The United States of Subprime

Yesterday, the National Association of Realtors cheerfully forecast that Improvements in Mortgage Markets Bodes Well for Housing in 2008.

Buried deeper in this sunny prediction were their revised expectations for existing
home sales; The NAR now expects a steeper than previously anticipated
drop of 10.8%.

This revision marks the eighth consecutive downwardly revised forecast from the NAR.

What is the cause of all this hosuing angst? Perhaps a clever front page headline in today’s WSJ provides a clue: The United States of Subprime. (free WSJ)

Its an article on just how surprising widespread the sub-prime mortgage usage was over the past 10 years:

"As America’s mortgage markets began unraveling this year, economists
seeking explanations pointed to "subprime" mortgages issued to
low-income, minority and urban borrowers. But an analysis of more than
130 million home loans made over the past decade reveals that risky
mortgages were made in nearly every corner of the nation, from small
towns in the middle of nowhere to inner cities to affluent suburbs . . .

The Journal’s findings reveal that the subprime aftermath is hurting a
far broader array of Americans than many realize, cutting across
differences in income, race and geography. From investors hoping to
strike it rich by speculating on condominiums to the working poor
chasing the homeownership dream, subprime loans burrowed into the heart
of the American financial system — and now are bringing deepening woe.

The data also show that some of the worst excesses of the subprime
binge continued well into 2006, suggesting that the pain could last
through next year and beyond, especially if housing prices remain
sluggish. Some borrowers may not run into trouble for years."

There’s a nice interactive map at the (free) WSJ:



So while we learn today that the sub-prime debacle is even broader and deeper than previously realized. This makes yesterday’s NAR release look all the more like the furious spinning it really was.

Here’s how they put lipstick on the pig:

Conditions in the mortgage market are improving for consumers, which should help to release some pent-up demand in early 2008, according to the latest forecast by the National Association of Realtors.

Lawrence Yun, NAR senior economist, notes that widening credit availability will help turn around home sales.  “Conforming loans are abundantly available at historically favorable mortgage rates.  Pricing has steadily improved on jumbo mortgages since the August credit crunch, and FHA loans are replacing subprime mortgages,” he said.

Yun said it’s important to place the current housing market in perspective, and that 2007 will be the fifth highest year on record for existing-home sales.  “Although sales are off from an unsustainable peak in 2005, there is a historically high level of home sales taking place this year – a lot of people are, in fact, buying homes,” he said.  “One out of 16 American households is buying a home this year.  The speculative excesses have been removed from the market and home sales are returning to fundamentally healthy levels, while prices remain near record highs, reflecting favorable mortgage rates and positive job gains.”

Let’s put the NAR spin aside, and look at the relative strength and weakness of construction:

Two years ago, Residential construction was about $688B per year, while Commercial Building (non-residential) was well under $300B. Residential has now fallen about 25%, while commercial has gained over 30%. Commercial construction has picked up some — indeed, much — of the slack of residential slippage — at least in terms of GDP.    

There is an element to the Residential boom not picked up by Commercial construction: The secondary effect on consumer spending. A major impact of the boom has been housing driven consumer spending. While there is still plenty of MEW going on, it is definitely attenuating. We see revolving credit partially substituting, but that is only a temporary solution.

Back to school season as disappointing, and that typically bodes poorly for the holiday shopping season

chart courtesy of AdvisorIntelligence


The United States of Subprime
Data Show Bad Loans Permeate the Nation;
Pain Could Last Years
WSJ, October 11, 2007; Page A1

Same article at Free WSJ

Existing home sales expected to drop 10.8%
National Association of Realtors says rate will be the lowest since 2002.
AP, October 10 2007: 1:18 PM EDT
Improvement in Mortgage Market Bodes Well for Housing in 2008
National Association of Realtors, October 10, 2007

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Thin Trading: Fed Fund Futures and Antique Watches

Yesterday, Traders embraced the release of the FOMC minutes. Indices were flat up until just before the 2:00pm release, and then took off, with the Dow gaining near 1%.

The thinking behind the Fed action was clearly revealed in that release. The emphasis was on the subsequent impact of credit on the entire system. The WSJ reported:

"Federal Reserve officials worried that credit-market
turmoil could reinforce slower growth at a time of "particularly high
uncertainty," leading to their half-point interest-rate cut last month,
minutes from the meeting show.

Without a cut, there was concern that "tightening
credit conditions and an intensifying housing correction would lead to
significant broader weakness in output and employment," the
rate-setting Federal Open Market Committee said. The minutes, released
yesterday, also showed members worried that market turmoil "might
persist for some time or possibly worsen."

They offered no clues about
the direction or timing of the Fed’s next move."

That last sentence is quite intriguing. Understanding whether or not a rate cut is forthcoming impacts yields, stocks prices, etc.

Given the significance of the Fed’s action, one would suppose that the markets which trade the Fed Futures would be, if not prescient, than at least telling about their future price action. One of the more fascinating aspects about this, however, has been the way the Fed Fund Futures have functioned over this time. They have been wildly wrong, forecasting an imminent rate cut since January 2006. I thought it might be instructive to look at why this maybe so, and what it might mean . . .

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Distributed Content Blog Advertising Model

A few people wrote in to ask me about yesterday’s Nielsen/Media Matrix rant.

-Some pointed out (privately) the flaws in these systems, noting they have been very error-prone in other media — radio, television, newspapers — for years.

-A few told me I was wildly wrong, and this is just a standard measuring approach. (I don’t buy that, as its easy enough to measure EXACTLY how many ads are actually served or clicked on. The aggregation/assignment approach, is a recipe for inaccuracy and abuse).   

-Several media people told me that the anarchy of the blogosphere terrifies the MSM, and this was an attempt to make it more acceptable (a "clean well lit place" one wrote).

-A major advertising executive asked a question that was most intriguing: "Why do you care, and what does it matter anyway?"

That’s a thought provoking question, worthy of an answer. Here’s mine:

There is little doubt that Blogging is changing how people get information, analysis and opinion. Major Media has recognized that there is a certain aggregation of readers, many of whom are not represented in the MSM readership. This means their advertisers are not reaching these consumers.

Based in part on this, I made a proposal to a large media firm over the summer, describing what I saw as an opportunity to create a new advertising structure for a large magazine or newspaper.

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