You gotta love this Great Correction. It’s gotten so much bad press. And so many people trying to stop it. But it just keeps going…doing its work. From Barry Ritholtz…
— There have been an average of 1.6 million nationwide foreclosure starts per year for the past five years.
— Foreclosure starts nationwide increased on an annual basis after 27 consecutive months of year-over-year declines.
— Bank repossessions are still down 18% year over year. Voluntary foreclosure freezes and increasing pre-foreclosure sales are the primary factors.
…2.8 million Americans are 12 months or more behind on their mortgages.
This truly amazing data point represents a very sad fact of the housing market. Once a homeowner falls that far behind in their mortgage, the odds are that they will never catch up. (Mortgage mods are likely to fail at an exceedingly high rate as well). Nearly all of these 2.8 million homes are likely to be some sort of distressed sale — short sale, auction, walkaway or foreclosure.
The bottom line is it means we are looking at a minimum of another 3 million homes going into foreclosure (or some variant) over the next few years.
Beyond the coming wave of foreclosures, credit availability is another factor holding housing activity down:
Since 2007, 19% of all borrowers (~9 million borrowers) have gone >90 days delinquent on their mortgages, or have had their mortgage liquidated.
In other words, one in five people who held or qualified for a mortgage not too long ago would not today. The 90 days delinquency on their credit reports prevents them from qualifying for a new mortgage.
This is a very significant data point to the idea of a housing turnaround. Why? Based on this delinquency alone, nearly all of these borrowers — about 9 million current homeowners — would be unable to qualify for [a] bank loan today. That is 9 million potential home buyers who are effectively barred from the market due to their credit scores. Removing that many people as potential home buyers amounts to a huge reduction in demand.
Isn’t that terrible? No, it’s just a correction correcting the overbuilding and overbuying in the housing market. And here’s more correcting….
(Reuters) — New claims for US state jobless benefits rose for the fifth time in six weeks and consumer prices fell in May…
Terrible again, right? Wrong…the correction is doing what it’s supposed to do. Bloomberg:
Americans are digging themselves out of mortgage debt.
Home equity in the first quarter rose to $6.7 trillion, the highest level since 2008, as homeowners taking advantage of record-low borrowing costs to refinance their loans brought cash to the table to pay down principal. The 7.3 percent gain was the biggest jump in more than 60 years, according to an analysis by Bloomberg of Federal Reserve data.
Residential mortgage debt peaked in 2007 at $10.6 trillion, doubling in six years, according to Fed data. Since then, it has fallen 7 percent as the value [of] all residential property has dropped 23 percent.
But the correction is not correcting the sector that needs correction most. The financial sector. Why? The feds protect it.
While the private sector digs out from under the burden of a debt bubble, the financial sector profits from federal giveaways. Wall Street CEO pay rose 20% in 2011. And here’s our new friend, Barry Dyke, reporting and commenting:
…while Main Street net worth has been pummeled, Wall Street asset managers’ compensation is soaring. In his new book, the author documents the explosion of the investment asset management business — which he calls the “asset management industrial complex” where managers are guaranteed Olympian paydays and consumers are left holding the bag with poor investment performance.
The current financial report card for Main Street Americans is grim. In June 2012, the Federal Reserve reported that the median net worth of families plunged by 39% in just three years from $126,400 in 2007 to $77,000 in 2010. According to the Fed, the financial crisis, which began in 2007, wiped out nearly two decades of wealth — with middle class families bearing the brunt of the decline. This puts Americans roughly in the financial position they were in 1992. In three years, Americans saw two decades of economic efforts vaporize.
Much of Americans’ wealth resides in retirement plans managed by the asset management industrial complex (mutual funds, private equity, hedge funds, banks, etc.) — which the author estimates to be a minimum $18 trillion. However, management fees eat up investor returns — creating headwinds virtually impossible to overcome. The author, citing Morningstar data, estimates that mutual fund shareholders — where most 401(k) funds reside — pay a minimum of 0.90 percent for every $10 thousand invested (and much higher when trading costs and other costs are factored in). Private equity and hedge fund managers—extract a much higher fee schedule, commanding 2 to 3% manager fee, plus 20 to 30% incentive compensation fee known as “carried interest.” [Private equity is where Presidential Candidate Mitt Romney made his fortune].
The author comments, “On a whole, investment performance from highly paid investment managers has been horrible over extended periods of time. According to Morningstar, over 61 percent of stock mutual funds have lagged the S&P 500 index over the past five years. In 2011, only 20 percent of funds beat the Standard & Poor’s 500-stock index, the worst showing for active fund manages in over a decade. Returns for private equity and hedge funds [both get much of their money from state pension funds] have been inconsistent, opaque, self-serving and hard to measure.”
However, asset managers saw their compensation soar. According to reports filed with the SEC in 2012, in reporting to go public, the private equity firm The Carlyle Group [which gets a great of investment money from state pension giant CalPERS] reported that three billionaire founders David Rubinstein, William Conway and Daniel D’Aniello reported a combined payday of $402 million in 2011. Most of this compensation was in cash dividends, where financiers enjoy a highly favorable 15% capital gains taxation rate on income.
The author details one of the greatest compensation crimes in 2008 when Citigroup and Merrill Lynch blew up and had to be bailed out by taxpayers for their failed cataclysmic bets in subprime mortgages. Citigroup lost $27.7 billion yet paid its top bankers $5.33 billion in bonuses. [In the same year Citigroup froze its cash balance pension plan for rank-and-file employees]. Merrill Lynch lost $27.6 billion and paid its top bankers $3.6 billion in bonuses. In 2011, Robert P. Kelly, CEO of Bank of NYMellon, a giant asset manager, got $33.8 million in severance and benefits as an exit package in 2011 just prior to the bank being sued by the US Justice Department for allegedly overcharging pension clients as much as $2 billion over a ten year period. Prior to this, Kelly was CFO of Wachovia, a failed bank which is now part of Wells Fargo. Not only were the banks bailed out during the crisis, most of the mutual industry was bailed out by the Federal Reserve.
Bill Bonnerfor The Daily Reckoning
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010.
Dont ever be fooled, no matter what the fed or any other misguided force may do, to protect or correct, it has absolutely no power to do so, as long as the fundamentals have been discarded.
(people have been complaining about my posts so I’m turning over a new leaf and striking a more positive tone from now on.)
“The bottom line is it means we are looking at a minimum of another 3 million homes going into foreclosure (or some variant) over the next few years.”
no problem. during the depression the government propped up the price of milk by dumping out large quantities of it, the price of produce by forbidding the growing of it, and the price of liquor by banning it. too many houses? hey, I sense a black market business opportunity here ….
One of the best books about the evil “investment” industry is Michael Edessess’s (not sure of spelling!) “The Big Investment Lie.” And this was before the Great Insane Robbery of 2008-20xx! Ah, how I look forward to the day when New York and DC are in flames, and heads of financiers and politicans are rolling down (respectively) Wall St. and Pennsylvania Avenue!
John Templeton (Wiki him) a great successful knowledgeable investor and wealth creator gave out an observation just before his death in 2008 that has stuck with me and guided me and my family for several years now. He stated, “Do NOT nor even consider buying any real estate until it falls to 5%-10% of the current (2007) price of the area. It must and WILL sooner than we all can right now believe possible, regress to the mean, which is near to 5%-10% of these unsustainable current prices. There will be NO buyers until then and then cash purchasing will be within reach of those folks who are now locked-out or feel hopeless to ever own property again.” As an old former homebuilder, I believe Sir John is right-on. A person can save 10 or 20,000 and buy with NO mortgage. Think of that! We shall see but we are only half way down and it will be hard to believe. Hang on, it will be unnerving and unstoppable but it will truly “flush” one of the huge problems we now face as Bill so rightly said we need. Equities will be much smaller than seems fair after paying for high-priced properties but that cannot change the fact it was all inflated to impossible prices because of our totally impossible corrupt banking system. Fractional reserve banking cannot last in an honest society. Everything is mis-priced eventually as we now are seeing and it will end badly. We better be ready.Sorry for the long post.
“It must and WILL sooner than we all can right now believe possible, regress to the mean, which is near to 5%-10% of these unsustainable current prices”
so negative! oh there’s LOTS of things they can do to keep prices up. well … the prices of SOME places, the rest will just have to go away.
When you've got a room full of 200 oil insiders scratching their heads at current high prices, something's gotta give.
For most investors, it’s weird to think of stocks as their go-to investing option.
The petropoly has bills to pay and setting the price of oil was a simple way to balance their budgets.
Investors don’t seem to care that what's propping up their investments is what will ultimately destroy them: government monetary policy.
For the next decade the energy revolution will be likely confined to the US, displaying the robustness of American entrepreneurship.
Why the Sage of Baltimore’s commentary persists through America’s changing times.
After attending Platt’s oil conference in London I want to relay two important themes you need to know.