Rising mortgage default rates, especially on so-called sub-prime loans to financially weaker borrowers, are driving some subprime lenders into bankruptcy and causing others to tighten up standards for loans. As a result the housing downturn in the US now looks like it has not yet bottomed out and recession is not out of the question.
With mortgage rates rising and house prices falling, experts say as many as one and one-half million Americans could lose their homes. Rick Sharga, with RealtyTrac, a company that provides information on real estate trends, says foreclosures are at an all-time high – up 42 percent since 2005.
"It's almost a perfect storm if you are a homeowner who is in distress right now,” Sharga says. “Because you are seeing housing values go down in parts of the country, so the house might not be worth what you paid for it."
With the continued shift of manufacturing to China we can't very well expect manufacturing to counter-balance the worsening US housing sector. The housing bubble basically replace the internet bubble. What next can replace housing as the growth industry?
Susan Bies, a governor of the Federal Reserve, said in a speech Friday in Charlotte, N.C., that the troubles of sub-prime borrowers represented the "front end" of a wave the central bank was monitoring.
"This is not the end; this is the beginning," she said.
A surge in the number of homeowners defaulting on sub-prime mortgages has triggered the collapse of more than a dozen lenders in recent months.
If this slump follows the same pattern as the last one, in 1991, it will persist for at least another year and may fuel a recession. New-home sales declined 45 percent from July 1989 to January 1991 and about 1 percent of all U.S. jobs, or 1.1 million, were lost in that recession, said Robert Kleinhenz, deputy chief economist of the California Association of Realtors.
This time around, new-home sales have declined 28 percent since September 2005, hitting a low in January, the last month for which data is available
The probability the U.S. economy will shrink for two quarters has risen to 50 percent, according to a model created when Greenspan ran the Board of Governors of the Federal Reserve System. The formula is based on differences in yields on Treasuries.
The economy has gone into recession six of the seven times since 1960 that short-term interest rates topped longer-term bond yields, as they do now.
Alan Greenspan puts the risk of recession down around 30%. But I figure the bond market knows better than Greenspan and the bond market disagrees.
The recovery from the last recession does not feel like it has been underway for all that long a time. Yet we might already be headed into another recession.
|Share |||By Randall Parker at 2007 March 15 09:57 PM Economics Housing|