About half of U.S. mortgages seen underwater by 2011
Al YoonReuters US Online Report Business News
Aug 05, 2009 16:12 EST
NEW YORK (Reuters) - The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.
Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.
"We project the next phase of the housing decline will have a far greater impact on prime borrowers," Deutsche analysts Karen Weaver and Ying Shen said in the report.
Of prime conforming loans, 41 percent will be "underwater" by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties' value, up from 29 percent, it said.
"The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding," the analysts said. Prime jumbo loans make up 13 percent of the total market.
Deutsche's dire assessment comes amid a bolt of evidence in recent months that point to stabilization in the U.S. housing market after three years of price drops. This week, the National Association of Realtors said pending home sales rose for a fifth straight month in June. A widely watched index released in July showed home prices in May rose for the first time since 2006.
Covering 100 U.S. metropolitan areas, Deutsche Bank in June forecast home prices would fall 14 percent through the first quarter of 2011, for a total drop of 41.7 percent.
The drop in home prices is fueling a vicious cycle of foreclosures as it eliminates homeowner equity and gives borrowers an incentive to walk away from their mortgages. The more severe the negative equity, the more likely are defaults, since many borrowers believe prices will not recover enough.
Homeowners with the riskiest mortgages taken out during the housing boom have seen the greatest erosion in equity, in part because they were "affordability products" originated at the housing peak, Deutsche said. They include subprime loans, of which 69 percent will be underwater in 2011, up from 50 percent in March, Deutsche said,
Of option adjustable-rate mortgages -- which cut payments by allowing principal balances to rise -- 89 percent will be underwater in 2011, up from 77 percent, the report said.
Regions suffering the worst negative equity are areas in California, Florida, Arizona, Nevada, Ohio, Michigan, Illinois, Wisconsin, Massachusetts and West Virginia. Las Vegas and parts of Florida and California will see 90 percent or more of their loans underwater by 2011, it added.
"For many, the home has morphed from piggy bank to albatross," the analysts said.
(Editing by Dan Grebler)
Source: Reuters US Online Report Business News
 MSNBC.com |
Job loss recovery may take years
Economy may be stuck with high unemployment, weak growth for years
There’s growing optimism about signs of life in the economy — expected to be capped with Friday’s report showing continued slowing in the pace of job losses. But this recovery, when it comes, won’t feel like any in memory.
The reason is that consumers — the mainspring of the economy — remain hunkered down. Growth is still coming from cost-cutting and federal spending, not from a pickup in real demand. And with 7 million workers sidelined by this recession, that headwind likely will be blowing for several years.
“We're not going to go back to where we've come from," said Mohamed El-Erian, CEO of PIMCO, a global investment management firm. "There's still an assumption out there in the marketplace that somehow this was a very nasty cyclical fall, and we're going to go back to where we've come from. That's not what’s going to happen.”
To be sure, there are a number of positive clues that the worst economic downturn since the Great Depression is easing. Last week, a series of reports offered hopeful signs that the housing market may be nearing the end of its economy-stopping collapse. A report by the Federal Reserve found that most of its 12 regional banks concluded that either the recession was easing or that economic activity had "begun to stabilize, albeit at a low level."
On Friday, the government's initial report on second-quarter gross domestic product showed the economy contracted by just 1 percent, a better-than-expected reading, after plunging by 6.4 percent in the first quarter.
All of which seems to have convinced stock market investors that happy days, if not here again already, are at least not too far down the road. Since its March low, the S&P 500 index — the broadest measure of stocks — is up nearly 50 percent.
Brown shoots
Those signs of economic stability follow an unprecedented government mobilization to head off a wider collapse: from the Fed’s trillion-dollar intervention in the financial markets to the Treasury’s massive bank bailout and the Obama administration’s $787 billion stimulus package. Other than massive government spending by the U.S. and other countries, though, the level of demand for goods and services needed to lead the economy out of recession hasn’t kicked in.
“There still is generally a picture of very weak final demand, especially in North America, Europe and Japan which are the primary industrialized countries still in recession,” said Brian Bethune, an economist at IHS Global Insight.
A major reason for that slack demand is that consumers, whose spending still accounts for two-thirds of GDP, remain hunkered down and show little sign of opening their wallets any time soon. Consumer confidence fell in July, and retailers Thursday reported another month of lousy sales results.
Consumer spending rose slightly in June for the second straight month, but incomes — the fuel for future spending — dropped by 1.3 percent. The savings rate dipped to 4.6 percent in June, but remained well above last year's 1 percent rate.
Falling home prices continue to erode consumers' wealth and sap their spending power. By 2011, roughly half of all American homeowners will be "underwater" - owing more on their mortgage than their home is worth, according to a report by analysts at Deutsche Bank.
Until real demand picks up, the large pool of workers sidelined by the recession will continue to have a hard time finding a job.
“Unless an individual company is in the position where they're really seeing their business pick up, they're very cautious about adding back,” said Tig Gilliam, CEO of staffing company Adecco North America. "And there are large companies out there who are going to come with big announcements still. We're not past the large announced layoff process yet, even in this cycle."
In the meantime, hundreds of thousands of unemployed workers face the loss of unemployment benefits as the recession drags on. The National Employment Law Project estimates that some 540,000 Americans will exhaust benefits by the end of September, and a 1.5 million will run out of coverage by the end of the year.
As of July, 4.4 million Americans had been out of work for more than six months, up from 2.6 million in February. Some 29 percent of jobless workers have been out of work for six months, a record since data were first reported in 1948, according to the NELP.
With unemployment stuck at high levels, jobless benefits running out and those consumers who have disposable income devoting more of it to savings, demand will likely remain sluggish.
Once companies do begin hiring again, it may be several years before overall employment reaches pre-recession levels. Roughly 125,000 new jobs are needed each month just to keep up with the growth of the work force.
So even if the economy quickly returned to the peak job creation performance of 2007, when the economy was adding roughly 400,000 new jobs a month, it would take more than two years to rehire the 7 million workers who lost their jobs to the recession.
Few economists expect a return to those 2007 growth levels any time soon. As demand picks up, companies will likely increase hours for part-time staff or bring back furloughed workers before creating new full-time jobs.
“We’re a long way from a recovery in new hiring,” said Bethune. “That's going to be a damper for the overall situation in the labor market.”
Analysts say some companies are also postponing hiring decisions until they get a better handle on the impact of new federal policies like healthcare reform.
So as the steep economic contraction that began 20 months ago begins to ease, analysts surveying the damage say the period following this recession may be like no other in recent memory: persistent high unemployment coupled with very weak growth. Though a return to growth is likely to mean the official end of the worst recession since the 1930s, it won’t feel like a recovery for millions of Americans.
“We can have muted growth,” said El-Erian. “We can have a nominal GDP in the 3 percent range. But that's not enough to stabilize the system. We have a system that has grown accustomed to 5, 6 percent nominal GDP. So we will have growth, but it will be timid. It will be what we call the ‘new normal.’"
URL: http://www.msnbc.msn.com/id/32314827/from/RSS/
By Emily Kaiser
WASHINGTON (Reuters) - The U.S. economy appears to be picking up steam even without its strongest engine -- consumer spending.
For a country that counts on consumption for roughly 70 percent of economic growth, that is quite a remarkable feat, but it poses some questions about the path and sustainability of the coming recovery.
With millions of people still out of work, prospects for consumption look grim. President Barack Obama said Friday that as far as he is concerned, there can be no economic recovery as long as people keep losing their jobs.
Revised data released last week showed the recession that began in December 2007 was even deeper than initially thought, ranking as the worst since the Great Depression of the 1930s. Consumer spending last quarter fell far more sharply than economists had predicted, even though tax cuts and government spending programs put more money in Americans' pockets.
Yet several Wall Street economists nudged up their growth forecasts for the rest of the year, saying the data reinforced the view that the downturn is in its dying days.
"The shape of the recovery is still in some doubt, but for growth the handwriting is on the wall and the outlook is a positive one for the second half of the year," said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi in New York.
One big factor working in the economy's favor is that businesses cut inventories to the bone as the recession dragged on, which means some replenishing is probably overdue.
A rebound in demand for autos, spurred on by the government's $1 billion "cash for clunkers" program that offered incentives to buy new, more fuel-efficient cars, also looks likely to provide a nice economic jolt in the third quarter.
Sales reports from the auto makers Monday will show just how big of a boost they received from the program, which exhausted its initial funding within the first week, and how confident the companies are that the sales gains can last.
The missing piece is jobs. Until Americans feel confident that their paychecks are safe, spending will stay subdued. Friday's employment report for July will mark an important test of whether the labor market is catching up to the improving economic outlook.
Douglas Holtz-Eakin, who was John McCain's top economic adviser during his presidential campaign last year, said an economic recovery based solely on a bounce in inventories would not have much staying power.
"We'll know we're out of the woods when we see real progress on the unemployment rate," he said. "That's going to be the thing we'll have to watch."
Economists polled by Reuters expect Friday's report to show 320,000 jobs were lost last month, with the unemployment rate inching up to 9.6 percent from 9.5 percent in June.
The U.S. jobless rate has already exceeded the euro zone's, which hit a 10-year high of 9.4 percent in June. Euro zone second-quarter GDP won't be released until Aug. 13, but most economists think it will be negative.
That will probably be enough to keep the European Central Bank on hold when its interest rate-setting committee meets on Thursday. The same goes for the Bank of England, which holds its policy meeting the same day.
Both central banks have already cut benchmark interest rates to record lows as they try to stabilize their economies.
SUSTAINABILITY
The rule of thumb is that the U.S. economy needs to grow at a 2.5 percent rate just to keep unemployment from rising. In the most recent Reuters survey of economists, the consensus view for 2010 was right around that level, which suggests the jobless rate will peak soon but may not come down for a while.
David Rosenberg, chief economist at Gluskin Sheff in Toronto, calls employment "the engine that keeps the motor turned on," and until it improves, sustainable recovery is far from assured.
In theory, as companies ramp up production again, they need more workers. However, it may take a while before hiring picks up this time.
In addition to cutting jobs, businesses reduced workers' hours sharply as the recession deepened. That means they may be able to meet increased demand by stretching the work week for existing employees before they need to expand their payrolls.
"We are still in a recession, we are still going to see job loss, and that is of course a tragedy," Christina Romer, one of Obama's top economic advisers, told Reuters Television. "What we are certainly going to be looking for is, do we see moderation in that loss and eventually a turnaround?"
Until that turnaround comes, don't expect much of a bounce in consumption.
On Thursday, many of the largest U.S. retail chains will report monthly sales results for July, a big month for back-to-school shopping. Analysts are looking for sales to be generally weaker than they were a year ago.
Persistently weak consumer spending is a big reason why Rosenberg and some other more bearish economists are worried that the coming recovery will lack staying power.
"Sustainability is the key, and it remains the wild card," he said. (Editing by Leslie Adler)
Copyright 2009 Reuters
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