State of the Economy

[DrPhil]

http://www.msnbc.msn.com/id/37274896...t_a_crossroads

Jobless rates drop in 34 states and DC

An improvement from March when 16 reported declines

[HDL66]

But first time claims for unemployment claims were unexpectedly up.

"There were 471,000 initial jobless claims filed in the week ended May 15, up 25,000 from an upwardly revised 446,000 the previous week, according to the Labor Department's weekly report.
The number of claims was higher than expected and curbed a four-week trend of losses. Economists surveyed by Briefing.com had expected new claims to fall to 439,000." http://money.cnn.com/2010/05/20/news...aims/index.htm

[Boodleboy322]

Originally Posted by AGDee

I have an Adjustable Rate Mortgage. I don't have a crazy one, I have the "normal" kind from before they started going crazy with them.

I just got back in town from a mini trip down the coast to Galveston Island, TX. Fortunately, there wasn’t any oil spill where I was. There was a great deal of weddings, bachelor/bachelorette parties going on as the start of wedding season for 2010 hits and there was definitely nothing recessionary about the spending habits going on down there. Almost two years since Hurricane Ike tore up the Island and severed the economy it appears to be back into the swing of things.

Stocks rallied to correctional points on Friday and Bonds tanked. Today was a horse of a different color. After seeing huge movements across all markets last week we saw stocks, treasuries and bonds go down all day. That doesn’t happen often but nevertheless can occur. It could mean a plethora of things, but usually it’s a good indication that market participation is low that the investment community is waiting for guidance.

AGDee touches up on something important that I thought I’d chime in and share my own two cents on – Adjustable Rate Mortgages (i.e. ARMs). The crazy ones that AGDee is referring to are the Payment Option ARMs. The not so crazy and in fact good ARMs, like AGDee’s mortgage rate, are Standard Fannie Mae/Freddie Mac Agency Hybrid ARMs.

A brief history on Payment Option ARMs:
In the early 1980s these types of mortgages were originated door to door by two guys working for a small community bank. Eventually, Washington Mutual bought the bank and took over the product, which took a significant increase in the Niche Investor market and later got securitized into Private Labels. They featured “Negative Amortization”. In laymen’s terms this is how it works. Negative Amortization is the ability to increase your principal balance of a loan that is caused by making payments lower than a set interest due. The remaining interest owed is tacked on to the loan’s principal balance, which ultimately causes the borrower to owe more money. For example, if the periodic interest paid on a loan is $400.00 and a $300.00 payment is made, as an allowable option, then $100.00 is added over to the principal balance of the loan. While these types of loans assisted borrowers by allowing them to make lower monthly payments for a short period of time the payment shock eventually catches up. At some point these hidden time bombs can reset and increase the payment to the borrower significantly, which can cause payment default. Here’s the stink of the whole thing - prior to the Subprime meltdown when originators were selling these types of loans there where issues from all sides. Naturally the banker sells the loan to the customer but what most people aren’t aware of is that the Federal Regulators, like the O.C.C., knew about these products and didn’t do anything until it was too late. Also, the rating agencies like Moody’s and S&P where aware that these types of loans had much looser underwriting guidelines than conventional mortgages and didn't do anything. In other words, if you couldn’t qualify on a vanilla ARM mortgage (like AGDee’s) then you could actually qualify for a Payment Option ARM. How does that make any financial or economical sense? Something about that sounds completely wrong – you don’t qualify for a government backed loan but you can have a "special" type of loan that is really a hidden time bomb??!!! An economics professor at George Mason made a comment that as much as there was predatory lending there were also predatory borrowers. Take this for instance – an 18 yr old kid working at the Smoothie King Shop down the road making minimum wage pulls out a $1,000,000.00 loan for a mortgage (this is a true story by the way). Believe it or not, there are Ivy League MBAs that don’t take out those types of mortgages. What was this guy at 18 thinking? For starters, the Mortgage Banker could easily qualify the individual and then three months down the road refinance the borrower into a new Payment Option ARM to avoid the payment shock. Smart huh ?? – No! What eventually happened was that the investment community quickly lost its appetite for these types of products in the Secondary Market. The bid price went from a sweet break even to 98, to 96, to 94 cents to the dollar in the span of two days! At the end of the day these types of mortgages were intended for savvy type borrowers that knew their income would increase substantially in the near future - not normal Joe's & Jane's.

Now a little on the safe type of ARMs: Fannie Mae and Freddie Mac or the two Government-Sponsored Enterprises (GSEs) regularly buy/sell vanilla Adjustable Rate Mortgages in the Secondary Market. These types of loans are intended for people that plan on moving in about 5-10yrs and are looking for a good rate for a short period of time. They are typically a little tougher to qualify on when compared to Fixed-Rate mortgages. Most Vanilla ARMs are attached to either the CMT or Libor index. Relatively speaking, the indexes have been performing fairly well and consumers that have recast out of their initial fixed period are mostly content with their interest rate. PM me if you really want to learn more about this. This could easily be a whole other thread in itself.

Stabilization in the housing market will be a key indicator that will tell us when things start shifting back to “normal” levels. The Achilles Heel there is you need a job to get a house and there’s no job with no economic recovery. I know it’s frustrating for some of you but hang in there. Going back to school or learning a new trade may be the interim answer.

Best of Luck,

Boodleboy322

[Beryana]

Originally Posted by Boodleboy322

Stabilization in the housing market will be a key indicator that will tell us when things start shifting back to “normal” levels. The Achilles Heel there is you need a job to get a house and there’s no job with no economic recovery. I know it’s frustrating for some of you but hang in there. Going back to school or learning a new trade may be the interim answer.

Hate to be the bearer of bad news, but a propped up housing market like we currently have is the same time bomb as the inflated market that just burst and is being propped up. Let the markets fix themselves (house values shift back to a normal/sustainable level) and things will be better in the long run. The same holds true for the banking industry - allow banks that are not being run properly, etc actually fail rather than propping them up for continued mismanagement.

As to going back to school or learning a new trade, there still have to be jobs out there. I live in a town whose economy for MANY years has been based on the paper industry and those mills are laying off workers who ARE going back to school and learning new trades, etc. HOWEVER the jobs aren't there because major employers don't exist in this town other than the hospital. And for those that own houses and wouldn't mind moving to where work is, because there are no real jobs, there aren't people moving to town looking for houses to purchase. . . .

Reality isn't as pretty as your business, economic and banking classes are leading you to believe.

[AGDee]

Nothing encouraging today

Stocks plummet on economic worries
http://news.yahoo.com/s/ap/20100525/...us_wall_street

Home prices drop 0.5 pct. from February to March

http://news.yahoo.com/s/ap/20100525/...us_home_prices

Oh the irony! I have two co-workers who both tried to buy houses to get the $8000 credit that required signing a purchase agreement by April 30th and closing by mid-June or something. Both had signed purchase agreements for very reasonable priced houses, both had 20% down payments. Neither house appraised high enough to get the mortgage. The existing owners can't sell for less. One was already a short sale.

I just don't see the housing market fixing itself miraculously. Too many people are just walking away from their mortgage/house.

[Boodleboy322]

The big question going on today is "Will Home Sales Improve, Contract or Sideways? Let's take the following into consideration:

The Good:
1. Home Prices: For anyone that is looking and can buy one they're affordable
2. Mortgage Rates: We're currently near record low levels. If you are well qualified you can get a no cost home loan at an interest rate south of 5.00%.
3. In a Buyer's Market: Although the Tax Credit that AGDee mentions has expired sellers are still offering incentives. These are referred to as "Seller Concessions" and are not refunds.
4. Tax Credit Momentum: There are competitive markets out there. In some areas, buyer demand is actually outdoing seller supply.
5. Home Builder Confidence is on the Rise: Thanks to all the sales contracts that builders got signed before the tax credit expired home builders are busy at work on new starter units. There's always some demand to remodeling as well.

The Bad:
1. Defaults are on the Rise: Standard or Prime loans are the fastest growing category of loan delinquencies.
2. Record Run of Foreclosures: Banks who largely delayed the liquidation of Real Estate Owned Properties over the winter and most of 2009 are beginning to kick borrowers out of their homes and prepare the properties for auctions.
3. Underwriting Guidelines: Fannie Mae and Freddie Mac continue to tighten up the rules so it's continually getting harder and harder for the average Joe to qualify for a mortgage.
4. Home buyers are Reluctant: The higher unemployment rate % for Americans between the age of 16-24 could have lasting ramifications on that generation's lifetime earnings and attitudes


The Ugly:
1. The number of Americans that are out of jobs for longer than 27 weeks is 6.7 million. See Duration of unemployment 27 weeks and over here: http://www.bls.gov/news.release/pdf/empsit.pdf

So in your opinion has Housing hit Rock Bottom and will it continue to improve or is buyer demand continuing to decline and home prices will follow? Last question, will any positive progress continue to stall at best and further growth will be delayed?

Regarding banks and their demise, someone introduced me to something known as the Texas Ratio back in January. The Texas Ratio (TR) is one measure of a bank’s financial strength and sometimes is an indicator of which banks may fail. To calculate the Texas Ratio simply divide the value of a lender’s non-performing assets by the sum of its tangible common equity capital and loan loss reserve. Non-performing assets are non-performing loans in addition to any real estate owned. The TR was developed by some folks at RBC Capital Markets and was used during the 1980 recession in analyzing banks financial strength. The simple on it is that when the ratio hits 1:1 or 100% of capital, it also has $50 of non-performing assets. If the ratio ends up getting too high then banks can raise new money to reduce the ratio. From those of that may be shareholders, raising new money dilutes your value. If the banks don’t raise new money then shareholders run the risk of losing all their money if the bank fails.

I haven’t looked at this in a while but here’s the last chart that I last looked at that shows the Texas Ratio. You can view it here: http://www.federalobserver.com/troubled_banks.html

[exlurker]

article w/ color graphs -- perceptions vs. reality of "shares" of control of wealth in USA:

http://harvardmagazine.com/2011/11/m...article-images

[Boodleboy322]

It's been a long time since I put anything back on this post. Overall, in my own personal opinion I think that we're still over supplied in the housing market and we haven't gotten back to satisfactory levels. Congress extended out the HARP programs, designed for people with their mortgages underwater and increased LTVs > 125%. However, there are signs of the economy stabalizing. What do you think?

http://www.bloomberg.com/news/2012-0...r-traffic.html

[AGDee]

My personal measures... my ex-husband is still unemployed although interviews have increased for him (since Sept. 2009 now). We are down to one empty house on our street. Sales prices for the houses that did sell were about what I owe on my house, but the houses that sold were foreclosures and should be worth about 10-15K more than mine in previous markets. At one point, houses were going for half what I owe on mine, so things seem to be improving. There is hope that I'll be able to sell and buy a condo with my profits in 10 years or so. I originally hoped that would happen in 5 years, but I guess I'll take 10.

I've been too focused on school to pay much attention but I did hear a news story that they were expecting another round of foreclosures to hit. I'm not sure why.

Found an article: Apparently it is due to a backlog that just delayed a lot of them in 2011.. http://articles.philly.com/2012-01-1...ure-processing

[AOII Angel]

In Phoenix, where the housing market was hit harder than most places, things are steadily improving. We bought our condo in June, and the same unit a floor down is selling for $40,000 more. Our realtor, whom we socialize with occasionally, said December was the busiest month he's ever had for home sales, which is odd since December is traditionally dead. Apparently, people are starting to buy again, and the prices are inching up. (Caveat: My condo cost us less than half of the selling price at the height of the housing boom.)

[Munchkin03]

Originally Posted by AOII Angel

Our realtor, whom we socialize with occasionally, said December was the busiest month he's ever had for home sales, which is odd since December is traditionally dead. Apparently, people are starting to buy again, and the prices are inching up. (Caveat: My condo cost us less than half of the selling price at the height of the housing boom.)

I'm tangentially in the construction industry (architect), and our sales this December were ridiculously good--and not just "good for a recession." I think a lot of clients sat out 2009 and 2010 and needed to do work and can do it now because their savings and investments have recovered.

For us, at least, the weather is helping out too. Typically, all sites shut down between November and March. We've had about a week total since November where no work could be done.

[AOII Angel]

Originally Posted by Munchkin03

I'm tangentially in the construction industry (architect), and our sales this December were ridiculously good--and not just "good for a recession." I think a lot of clients sat out 2009 and 2010 and needed to do work and can do it now because their savings and investments have recovered.

For us, at least, the weather is helping out too. Typically, all sites shut down between November and March. We've had about a week total since November where no work could be done.

Good to hear!