is the title of an editorial in today's International Herald Tribune. In it, Alan Meltzer argues, "If President Obama and the Fed continue down their current path, we could see a repeat of those dreadful inflation years [the 1970s]."
Professor Meltzer reminds us that cutting off the inflation of the '70s wasn't easy. The feds turned the screws...and let the prime rate go above 21%. Of course, today's Fed has this information. And Paul Volcker, who was Fed chairman during that period, is now an economic advisor to Barack Obama. Still, "I do not worry about their knowledge or technical expertise," continues Mr. Meltzer, "What I doubt is the commitment of the administration and the autonomy of the Federal Reserve ... Under Bernanke, the Fed has sacrificed its independence and become the monetary arm of the Treasury..."
"The Fed's job is to take the punch bowl away," said an Eisenhower era chief. But we have come a long way since the Ike and Dick years. This time, the inflationary party is likely to get out of control, happy days will be here for a while...and then some very sad days are likely.
When the I.O.U.S.A. team interviewed Paul Volcker in December of 2007, he said, "...when I look back on my lifetime, it is obvious that letting inflation get a little bit out of control and not dealing with economic problems effectively in the'70s led to a very uncomfortable crisis. We don't want to have to go through big recessions again to teach people fiscal responsibility. Instead, we should anticipate what needs to be done while maintaining the growth of the economy. And the threat will always be an unstable economy and an unstable currency. And that's not just destructive to economic life, but it can be destructive to America's position in the world, which to me is the greatest concern."
By Krishna Guha and Sarah O’Connor in Washington May 4 2009
Almost two months after Ben Bernanke, chairman of the US Federal Reserve, uttered the words “green shoots” of recovery in a television interview, debate continues to rage as to whether the world economy is starting to stabilise and will soon turn the corner.
Compared with the start of the year – when the global economy was falling off a cliff in a synchronised contraction of unprecedented rapidity – the situation has improved dramatically. While almost all of the world’s leading economies are still shrinking, some at a still very rapid pace, forward-looking economic data point at least to a moderation in the rate of decline and potentially much more.
The outlook in many parts of Europe – including the UK and Germany – and in Japan has not brightened very much, but the outlook in the US and China, the two most plausible engines of global recovery, looks better.
Four developments in particular hold promise for the future: some easing in financial conditions globally; a pick-up in growth in China; an apparent bottoming out in US home sales and house construction; and a patchy increase in US consumer spending.
The question is whether the plateauing in global activity apparently in train is the final bottom in this economic cycle and whether the so-called “green shoots” represent the beginnings of a sustainable rebound.
Lawrence Summers, senior economic adviser to US President Barack Obama, remains cautious. He told Fox News on Sunday April 26: “That sense of unremitting free fall that we had a month or two ago is not present today.” But he added: “It’s going to be a very long road. There are going to be steps forward and there are also going to be steps backwards.”
In most recessions, a slowing in the rate of decline naturally leads to a bottoming and then a recovery as investors, businesses and consumers stop worrying about economic Armageddon, satisfy themselves that past excesses have been worked out and start buying, hiring and spending again.
The New York-based Economic Cycle Research Institute says the US is “on the cusp of a growth rate cycle upturn” – a slowing in the rate of decline. It adds: “Over the last 75 years, growth rate cycle upturns during every recession were followed zero to four months later by the end of the recession itself. No exceptions.”
In fact, as the ECRI admits, there is one exception: the Great Depression in 1931. This may not be Great Depression Mark II but nor is it a normal recession, and the parallels with 1931 are close enough to worry that the usual transition from slowing decline to stabilisation and recovery might not hold this time either.
There will be a temporary fillip to growth later this year from a classic inventory cycle. Manufacturing companies cut production so fast in the final quarter of 2008 that production is now running below sales. At some point, companies will be satisfied that they no longer have excess inventories and will raise production to match the current prevailing level of sales. This should deliver a quarter or two of growth. The question is what happens afterwards.
China returning to strong growth mode and avoiding a meltdown of its own is a necessary condition for a global upturn, but not a sufficient one. With Europe and Japan in rapid decline, it will probably take a homegrown US recovery to produce an early global turnabout. This is remarkable, considering the US was the epicentre of the crisis, and in all past cases such countries have exported their way back to growth.
It is possible to sketch out what might power a US recovery. The brutal contraction in the home construction industry is abating (even if home prices are still declining), taking away a big drag on growth. An end to economic freefall could unleash pent-up demand in sectors such as autos, where sales are running below the level required to maintain the current stock of vehicles. Moreover, there is tremendous fiscal and monetary stimulus in the pipeline.
US consumer spending returned to growth at an annualised rate of 2.2 per cent in the first quarter of this year, after falling at about 4 per cent annualised in each of the preceding two quarters. If this can be sustained, the prospects for global recovery look good.
However, Sheryl King, an economist at Merrill Lynch, fears “it is a one-quarter wonder”. Higher spending was underpinned by one-off increases in social security payments and decreases in personal taxes that boosted disposable income even as earned income fell as a result of huge job losses.
Looking ahead, even with further aid from stimulus tax breaks and transfers such as benefit payments, unless the US jobs market improves sharply it is hard to see where consumers will find the money to support significant increases in spending.
Moreover, the US savings rate – currently 4.2 per cent – could rise a lot further if households try to repair lost wealth. This is very hard to predict. To restore their net worth as of mid-2007, they would have to save or gain through capital appreciation $12,885bn (€9,674bn, £8,661bn). But to restore their net worth as of end-2005 would require only half that – $6,621bn. The time-frame over which they might try to restore lost wealth is highly uncertain, as is the share that might come from further rebounds in stock prices.
Tight credit could suppress any rebound in spending, furthermore. “We will not have a sustainable recovery without a stabilisation of our financial system and credit markets,” Mr Bernanke said in a speech last month. But he added: “We are making progress on that front.”
Equities have bounced about 30 per cent in the FTSE All-World index from their lows and some indicators of credit market stress have eased, partly in response to policy interventions, though shares are still lower than on January 1 and indicators of credit market stress remain at high levels.
Mr Bernanke believes fixing the financial system is the key to recovery, as it would end the “feedback loop” between the shrinking economy and the damaged financial sector and replace it with a virtuous circle of more credit, higher asset prices and more growth. But some policymakers worry that, while a financial fix is necessary, it might not be enough to fuel decent growth. Households with damaged balance sheets may not respond vigorously even to a dramatic easing in the supply and price of credit.
Certainly, the path of US consumer spending remains deeply uncertain. It is quite possible that everything will fall into place, and a financial fix, cheaper credit, higher stock prices, better job market conditions, improving confidence and sustained spending will reinforce each other in the US and globally. If so, the green shoots will flourish and the US – with China – could lead the world out of recession and into sustained recovery starting this year.
But it is also possible the green shoots will wither with contraction or stagnation in US private demand, certainly if there is a further financial relapse, perhaps even if there is financial repair.
If that is the case, the US could find itself in a situation loosely analogous to that of Japan in the mid-1990s – not collapsing, but unable to power a sustained strong recovery and requiring a repeat fiscal stimulus. Genuine world recovery would then come only when an adequate replacement source of global demand, possibly in some combination of Asia and continental Europe, arose – which could take many years.
What is undeniable, though, is that for the first time in many months there are now some upside risks to the global economic outlook as well as many remaining downside risks.
FOUR AREAS WHERE GREEN SHOOTS COULD SPROUT:
US housing
With US mortgage rates at record lows and national home prices down more than 30 per cent from their 2005 peak, there are hopes that the seeds of a housing market recovery may soon sprout, writes Saskia Scholtes. In some of the hardest-hit markets, bargain hunters have begun to emerge. In California, such buyers have helped spur 80 per cent jumps in sales in both February and March.
National sales of existing and new homes in February rose by 5.1 per cent and 4.7 per cent respectively, while housing starts and permits were also higher. Those figures fell once more in March, but at a more modest pace than in previous months, suggesting that activity may be at or near a bottom.
Prices, however, have continued their relentless decline. The S&P Case Shiller house price index of the 20 biggest US cities has fallen for 30 consecutive months. February was the first time since October 2007 that the index did not report record annual price drops.
Foreclosures make up about half of sales in the boom-and-bust states such as California and Florida. This means that while sales rise, prices continue to fall as more distressed inventory comes to market. “Foreclosures have crowded out voluntary sales, but they have helped total sales find a bottom,” says Michelle Meyer of Barclays Capital, adding that deep discounts and low mortgage rates were attracting buyers.
A recovery in housing will be slow and feeble, however. Economists point to a large overhang of new and existing homes for sale, as well as a large pent-up inventory of homes waiting for more price stability. As prices lag behind demand, analysts expect further price falls until a bottoming out in the second half of 2010. Sustained recovery will come only when government breaks the “negative feedback loops of unemployment and the credit crunch,” says Ms Meyer.
US retail
Wal-Mart, the largest US retailer, noted last week a recent shift in American shopping patterns, writes Jonathan Birchall.
Eduardo Castro-Wright, head of the company’s US stores, said lower payroll taxes – due to government stimulus efforts – and cheaper fuel meant sales growth had become less dependent on low-cost groceries and other basics. “People are using that money to buy some of the discretionary items that they were not buying before.”
Elsewhere anecdotal evidence also suggests that the steep declines in discretionary spending seen in the fourth quarter have moderated, although overall spending remains soft. Muhtar Kent, chief executive of Coca-Cola, suggested that lower fuel prices might be supporting sales in fast food restaurants. JC Penney, a mid-priced US department store and useful barometer of Main Street sentiment, has also twice raised its earnings guidance, on stronger than expected but still declining sales. “I would not say we are more optimistic, but we are comforted that it is more predictable,” says Mike Ullman. The retailer still expects compar- able sales to be down 10 per cent this year, and has cut back inventories.
Mall spending is forecast to see combined comparable sales for March and April down around 1 per cent, while sales in May could be flat or slightly up, according to the International Council of Shopping Centres.
Some sectors remain hard hit. Luxury retailers Saks and Neiman Marcus have continued to report annualised monthly declines of 20 per cent or more in comparable sales. Frank Blake, chief executive of Home Depot, the home improvement retailer, says that markets that were hit hard early, such as California, are no longer the worst. “It’s not like it’s good. It’s just less bad,” says Mr Blake.
Financial markets
World equity markets have rallied sharply since early March, with key indices up more than 30 per cent, writes Aline Van Duyn.
Over the same period, many of the indicators that signalled enormous levels of distress in the world’s financial system have also improved. It is clear that financial markets are no longer pricing in a complete collapse in the global economy.
Measures of stress in the banking system, such as the interest rates charged among banks, have fallen sharply in recent weeks. The widely watched London interbank offered rate (Libor) has fallen to its lowest this year. However, most bank stress indicators remain high relative to historic levels, or to where they stood before the devastating bankruptcy of Lehman Brothers last September.
“The recession is ending around now, and the stock market is anticipating this,” says Larry Kantor of Barclays Capital, who switched to a bullish stance on equities in March. “Credit markets have not gained as much, but are heading in the same direction.”
The costs of borrowing have even fallen significantly for risky companies – those with such high levels of debt that a default is possible if earnings decrease or if it is difficult to refinance debt that comes due. Some of these have also been able to borrow new debt, at least in the US market. In Europe, investor demand is more limited.
Despite the positive signs, there are still concerns that stresses in the banking system and the closure of large sources of funding, such as the securitised debt markets, could again hurt fragile investor confidence.
Goldman Sachs notes that funding prospects “remain very challenging”. New bond issues remain heavily skewed toward high-quality credits, and we anticipate only a very slow improvement in this pattern over the next year.
China
Perhaps more than any major economy, China is showing signs of improvement, writes Geoff Dyer. Indicators suggest that the economy began to recover in March with industrial production rising 8.3 per cent from 2.8 per cent in January-February.
The official figure for first-quarter growth of 6.1 per cent fell from 6.8 per cent in the fourth quarter. Independent estimates, however, suggest sequential growth picked up from 1-2 per cent in the fourth quarter to about 5 per cent in the first quarter. Economists are revising growth forecasts upwards again. Qing Wang of Morgan Stanley says there was a “sharp sequential rebound” in March and has lifted his 2009 forecast from 5.5 per cent to 7 per cent.
Beijing has strong-armed banks into extending Rmb4560bn ($660bn, €498bn, £444bn) in loans in the first three months of the year – more than all new bank lending in 2008. This has backed state infrastructure spending – the Dragonomics consultancy estimates the rate of increase in fixed asset investment doubled in the first quarter to 31.4 per cent.
A sustainable recovery will require private investment and consumption. However industrial profits margins have plunged in recent months, which bodes ill for capital spending. Job cuts in factories and reduced salaries for many others are likely to drag on consumer demand for months. More aggressive measures to boost consumption, such as big rises in healthcare spending or income tax cuts, are being called for.
The current account surplus remains huge, raising fears that the economy has yet to undergo the rebalancing occurring in the US and elsewhere. The trade surplus could shrink this year as the investment-led recovery pulls in more imports. However, the surplus could also indicate a larger over-capacity that has yet to be absorbed.
More than one in five homeowners underwater: Zillow
May 6, 2009
NEW YORK (Reuters) - Home values in the United States extended their fall in the first quarter, with more than one in five homeowners now owing more on their mortgages than their homes are worth, real estate website Zillow.com said on Wednesday. U.S. home values posted a year-over-year decline of 14.2 percent to a Zillow Home Value Index of $182,378, resulting in a total 21.8 percent drop since the market peaked in 2006, according to Zillow's first-quarter Real Estate Market Reports, which encompass 161 metropolitan areas and cover the value changes in all homes, not just homes that have recently sold.
U.S. homes lost $704 billion in value during the first quarter and have depreciated $3.8 trillion in the past 12 months, according to analysis of the reports.
Declining home values left 21.9 percent of all American homeowners with negative equity by the end of the first quarter, Zillow said.
By comparison, 17.6 percent of all homeowners owed more on their mortgage than their property was worth in the fourth quarter of 2008, and 14.3 percent were underwater in the third quarter of last year, the reports showed.
Nine consecutive quarters of declines have left eight regions -- including the Modesto, California, Stockton, California, and Fort Myers, Florida regions -- with median value declines of more than 50 percent since those markets peaked.
In 85 of the 161 markets covered in the report, the annualized change over the past five years is negative or flat, the reports showed.
But in an early sign of improvement, 17 metropolitan areas across the country -- notably several hard-hit markets in California, including Los Angeles, San Diego and Modesto -- have seen two or more consecutive quarters of smaller year-over-year declines in home values, the reports showed.
Meanwhile, potential sellers appear to be holding back until evidence of an improved housing market. In a separate survey of homeowner sentiment, nearly one-third, or 31 percent, of homeowners said they would be at least somewhat likely to put their homes on the market in the next 12 months if they saw signs of a recovering real estate market, the reports showed.
"Slowing declines in select markets are a bright spot or, at least, what passes for one given current market conditions," Dr. Stan Humphries, Zillow vice president of data and analytics, said in a statement.
"Unfortunately, given the magnitude of the current rates of decline, we're still many months away from a bottom even as depreciation slows," he said. "Moreover, the additional information we have this quarter on 'shadow inventory,' with one-third of homeowners indicating they would like to put their home on the market if conditions improve, confirms our earlier fears that a bottom in home values could be quite protracted."
"By our calculations, this could translate into as many as 20 million homes that could seep into the market as prices stabilize, maintaining a constant stream of supply that far outpaces demand, thus keeping prices flat. I'm doubtful that we'll see the bottom until 2010, and thereafter it's increasingly clear that we're likely to have a long bottom before we see meaningful recovery in home values," Humphries said.
Of all transactions is the past 12 months, 20.4 percent were foreclosures, up slightly from 19.9 percent in the fourth quarter, while 11.9 percent of homes sold were short sales, also up slightly from 10.9 percent in the fourth quarter, the reports showed.
Rich Default on Luxury Homes Like Subprime Victims
By Bob Ivry and Dan Levy
May 6 (Bloomberg) -- Chuck Dayton put down a quarter of the $950,000 purchase price when he bought his house in Newport Beach, California, in 2004. He was making $500,000 a year with his drywall company and he expected home values to keep rising.
Then the mortgage market collapsed, new construction stopped and builders no longer needed his services. Dayton, 43, went into default four months ago because he couldn’t afford payments on the three-bedroom home, located within a block of the Pacific Ocean. He hopes his lender will agree to sell the seven-year-old house for less than he owes to avoid a foreclosure.
“It’s just wait and see right now,” Dayton said.
Borrowers such as Dayton, whose 2004 compensation was almost 10 times the median U.S. household income, are becoming trapped by the same issue facing the poorest subprime homeowners: falling home prices erase equity and make it impossible to sell or refinance without losing money.
The number of U.S. homes valued at more than $729,750, the jumbo-loan limit in the most affluent areas, entering the foreclosure process jumped 127 percent during the first 10 weeks of this year from the same period of 2008, data compiled by RealtyTrac Inc. of Irvine, California, show. The rate rose 72 percent for homes valued at less than $417,000 and 78 percent for all homes, RealtyTrac said.
‘Trickle Up’
“It’s the trickle-up effect,” said David Adamo, chief executive officer of Luxury Mortgage Corp., a home-loan bank in Stamford, Connecticut. “Just like homeowners in smaller homes, these homeowners anticipated being able to refinance mortgages to continue making payments and at a future date sell for a gain and put it toward their next home. That strategy backfired when the market for jumbo mortgages dried up.”
Jumbo loans are larger than what government-controlled Fannie Mae and Freddie Mac will buy or guarantee, currently $417,000 in most areas. Jumbo lending slowed in the fourth quarter to $11 billion, or 4 percent of the mortgage market, the lowest quarterly figure since Inside Mortgage Finance, a Bethesda, Maryland-based trade publication, started tracking the data in 1990.
Subprime loans were made available to borrowers who never proved they could make monthly payments on time. The loans accounted for more than 20 percent of the U.S. mortgage market in 2005, up from less than 8 percent in 2003, according to Inside Mortgage Finance.
Subprime Implosion
Defaults by subprime borrowers began rising in 2007. Since then, financial institutions that had bet on earning cash flow from home loans packaged into securities have announced credit- market losses and writedowns of almost $1.4 trillion, data compiled by Bloomberg show.
Among all homeowners, 21.8 percent were underwater in the first quarter, Seattle-based real estate data service Zillow.com said in a report today. At the end of the fourth quarter, 17.6 percent of homeowners owed more than their original mortgage, while 14.3 percent had negative equity three months earlier.
Property values dropped 14 percent from a year earlier in the first quarter, reducing the median value of all U.S. single- family homes, condominiums and cooperatives to $182,378, Zillow said. The gain in underwater homeowners will lead to more bank repossessions, the company said.
The U.S. government has lent banks $392 billion to stem the losses through its Troubled Asset Relief Program. Another $12.4 trillion was spent, lent or guaranteed by the government and the Federal Reserve to stop the longest recession since the 1930s.
Loan Losses
About $500 billion of prime-jumbo mortgages are bundled into bonds, according to Memphis, Tennessee-based FTN Financial. In February, JPMorgan Chase & Co. analysts John Sim and Abhishek Mistry in New York almost doubled their projections for losses on those mortgages to as much as 10 percent because of increasing defaults.
Foreclosures have come to the Hamptons, the beach towns about 100 miles east of New York City on Long Island, where homeowners have included Blackstone Group LP Chief Executive Officer Stephen Schwarzman, hedge fund manager John Paulson and Goldman Sachs Group Inc. CEO Lloyd Blankfein.
Almost 90 borrowers entered the foreclosure process in the towns of East Hampton and Southampton in the first 10 weeks of 2009. That compared with 109 in the same period last year and 73 in the first 10 weeks of 2007, according to the Real Estate Report in West Islip, New York.
Hamptons Sales Fall
Home sales in the Hamptons fell 67 percent in the first quarter from a year earlier, the most since records were first kept in 1982, according to Town & Country Real Estate of the East End LLC. The median sale price slid 28 percent from a year earlier.
Rule changes spurred by rising defaults now require lenders to work with delinquent New York homeowners before beginning the foreclosure process, said Pat Ammirati, president of the Real Estate Report.
“There was this unrealistic view that the crazy financing was limited to subprime when of course it was across the board,” said Andrew Laperriere, Washington-based managing director at research firm International Strategy & Investment Group. “A lot of jumbo mortgages were nothing down with high debt-to-income ratios.”
Short Sale?
Dayton said he financed the purchase of his home, 40 miles south of Los Angeles in Orange County, with a payment-option adjustable-rate mortgage now serviced by JPMorgan’s Washington Mutual. The option allowed him to pay less each month than the interest on the loan, with any unpaid amount added to his debt.
Dayton refinanced in February 2007 with a $1 million loan from Washington Mutual, and used some of the proceeds for business expenses, said Robin Milonakis, his agent at Altera Real Estate in Dana Point, California. He also took out two private mortgages and now has a balance of $106,000 on those loans, she said.
Dayton went into default on Jan. 29 and owes $46,584 in delinquent payments and penalties, according to First American CoreLogic, a Santa Ana, California-based mortgage data firm. Dayton said he’s found a buyer willing to pay $950,000.
The foreclosure process typically takes about a year. That means jumbo-loan defaults, which are climbing at the fastest pace in at least 15 years, will increase over the next year, according to LPS Applied Analytics in Jacksonville, Florida.
Goodbye Jumbo
President Barack Obama’s Homeowner Affordability and Stability Plan has no provision to help jumbo mortgage borrowers. The plan focuses on shoring up home loans eligible to be bought by Fannie Mae and Freddie Mac, also called conforming loans.
“The government has thumbed their noses at people who have jumbo mortgages,” said Steve Habetz, president of Threshold Mortgage Co. in Westport, Connecticut.
The share of U.S. homes in the foreclosure process that are valued at more than $729,750 increased to 2.83 percent this year through March 10 from 2.21 percent in the same 10 weeks of 2008, according to RealtyTrac. In the same 10-week period, the share of homes valued at $417,000 or less in foreclosure fell to 87 percent from 89.7 percent in 2008, RealtyTrac said.
Price Slump
California is hardest hit by luxury-home foreclosures. More than 1,500 borrowers with properties in the state that once sold for more than $1 million defaulted on their mortgages in February, said Mark Hanson, managing director of the Field Check Group, a real estate company in Palo Alto, California.
About 3 percent, or 254,745, of the state’s 8.5 million houses are assessed for more than $1 million by county assessors, according to San Diego-based MDA DataQuick, a real estate monitoring company.
While sales for all homes in the state increased 2.5 percent last year from 2007, sales of homes valued at more than $1 million declined 43 percent to the lowest since 2003, MDA DataQuick reported. Part of the reason is falling prices as California’s median home price dropped 41 percent in February to $247,590, according to the state’s Association of Realtors.
Another explanation may be stricter lending guidelines, Hanson said.
“You have to have income of $250,000, a 20 percent down payment and near perfect credit to buy a $1 million home now, so the number of buyers isn’t what it was,” Hanson said. “There just aren’t enough buyers to sop up supply. We’re seeing the collapse of the high-end market.”
‘What to Do’
Values have taken longer to decline in more affluent areas, taking some homeowners by surprise, said Philip Tirone, president of Los Angeles-based Mortgage Equity Group Inc.
“People are coming to me to do a refinance or buy another property, and what they thought they had in the equity of the home they don’t have and they don’t know what to do,” Tirone said.
Delinquencies are caused by people who owe more on their mortgages than their houses are worth, said James McLauchlen, a broker and appraiser in Southampton, New York, for James R. McLauchlen Real Estate Inc. and Hamptons Appraisal Service Corp.
“They throw their hands up and say I’m not going to kill myself trying to take care of this debt,” McLauchlen said. “Some folks work hard to make payments. Others just can’t pay. They offer a deed in lieu of foreclosure and off they go.”
Dayton said he doesn’t know when he’ll restart his drywall business, which he shut down in November for lack of work.
“This market is not even close to bottoming out, in my opinion,” Dayton said. “It continues to drop.”
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Emerging-Market Stocks May ‘Break Out’ by Year-End, Mobius Says
Chen Shiyin
4 May 2009
(Bloomberg) – Emerging-market stocks may “break out” into a bull market at the end of the year as falling interest rates and easing inflation make equities more attractive, Templeton Asset Management Ltd.’s Mark Mobius said.
Mobius reiterated that emerging markets are “building a base” for the next rally. Chrysler LLC’s bankruptcy filing and other “short-term risks” may hold back the rally, while speculators may bet stocks will fall, he said.
“We are at the base building period for the next bull market,” Mobius, who helps oversee $20 billion in emerging- market assets at San Mateo, California-based Templeton, said yesterday in an interview in Bali, Indonesia, where he’s attending a conference. “What I see happening is perhaps this continuing till the end of the year, and then a break out.”
Developing markets made up all 10 of the best-performing stock indexes in 2009, led by Peru and China. The MSCI Emerging Markets Index has jumped 17 percent this year, compared with a 2.6 percent retreat in the MSCI World Index.
Since Mobius said on March 23 that the base for the rally is being built, the emerging-market gauge rose 20 percent, outpacing the global measure’s 13 percent advance.
Government stimulus programs from the U.S. to China have prompted Federal Reserve Chairman Ben S. Bernanke to say there’s evidence of “green shoots” in some markets. Reports on consumer confidence and manufacturing in the world’s largest economy last week spurred optimism the worst of the recession may be over.
Growth Outlook
The International Monetary Fund, the Washington-based lender with 185 member nations, said last month the world economy may shrink 1.3 percent this year, compared with its January prediction of 0.5 percent growth.
Short sellers are increasing bets against developing-nation stocks by the most since March 2007, a signal the biggest rally in 16 years may fizzle as profits plunge.
Short interest in the iShares MSCI Emerging Markets Index fund, which tracks equities in 23 developing nations, climbed 51 percent in March, the biggest jump in two years, according to New York Stock Exchange data compiled by Bloomberg. The growth in short sales, where investors borrow stock and sell it on the expectation prices will fall, marks a shift from the last three rebounds in emerging-market stocks. In those cases, traders closed out their bets.
Chrysler, based in Auburn Hills, Michigan, is the latest U.S. company to file for bankruptcy after a group of 20 secured lenders rejected an offer by the government that would have paid them $2.25 billion for $6.9 billion of debt, or 33 cents on the dollar.
‘Green Shoots’
“There are green shoots in the American economy,” Mobius said. “Some companies will declare lower earnings but there are still companies posting rising earnings.”
BNP Paribas Asset Management was also upbeat about the recovery of emerging-market stocks, saying shares in Brazil, Russia, India and China present the best combination for a recovery in economic growth amid continued volatility.
The investment firm turned positive on Russia in March and now holds more shares in the four so-called BRIC markets than benchmark indexes suggest, Martial Godet, who helps oversee the equivalent of $44 billion of assets as Paris-based head of investment management for new markets at BNP Paribas, said in an April 30 interview in Singapore. He said he expects the “outperformance” of the four markets to continue.
Even after the rebound this year, the emerging-market index is valued at 1.58 times book value, lower than its five-year average of 2.1 times. Based on estimated earnings, the measure has a multiple of 13 times.
‘Pretty Cheap’
“If you look at price-to-book value, you see that it’s below the average that we’ve seen for a number of years,” Mobius said. “We are not buying stocks that have a price- earnings ratio of over 10, by and large, with some exceptions, and we look at a five year time frame. Looking five years out, things look pretty cheap.”
Hong Kong-listed Chinese companies will be the best bet when the emerging markets embark on the bull market, with companies that supply commodities and cater to consumers benefiting the most, Mobius said. He also favors shares in Turkey, South Africa and Brazil, he added.
China Makes Recession Recovery
By Bill Bonner
May 6th, 2009
Happy days are here again! Enjoy them while they last...
"Optimism builds," says a headline in the Financial Times.
As predicted, the world markets are enjoying a bounce. People who had no idea there was anything wrong with the world financial system two years ago, now say the problem has been fixed.
Who fixed it? The people who had no idea what was wrong with it, of course.
What did they fix it with? The same thing that caused the problem they didn't see - debt.
Who makes sure it won't break again? The people who didn't notice the wheels coming off the last time.
Yesterday, the Dow rose 214 points. Oil closed over $54. Gold ended the day over $900. And dollar sank to $1.33 per euro.
Most interesting...bond yields, though still pathetically low, are rising. The U.S. 10-year note yields more than 3%. The long bond yields more than 4%.
The longer these trends go on, the more reasons people will find to believe that it is not just a bounce...but another major boom.
New York-based Economic Cycle Research Institute says, "The U.S. is on the cusp of a growth rate cycle upturn," the article explains.
Let's look at whether this optimism is justified.
On the housing front...U.S. houses are down 30% from their highs. The Case-Shiller index of housing prices has fallen for 30 months in a row. Isn't that enough?
Maybe. The latest data shows more sales - of new, as well as existing houses. And there are more housing starts too. But in the former boomiest states - California, Nevada and Florida - about half the sales are of foreclosed properties. These properties are hitting bargain prices...but pulling down the value of the entire housing stock. And there are still lots of houses to sell. So don't expect any major turnaround in prices. If prices have hit bottom - which we doubt - gains are likely to be very small...and they'll come very slowly.
When the housing crisis began, we estimated that prices needed to come down about 40% in order to make the average house affordable by the average person. But that was before the average person's income came down. If the depression continues, as we think it will, house prices should come down a further 10% to 20%.
And don't forget about the second wave of defaults headed our way. The Richebächer Letter's Rob Parenteau tells us that in 2011, the "Option ARM" and "Alt-A" home loans will reset at a higher rate...and some unlucky homeowners could see their mortgage payments as much as double. Millions will see their wealth disappear...and the ripple effect it will have on the banks and economy as a whole will be devastating.
Besides, if the United States is entering the "worst downturn since the Great Recession," who will have the money to buy a house? But that's the issue. Maybe the world is not entering a major downturn, after all. Maybe it was just a case of mass hysteria...a panic, like the Y2K bug...or terrorism...or swine flu. Maybe people are now getting over it...and getting back to business, just like they did before.
Consumers are becoming bolder. Consumer confidence measures are about 20% below the baseline metric of 1985...but that's a big improvement; they had been nearly 40% below the '85 standard.
There is some evidence that consumers are returning to their bad habits, too. Consumer spending is picking up - at least, that's what recent numbers from the discount stores show. They're taking up cheap thrills and necessities again. But luxury shops are still reporting drops of about 20% per year.
Major stock markets have rebounded 20% and more. But the real excitement has come in emerging markets. A few months ago, it looked as though China would be unable to decouple from the developed world. They were stuck, said analysts, like a rusty sink drain. The Middle Kingdom was headed towards recession just like everyone else. But then those clever Chinese seem to have found a wrench big enough to pop the joint. Almost unbelievably, China seems to have pulled off the much desired "V-shaped recovery." Instead, of contracting, China's figures show it expanding at a more than 8% rate.
China might be lying, of course. It seems very unlikely to us that China could have recovered so quickly. This is not a recession, we keep saying. It's a depression. And depressions demand structural changes - the kind that takes time.
Besides, eyewitness reports tell a story that sounds like a cross between "Grapes of Wrath and a repeat of Mao's Long March." That is Elliot Wilson's description after a recent trip into the heartland of the communist giant.
"Once-bustling malls are now empty," Wilson continues. "Plaza 66 in Shanghai, owned by Hong Kong-listed Hang Lung Properties, is a case in point. On a Friday afternoon, the 51,700 square meters of high-end retail space boasted exactly 11 customers...
"Everywhere's the same. I talk to the concierges of Shanghai's leading hotels, always men in the know. At the JC Mandarin, occupancy is at 40 percent in early February, against 80% a year ago. At the vast JW Marriott, it's even worse; just 25%..."
Office complexes too are "empty, empty, empty...Gemdale... 50 floors of office space completed last summer are all empty..."
But what the heck? Maybe we're wrong. Maybe China is already recovering. It may be a structural depression - but only for the developed countries, particularly the United States. Maybe it's only a recession for China. And maybe it's over. Seems almost unbelievable...but now, with so many wonders to wonder about we wonder why we bother to wonder at all.
Besides, other developing economies are reporting the same things - increases in exports after a catastrophic collapse at the end of the last year. You can measure the collapse easily just by looking at the Baltic Dry Index - which keeps track of bulk shipping rates. It fell by more than 90% last year. From its low, it's doubled - up 100%. But that still leaves it down 80% from a year ago.
Stock markets in emerging markets show similar increases. Brazil's stock market is up almost 90% from its low. South Korean stocks are up 71%. And Chinese stocks - those listed on the Shanghai exchange - have gained 50%.
Apparently, someone thinks the worst is over. Maybe that person is right. But we doubt that this rebound is the sign of a new, healthy boom. Credit expanded for half a century. The Bubble Epoch at its end caused trillions of dollars worth of errors. Many of those errors have already been corrected. But the economy the bubble built remains unreconstructed. Same mismanaged companies...same mismanaged regulators...same mismanaged banks. Exporting nations had gotten into the habit of earning net sales from the U.S.A. of $2 billion per day. Those earnings provided much of the speculative capital that created the Bubble Epoch prices. But that money has all but disappeared. And there's not much chance that it will return anytime soon.
Instead of a healthy new boom, our guess is that the world is enjoying a sick echo of the old one. Governments, led by the U.S.A., attempt to reinflate the bubble with guarantees and giveaways equal to an entire year's annual output of the world's largest economy. Since every penny of this money is borrowed, it makes sense that every penny will have to be withdrawn from the world economy at some point.
In fact, economists are already looking ahead to the moment when deflation fears give way to inflation fears.
"Inflation Nation," is the title of an editorial in today's International Herald Tribune. In it, Alan Meltzer argues, "If President Obama and the Fed continue down their current path, we could see a repeat of those dreadful inflation years [the 1970s]."
Professor Meltzer reminds us that cutting off the inflation of the '70s wasn't easy. The feds turned the screws...and let the prime rate go above 21%. Of course, today's Fed has this information. And Paul Volcker, who was Fed chairman during that period, is now an economic advisor to Barack Obama. Still, "I do not worry about their knowledge or technical expertise," continues Mr. Meltzer, "What I doubt is the commitment of the administration and the autonomy of the Federal Reserve ... Under Bernanke, the Fed has sacrificed its independence and become the monetary arm of the Treasury..."
"The Fed's job is to take the punch bowl away," said an Eisenhower era chief. But we have come a long way since the Ike and Dick years. This time, the inflationary party is likely to get out of control, happy days will be here for a while...and then some very sad days are likely.
When the I.O.U.S.A. team interviewed Paul Volcker in December of 2007, he said, "...when I look back on my lifetime, it is obvious that letting inflation get a little bit out of control and not dealing with economic problems effectively in the'70s led to a very uncomfortable crisis. We don't want to have to go through big recessions again to teach people fiscal responsibility. Instead, we should anticipate what needs to be done while maintaining the growth of the economy. And the threat will always be an unstable economy and an unstable currency. And that's not just destructive to economic life, but it can be destructive to America's position in the world, which to me is the greatest concern."
Optimism builds
By Krishna Guha and Sarah O’Connor in Washington
May 4 2009
Almost two months after Ben Bernanke, chairman of the US Federal Reserve, uttered the words “green shoots” of recovery in a television interview, debate continues to rage as to whether the world economy is starting to stabilise and will soon turn the corner.
Compared with the start of the year – when the global economy was falling off a cliff in a synchronised contraction of unprecedented rapidity – the situation has improved dramatically. While almost all of the world’s leading economies are still shrinking, some at a still very rapid pace, forward-looking economic data point at least to a moderation in the rate of decline and potentially much more.
The outlook in many parts of Europe – including the UK and Germany – and in Japan has not brightened very much, but the outlook in the US and China, the two most plausible engines of global recovery, looks better.
Four developments in particular hold promise for the future: some easing in financial conditions globally; a pick-up in growth in China; an apparent bottoming out in US home sales and house construction; and a patchy increase in US consumer spending.
The question is whether the plateauing in global activity apparently in train is the final bottom in this economic cycle and whether the so-called “green shoots” represent the beginnings of a sustainable rebound.
Lawrence Summers, senior economic adviser to US President Barack Obama, remains cautious. He told Fox News on Sunday April 26: “That sense of unremitting free fall that we had a month or two ago is not present today.” But he added: “It’s going to be a very long road. There are going to be steps forward and there are also going to be steps backwards.”
In most recessions, a slowing in the rate of decline naturally leads to a bottoming and then a recovery as investors, businesses and consumers stop worrying about economic Armageddon, satisfy themselves that past excesses have been worked out and start buying, hiring and spending again.
The New York-based Economic Cycle Research Institute says the US is “on the cusp of a growth rate cycle upturn” – a slowing in the rate of decline. It adds: “Over the last 75 years, growth rate cycle upturns during every recession were followed zero to four months later by the end of the recession itself. No exceptions.”
In fact, as the ECRI admits, there is one exception: the Great Depression in 1931. This may not be Great Depression Mark II but nor is it a normal recession, and the parallels with 1931 are close enough to worry that the usual transition from slowing decline to stabilisation and recovery might not hold this time either.
There will be a temporary fillip to growth later this year from a classic inventory cycle. Manufacturing companies cut production so fast in the final quarter of 2008 that production is now running below sales. At some point, companies will be satisfied that they no longer have excess inventories and will raise production to match the current prevailing level of sales. This should deliver a quarter or two of growth. The question is what happens afterwards.
China returning to strong growth mode and avoiding a meltdown of its own is a necessary condition for a global upturn, but not a sufficient one. With Europe and Japan in rapid decline, it will probably take a homegrown US recovery to produce an early global turnabout. This is remarkable, considering the US was the epicentre of the crisis, and in all past cases such countries have exported their way back to growth.
It is possible to sketch out what might power a US recovery. The brutal contraction in the home construction industry is abating (even if home prices are still declining), taking away a big drag on growth. An end to economic freefall could unleash pent-up demand in sectors such as autos, where sales are running below the level required to maintain the current stock of vehicles. Moreover, there is tremendous fiscal and monetary stimulus in the pipeline.
US consumer spending returned to growth at an annualised rate of 2.2 per cent in the first quarter of this year, after falling at about 4 per cent annualised in each of the preceding two quarters. If this can be sustained, the prospects for global recovery look good.
However, Sheryl King, an economist at Merrill Lynch, fears “it is a one-quarter wonder”. Higher spending was underpinned by one-off increases in social security payments and decreases in personal taxes that boosted disposable income even as earned income fell as a result of huge job losses.
Looking ahead, even with further aid from stimulus tax breaks and transfers such as benefit payments, unless the US jobs market improves sharply it is hard to see where consumers will find the money to support significant increases in spending.
Moreover, the US savings rate – currently 4.2 per cent – could rise a lot further if households try to repair lost wealth. This is very hard to predict. To restore their net worth as of mid-2007, they would have to save or gain through capital appreciation $12,885bn (€9,674bn, £8,661bn). But to restore their net worth as of end-2005 would require only half that – $6,621bn. The time-frame over which they might try to restore lost wealth is highly uncertain, as is the share that might come from further rebounds in stock prices.
Tight credit could suppress any rebound in spending, furthermore. “We will not have a sustainable recovery without a stabilisation of our financial system and credit markets,” Mr Bernanke said in a speech last month. But he added: “We are making progress on that front.”
Equities have bounced about 30 per cent in the FTSE All-World index from their lows and some indicators of credit market stress have eased, partly in response to policy interventions, though shares are still lower than on January 1 and indicators of credit market stress remain at high levels.
Mr Bernanke believes fixing the financial system is the key to recovery, as it would end the “feedback loop” between the shrinking economy and the damaged financial sector and replace it with a virtuous circle of more credit, higher asset prices and more growth. But some policymakers worry that, while a financial fix is necessary, it might not be enough to fuel decent growth. Households with damaged balance sheets may not respond vigorously even to a dramatic easing in the supply and price of credit.
Certainly, the path of US consumer spending remains deeply uncertain. It is quite possible that everything will fall into place, and a financial fix, cheaper credit, higher stock prices, better job market conditions, improving confidence and sustained spending will reinforce each other in the US and globally. If so, the green shoots will flourish and the US – with China – could lead the world out of recession and into sustained recovery starting this year.
But it is also possible the green shoots will wither with contraction or stagnation in US private demand, certainly if there is a further financial relapse, perhaps even if there is financial repair.
If that is the case, the US could find itself in a situation loosely analogous to that of Japan in the mid-1990s – not collapsing, but unable to power a sustained strong recovery and requiring a repeat fiscal stimulus. Genuine world recovery would then come only when an adequate replacement source of global demand, possibly in some combination of Asia and continental Europe, arose – which could take many years.
What is undeniable, though, is that for the first time in many months there are now some upside risks to the global economic outlook as well as many remaining downside risks.
FOUR AREAS WHERE GREEN SHOOTS COULD SPROUT:
US housing
With US mortgage rates at record lows and national home prices down more than 30 per cent from their 2005 peak, there are hopes that the seeds of a housing market recovery may soon sprout, writes Saskia Scholtes. In some of the hardest-hit markets, bargain hunters have begun to emerge. In California, such buyers have helped spur 80 per cent jumps in sales in both February and March.
National sales of existing and new homes in February rose by 5.1 per cent and 4.7 per cent respectively, while housing starts and permits were also higher. Those figures fell once more in March, but at a more modest pace than in previous months, suggesting that activity may be at or near a bottom.
Prices, however, have continued their relentless decline. The S&P Case Shiller house price index of the 20 biggest US cities has fallen for 30 consecutive months. February was the first time since October 2007 that the index did not report record annual price drops.
Foreclosures make up about half of sales in the boom-and-bust states such as California and Florida. This means that while sales rise, prices continue to fall as more distressed inventory comes to market. “Foreclosures have crowded out voluntary sales, but they have helped total sales find a bottom,” says Michelle Meyer of Barclays Capital, adding that deep discounts and low mortgage rates were attracting buyers.
A recovery in housing will be slow and feeble, however. Economists point to a large overhang of new and existing homes for sale, as well as a large pent-up inventory of homes waiting for more price stability. As prices lag behind demand, analysts expect further price falls until a bottoming out in the second half of 2010. Sustained recovery will come only when government breaks the “negative feedback loops of unemployment and the credit crunch,” says Ms Meyer.
US retail
Wal-Mart, the largest US retailer, noted last week a recent shift in American shopping patterns, writes Jonathan Birchall.
Eduardo Castro-Wright, head of the company’s US stores, said lower payroll taxes – due to government stimulus efforts – and cheaper fuel meant sales growth had become less dependent on low-cost groceries and other basics. “People are using that money to buy some of the discretionary items that they were not buying before.”
Elsewhere anecdotal evidence also suggests that the steep declines in discretionary spending seen in the fourth quarter have moderated, although overall spending remains soft. Muhtar Kent, chief executive of Coca-Cola, suggested that lower fuel prices might be supporting sales in fast food restaurants. JC Penney, a mid-priced US department store and useful barometer of Main Street sentiment, has also twice raised its earnings guidance, on stronger than expected but still declining sales. “I would not say we are more optimistic, but we are comforted that it is more predictable,” says Mike Ullman. The retailer still expects compar- able sales to be down 10 per cent this year, and has cut back inventories.
Mall spending is forecast to see combined comparable sales for March and April down around 1 per cent, while sales in May could be flat or slightly up, according to the International Council of Shopping Centres.
Some sectors remain hard hit. Luxury retailers Saks and Neiman Marcus have continued to report annualised monthly declines of 20 per cent or more in comparable sales. Frank Blake, chief executive of Home Depot, the home improvement retailer, says that markets that were hit hard early, such as California, are no longer the worst. “It’s not like it’s good. It’s just less bad,” says Mr Blake.
Financial markets
World equity markets have rallied sharply since early March, with key indices up more than 30 per cent, writes Aline Van Duyn.
Over the same period, many of the indicators that signalled enormous levels of distress in the world’s financial system have also improved. It is clear that financial markets are no longer pricing in a complete collapse in the global economy.
Measures of stress in the banking system, such as the interest rates charged among banks, have fallen sharply in recent weeks. The widely watched London interbank offered rate (Libor) has fallen to its lowest this year. However, most bank stress indicators remain high relative to historic levels, or to where they stood before the devastating bankruptcy of Lehman Brothers last September.
“The recession is ending around now, and the stock market is anticipating this,” says Larry Kantor of Barclays Capital, who switched to a bullish stance on equities in March. “Credit markets have not gained as much, but are heading in the same direction.”
The costs of borrowing have even fallen significantly for risky companies – those with such high levels of debt that a default is possible if earnings decrease or if it is difficult to refinance debt that comes due. Some of these have also been able to borrow new debt, at least in the US market. In Europe, investor demand is more limited.
Despite the positive signs, there are still concerns that stresses in the banking system and the closure of large sources of funding, such as the securitised debt markets, could again hurt fragile investor confidence.
Goldman Sachs notes that funding prospects “remain very challenging”. New bond issues remain heavily skewed toward high-quality credits, and we anticipate only a very slow improvement in this pattern over the next year.
China
Perhaps more than any major economy, China is showing signs of improvement, writes Geoff Dyer. Indicators suggest that the economy began to recover in March with industrial production rising 8.3 per cent from 2.8 per cent in January-February.
The official figure for first-quarter growth of 6.1 per cent fell from 6.8 per cent in the fourth quarter. Independent estimates, however, suggest sequential growth picked up from 1-2 per cent in the fourth quarter to about 5 per cent in the first quarter. Economists are revising growth forecasts upwards again. Qing Wang of Morgan Stanley says there was a “sharp sequential rebound” in March and has lifted his 2009 forecast from 5.5 per cent to 7 per cent.
Beijing has strong-armed banks into extending Rmb4560bn ($660bn, €498bn, £444bn) in loans in the first three months of the year – more than all new bank lending in 2008. This has backed state infrastructure spending – the Dragonomics consultancy estimates the rate of increase in fixed asset investment doubled in the first quarter to 31.4 per cent.
A sustainable recovery will require private investment and consumption. However industrial profits margins have plunged in recent months, which bodes ill for capital spending. Job cuts in factories and reduced salaries for many others are likely to drag on consumer demand for months. More aggressive measures to boost consumption, such as big rises in healthcare spending or income tax cuts, are being called for.
The current account surplus remains huge, raising fears that the economy has yet to undergo the rebalancing occurring in the US and elsewhere. The trade surplus could shrink this year as the investment-led recovery pulls in more imports. However, the surplus could also indicate a larger over-capacity that has yet to be absorbed.
More than one in five homeowners underwater: Zillow
May 6, 2009
NEW YORK (Reuters) - Home values in the United States extended their fall in the first quarter, with more than one in five homeowners now owing more on their mortgages than their homes are worth, real estate website Zillow.com said on Wednesday.
U.S. home values posted a year-over-year decline of 14.2 percent to a Zillow Home Value Index of $182,378, resulting in a total 21.8 percent drop since the market peaked in 2006, according to Zillow's first-quarter Real Estate Market Reports, which encompass 161 metropolitan areas and cover the value changes in all homes, not just homes that have recently sold.
U.S. homes lost $704 billion in value during the first quarter and have depreciated $3.8 trillion in the past 12 months, according to analysis of the reports.
Declining home values left 21.9 percent of all American homeowners with negative equity by the end of the first quarter, Zillow said.
By comparison, 17.6 percent of all homeowners owed more on their mortgage than their property was worth in the fourth quarter of 2008, and 14.3 percent were underwater in the third quarter of last year, the reports showed.
Nine consecutive quarters of declines have left eight regions -- including the Modesto, California, Stockton, California, and Fort Myers, Florida regions -- with median value declines of more than 50 percent since those markets peaked.
In 85 of the 161 markets covered in the report, the annualized change over the past five years is negative or flat, the reports showed.
But in an early sign of improvement, 17 metropolitan areas across the country -- notably several hard-hit markets in California, including Los Angeles, San Diego and Modesto -- have seen two or more consecutive quarters of smaller year-over-year declines in home values, the reports showed.
Meanwhile, potential sellers appear to be holding back until evidence of an improved housing market. In a separate survey of homeowner sentiment, nearly one-third, or 31 percent, of homeowners said they would be at least somewhat likely to put their homes on the market in the next 12 months if they saw signs of a recovering real estate market, the reports showed.
"Slowing declines in select markets are a bright spot or, at least, what passes for one given current market conditions," Dr. Stan Humphries, Zillow vice president of data and analytics, said in a statement.
"Unfortunately, given the magnitude of the current rates of decline, we're still many months away from a bottom even as depreciation slows," he said. "Moreover, the additional information we have this quarter on 'shadow inventory,' with one-third of homeowners indicating they would like to put their home on the market if conditions improve, confirms our earlier fears that a bottom in home values could be quite protracted."
"By our calculations, this could translate into as many as 20 million homes that could seep into the market as prices stabilize, maintaining a constant stream of supply that far outpaces demand, thus keeping prices flat. I'm doubtful that we'll see the bottom until 2010, and thereafter it's increasingly clear that we're likely to have a long bottom before we see meaningful recovery in home values," Humphries said.
Of all transactions is the past 12 months, 20.4 percent were foreclosures, up slightly from 19.9 percent in the fourth quarter, while 11.9 percent of homes sold were short sales, also up slightly from 10.9 percent in the fourth quarter, the reports showed.
Rich Default on Luxury Homes Like Subprime Victims
By Bob Ivry and Dan Levy
May 6 (Bloomberg) -- Chuck Dayton put down a quarter of the $950,000 purchase price when he bought his house in Newport Beach, California, in 2004. He was making $500,000 a year with his drywall company and he expected home values to keep rising.
Then the mortgage market collapsed, new construction stopped and builders no longer needed his services. Dayton, 43, went into default four months ago because he couldn’t afford payments on the three-bedroom home, located within a block of the Pacific Ocean. He hopes his lender will agree to sell the seven-year-old house for less than he owes to avoid a foreclosure.
“It’s just wait and see right now,” Dayton said.
Borrowers such as Dayton, whose 2004 compensation was almost 10 times the median U.S. household income, are becoming trapped by the same issue facing the poorest subprime homeowners: falling home prices erase equity and make it impossible to sell or refinance without losing money.
The number of U.S. homes valued at more than $729,750, the jumbo-loan limit in the most affluent areas, entering the foreclosure process jumped 127 percent during the first 10 weeks of this year from the same period of 2008, data compiled by RealtyTrac Inc. of Irvine, California, show. The rate rose 72 percent for homes valued at less than $417,000 and 78 percent for all homes, RealtyTrac said.
‘Trickle Up’
“It’s the trickle-up effect,” said David Adamo, chief executive officer of Luxury Mortgage Corp., a home-loan bank in Stamford, Connecticut. “Just like homeowners in smaller homes, these homeowners anticipated being able to refinance mortgages to continue making payments and at a future date sell for a gain and put it toward their next home. That strategy backfired when the market for jumbo mortgages dried up.”
Jumbo loans are larger than what government-controlled Fannie Mae and Freddie Mac will buy or guarantee, currently $417,000 in most areas. Jumbo lending slowed in the fourth quarter to $11 billion, or 4 percent of the mortgage market, the lowest quarterly figure since Inside Mortgage Finance, a Bethesda, Maryland-based trade publication, started tracking the data in 1990.
Subprime loans were made available to borrowers who never proved they could make monthly payments on time. The loans accounted for more than 20 percent of the U.S. mortgage market in 2005, up from less than 8 percent in 2003, according to Inside Mortgage Finance.
Subprime Implosion
Defaults by subprime borrowers began rising in 2007. Since then, financial institutions that had bet on earning cash flow from home loans packaged into securities have announced credit- market losses and writedowns of almost $1.4 trillion, data compiled by Bloomberg show.
Among all homeowners, 21.8 percent were underwater in the first quarter, Seattle-based real estate data service Zillow.com said in a report today. At the end of the fourth quarter, 17.6 percent of homeowners owed more than their original mortgage, while 14.3 percent had negative equity three months earlier.
Property values dropped 14 percent from a year earlier in the first quarter, reducing the median value of all U.S. single- family homes, condominiums and cooperatives to $182,378, Zillow said. The gain in underwater homeowners will lead to more bank repossessions, the company said.
The U.S. government has lent banks $392 billion to stem the losses through its Troubled Asset Relief Program. Another $12.4 trillion was spent, lent or guaranteed by the government and the Federal Reserve to stop the longest recession since the 1930s.
Loan Losses
About $500 billion of prime-jumbo mortgages are bundled into bonds, according to Memphis, Tennessee-based FTN Financial. In February, JPMorgan Chase & Co. analysts John Sim and Abhishek Mistry in New York almost doubled their projections for losses on those mortgages to as much as 10 percent because of increasing defaults.
Foreclosures have come to the Hamptons, the beach towns about 100 miles east of New York City on Long Island, where homeowners have included Blackstone Group LP Chief Executive Officer Stephen Schwarzman, hedge fund manager John Paulson and Goldman Sachs Group Inc. CEO Lloyd Blankfein.
Almost 90 borrowers entered the foreclosure process in the towns of East Hampton and Southampton in the first 10 weeks of 2009. That compared with 109 in the same period last year and 73 in the first 10 weeks of 2007, according to the Real Estate Report in West Islip, New York.
Hamptons Sales Fall
Home sales in the Hamptons fell 67 percent in the first quarter from a year earlier, the most since records were first kept in 1982, according to Town & Country Real Estate of the East End LLC. The median sale price slid 28 percent from a year earlier.
Rule changes spurred by rising defaults now require lenders to work with delinquent New York homeowners before beginning the foreclosure process, said Pat Ammirati, president of the Real Estate Report.
“There was this unrealistic view that the crazy financing was limited to subprime when of course it was across the board,” said Andrew Laperriere, Washington-based managing director at research firm International Strategy & Investment Group. “A lot of jumbo mortgages were nothing down with high debt-to-income ratios.”
Short Sale?
Dayton said he financed the purchase of his home, 40 miles south of Los Angeles in Orange County, with a payment-option adjustable-rate mortgage now serviced by JPMorgan’s Washington Mutual. The option allowed him to pay less each month than the interest on the loan, with any unpaid amount added to his debt.
Dayton refinanced in February 2007 with a $1 million loan from Washington Mutual, and used some of the proceeds for business expenses, said Robin Milonakis, his agent at Altera Real Estate in Dana Point, California. He also took out two private mortgages and now has a balance of $106,000 on those loans, she said.
Dayton went into default on Jan. 29 and owes $46,584 in delinquent payments and penalties, according to First American CoreLogic, a Santa Ana, California-based mortgage data firm. Dayton said he’s found a buyer willing to pay $950,000.
The foreclosure process typically takes about a year. That means jumbo-loan defaults, which are climbing at the fastest pace in at least 15 years, will increase over the next year, according to LPS Applied Analytics in Jacksonville, Florida.
Goodbye Jumbo
President Barack Obama’s Homeowner Affordability and Stability Plan has no provision to help jumbo mortgage borrowers. The plan focuses on shoring up home loans eligible to be bought by Fannie Mae and Freddie Mac, also called conforming loans.
“The government has thumbed their noses at people who have jumbo mortgages,” said Steve Habetz, president of Threshold Mortgage Co. in Westport, Connecticut.
The share of U.S. homes in the foreclosure process that are valued at more than $729,750 increased to 2.83 percent this year through March 10 from 2.21 percent in the same 10 weeks of 2008, according to RealtyTrac. In the same 10-week period, the share of homes valued at $417,000 or less in foreclosure fell to 87 percent from 89.7 percent in 2008, RealtyTrac said.
Price Slump
California is hardest hit by luxury-home foreclosures. More than 1,500 borrowers with properties in the state that once sold for more than $1 million defaulted on their mortgages in February, said Mark Hanson, managing director of the Field Check Group, a real estate company in Palo Alto, California.
About 3 percent, or 254,745, of the state’s 8.5 million houses are assessed for more than $1 million by county assessors, according to San Diego-based MDA DataQuick, a real estate monitoring company.
While sales for all homes in the state increased 2.5 percent last year from 2007, sales of homes valued at more than $1 million declined 43 percent to the lowest since 2003, MDA DataQuick reported. Part of the reason is falling prices as California’s median home price dropped 41 percent in February to $247,590, according to the state’s Association of Realtors.
Another explanation may be stricter lending guidelines, Hanson said.
“You have to have income of $250,000, a 20 percent down payment and near perfect credit to buy a $1 million home now, so the number of buyers isn’t what it was,” Hanson said. “There just aren’t enough buyers to sop up supply. We’re seeing the collapse of the high-end market.”
‘What to Do’
Values have taken longer to decline in more affluent areas, taking some homeowners by surprise, said Philip Tirone, president of Los Angeles-based Mortgage Equity Group Inc.
“People are coming to me to do a refinance or buy another property, and what they thought they had in the equity of the home they don’t have and they don’t know what to do,” Tirone said.
Delinquencies are caused by people who owe more on their mortgages than their houses are worth, said James McLauchlen, a broker and appraiser in Southampton, New York, for James R. McLauchlen Real Estate Inc. and Hamptons Appraisal Service Corp.
“They throw their hands up and say I’m not going to kill myself trying to take care of this debt,” McLauchlen said. “Some folks work hard to make payments. Others just can’t pay. They offer a deed in lieu of foreclosure and off they go.”
Dayton said he doesn’t know when he’ll restart his drywall business, which he shut down in November for lack of work.
“This market is not even close to bottoming out, in my opinion,” Dayton said. “It continues to drop.”
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