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About Property Flipping by Teresa Boardman
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Recession Article by Jan Hatzius: Goldman Sachs:
From: Jan Hatzius [mailto:jan.hatzius@gs.com]
Sent: Sunday, February 10, 2008 10:49 AM
Subject: US Views: How Deep and How Long?
US Views: How Deep and How Long?
1. There is no longer much doubt in my mind that the US economy is now in recession. First, employment seems to be contracting. This is not just because of the decline in January payrolls, but also because the unemployment rate and continuing jobless claims over the past few months have risen at a pace that typically indicates falling employment. Second, the business surveys have weakened sharply over the past month. That’s particularly visible in the nonmfg. ISM and the Fed’s Senior Loan Officers survey, but second-tier surveys such as the Philly and Richmond Fed tell a similar tale (only the mfg ISM was a bit better). Third, the negative feedback loops that define a recession are now in full swing, especially the links between falling house prices, rising mortgage credit losses, rising credit restraint, falling homeownership and employment, and further declines in house prices.
2. The key question is now the depth and length of the recession. I continue to think it will be relatively mild, much closer to the 1990-1991 and 2001 downturns than the 1973-1975 recession or the 1980-1982 double dip. However, I am less confident in terms of length. Sure, the fiscal and monetary stimulus should produce positive growth in 2008 H2, but the question is whether growth falters anew when the stimulus has passed. Accordingly, we have a 0% GDP quarter in early 2009, not quite a double dip but awfully close.
3. The reason why the economy is likely to stay weak for quite a while is that it’s hard to see a genuine acceleration while home prices are still falling and estimated mortgage credit losses are still rising. Since last fall, our working assumption has been a total mortgage credit loss of $400bn. But I think the risks to this estimate have shifted to the upside because house prices are currently falling even faster than we had expected. By our estimates, the 20-city composite Case-Shiller index for November shows a 20% annualized rate of decline in seasonally adjusted terms. The national decline is probably a bit slower (bubble markets are over-represented in the 20-city index), but this does suggest that the risks to our estimate of a 10% decline in all of 2008 are skewed to the upside.
4. The basic problem is that a $400bn estimate doesn’t leave a lot of room for losses on non-subprime mortgages, which are likely to rise sharply if home prices drop a lot. Most mortgage strategists currently expect $200-$300bn of losses on subprime mortgage alone but see non-subprime losses of less than $100bn. The latter is probably too optimistic. If home prices decline another 15% from current levels, we estimate that there will be about 15 million homeowners (or 30% of all households with mortgages) who have negative equity, i.e. mortgage debt that exceeds the value of their house. Of these, about $1 trillion will be held by subprime borrowers, but the remaining $2 trillion will be held by other borrowers. A significant share of these borrowers – hard to know how many, but very likely more than the less than the roughly 10% suggested by a $100bn non-subprime loss estimate – is likely to default. This is either because they lose their jobs and have insufficient financial resources (yes, this can also happen to non-subprime borrowers) or because they decide to “walk away” from their mortgage. The latter behavior isn’t at all common under normal circumstances, but one lesson of the Texas and California housing downturns of the 1980s and early 1990s is that some homeowners decide to “mail in the keys” when they are deeply in negative equity and see little chance of returning to a positive-equity situation. (Note that many US states, including California and Texas , prevent mortgage lenders from seizing assets other than the house itself.)
5. I spent the last week seeing key clients in Europe . Many agree that a US recession is now probably underway, and much of the discussion focused on how bad it will get. A few themes stood out:
a) The downside risks posed by the various aspects of the credit market downturn, including the worries about the knock-on effects of impending monoline downgrades. (My answer: clearly an important issue, though I view it more as a sub-problem of the losses on the outstanding mortgages themselves since insurers redistribute risk around the system but don’t really add to it in a fundamental economic as opposed to accounting sense.)
b) The trade-off between output and inflation, and the possibility that the Fed will lose its ability to stay on an aggressive easing path if inflation picks up further from here. (My answer: ultimately, recession should lead to slowing inflation via greater excess slack, but it’s true that the recent inflation data have been disappointing, the core PCE is now 2.24%, and the year-on-year comparisons for core PCE inflation will turn quite adverse in the February-June period.)
c) The idea that the downturn could be worse than we are forecasting because the Fed is now paying the price for having kept real interest rates below their “equilibrium” levels for so long. (My answer: I have sympathy with the idea that the built-up imbalances are now coming home to roost, though it’s awfully difficult to know what the equilibrium level of interest rates really is.)
d) The question whether the likely recoupling of the global economy is now discounted. (My answer: probably not, especially in terms of global cyclical equities that have remained very resilient despite a clear deterioration of the economic outlook.)
______________________________________________
Jan Hatzius
Chief US Economist
Goldman, Sachs & Co.
One New York Plaza , 45th Floor
New York , NY 10004
Telephone: 212-902-0394
Fax: 212-346-3115
Email: jan.hatzius@gs.com
** Today the DFI announced that in 2007 16% of the audits on mortgage brokers resulted in actions serious enough the findings have been turned over to law enforcement. Also there is a 35% increase in fraud reported.
#1 Same borrower on more than one owner occupied loan. (better rate and terms) Illegal Flipping. Multiple government enforcement agencies working together to attack this issue.
a. 2 homes in 2 weeks with the same mortgage company’
b. 21 to 60 in 1 year
#2 The file was funded as a stated income loan with documents in the file that the stated was exaggerated.
#3 Loans were written at rates above usuary. (18% all fees)
#4 Telling Appraisers what value to deliver.
** Monday there will be 1.5 million dollars available from the State funds for counseling to those that are having trouble making their mortgage payments.
** If you like signing lots of papers, we are 90 days from having another disclosure for borrowers to sign.
** There are 4 state bills pending to clam down on mortgage brokers.
….for sure rebates will be handled to the consumer advantage now.
** Our state is joining 26 others for a national licensing of loan officers alliance
** At the close of December their were 13,722 licensed and about 1700 additional that applied- there are only 6,820 licensed loan officers. There are 488 fewer mortgage brokers.
** In 2007 there were 1300 complaints against mortgage brokers and loan officers.
** The State caused restitution of over $500,000 to harmed consumers last year.]
** For those of you who use websites to search for homes, most of the websites, even broker websites don’t have all of the listings.** One of our local major banks is hoping they have budgeted correctly for a fourth quarter 2008 bottom..
** Most people hate being an online lead, yet, Interactive Corp paid app 1 billion for lending tree and another billion in capitol and Experian paid over 400 million for lower my bills.com a mortgage lead generator.
** When WaMu purchased subprime Specialist Long Beach Mortgage, almost everyone in the industry asked WHY?
** Mortgage Insurance companies have rated most of Seattle as a soft market, requiring stiffer underwriting standards.
10 Reasons to sell your home yourself - FSBO Perhaps its a matter of love.
1- I love answering the door at 11PM, in my PJ’s.
2- I love people stealing my treasures.
3- I love receiving 50 offers at 6% below my asking price.
4 l love people peeking into my bedroom window at 8 AM Sunday morning.
5- I love having my neighbor ask if I will finance his cousin; the one that just finished bankruptcy.
6- I love the idea of trading my home for a junker.
7- I love the Realtors that drop in to pitch me on using them.
8- I love having Realtors spouses telling me I should meet a real pro, the one who I refer to in #7 above.
9- I love making signs and flyers.
10- I love telling everyone that drops by the 100 fine features of my home.
10 Reasons to list with a flat fee broker:
1- I like being charitable: This way I can add to the flat fee’s paper route income.
2- I like being an author: my first book, the hazards of being the seller with no agent advice after the listing is signed.
3- I like being a locksmith: the flat fee guy won’t take the lock box off the door and the new buyer is threatening me. PS: It’s 3 weeks after we closed the deal.
4- I like taking signs down; same timing as number 3 above.
5- I like supporting office pools; that’s where the flat fee’s office is likely to be.
6- I like being a trash remover; same as 4 above but it’s now been 6 weeks, the sign has been laying by the house for the last three.
7- I like being a conversationalist; all I get at the flat fee office, is the secretary at the front desk. She and I have become friends now.
8- I like being a delivery person; every offer has to be either dropped off or picked up at the flat fee office pool office. If I don’t do it, no one does.
9- I like knowing where the MLS office is; there was a mistake in the listing, I finally went to the mls office and made them correct it.
10- I like limiting the exposure my home receives; no open houses, no brokers open houses, no office tours of my home, no extra marketing, no, no, and no.
3 More Consumer Tips:
1- If your home inspector suggests the furnace has a problem have it inspected
2- Don’t do anything to the home you are buying until you actually own it.
3- If you are a seller, since you have to live with Zillow you better hire zorro.
Now the 10 predictions. First know that it is public record (blog) that I only got 2 of 10 right in 2007 and you are the first to get 2008.
The two were that house values stock would suffer at least a 25% drop in value, it was worse, and that Yahoo would end Prudentials exclusive arrangement.
1- More things you pay for will become free. Ex competitor to quick books
2- Keller Williams will be the only major real estate brokerages in our 3 county area to grow in number of agents this year
3- The mortgage refi business will stay strong this year.
4- Favorite Bank: Flagstar Bank (FBC)
5- B of A will not purchase Countrywide
6- Microsoft will purchase Yahoo and then go purchase either Zillow or Trulia
7- If California gets even worse with foreclosures or Seattle has big problems Chase will by WaMu
8- Seattle won’t get very bad and please hold on California
9- Redfin will go the way of the East Costs Darling of Discount… Foxtons which did go away.
10- Because of his selection of the February speaker, Eric Lee will be given a new assignment by
The Seattle Chapter 4 International Right of Way Association (IRWA)
