Can Housing Recover With Zombie Lenders?; Eisenbeis: Will Our Children Pay?|
January 30, 2013
"Fewer Americans are becoming homeowners as the U.S. homeownership rate continues to slip ever so slightly each year, government data shows. Overall, the U.S. homeownership rate slipped to 65.4% in the fourth quarter of 2012, down 0.6 percentage points from 66% in the fourth quarter of 2011 and a slight drop from a homeownership rate of 65.5% the previous quarter. 'The fact that the housing recovery is being driven principally by investor demand means that the slight decline in the homeownership rate in the fourth quarter is unlikely to be the last,' said Capital Economics." Housing WireEarlier this week, The Institutional Risk Analyst was in Las Vegas for the 2013 winter conclave of the American Securitization Forum. Suffice to say that it is spring once again on Wall Street and in the real estate market, two reasons why optimism is the buzz coming out of the biggest investor conference in the world. One of the shockers we heard at the ASF conference was the grim outlook for real estate in Europe, which is several years behind the US in the resolution process. Another was the scandalous profits that the TBTF banks are taking out of the mortgage sector c/o of the Federal Open Market Committee. Between QE and various other direct and indirect subsidies, we figure that the TBTF zombie banks are sucking $1 trillion per year out of the US economy in terms of net, net economic flows. Of course the zombie banks are the least efficient capital providers immaginable, thus some of the prognostications about the outlook for US housing in 2013 at the ASF meeting leave us puzzled. Now that WaMu, Lehman Brothers, Countrywide and Wachovia are gone, the capacity to lend in the US has been enormously reduced. Add to that a mountain of new and pointless federal regulations and you have a financing gap in US housing that is enormous. Ivy Zelman sees another 5% in HPA in 2013, for example, but we wonder how this march up the wall of worry will be financed. Go ahead, call us bears Ivy. As one veteran banker told The IRA yesterday in Las Vegas, "the day that Wachovia was acquired, the TBA market in US mortgages moved 75 basis points. The strength of the US economy is competition, but not in mortgage finance. The smaller players lived on the bleeding edge of the mortgage market, but they were also far more efficient lenders than the large banks. Now care of the Fed we have a highly inefficient oligopoly in the US mortgage market that is built around the large banks." In the most recent issue of Housing Wire, the incapacity of the TBTF banks to provide credit to the US economy is laid bare via an analysis of HAMP, the federally subsidized program to modify underwater residential mortgage loans. in "Lessons learned from HAMP," Tomasz Piskorski and Amit Seru conclude that the large loan servicers have been unable to process a significant number of modifications. "Contrary to popular belief, all servicers are not created equal," they write, but their conclusions also speak to the availability of new mortgage lending capacity. While we think there is real momentum behind the rise in home prices, mostly from investors looking to acquire rental properties, the missing ingredient seems to be financing for both home purchases and new construction. Players in the AZ market tell The IRA that the existing homes sales market is on fire, but they also note that builders cannot find labor to populate job sites. It seems that much of the Mexican labor that once drove the housing boom in the Southwest has quietly literally gone home. So while it is springtime once again on Wall Street c/o the rebounding housing sector, it seems appropriate for Americans to remain cautious. Even as this issue of The IRA goes to press, the euro is ralling against the almighty dollar. News reports are filled with suggestions that the Bank of China is threatening currency war unless the Fed stops QE. And our dear friends at Cumberland Advisers wonder if older Americans, after all is said and done, will ever really get paid by his or her children. In this issue of The Institutional Risk Analyst, Bob Eisenbeis, Cumberland's Vice Chairman and Chief Monetary Economist, tries to answer that question. But we all of us already know the answer, yes? What Makes Us Think They Will Pay?
"U.S. homeownership rate continues to slip"
January 29, 2013
January 29, 2013
Notwithstanding all the political rhetoric in DC from both the President and members of Congress, responsible US budget scenarios that reflect current spending commitments and revenue streams show two things. First, the federal governmentís share of GDP (not including interest payments on outstanding debt) is on track to hit 25% by 2016 and 30% by 2065 or so; while revenues, given current tax structures, will peak out at less than 20% of GDP. Second, the main source of this increase is our federal commitments to provide healthcare to our citizenry. By 2084, federal healthcare costs as a percentage of GDP will be equal to what total government spending is today as a percentage of GDP. In other words, unless we do something, the deficit will continue to increase, and it will become ever clearer that we are on an unsustainable path. It is also important not to be fooled by Washington talk about cutting the deficit. Politicians are not talking about cutting the deficit. They are talking about cutting increases in the deficit from levels they might otherwise have reached. Current projections have the deficit increasing by about $10 trillion over the next ten years, which dwarfs the one to two trillion dollars of spending cuts that are being bandied about in current discussions in DC. Another group that havenít distinguished themselves in the budget discussions are our senior citizens and their main lobbying group, the AARP. They have steadfastly stonewalled any reforms to retirement and healthcare benefits, even when those reforms are prospective and would not reduce benefits to current retirees. The fact is that Social Security is not our major budget buster, according to the OMB projections. Social Security outlays are essentially flat through 2082. What arenít flat are payments into Social Security, which are de facto, earmarked tax receipts targeted to cover needed disbursements. Forget the so-called Social Security Trust Fund Ė it doesnít exist. All it contains is Treasury debt, which can only be converted into cash by diverting current taxpayer receipts from other programs or through increased borrowing by the government, which would only deepen our deficit hole. So who is going to pay for all the entitlements that have been put into place? When speaking to groups of senior citizens, I ask them if they would knowingly saddle their children and grandchildren with huge amounts of debt to cover services that they, the elderly, have voted for themselves in ill-designed schemes? Almost universally, the response is no! But that is exactly what we have done and are continuing to do to our children and grandchildren, most of whom are too young to vote or arenít even born yet. Those tax dollars I mentioned that are needed to cover mandated Social Security and medical care payments are dollars taken from the pockets of the young. They are not dollars that we, the elderly, have contributed in the past that are sitting in some lockbox on which we now have a legitimate claim. We are being told that we donít have to choose between the interests of the young and the needs of the elderly. But those assertions are not correct. Our children are the ones who will pay, since they are the ones who will be taxed to cover benefits payments. Their disposable incomes will be reduced, and the growth potential of the economy will also be reduced because of the burdens of increased government. The answer also doesnít lie in taxing the income of the rich or confiscating their wealth. There simply isnít enough of either to make a meaningful dent in the revenue shortfall. Moreover, history has shown that the rich can be extremely successful in sheltering assets and income, and they can afford the costs of doing so. Our children are the ones who will ultimately control the purse strings and will have to choose whether to meet the commitments placed upon them by past generations, or meet the needs of their own families. I think that choice is clear, and itís the one that I would make as well, were I in their shoes. From the perspective of any parent, the children come first. And those of us who naively voted to grant ourselves benefits will be left wanting, and rightly so. Questions? Comments? email@example.com
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