2007 March 15 Thursday
Mortgage Defaults Driving US Economy To Recession?

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?

More than a dozen mortgage lender firms have gone bankrupt.

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.

Parallels are being drawn with the 1991 recession.

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

Interest rates on shorter and longer term US Treasury bonds provide another indication of looming recession.

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

John S Bolton said at March 16, 2007 2:08 AM:

A lot of these mortgage problems have to do with zero down-payment loans going to those using fake ID's, such as illegals and general fraudsters.
New Century, with a large share of the subprime mortgages, is reporting that several percentage points of their originations have failed to make even the first payment.
Fraud has been increasing very rapidly, as stalled house prices, absurdly loose requirements, and a fast-learning flim-flam element catches on to the possibilities.
One trick is for a ring to buy a house and sell to a confederate at a higher price, with no money down and fake ID, pay off the first loan, then run off with the difference, leaving the creditor to foreclose without even one month's payment on the newer mortgage.
This is possible because banks are accepting fake ID like the matricula consular.
Next I predict we'll hear of fakey builders' liens being placed on houses bought with zero down, and the other relevant preconditions for such a fraud scheme. If real estate sales licenses are given to fake-ID users in similar fashion, that opens up other possibilities.
When you scrape the bottom of the barrel for home-buyers, their removal from the market as the revulsion against such loans multiplies as currently, chokes off considerable parts of the demand for low-end properties. Barrios will be hard-hit with price declines, I imagine.

Craig said at March 16, 2007 12:37 PM:

This was always a steroid economy, to begin with: built on easy money, high budget deficits, high consumer debt, high trade deficits, and vast numbers of new immigrants. That's not the kind of economy built to last. It's not tax cuts that improve performance - the economy did just as well in the 90s after Bill Clinton RAISED taxes - it's about the fundamentals, and the fundamentals just aren't there. We're getting less competitive relative to other nations, particularly China and India, because our schools aren't improving. America needs to improve its trade position compared to the rest of the world, and an economy built on new home construction and services doesn't do that, because you can't really trade those with other nations.

It's the fundamentals, stupid.

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