Nothing Good There

As far as I can tell, most analysts now concede that the bursting credit and real estate bubbles played a key role in bringing about the devastating downturn of the past two years.

Logically, that would suggest that a sustainable recovery is going to require some degree of stability -- no, normalcy -- in these two areas. Yet by most accounts, credit markets are on life support, dominated by the Federal Reserve and banks with broken business models that are somehow too big to fail.

Meanwhile, the residential property market is still being propped up by all sorts of subsidies -- for more on this, see "Policy and Housing: Someone’s Gotta Give!"-- and the supply-side of the equation remains an ongoing concern, if reports like the following from Reuters, "U.S. Mortgage Delinquencies Set Record," are anything to go by:

High U.S. unemployment keeps pushing up the rate of mortgage delinquencies, which could in turn drive personal bankruptcies and home foreclosures, monthly data from the Equifax Inc credit bureau showed on Monday.

Among U.S. homeowners with mortgages, a record 7.58 percent were at least 30 days late on payments in August, up from 7.32 percent in July, according to the data obtained exclusively by Reuters.

August marked the fourth consecutive monthly increase in delinquencies, and the report showed an accelerating pace. By comparison, 4.89 percent of mortgages were 30 days past due in August 2008, while in August 2007, the rate was 3.44 percent, Equifax data showed.

The rate of subprime mortgage delinquencies now tops 41 percent, up from about 39 percent in each of the prior five months.

The results, which correlate with consumer bankruptcy filings, suggest U.S. homeowners remain under financial stress despite signs of improving sentiment and fundamentals in the U.S. housing market.

In addition, the commercial property market is looking dicey again, as Bloomberg reveals in "Moody’s Property Index Resumes ‘Steep’ Fall in July":

Commercial real estate prices in the U.S. resumed a “steep decline” in July after showing signs of leveling off in June, Moody’s Investors Service said, as credit restrictions curtail lending and push landlords toward default.

The Moody’s/REAL Commercial Property Price Indices fell 5.1 percent in July from the month before, Moody’s said today in a statement. The index is down almost 39 percent from its October 2007 peak. The decline in June was 1 percent.

Commercial property sales this year may fall to an 18-year low. This latest set of numbers suggests no letup in that trend, said Neal Elkin, president of Real Estate Analytics LLC, a New York firm that partners with Moody’s in producing the report.

“We are still vulnerable to moves on the downside,” Elkin said in a telephone interview. “As time passes, the distress and the stress among those who need to sell is growing.”

Elkin cited figures from Real Capital Analytics Inc., whose data are used in compiling the report, showing the portion of sales classified as “troubled” -- those properties in or close to default -- almost doubled to 23 percent in July from March.

That’s “something we’ve never seen,” Elkin said.

Sales this year through July totaled about one-third of the year-earlier number, Moody’s Managing Director Nick Levidy said in the statement. The market averaged about 375 sales a month this year compared with almost 1,100 a month last year, he said.

Office sale prices fell 23 percent from a year ago in New York, 27 percent in San Francisco and 22 percent in Washington, according to the report.

South Affected

Prices of apartment buildings in the U.S. South have seen some of the steepest value declines, according to the report. Apartment prices in the region dropped 44 percent in the 12 months through June, almost twice the nationwide decline of 24 percent, and are now about half what they were two years ago.

Florida apartment values tumbled 40 percent in a year, the report said.

“That’s eye-popping,” Elkin said. The decline is being caused in part by “a ripple effect” from the overbuilding of condominiums in those markets, many of which are now competing as rentals, he said.

In sum, it seems like those who see signs of light at the end of the tunnel need to look a bit more carefully at what's really there.

Comments

[mei]

Can’t state enough how important the sacrifices that go into wealth creation are.

Curious if anyone has caught this book yet? “The Richest Man in Town” by W Randall Jones. I’ve read half of it so far and let me tell you it is well worth it. Would like to hear what everyone else thought of it?

http://www.richestmanintown.com

[Don]

I've been hearing about it, but it's not been something I wanted to believe, perhaps, because to me it's the final curtain call on this entire house of cards. This whole bailout has become like a giant tornado of money. If your hands are fast enough, you might catch a little bit of it, only to see it ripped out again into the vortex that leads to that black hole at the center of this government.

With what imaginary friend do they plan to create the new high paying jobs that will last in the short or even medium term? How many people do you know that were in real estate? Except for food, almost every single thing I find in the store is made in China. I joked around with a few junk merchants in the local mall over the weekend. I would pick up an item and ask ... "made in Haiti?" I wasn't surprised at the reaction I got. It was either laughter or a frown. The people who frowned were mad at me for asking such a stupid question, because they have no idea where this stuff comes from, and could care less. The smart ones smiled or shook their heads, because they have sense enough to understand that very soon they won't have a job anymore, because we can't afford to produce most of what we buy, without some form of farm subsidy.

The bottom line is, you can't fix this mess without a collapse, because it takes a reorganization, not just of government or business, but of people's entire minds. Capitalism has a memory about as long as two generations. That's it, after that, people forget the real value of anything, especially a government that has no solution for the reality of what this really is.

[edgar]

Hot new money, that and don't count the losses, is all that matters.

[jturner]

I'm glad you mentioned that the credit markets are on life support from the Fed. The Federal Reserve pretty much is the only player in town these days and is trying to backstop everything. This is such a unique and dangerous role, and the potential consequences of such actions are very large. That is why I continue to feel that investors should try to protect themselves by owning some gold. I recently read some good articles on the Fed's efforts to stave off deflation, as well as what one can expect from the Fed's announcement this afternoon, at http://www.goldalert.com. Although the markets are currently in liftoff mode, there is no free lunch, and eventually the US will have to take its medicine for the reckless spending habits. This will come in the form of a further debased currency and lower standard of living, in my opinion.