Wednesday, December 20, 2006
Holding Our Hands
Now every happily married woman already knew that holding her husband's hand made her feel better, and these latest rounds of economic stats also seem to confirm what we already knew -
- real inflation is high, but the the ability to pass this on to the consumer seems limited,
- homebuilders are financially pressed by the downturn in the housing market, and are writing off assets or trying to build on them ASAP in order to monetize those assets,
- mortgage rates are rising, and that will further depress the purchase/refi market next year,
- the low/no/negative areas of housing appreciation have spread out to encompass most of the country, as demonstrated by listing prices (LPs always understate pricing drops),
- there are an unbelievable number of unstable subprime loans out there, which will further depress the housing market in a substantial number of areas,
- someone's going to be taking some hefty losses from those loans, and those someones will include not just the lienowner and the borrower but the borrower's neighbors, which will create new pockets of home price depreciation, and will push more homes into short sale or foreclosure,
- household debt is at astronomical levels, and the increase in DSR and FOR has coincided with a period in which the economy was generally strong and the aging of the American population (traditionally people pay down their debts as they approach retirement). Any slackening in the economy will thus be exaggerated in its effect.
There are also open questions regarding the economy. One of those is whether the Alt-A high-adventure class of mortgages is destined for a meltdown similar to subprime. My guess is yes. If you are sitting with an interest-only/option ARM taken out last year on a house that's now worth eighty or a hundred thousand less than your loan amount, your refinancing options are sharply limited, to say the least.
Another, rather positive economic question regards the cushioning effect of small business on the economic downturn. My feeling is that it will be major. I can't quantify that, and I can't prove it. Also, my viewpoint might be skewed because personally, I'm facing a problem of an overload of business which is escalating rapidly. However, when I talk to other people in knowledge/expertise businesses, they seem to be reporting similar outlooks. Contractors might be pounding on our doors looking for business, but we are all in the position of hunting for people who fit our needs. They are scarce.
A third potential positive question is the role of private capital in cushioning the credit contraction destined to occur in bank lending. This is seen everywhere from the hard-money lending business (and they have dropped their lending margins on average from about 70-75% to 60-65%) to small business lending to large takeover deals. The growth in this type of activity is immense. This parallels the shift in real estate mortgage funding from GSEs to MBS. Let us all hope that the underrating of risk that occurred in mortgage lending doesn't spring up in this market. When losses can't be offloaded, it tends to keep people more honest. The big dealmakers can and do offload their risks, but most of the smaller segment doesn't.
Finally, the outlook for legal firms relating to the mortgage mess couldn't be brighter. The lawsuits should proliferate for the next decade, according to mortgage gossip.