No Reason to Get Excited

What will the financial news headlines read on January 29? Dollars to doughnuts, I’d expect more than a few screaming headlines about economic growth—next Friday is when the U.S. Department of Commerce rolls out its advance estimate for GDP in the fourth quarter of 2009. But all will likely not be as it seems, if so. A number of analysts have been sounding the warning bell as of late about the dreaded “blip”—that is, GDP growth that they expect to be eye-poppingly good, but largely both transitory and (for lack of a better word) fake. Over at Goldman Sachs, the call now is for 5.8% headline GDP growth in the last quarter of 2009; and that’s up from their earlier prediction of 4.0%. End of the Great Recession? Perhaps only statistically. The fact remains that housing is hurting, and job growth is (for now) nowhere in sight. Goldman’s analysts noted as much, as well, and made clear the case for the upcoming “blip”—suggesting that as much as 2/3rds of the headline GDP number would come from a “sudden stabilization in inventories.” Final demand will only contribute roughly 2% to the predicted headline GDP figure—tepid recovery, to say the least. Both Paul Krugman and Calculated Risk have spent some time discussing this issue, but what’s not been discussed in depth is the potential for future economic shocks during such a vulnerable time for the U.S. economy. The Fed’s Yellen, for example, has noted this vulnerability, arguing recently that “the gradual expansion gathering steam will remain vulnerable to shocks. The financial system has improved but is not yet back to normal. It still holds hazards that could derail a fragile recovery.” One of the largest such hazards is real estate, which so far may be head-faking nearly every economist and pundit attempting to assess economic direction. Total delinquencies, excluding foreclosures, stood at nearly 10 percent of all mortgages by the end of November 2009, according to Lender Processing Services [stock LPS][/stock] data. Add in foreclosures, and that number jumps to 13.2 percent. Where do you think those numbers have gone since then, in December and the first half of January? (That’s a rhetorical question: the answer is they’ve gone up.) Most analysts expect a so-called “jobless recovery,” too—and there is no truer connection in the servicing business than the loss of a job and the inability to pay the mortgage. Worse yet, it’s taking out-of-work consumers longer than ever to find a new job: according to the Commerce Department’s latest stats for December 2009, 4 in 10 unemployed workers were jobless for 27 weeks or longer. All of which means that the ability of homeowners to make good on their mortgage commitments seems only more likely to come under pressure as we roll through 2010. It matters little, too, whether we see this distressed inventory enter the market as a short sale or in the form of REO, bank-owned real estate—both methods of liquidation tend to exert downward pressure on home prices. The mess of delinquencies continues to grow, too, despite a tax credit program that by all accounts has been a dynamic shot-in-the-arm for the origination and realtor crowd (groups that generally tend to care little about defaults, so long as there is another loan to make). It’s no mistake the tax credit program was extended until June 2010, and extended to a wider audience than just first-time homebuyers. But the long-term problem with the tax credit is easy to see: it siphons demand from future periods, and brings it into the present period. That’s why the number of contracts on pending home sales filed in November fell an alarming 16 percent, according to the National Association of Realtors, when the original credit was set to expire. As a result, I wouldn’t expect to see the traditional spring sales bounce this year—because we’ve already seen it. To prove that point, we’re already seeing listing prices fall as we roll into the New Year, according to data from Altos Research. Listing price data is often a strong leading indicator of what we’ll see a quarter from now in well-known repeat-sales HPI like the Case-Shiller—so enjoy those nominal price gains while they last, folks. Oh, and did I mention that the Fed is set to exit mortgage markets in a few short weeks, too? Most analysts expect a rise in interest rates, as a result, and the issues here have been the subject of numerous in-depth reports here at HW. So let’s review: Increasing delinquencies, tied to a jobless recovery, leading to increased distressed property sales, providing downward pressure on home prices. Expiration of the tax credit, reducing buyer demand, and providing downward pressure on home prices. Fed exiting mortgage markets, driving up mortgage rates, which drive down buyer demand, providing downward pressure on home prices. Can someone remind me: how many homeowners in the U.S. are already underwater on their mortgage, again? Because they’re about to get plenty of new neighbors. Some recovery, indeed. Paul Jackson is the publisher of HousingWire.com and HousingWire Magazine.