Mish's Global Economic Trend Analysis

Epidemic of Thrift vs. Leap of Faith; Housing Slide Will Seal Recession Fate
Commercial Real Estate Foreclosures to Hit Chicago "Loop", First Since 1999; Big Wave of Commercial Foreclosures, Bank Failures Coming
Benevolence by JPMorgan? "JPMorgan Offers us a Chance to Refinance at 4% with No Closing Costs" What's Going On?
3rd Quarter GDP Likely Negative, Recession Never Ended

Epidemic of Thrift vs. Leap of Faith; Housing Slide Will Seal Recession Fate

Posted: 23 Aug 2010 07:13 PM PDT

I am reasonably certain that the economy is still in recession. If not (and this is ultimately up to the NBER to decide), the pending disaster in housing and commercial real estate will seal the double-dip deal.

Either way, the prognosis is not good, as economic conditions are deteriorating rapidly. With that thought in mind, please consider Housing Slide in U.S. May Drag Economy Into Recession

"If foreclosures continue to mount and depress home prices, that could send the economy back into a recession," said Celia Chen, an economist who tracks the industry for Moody's Analytics Inc. "The housing market and the broader economy are closely intertwined."

With 14.6 million Americans out of work, homeowners are struggling to hold onto their properties. One in seven mortgages were delinquent or in foreclosure during the first quarter, the highest in records dating to 1979, according to the Washington- based Mortgage Bankers Association. Foreclosures probably will top 1 million this year, said RealtyTrac Inc., an Irvine, California-based data company.

Federal efforts to help have had little success. Of 1.31 million loan modifications started under the Obama administration's Home Affordable Modification Program, 48 percent were canceled by the end of July, the Treasury Department said Aug. 20. More than half of all modifications defaulted again within 12 months, the Office of the Comptroller of the Currency said June 23.

Shadow inventory, or the number of homes repossessed or in default that eventually will be offered for sale, stood at 7.3 million in the first quarter, according to Laurie Goodman, an analyst in New York at mortgage-bond broker Amherst Securities Group LP. As those properties hit the market, prices will come under pressure and buyers will wait for better deals.

"The only thing that's going to fix the housing markets right now is a work-through of what excess supply is on the markets and improvement in unemployment," Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said today in an interview on Bloomberg Television's "In the Loop with Betty Liu." "That process is a very, very long-term process."

Consumer spending rose 1.6 percent in the second quarter, down from 1.9 percent in the previous three months. Purchases of home furnishings and appliances fell 1.7 percent to an annual pace of $256.5 billion in June from a 2010 high in April, according to the Bureau of Economic Analysis.

"There is an epidemic of thrift," said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts. "Households and businesses are super-cautious right now. Sometime in the next 6 to 12 months, we'll start to see more movement on home and car purchases and greater willingness on the part of businesses to hire."

Epidemic of Thrift vs. Leap of Faith

Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts correctly says there "There is an epidemic of thrift".

Indeed there is, and actually it is a good thing! Consumers need to deleverage and they are.

Unfortunately Behravesh blows it with "Sometime in the next 6 to 12 months, we'll start to see more movement on home and car purchases and greater willingness on the part of businesses to hire."

Excuse me for asking but ... Small Businesses are Not Hiring - Why Should They?

As is typical of most economists, Behravesh displays an amazing and unwarranted leap of faith.

Structurally High Unemployment for a Decade

Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC has it correct: It will take a "very, very long-term process" to fix this mess.

Consumer demand is dead. That demand is not coming back anytime soon, and there is no driver for jobs if it doesn't. Unemployment and GDP will both be extremely weak for the duration.

Harsh Reality From Bernanke

In the Incredible Shrinking Boomer Economy I noted a harsh reality quote of Bernanke:

"It takes GDP growth of about 2.5 percent to keep the jobless rate constant. But the Fed expects growth of only about 1 percent in the last six months of the year. So that's not enough to bring down the unemployment rate."

I wrote that in July of 2009. Nothing has changed.

Indeed, 3rd Quarter GDP Likely Negative, Recession Never Ended

Pray tell what happens if GDP can't exceed 2.5% for a couple of years? What about a decade (or on and off for a decade)?

If you have come to the conclusion that we are going to have structurally high unemployment for a decade, you have come to the right conclusion. Ask yourself: Is that what the stock market is priced for?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Commercial Real Estate Foreclosures to Hit Chicago "Loop", First Since 1999; Big Wave of Commercial Foreclosures, Bank Failures Coming

Posted: 23 Aug 2010 12:31 PM PDT

With office space selling 30% below the 2007 high in the top-10 US office markets, and with lease rates still falling, one should expect to see more foreclosures in major cities.

Chicago is about to be hit says Crain's Chicago Business in Office tower at 500 W. Monroe flirts with foreclosure — again

A Georgia firm that holds two junior mortgages on the 46-story tower at 500 W. Monroe St. says the building's loans went unpaid when they came due this month and that the company may foreclose and take control of the property.

It would be the first foreclosure of a major office tower in the Loop in 11 years and a sign that the market remains mired in the hangover of the debt-stoked valuation bubble that peaked in mid-2007. That's when Broadway Partners Fund Manager LLC, a once high-flying New York firm, bought 500 W. Monroe for $336.7 million, with a package of loans that made up more than 95% of the purchase price.

"These are the situations that have gotten awfully complex," says Dan Fasulo, managing director at New York-based Real Capital Analytics Inc., a commercial real estate research firm. "This one looks untenable."

Mr. Fasulo reckons that 500 W. Monroe could be worth about $240 million today, based on an estimate of the building's net operating income and the return investors would expect since the tower is just 70% leased. That would put its current value at roughly 30% below the 2007 purchase price, a decline in line with national trends. A report last week by New York-based Moody's Investors Service showed property values in the top 10 U.S. office markets have plummeted 31% since the 2007 peak.

Should 500 W. Monroe fall into foreclosure, it's unlikely to be the last, given the recession-stymied demand for office space and the wave of big loan maturities in coming years. Lenders so far largely have been willing to extend those loans, but that could change.

"This is an early canary in the coal mine," says Rick Schuham, a Chicago-based executive vice-president at Studley Inc., a firm that represents office tenants. "There are plenty of tough stories out there."

Big Wave of Commercial Foreclosures Coming

Bernanke's stimulus efforts did next to nothing for residential housing, and absolutely nothing for commercial real estate. With a wave of maturities coming due, and with lease prices still dropping, pressures on commercial real estate are enormous.

Moreover, it is crystal clear that the economy is headed back towards recession, assuming of course one believes the recession that started in 2007 ever ended.

I suggest the recession never ended in light of the fact 3rd Quarter GDP Likely Negative.

How much patience lenders have in a weakening economic environment to restructure loans remains to be seen, but surely it isn't infinite.

Big Wave of Bank Failures Coming

Given that regional banks are in general the ones with the most commercial real estate exposure, it should not be too difficult to look one step ahead and see the effects of another economic downturn on mid-sized banks.

Recovery a "Statistical Mirage"

Brace yourself because the recovery of 2009 was nothing but a statistical mirage fueled by unsustainable government spending and bank bailouts. That mirage is rapidly fading off into the sunset.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Benevolence by JPMorgan? "JPMorgan Offers us a Chance to Refinance at 4% with No Closing Costs" What's Going On?

Posted: 23 Aug 2010 09:08 AM PDT

Reader "Michele" received a notice from JPMorgan Chase out of the blue, offering to lower her 4.75% mortgage to 4.00%. Chase will waive closing costs.

Michele Writes ...

Hi Mish,
My husband and I just got an offer we can't refuse. We have our home mortgage with Chase bank. This past year, we have been aggressively paying off our 15 year fixed at 4.75% with extra monthly payments on principle. This week, we got an offer from Chase, to refinance for free to a 15 year fixed at 4%, with no prepayment penalties.

The first paragraph of the letter goes like this: "It seems like responsible homeowners like you - who always pay their mortgage on time - are the only ones who haven't received mortgage "relief." At Chase, we think you deserve relief as much as anyone else, and we believe we can lower your mortgage rate now through the Chase Rate Reduction Program."

Any theories on why a bank like Chase would give up .75% interest and pay the origination fee, appraisal fee, title insurance, attorney fees, closing fee, notary fee, flood determination fee, overnight delivery fee, title search fee, recording fee and city/county tax/Stamps fee?

Michele

Benevolence by JPMorgan?

Hello Michele

In spite of the wording of that letter rest assured that JPMorgan Chase has its best interest at heart not yours. However, it just so happens it is quite possible its best interest and yours are aligned.

What's Happenin'?

Mortgage rates have collapsed for very qualified borrowers.
Refinances are booming, again for qualified borrowers.
You have equity in your house.
You are a good customer.
JPMorgan is afraid they will lose a profitable loan.
So they offered to reduce your rate.

While it may be a good deal for you, the offer has nothing to do with their McDonald's like statement implying "you deserve a break today".

The driving force is what is in the best interest of JPMorgan.

Low Mortgage Rates Spur Refinance Boom

FreeRateUpdate reports Mortgage Rates Spurring Refinance, but Some Banks are Underwriting Too Slow

With the current mortgage rates at 4.00% for a 30 year fixed, 3.50% for a 15 year fixed and 3.25% for a 5/1 ARM, home owners are now taking the plunge to refinance. Many have been just watching the market to see what was going to happen and are now making their move. Since rates have reached historical lows not seen since the 1950s, the refinance door has opened up for everyone. Even those who already enjoy low rate mortgages are eager to apply for a refinance. Mortgage rates may be spurring refinance, but some banks are underwriting too slow to get loans closed.

Consumers, no doubt, are becoming frustrated with the amount of time it is taking to close their refinancing deal. As mortgage guidelines have changed and have become more complicated than several years ago, the process has become longer. In the past, automatic underwriting systems told exactly what was necessary to approve a loan. As the rules have changed, processors and underwriters must thoroughly examine the financial history of an applicant. Every credit glitch, every dollar deposited, every bad check and every overdraft must be explained. Documentation that must be received and verified can take a very long time. Any issue found delays the refinance mortgage from closing within a reasonable amount of time. ....

It's highly likely JPMorgan Chase knows Michele has no "glitches" and that it is a matter of time before she refinances. To keep the loan, JPMorhan sends a "Benevolent Letter".

How Credit Scores Affect Refinancing

Jim Gallagher at the St. Louis Post Dispatch writes Refinancing mortgage now may be timely idea

Mortgage rates hit yet another new low this week — 4.42 percent on a 30-year loan. That's the lowest since Freddie Mac began keeping track in 1971.

So, if you've been thinking about refinancing, is now the time to strike?

The answer is yes, probably. Rates may go lower in the next few weeks; no one knows. When they hit bottom, we won't realize it.

But the consensus among economists is that our slow-poke economy will eventually pick up steam and interest rates will then go higher.

I do not know where mortgage rates are going, but the consensus the economy is going to pick up steam is foolish.

The odds are we will not see a double-dip recession for the simple reason we are still in one. Nearly every economic indicator is headed lower.

58 out of 58 Economists Overoptimistic on Philly Fed Manufacturing Estimate; Median Forecast +7 Actual Result -7.7, a "Veritable Disaster"

Weekly Unemployment Claims Hit 500,000, Exceed Every Economist's Estimate; No Lasting Improvement for 9 Months

3rd Quarter GDP Likely Negative, Recession Never Ended

Moreover Small Businesses are Not Hiring - Why Should They?

Gallagher continues ...

If you're eligible to refinance, consider yourself lucky. "You can be the perfect borrower, but you won't qualify to refinance because the neighbor next door went into foreclosure and the house sold for 50 cents on the dollar," says Doug Schukar, CEO of USA Mortgage, one of the largest mortgage banking operations in St. Louis.

Mortgage lenders have tightened their standards since they helped KO the economy in 2008. The mortgage rates you see advertised are for the most credit worthy customers.

If your credit score is under 720, you probably won't get the best rates, says John Frank, president of Paramount Mortgage in Creve Coeur. If it's under 640, you'll find it hard to get a mortgage. The median credit score in the U.S. is 711, according to the scoring company FICO.

"You can negotiate," says Suzanne Gellman, consumer economics specialist at the University of Missouri. Lenders add "junk fees" to boost profits, so look closely at the charges. "Missouri doesn't require lawyers. So, if it says 'legal fees,' where was the attorney?" she asks.

The one thing I would caution Michele on is the waiver of closing costs. Does it really mean all costs? With no points?

Others may disagree, but I like "no points, no fee loans" for the simple reason if rates drop again, you can refinance again without penalty.

Addendum:

"JH" Writes ...

I'd be interested in knowing if JP Chase's offer is to re-fi the entire ORIGINAL loan balance, or just the remaining. If Michele is paying down principal, JPM is seeing less and less actual interest each month on the loan (especially true on a 15yr am), so I'd not be surprised for a loan offered to "start over" the amortization schedule on a new loan for the ORIG amount, thereby maximizing JPM's interest income.

Reply:

I am pretty certain that JPMorgan Chase would not be doing what you suggest. It would add risk to JPMorgan while giving cash back to Michele. Even if that were the case, Michele could simply take the cash back, and apply it to the new loan, which I believe she would do.

Nonetheless, there is a trap of sorts given Michele may only have 10 years left (or 8 or whatever because of the extra payments), and now she is back in a 15-year loan.

However, Michele seems disciplined enough to make extra payments. She can easily keep making her current payment (with extras). Assuming Michele has a year's worth of living expenses in an emergency fund in cash, I would suggest she continue to do just that.

In that sense, nothing has changed but the lower rate. However, in an emergency she also has the flexibility to make the lower payments. This is an advantage to someone with discipline like Michele. For someone without discipline, it can resort in more interest being paid than their original plan.

Addendum II:

Michele writes ....

I called the Chase representative handling our case, and he assured me that, "even though it seems unbelievable, Chase is covering all closing costs. There will be absolutely no closing costs for us. And, no points." I will get back to you if any hidden costs pop up when we get our first statement on the new refinance loan.

Yes, you are correct in writing that we have no glitches. Our credit scores are high 700, low 800, we have 62% equity in our house, healthy savings accounts, both employed and no other debts. Driving to work in my nine year old car, and coming home to second hand furniture, I always wondered how my peers could afford so much new stuff over the past ten years. Of course, your blog has been telling us their housing ATM secrets for years now. At least in this deflationary economy, we finally feel less "suckered" then we did in the go-go housing days.

Thanks for a great blog.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

3rd Quarter GDP Likely Negative, Recession Never Ended

Posted: 23 Aug 2010 01:54 AM PDT

While some people still think the odds of a double dip recession are close to zero, ironically, the only reason they may be right is if the first dip never ended.

Please consider last Friday's Breakfast With Dave, wherein Rosenberg stated U.S. RECESSION NEVER ENDED; GDP TO CONTRACT IN Q3

Our suspicions have been confirmed — the recession never ended. Macroeconomic Advisers produces a monthly U.S. real GDP series and it shows that the peak was in April, as we expected, with both May and June down 0.4% in the worst back-to-back performance since the economy was crying Uncle! back in the depths of despair in September-October 2008.

The quarterly data show that Q2 stands at a +1.1% annual rate (so look for a steep downward revision for last quarter) and the "build in" for Q3 is -1.5% at an annual rate. Depending on the data flow through the July-September period, it looks like we could see a -0.5% to -1% annualized pace for the current quarter. Most economists have cut their forecasts but are still in a +2.5% to +3.5% range. What is truly amazing is that despite all the fiscal, monetary, and bailout stimulus, the level of real economy activity, as per the M.A. monthly data, is still 2.5% below the prior peak. To put this fact into context, the entire peak to trough contraction in the 2001 recession was 1.3%! That is incredible.

Interestingly, and dovetailing nicely with our deflation theme, nominal GDP fell 0.3% in May and by 0.4% in June. This is a key reason why Treasury yields are melting.

How Likely is a Double Dip?

Flashback June 25, 2010: ECRI Weekly Leading Indicators at Negative 6.9; How Likely is a Double Dip?

Inventory restocking contributed 1.88 of the reported 2.7 [first quarter annualized GDP].

Second quarter GDP may very well be flat or even negative and it is increasingly likely third quarter GDP will be negative.

Meanwhile the ECRI is still spouting "With coincident indicators, ranging from GDP, employment, income and sales, all showing simultaneous improvement, the U.S. economy is undoubtedly in a recovery".

Flashback August 15, 2010: ECRI WLI "Flattens Out" at -9.8% - ECRI says "Gage is Fine"

I actually have the odds of a double-dip recession falling quite rapidly. Why? Because it is increasingly likely the recession that started in 2007 never ended.

Second quarter GDP will likely be revised way lower to 1.1% or so. Unless things improve, 3rd quarter GDP will contract. Amazingly, economists are still clinging to estimates of 2.5% and up.

So expect to discover the vast majority of economists will be surprised at the forthcoming downward revisions, even after we point these things out well in advance and repeat them.

Surprise, Surprise, Surprise

Recent Surprises

58 out of 58 Economists Overoptimistic on Philly Fed Manufacturing Estimate; Median Forecast +7 Actual Result -7.7, a "Veritable Disaster"

Weekly Unemployment Claims Hit 500,000, Exceed Every Economist's Estimate; No Lasting Improvement for 9 Months

The ECRI is still touting the "flattening" of the Weekly Leading Indicators (WLI) at -10. With the collapse in treasury yields, a print of -500,000 on weekly claims, and a god-awful Philly Fed report, let's watch the next few weeks. I suspect this "flattening" period will soon be over.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Monday, August 23, 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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