The Big Bailout - The Good, The Bad, and The Ugly The federal government has now intervened to provide support for the economy and restore investor confidence by potentially risking hundreds of billions of taxpayer dollars. While allocating taxpayer money to support illiquid mortgage assets of questionable value is hardly ideal, it will likely prevent the failure of a major facet of the U.S. financial system.
The good news is that action by the Fed, the Treasury Department, and in coming days, Congress, should provide short-term stability in the face of what had been a rapidly accelerating financial crisis that was having impact around the globe.
The bad news is that these actions will obligate U.S. taxpayers to as much as $1 trillion dollars in future cost. Additionally, the situation is not likely to right itself in rapid fashion as the many years of loose lending cannot be repaired overnight.
The ugly is that the federal government providing the "solution" is the same entity that has been asleep at the wheel while the massive government sponsored enterprises of Fannie Mae and Freddie Mac recklessly expanded their lending practices to the point of eventual failure. To make matters worse, they had plenty of private investment banks and lending institutions come along for the ride. Such a failure, the American people were assured, would never happen to Fannie and Freddie, yet somehow here we sit today. And as a result of all the bailout activity, the federal government will be the primary backer for the lion's share of residential mortgages for the foreseeable future.
Data released in the past week continued to show weakness in the housing market and the economy. Both housing starts and building permits continued to pull-back as negative sentiment and increasing foreclosures hurt sales of new homes. Leading economic indicators were also lower, indicating that a more sluggish economy can be expected in the coming months. The economy has already recorded job losses for every month so far this year while the nation's unemployment rate jumped to a five-year high of 6.1% in August. Weaker economic growth and the effects from developments in the financial markets this past week are only going to put additional pressure on the employment picture in the months to come.
The Economy Housing starts fell to a 17-year low in August as slower conditions in the housing market continue to force builders to pullback on building activity. Total starts fell 6.2% to a seasonally-adjusted annual rate of 895,000 in August. Declines in both single and multi-family housing starts contributed to the overall slowdown in building. Building permits also continued to correct in August with total permits falling 8.9% to an annual rate of 854,000 units. Both single and multi-family building permits posted monthly declines to drag issuances to a fresh 26-year low.
Leading indicators fell again in August signaling that further sluggishness can be expected in the coming months. Leading indicators posted a 0.50 point drop in August while the index for both June and July were revised higher by 0.10 points. The leading index now stands at 100.80, down from an upwardly revised July figure of 101.30. The index is down 1.0 point from its levels six months ago when it was 101.80. This is the second straight month that the leading index has posted a monthly decline.
The economy continued to shed jobs with total non-farm payrolls falling by 84,000 in August. This is the eighth straight month that the economy has posted job losses while the nation's unemployment rate has now jumped to a five-year high of 6.1%.
Housing Market National average mortgage rates declined to 5.78% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on September 18th. This is the fifth straight week that rates have declined and the lowest they have been since mid-February. In the week ending September 12th, the MBA's seasonally-adjusted Purchase Index increased to 380.4 from 371.5 in the previous week. The latest figure reflects a 2.4 percent increase from last week but a 15.84 percent drop from the same period last year. Falling mortgage rates have caused purchase applications to increase for four straight weeks while also sparking a jump in refinance activity.
Both new and existing home sales increased in July. New home sales in July increased from its lowest levels since September 2001 last month. Sales increased 2.4% in July to a seasonally-adjusted 515,000 homes, up from a revised June figure of 503,000. Sales for the previous three months, however, were revised lower by 46,000 units. The number of new homes for sale continued to decline as builders continue to scale back production. New home inventory declined to 416,000 which is the lowest it has been since October 2004. In July, median new home prices increased for the second straight month to $230,700.
Annualized sales of total existing homes in July rebounded to its strongest pace since February. Sales increased 3.1% from June levels to 5,000, 000 units. Sales of existing homes are down 13.2% from the 5.76 million units in July 2007. Median existing home prices in July declined to $212,400 from $215,100 in June. This is the first time since February that median existing home prices posted a monthly decline. The number of existing homes for sale increased 3.87% to 4.669 million units. At the current sales pace, there are 11.2 months of existing homes supply on the market which is an all-time high.
For market-level data and analysis please visit our website at http://www.hwmarketintelligence.com. For more detailed information on the indicators discussed in this key indicator alert, please visit the following links:
|Real GDP Growth||3.3%||B+|
|Purchase Mortgage Applications||380.4||D-|
|Median Price Existing Home||$212,400||F|
|Existing Home Sales||5,000,000||D+|
|Existing Home Inventory||4,669,000||F|
|Existing Home Affordability||51.1%||C+|
|Median Price New Home||$230,700||F|
|New Home Sales||515,000||F|
|New Home Inventory||416,000||F|
|New Home Affordability Ratio||47.4%||B|
Get the Facts.
Reduce Your Risk.
Sell More Houses.
Published Research Reports from Hanley Wood Market Intelligence have information and analysis to make better decisions.