CME Futures Market on U.S. Housing Prices in 2009

[Slimprofits]

Using data from the CME futures market, the outlook for home prices isn’t all that much better over the coming year. Current market expectations are that the 10-city Case-Shiller home price index will drop another 13 percent between June 2008 and November 2009. That is a peak-to-trough decline of 30.6 percent.

The home price declines are expected to be far more severe in bubble markets such as Las Vegas, where the futures market is predicting another 18.0 decline between June 2008 and November 2009. This would put the peak-to-trough decline in Las Vegas home prices at a whopping 44.7 percent. San Diego could see another 17.4 percent decline, for a peak-to-trough decline of 42.0 percent; San Francisco another 17.7 percent decline, for a peak-to-trough decline of 39.7 percent, and Los Angeles another 19.8 percent decline, for a peak-to-trough decline of 42.7 percent if current futures prices are realized...

source: Wells Fargo 'Economic Indicators' - September 2008

[goprisko]

US Housing Crisis.... Steve Keen's view.....

From Steve Keen....................

**********************************************
Published in September 19th, 2008
Posted by Steve Keen in Uncategorized


I’ve had a couple of very enjoyable chats this week with Red Simon, on the ABC Breakfast Show in Melbourne, and some friends have been trying to get me to throw some old Skyhooks song lines into the conversation–such as “Horror Movie” and the like (for any non-Australian and/or non-”Living in the Seventies” readers, Red was the drummer and lyricist; here is a link for the lyrics).

Though they’re definitely apt, the piece of 70’s music that most came to mind when I spotted this new feature on the US Federal Reserve’s website this morning was from The Carpenters (which in contrast to The Skyhooks, was not one of my favourite bands): “We’ve only just begun“.

It’s an interactive map of the subprime and alt-A mortgage catastrophe in the United States. The numbers, which are also available for download as Excel spreadsheets, are simply staggering.

The scariest part of the data relates to what are known as ARMs (”Adjustable Rate Mortgages”)–fixed rate mortgages that began with a “teaser” low rate, and then reset after a number of years to a higher rate (the standard US mortgage is a fixed rater, unlike Australia where variable rate mortgages are the norm).

Of the almost 3 million subprime loans (the precise number is 2,919,604, representing 2.5% of America’s 115,904,641 housing units), almost 2/3rds are ARMs (the national average is 62.9%), and just over 30% of them will reset to the higher rate in the next 12 months (with another 10% to follow over the next two years).

That’s why this crisis has “only just begun”. There are two sides to this catastrophe, and whatever is done about it, one side or the other is bankrupt.

IF the ARMs go ahead, then the number of American households that will go bankrupt is at the minimum 1 million–because there’s no way these borrowers can pay the higher rate. At the simplest scale, this is because the rates will rise from an already high average rate of 8.8% to a usurious 14.8%. But on top of this, the effective rate for the loans throughout has been the higher rate–and the gap between this and the initial teaser rate was capitalised onto the debt.

So a borrower who took out a loan in 2006 of $183,900 (the average subprime loan size–note by the way how small this is compared to median Australian housing loans), and whose loan resets to the higher rate next year, will go from paying 8.8% on 183,900 to paying 14.8% on $219,200–a doubling of annual interest payment commitments, from $16,180 to $32,440.

This for a cohort of borrowers who are already massively behind on their payments–though not as massive as it will get (currently 10% are behind 30-60 days, 5% 60-90 days, 10% 90 days plus, and 11% are in foreclosure). There’s no way they can manage this: they are, as the Americans put it, “toast”.

But what if they are freed from this obviously onerous burden by legislative fiat? Then the people and institutions who bought the residential mortgage-backed securities (RMBSs) that these mortgages finance are “toast”: the bonds will be next to worthless.

And it won’t end there. After the subprimes come the “Alt-A” mortgages–ones not high enough grade to qualify as prime, but above subprime in past credit history. There are roughly 2 1/4 million of them, with much higher debt levels (average of US$321,000), lower average interest rates (6.6%), currently lower default rates (5.6%–half as many in foreclosure as the subprimes), and lower levels of arrears (just over 10% behind, versus 25% of the subprimes).

But just over half of them also have ARMs, and about half of them are scheduled to reset to a 3% higher rate in 2010 or later. By then, economic conditions will have deteriorated so much that their own finances will be “subprime” at the time, and the snowball will continue rolling down the Highway to Hell.

So We’ve Only Just Begun. And it is a Horror Movie, though not “right there on your TV”–if you’re American, you’re living in it.

And if you’re not American, then it’s still almost guaranteed that some of your investments will suffer–whether indirectly if you own shares or property, or directly if you or an agency that affects you purchased the RMBSs that funded the subprime scam. You may well wish that you were still “Living in the Seventies“.
Welcome aboard the FF Titanic
Published in September 17th, 2008
Posted by Steve Keen in Uncategorized
19 Comments

I published this commentary on Crikey and in the Newcastle Herald yesterday; I will probably expand on this for my October Debtwatch Report, but here’s a “heads up” before next month–after all, with the speed with which events are unfolding, something else might supplant this topic by then.
Welcome aboard the FF Titanic

Another day, another financial collapse. The effective nationalisation of Fannie Mae and Freddie Mac last week was initially greeted by the market, yet again, as The End Of The Crisis. Then Lehman Brothers teetered and finally fell into bankruptcy. The crisis was, once again, alive and well.

There is a pattern here: a rescue of one once venerable institution with what appear to be oodles of money, a brief euphoria, and then yet another failure at often an even bigger institution.

The key collapse here, and the one that makes it obvious that no rescue is going to stop this crisis, was the failure of Fannie and Freddie. The terms of the rescue require them to sell ten percent of their portfolio of loans every year–which would start at a cool $500 billion in 2010.

But Fannie and Freddie have been the key buyers of (above subprime) mortgage debt for decades. What happens to the economy if, instead of them buying debt, they start trying to sell it? Who on earth is going to buy it?

This is a rescue plan that can’t possibly work, because it attempts to keep the US economy moving at full speed ahead, while simultaneously throwing the engine into full reverse. The US expansion of the past three decades has been debt-fuelled. Now America is going to try to grow just as quickly, while reducing debt.

Good luck. Last year, the growth in private debt added US$4.5 trillion in spending power to the USA’s $14 trillion GDP–a whopping 27 percent of America’s aggregate demand. Now the private sector (including the “conservatored” Fannie and Freddie) is going to try to reduce debt? Then aggregate demand will fall by more than 30 percent. That is the recipe for a Depression, not a rescue.

There is little that the US government can do to counteract this process, especially since it is already deeply in debt itself. Ideally, the government should be increasing its debt and giving the private sector the money it needs to honour its financial commitments—at the cost of a serious haircut (otherwise known as nationalisation). But in this crisis, the government is starting off with its hands tied, and looking puny to boot.

Government debt is already 53% of US GDP, but that’s trivial beside business debt at 72%, household debt at 98%, and–most toxic of all–financial sector at 112%. Not all of that private sector debt is toxic, but even if half of it were, a government attempt to paper over the crisis would triple its accumulated debt.

So the Feds can’t afford to rescue America’s private sector from itself, and every rescue will be far too little, far too late.

**********************************************

More things to ponder.....


Indy


To go where few dare go......
To see what none have seen.....


Dr. George W. Oprisko phone: +264(0)65 251-153
Executive Director
Africa GeoPower, Ltd. goprisko@africageopower.com

[Jim Nickerson]

Re: CME Futures Market on U.S. Housing Prices in 2009

Using data from the CME futures market, the outlook for home prices isn’t all that much better over the coming year. Current market expectations are that the 10-city Case-Shiller home price index will drop another 13 percent between June 2008 and November 2009. That is a peak-to-trough decline of 30.6 percent.

The home price declines are expected to be far more severe in bubble markets such as Las Vegas, where the futures market is predicting another 18.0 decline between June 2008 and November 2009. This would put the peak-to-trough decline in Las Vegas home prices at a whopping 44.7 percent. San Diego could see another 17.4 percent decline, for a peak-to-trough decline of 42.0 percent; San Francisco another 17.7 percent decline, for a peak-to-trough decline of 39.7 percent, and Los Angeles another 19.8 percent decline, for a peak-to-trough decline of 42.7 percent if current futures prices are realized...

source: Wells Fargo 'Economic Indicators' - September 2008

Anyone caring to look, Meredith Whitney was interviewed by Bartiromo last week, http://www.cnbc.com/id/15840232?video=856915680 and I believe she too suggested ~40% declines.

[marvenger]

Re: US Housing Crisis.... Steve Keen's view.....

There is little that the US government can do to counteract this process, especially since it is already deeply in debt itself. Ideally, the government should be increasing its debt and giving the private sector the money it needs to honour its financial commitments—at the cost of a serious haircut (otherwise known as nationalisation).

the planned toxic fund increases government debt and gives certain favoured segments of the private sector money at no cost of nationalisation. This isn't socialism its fascism!

[jtabeb]

Re: US Housing Crisis.... Steve Keen's view.....

the planned toxic fund increases government debt and gives certain favoured segments of the private sector money at no cost of nationalisation. This isn't socialism its fascism!

You want some coffee, now that you're awake?

[jtabeb]

Re: US Housing Crisis.... Steve Keen's view.....

the planned toxic fund increases government debt and gives certain favoured segments of the private sector money at no cost of nationalisation. This isn't socialism its fascism!

You want some coffee, now that you're awake?

[Slimprofits]

Re: CME Futures Market on U.S. Housing Prices in 2009

LATimes.com: Free-falling in Palmdale: Prices nearing $100K

The free-fall in prices in distressed areas of Southern California is a major, and ongoing, story -- even if it bears little resemblance to what you're seeing in your neighborhood. Collapsing prices are causing more foreclosures, and prices continue to collapse, raising the likelihood of more foreclosures. This is what most of us call a "vicious cycle," although the Fed chairman, who evidently doesn't like name-calling, prefers the less judgmental "economic feedback loop."

In one Palmdale neighborhood, median sales prices are closing in on $100,000.

Some interesting comments left by readers too:

I live in 93551 and I think the top Median in 06/07 was about $360k. I'd say that number is below 200 now and I have lost alot of $$ on my fixer upper I bought in 04 at well below median.

93550 was over 300 at peak for sure, but it's a mixed area with some nice and not so nice neighborhoods.

Much of this is fallout from unemployment and gas prices as this is a commuter town and also a Sub-Prime hotspot. Prices increased after they did in LA proper. It's beneficial that they drop ASAP to get them moving again, but I am not sure there is the population to buy anyway, they all moved to where the jobs are. They overbuilt the area too and there are acres of graded lots just sitting.

Okay, I've had it. I did everything the mortgage company asked me to do. I faxed and refaxed and refaxed documents in order to get a loan modification. Nothing. I can't sell. I can't refi. i am upside down. Not only am I now paying an adjusting mortgage eating my paycheck that I had no intention of keeping, I now have to pay to bail out the very people who refuse to help me. I am walking. There is no hope.

[c1ue]

Re: CME Futures Market on U.S. Housing Prices in 2009

Have you ever been to Palmdale?

I've driven through there once. It is at least 45 miles from anywhere with a job in LA.

There might be a military base nearby, and I think one or two private space flight companies, but absolutely nothing else.

Even with a reasonably gas mileage capable car, $15/day round trip work commute winds up being almost as much as the mortgage. Then you've got the pain of trying to live in the literal boonies.

Shops? Restaurants? Entertainment? blech

[we_are_toast]

Re: CME Futures Market on U.S. Housing Prices in 2009

Then you've got the pain of trying to live in the literal boonies.

Shops? Restaurants? Entertainment? blech

Ahhhhhh, I'm 30 miles from the nearest blacktop road, 5 miles from the nearest power or phone line, and 2 miles from the nearest full time neighbor. In my corner of the "boonies"; the air is crisp and clean, at night I see the milky way from horizon to horizon, moose walk through my back yard while pronghorn, badgers, mountain lions and bears come and go as they please. When the SHTF let me know how life in the congested, noisy, polluted city is going.
;)

[Slimprofits]

Re: CME Futures Market on U.S. Housing Prices in 2009

Have you ever been to Palmdale?

No, but I can form a mental picture. It sounds completely insane that people were paying $300k+ there.

[Slimprofits]

Re: CME Futures Market on U.S. Housing Prices in 2009

Ahhhhhh, I'm 30 miles from the nearest blacktop road, 5 miles from the nearest power or phone line, and 2 miles from the nearest full time neighbor. In my corner of the "boonies"; the air is crisp and clean, at night I see the milky way from horizon to horizon, moose walk through my back yard while pronghorn, badgers, mountain lions and bears come and go as they please. When the SHTF let me know how life in the congested, noisy, polluted city is going.
;)

Yeah, but I'm going to venture a guess that Palmdale isn't exactly a retreat in the hills, so you're comparing apples and grapefruit.

Think lifeless suburbs, not moose, deer and bald eagles.

[c1ue]

Re: CME Futures Market on U.S. Housing Prices in 2009

First question: did you pay $300K for your backwoods retreat? Maybe with an ARM mortgage?

Second question: Does this look like a wholesome place to live?

[we_are_toast]

Re: CME Futures Market on U.S. Housing Prices in 2009

First question: did you pay $300K for your backwoods retreat? Maybe with an ARM mortgage?

Second question: Does this look like a wholesome place to live?

Ohhhhh, I thought you said boonies, them theres the burbs!

First answer, built the 1700 ft^2 retreat myself, $100k sweat equity = no mortgage.

2nd answer: from the picture, you'd have to drag me kicking and screaming to visit the place much less live there. But I'd say the same for most cities.

[Andreuccio]

Re: CME Futures Market on U.S. Housing Prices in 2009

Have you ever been to Palmdale?

I've driven through there once. It is at least 45 miles from anywhere with a job in LA.

There might be a military base nearby, and I think one or two private space flight companies, but absolutely nothing else.

Even with a reasonably gas mileage capable car, $15/day round trip work commute winds up being almost as much as the mortgage. Then you've got the pain of trying to live in the literal boonies.

Shops? Restaurants? Entertainment? blech

The other great thing about Palmdale is the climate. It's blistering hot in the summer and can get very cold in the winter, necessitating pretty much constant air conditioning or heating.

(Avg high in the summer is about 97, with extremes to 113, average low in winter about 34, with extremes to 6, all Fahrenheit. It's also very windy.)

I have some in-laws that decided buying a house in Palmdale would be a great investment, despite my advice NOT TO! They managed to time the market almost perfectly, buying in late 2006. It was just after the peak, since people were beginning to offer incentives. They still were able to pay peak price, though. Zillow shows their place being worth about 40% less than what they paid, which I think is optimistic. Still plenty of downside, too.

[Andreuccio]

Re: CME Futures Market on U.S. Housing Prices in 2009

No, but I can form a mental picture. It sounds completely insane that people were paying $300k+ there.

It was, but there was a reason for it. Since houses in some of the worst parts of LA were going for over $600,000, $300,000 sounded like a bargain. A lot of people that couldn't afford to buy in LA, and thought they might be priced out of housing forever, snapped up places in Palmdale. For all it's disadvantages, you could get much more house in a much nicer neighborhood than you could in LA. Remember also that gas, heating, and electrical (for air conditioning) were all cheaper, so unless you foresaw the energy price increases, the economics didn't seem unreasonable.

BTW, houses in South Central for over 600K was also arguably insane. The same houses could have been had for less than 100K six years earlier.