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Subprime fact of the day
Even with about a tenth of all subprime mortgages now in foreclosure, only a small share of all American families -- about 0.3 percent -- own a home in foreclosure...
Here is the link, from Mark Thoma. This is one big reason why I'm not yet convinced by the economic pessimists. The article also notes how many estimates of the S&L crisis of the 1980s were exaggerated, and suggests the same tendency may be happening today.
Addendum: This piece is a good statement of the case for pessimism.
Posted by Tyler Cowen on December 27, 2007 at 09:01 AM in Data Source | Permalink
Comments
OK, I don't fall with the real pessimists, the people who write about the yard sale economy.
On the other hand, I look at the savings rate and the home equity ratio and I see something that does not look sustainable.
What will the inflection look like? Can consumers return to savings while servicing debt and keeping shops afloat?
Is it pessimistic to expect a mere recession?
Posted by: odograph at Dec 27, 2007 10:10:44 AM
It's not so much the foreclosures but a) the drop in prices and slowdown in sales means many business sectors connected to real estate are now hurting, this effects the economy at large, b) more important, I think, is that the mortgages were packaged into securities and purchased on huge margin. There will undeniably be bank failures, etc. as the extent of this now-toxic glop becomes known.
Posted by: Bob Morris at Dec 27, 2007 10:23:49 AM
As Bob pointed out, leverage can be a problem. Recall that for the LTCM crisis of 1998, the total amount of money involved in the bailout was a mere $3.6 billion, but LTCM's positions were about $1.25 trillion and it was rightly felt that its failure would have posed a huge systemic risk to financial markets. It would have been naive to claim that there was no problem because $3.6 billion is a relatively small amount compared to the overall economy.
In any case, the problem will accelerate in 2008 as non-subprime mortgages (option ARMs in particular) blow up. House prices in places like California will need to fall about 30% and possibly as much as 50% in real terms.
Posted by: at Dec 27, 2007 10:38:57 AM
Most people will do absolutely everything in their power to avoid foreclosure on their houses. For those who've seen their monthly payments balloon upwards, as is so common these day, this will include cutting spending on everything else to absolute starvation levels, just so the mortgage can be paid. Spending cuts of this sort are obviously not good for the economy, though how this can be measured I don't know.
Posted by: Peter at Dec 27, 2007 10:39:05 AM
Wall Street was not the only one leveraging:
"Median household debt rose by almost 34 percent between 2001 and 2004, while net worth went up by just 1.5 percent, according to the latest Survey of Consumer Finances (SCF) report."
http://stlouisfed.org/publications/re/2006/c/pages/digging.html
Posted by: odograph at Dec 27, 2007 10:47:47 AM
Peter, when mortgage payments are made, the money does not simply disappear. Your observation that households with ballooning mortgage payments will be spending less on output of the economy only implies inadequate demand for output of the economy if the people who receive those mortgage payments are less likely to buy output of the economy than the households would have been. It is possible that this is the case, but you offered no evidence that it is. Without that evidence, your observation is not the least bit troubling and it is not at all "obvious" that spending cuts of this sort are not good for the economy.
Posted by: Jim at Dec 27, 2007 10:49:06 AM
This crisis is not about home mortgages, it is banks and others placing bets on home mortgages. Credit default swaps and other derivatives allowed phenomenal, and still largely unmeasured, leverage against the underlying securities. Whatever the total dollar value of the risky mortgages, or their percentage of the total mortgage market, these derivatives could multiply the total dollar default risk by a factor of ten (or one hundred). Talking about individual borrowers is missing the point.
Posted by: brian at Dec 27, 2007 12:12:38 PM
odograph:
This is what you get when you have a central bank holding interest rates artificially low. Boom and Bust!
Posted by: Jay at Dec 27, 2007 12:35:59 PM
Jim, isn't it conventional wisdom that "consumer confidence" is important for the economy? I mean you are asking Peter to justify it, but when the "go shopping" thing is a Presidential response to crisis ....
Posted by: odograph at Dec 27, 2007 12:37:59 PM
Jay, I think there's a lot I don't understand about central banks and interest rates ... but yeah, I kind of buy the idea that the Greenspan Put was stretched too long.
Posted by: odograph at Dec 27, 2007 12:53:31 PM
In any case, the problem will accelerate in 2008 as non-subprime mortgages (option ARMs in particular) blow up. House prices in places like California will need to fall about 30% and possibly as much as 50% in real terms.
The causal chain from the former to the latter seems weak to me. For instance, kill off a couple of the bigger manufacturers (certainly a possiblity), and you'll see the overhang shrink pretty quickly even at the current level of sales. Can you spell out how you see the linkage in greater detail?
Posted by: Bernard Guerrero at Dec 27, 2007 12:59:07 PM
Regarding consumer confidence, obviously we should just
keep on telling everybody that everything is just fine
and that there is nothing to be worried about at all.
I am reminded about an old joke about the Soviet economy
that dates from the Brezhnev era. So, think of the Soviet
economy as a train going on tracks. Under Lenin, when the
train came to the end of the tracks, Lenin appealed to the
revolutionary fervor of the workers, so they got out and
built more track, and the train continued onwards. Under
Stalin, when the train came to the end of the tracks, Stalin
threatened to kill everybody if they did not get out build
more track, so they did and the train continued onwards.
Under Khrushchev, when the train came to the end of the tracks,
Khrushchev told them to tear up the tracks from behind the
train and put them in front of the train, and the train
continued onwards.
Under Brezhnev, when the train came to the end of the tracks.
he told everybody to pull down the curtains close their eyes,
cover their ears and stamp on the floor to pretend that the
train was still moving.
Posted by: Barkley Rosser at Dec 27, 2007 3:15:31 PM
The estimate is from John Berry-- someone with close contacts with the Fed Board and staff. My question is this the data he is getting from the Fed and does it reflect their thinking about the magnitude of the problem?
Posted by: spencer at Dec 27, 2007 4:52:16 PM
Most people will do absolutely everything in their power to avoid foreclosure on their houses.
That's outdated. The new reality is "jingle mail": homeowners mailing in the keys. They bought the house with almost no money down and they're underwater (due to falling prices, they owe more than the house is worth). They cut their (minimal) losses and walk away.
Astonishingly, lenders are even seeing people paying off their credit cards but defaulting on their mortgage. The recent change in bankruptcy laws may have encouraged this, since credit card debt is no longer wiped out by bankruptcy.
Posted by: at Dec 27, 2007 10:53:58 PM
Can you spell out how you see the linkage in greater detail?
The case is set forth here (I'm not the author).
Basically, he's saying that houses were only "affordable" to people with ordinary incomes through the help of exotic mortgages with low teaser rates, and nobody offers such mortgages any more or is likely to soon. So the pool of potential buyers at today's prices has drastically shrunk and unsold inventory has ballooned (we end up with "90% fewer qualified buyers for five times the number of homes").
Note he's referring specifically to California -- he's not predicting a nationwide 50% drop.
Posted by: at Dec 27, 2007 11:06:45 PM
Odograph has been reading too many macro textbooks--consumers can't return to savings.! What savings
Confess, I am not an economist but rather a finance guy. Comparisons to S&L crisis
are beside the point--different type of problem. Yes magnitude of S&L crisis
overstated. Current debt crisis understated. Lets make this down, I will buy
Tyler dinner at the 4 seasons (and a train ticket) in New York if there is no recession.
You economists (or at least the ones who post here) are such Candides!!!!
Posted by: Robert at Dec 28, 2007 1:09:59 AM
[Your observation that households with ballooning mortgage payments will be spending less on output of the economy only implies inadequate demand for output of the economy if the people who receive those mortgage payments are less likely to buy output of the economy than the households would have been.]
the people who receive the mortgage payments are banks, not individuals, and their main use of them will be to rebuild their capital ratios (ie, literal hoarding) rather than to pay them out as dividends to people who might spend them.
Posted by: dsquared at Dec 28, 2007 7:49:00 AM
[Your observation that households with ballooning mortgage payments will be spending less on output of the economy only implies inadequate demand for output of the economy if the people who receive those mortgage payments are less likely to buy output of the economy than the households would have been.]
the people who receive the mortgage payments are banks, not individuals, and their main use of them will be to rebuild their capital ratios (ie, literal hoarding) rather than to pay them out as dividends to people who might spend them.
Posted by: dsquared at Dec 28, 2007 7:49:29 AM
Robert, don't make that bet. Recall that Japan, throughout the 1990s, did not have a recession (in the technical sense of three consecutive quarters of negative growth). There are plenty of possible negative outcomes that don't get called recessions.
Posted by: dsquared at Dec 28, 2007 7:51:40 AM
Robert, what a slander ... I've never read a macro textbook in my life (for better or worse). I stuck an "s" on "return to saving" and was confusing, sorry.
Posted by: odograph at Dec 28, 2007 9:50:30 AM
When financial products sound more like adult toys (teaser ARMS and honeymoon sweeteners) than sound lending practices, that's the first clue.
Posted by: andrew at Dec 28, 2007 10:18:12 AM
Dot coms only represent a small percentage of the stock market. There is now way they could cause global markets to crash.
Posted by: Patinator at Dec 28, 2007 11:38:31 AM
*no
Posted by: Patinator at Dec 28, 2007 11:39:23 AM
The real reason that subprime gets so much hype is that it is disproportionately hurting newspaper revenues (compared to other industries). See this article.
http://www.ft.com/cms/s/0/d88582e2-b4a9-11dc-990a-0000779fd2ac.html
That comment was sarcastic. Actually, I fall into the pessimist camp in the sense that I think that a boom/bust in asset prices can frustrate expectations, cause uncertainty, and spur everyone to try to accumulate the same "safer" assets at the same time, which can cause a recession - unless the authorities can somehow increase the supply of "safer assets", which the Fed can do and has been doing. So, I'm a pessimist in that I believe asset price collapses can cause a recession, but I also believe that the best policy response is Central Bank provision of liquidity.
Bad news? Real losses have to be recognized - and most of them still have not been. Good news? Those losses don't have to take everything else down, and policymakers appear to be taking the appropriate steps.
Posted by: tedm at Dec 28, 2007 2:35:57 PM
A back of the envelope calculation brings that .003% foreclosure rate to, oh, $74 billion. That's certainly not pocket change!
- US population: 300mm
- Avg. family size: 2.4 person per house (pph)
- Homeownership including investor property: 72%
- Median home value: $275,000:
Calc: 300,000,000/2.4*.72*.003*$275,000
=$74 billion
Certainly I won't go into a long drawn analysis about the $74 billion, or mortgage backed securities, non-performing banked owned real estate assets, property devaluations or the estimated absorption rate of the estimated 270,000 foreclosed properties, my only comment is markets don't turn over night, including the real estate market. Add to the mix oil at $100 barrel, a non-existent US auto industry, record commodity prices - including gold, and analysts commenting that 2008 could be even a tougher year for real estate, all point to, perhaps, a slowing US economy.
And if the number's don't work for you, go to your local Home Depot on any weekend, if you don't have to wait in line for any length of time or you actually get someone to help you, that should indicate something rather obvious (hint: it's not because Home Depot is improving their customer service).
Posted by: at Dec 28, 2007 9:45:32 PM
