Thursday, November 18, 2010

Mortgage delinquencies improve very slowly

This recovery has been slow, and agonizingly slow for all those exposed to the real estate market. The top chart shows mortgage delinquencies as a % of total loans, while the bottom chart shows foreclosures as a % of total loans. Both reached record-high levels early this year. There's been some progress since then, but we still have a long way to go before the real estate market gets back to anything that might be considered normal. Lots of pain and suffering out there, and it's going to be a hard slog for at least the next year or two, even though it is nice to see that we have turned the corner and are moving in the right direction.

If there is any consolation to be found here, it is that this problem (record-high delinquencies and foreclosures) has been with us for quite some time now, and the market has had plenty of time to adjust prices and take losses. It is very likely that all the losses that are going to come out of the real estate market have already been priced in, and all the bad news has been digested. Undoubtedly there are many homeowners who haven't yet accepted the fact that they have lost lots of equity in their homes, but the market has most likely figured it out by now. The worst is over, and now the economy and the market can slowly put things back together.


brodero said...

A good item about today's news is
the year over year change has turned negative..from 9.64% last
years 3rd qtr to today's 9.13%

Benjamin Cole said...

Agonizingly slow for those exposed to real estate...or looking for work.

Really, anybody not connected to the war effort (remember real military outlays now double that of 2000, a huge drain on the private sector), or health care.

With the Cleveland Fed reporting inflation at record-low 0.5 percent annual rate...and going down, not up...with Merrill Lynch economists reporting that labor costs will continue to go down...

I understand fear of inflation.

But a real-world economy is not a theoretical is here for our prosperity.

The Fed should be blowing the doors wide open. In similar circumstances Milton Friedman advised Japan to go to quantitative easing. We should cut taxes and regs.

Print money until the plates melt.

W.E. Heasley said...

The decline in foreclosures is interesting.

However, the giant bubble of foreclosures, the mountain on the chart depicted in the post, is a bubble that produces cascading known consequences. While those consequences play out through he economy, Mr. Shadow Inventory of foreclosures that have not reached the market yet, estimated at one million units, merely accelerates and magnifies the cascading consequences. Then we have tons of single family units under water regarding loan-to -value. That is not to mention the day-of-reckoning regarding the unwinding of the Fannie and Freddie mega-mess adding to the accelerating cascade of consequences.

If the housing sector bottoms in two year, it will be an elongated “u” shaped bottom as too many mal-components exist to create a “v”.

Public Library said...

I said this 2 years ago on here. There is no reason to get into the real estate game, low rates or not. The real estate market now is akin to sitting in the middle of the Atlantic with only sails and no wind.

Unless the government starts giving away houses for free, no point in being long the asset. This will take a good decade (we are 2 years in) to work out.

Scott, the market fully expects Heli-Ben to unload all $850B of his newly minted dollars. In fact, I think the market might start gearing up for even more based on his rhetoric.

Put on your seat belts, because this here is the wildest ride in the wilderness.

Benjamin Cole said...
This comment has been removed by the author.
Benjamin Cole said...

Public Library

I am flabbergasted, stupified, agog at the importance being attached to Bernanke's cautious, incremental QE2.

Okay, according to the Cleveland Fed (see Carpe Diem) , we are running at about 0.5 percent on the CPI now, and serious studies suggest that the reported rate is artificially high.

Unit labor costs are going down (1.8 percent annual rate), and as you point out real estate is dead long term. Demand is weak.

Meaning, operating a business gets less expensive all the time, in the current environment (barring more stupid federal regs).

So, where does inflation come from? $100 billion a month of QE (when we already did a depression-dodging $1.5 trillion QE)?

BTW, inflation, or reflation, would be terrific in real estate markets, for owners, banks and the economy. If QE2 can accomplish that, I say pour it on, and set the house on fire.

Likely, QE2 will be some help, put a million people to work, we can hope.

Inflation? Would that it were.

Some people have been warning about inflation for years. Instead, the core rate has been steadily southwards. I hope Scott Grannis is right, and we run real inflation for several years. But I think we have to learn to speak Nippon, and find out what happened in Japan. 20 years of delfation, and the Fay :ady is not singing yet.

Your stock and real estate portfolios could take 75 percent haircuts (as they did in Japan), if we don't print some serious money now.

When Ronald Reagan left office, the great inflation-fighter had prices rising at about 5 percent a year. Now we are at one-tenth the rate everyone (including me, I was an RR fan) embraced as heroic and magnificent back then.

What drives the current obsession-fetish with inflation?

Is it simple partisan dogma? A monetary version of a clean freak? The Sarah Palinization of the entire right-wing?

Benjamin Cole said...

Some good news...

U.S. diesel consumption increased in October from a year earlier, a signal that the U.S. economy is rebounding, according to the American Petroleum Institute.
Demand for ultra-low sulfur diesel, the type used on highways, rose 8.4 percent to average 3.19 million barrels a day last month, the industry-funded group said today in a report. Consumption during the first 10 months of 2010 climbed 2.9 percent to 2.97 million barrels a day."

Like Scott Grannis always sagely warns, one indicator can be chatter...still, hard to see diesel consumption rising w/o more activity...especially as newer diesel trucks are using less diesel per mile....

But 2.9 percent growth for whole year is only okay, not great....

John said...


I have a question, Sir.

Does QE (alone) increase the money supply? Or does it just provide more reserves for the banking industry? It was always my impression that if the Fed bought an asset it credited the account of the member bank through which it made the purchase. Until that bank made a loan using the funds provided by the Fed no actual money supply increase occured.

There are a lot of people accusing the Fed of balooning the money supply, monetizing the debt, etc.

Are they?

Scott Grannis said...

John: I tried to address this issue in a prior post:

The short answer is that when the Fed buys something, it can only pay for it with reserves. Reserves can then be used by the banking system to expand the money supply (deposits, currency, etc.), but that does not necessarily happen. It didn't happen with QE1.

Since the Fed now pays interest on reserves, reserves are very much like T-bills: a risk-free asset. The world has been so risk-averse for the past two years or so that it has been quite willing to hold all the extra reserves the Fed has added to the system. This may happen with QE2 but we have no way of knowing.

Think of QE2 as the Fed's offer to exchange newly-minted T-bills for longer-maturity T-bonds. Those T-bills can be turned into cash only to the extent the financial system has no desire to hold more T-bills.

John said...

Thank you.

Bill said...


Do you still think the S&P 500 can gap up 3% by year end to finish up 10% for the year?

Scott Grannis said...

On an intra-day basis, that's already happened (Nov. 5th). As of today the S&P is up 7.6% year to date. A 3% move can happen in just a few days, if the conditions are right. I see no reason why the S&P couldn't finish with at least a 10% gain for the year. And that's not counting dividends.

Benjamin Cole said...

Re QE2:

Scott Sumner, and several other economists, advocate the Fed actually charge interest on reserves, rather than pay interest. This would give the banks a little kick in the butt to start lending.....

fwiw imho said...

RE: "operating a business gets less expensive all the time, in the current environment".
And that is support the Fed position that there is no inflation?

I run a business. 40 employees, down from 60. My costs are not going down. Labor locked in for year; don't see any downside movement. Insurance costs (WC, health, liability, auto, umbrella, Fed and State unemployment) are rising. Utilities (gas, electric, water) are rising. Property taxes are rising. Fuel (gas and diesel) are rising. Material costs are rising.

Because of increased competition (same number of competitors chasing fewer opportunities), margins are down.

In the real world (my world), I see inflation. Not deflation. Take a look at the the items you NEED, not want. They are increasing in cost. The only things I see decreasing in cost are items I want, but do not need.

Could the Fed be fudging the numbers? Naaaaaaah, not the
Fed. We can trust the Fed, they are just like the government.

Mr. Kowalski said...

I call your blog the sunshine blog.. nary a negative word. In the last eight years, worldwide debt has gone from 60 trillion to 188 trillion dollars.. then we come to the derivatives. There will be no recovery, folks. The unemployment you see is permanent, not cyclical.

John said...

XRT, the retailers exchange traded fund made a new closing high for the year friday. Seems everyone isn't unemployed.

Scott Grannis said...

Mr K: you must have missed the many negative comments I've had over the years regarding the gigantic policy errors coming out of Washington: bad monetary policy, and misguided (Keynesian) fiscal policy. These are huge problems that act as headwinds to economic progress.

Bad policy trumps debt as something to worry about. Bad policy can both foment and pop debt bubbles.

Benjamin Cole said...


I run a very small business, used to have eight employees, now down to two.

Gasoline is less than when it was $4 a gallon, and phones are cheaper than they ever were. Rents are lower (I own my space, but rent some space out; it is hard to get tenants).

I am sure you get many applicants for every job opening you have. Meaning your payroll costs could go down, although maybe you are not willing to hack off long-term employees to save money.

Years back I bought a certain kind of brush for $2 (to spread epoxy) Then about 10 years ago I bought 2,000 such brushes for about $1 each. Now I can buy brushes at the $1 store.

Anyway, anecdotes are interesting, but the BLS reports unit labor costs decreasing at a 2 percent annual rate, and the Cleveland Fed is reporting median CPI at 0.5 percent.

Inflation is not a concern. Inflation was 5 percent when Ronald Reagan left office, and we enjoyed nearly 20 years of prosperity beginning with Reagan.

Why are we in knots now about 0.5 percent?

Bill said...


With news that Greece may not meet the terms of continued funding of its bailout and continuing trouble in other Euro countries, isn't it likely that there will be a coming collapse of the Euro? What impact do you think that will have on US markets? It seems like these bailouts are just kicking the can down the road.

John said...


Didn't we do all this last summer?


Re real estate game...depends on the individual and their objectives. Buying for flips, yes. Probably a bad idea unless its a special situation or the buyer is VERY patient. A retiree who wants a second home nearer children and grandchildren and who plans to spend time there, its a good time to shop IMO. Its a buyer's market and good values can probably be found.

I agree with you that the Fed will ignore the criticism and fully implement their QE plan...maybe even front loaded. We probably will disagree with the consequences. I don't know about you, but no one at the Fed is calling me for my opinion. We'll all get to wait and see what happens, no?

Have a Happy Thanksgiving, Pub.

Scott Grannis said...

Bill: key market indicators like swap spreads and government yields suggest that while Europe is going to have problems digesting the debt problems of Greece, Ireland and Spain, this is not going to be the end of the euro. I'm hoping to put together a post on this subject later today.

Jeff said...

Best explaination of QE2 that I have seen...

Benjamin Cole said...


Fed’s Kocherlakota Says Inflation Low, Growth ‘Alarmingly’ Slow
By Steve Matthews and Joshua

U.S. economic growth is slowing and inflation is falling, two worrying trends that warrant the new round of monetary easing by the central bank, said Federal Reserve Bank of Minneapolis President Narayana Kocherlakota.

Inflation of about 1 percent is “low” and “more troublingly the inflation rate is drifting downward,” Kocherlakota said today in a speech in Sioux Falls, South Dakota. “Growth has been low in this recovery compared with most. More alarmingly, growth has been decelerating.