Keep People in Their Homes

From the Financial Times, the slumping economy is causing more trouble for the housing market:

More than one in every eight homeowners with a mortgage was behind on home loan payments or in some stage of foreclosure at the end of the second quarter, as mounting unemployment aggravated the housing crisis, the Mortgage Bankers Association said on Thursday.

The percentage of loans that were in foreclosure or at least one payment past due rose to 13.16 per cent, the highest increase since the MBA began keeping records in 1972 and a jump of more than a percentage point since the first quarter.

Jay Brinkmann, chief economist at the MBA, said signs were growing that mortgage performance is being affected more by unemployment than by the structure of risky home loans, indicating a new stage in the foreclosure crisis that may not be easily addressed by government loan modification programmes.

While the proportion of foreclosures started on borrowers with subprime adjustable-rate mortgages fell dramatically in the second quarter, foreclosure starts on traditional prime fixed-rate loans saw a dramatic increase. Prime fixed-rate loans accounted for one in three foreclosure starts at the end of the second quarter. A year ago they accounted for one in five.

"There has been a shift in the problem from one driven by the types of loans to one driven by macro problems in the economy and drops in house prices," said Mr Brinkmann.

It seems like we still must, as NDN has argued since last September, do more to keep people in their homes.

Some not so great economic news on producer prices and housing, courtesy of today's New York Times:

New figures showing a decline in wholesale prices and a drop in new-home construction highlighted how weak the economy remains, even as some optimists declare the recession to be over.

Producer prices fell more than expected in July as the costs of food and energy slipped, the Labor Department reported on Tuesday. The 0.9 percent monthly decline came after three months of increases, and suggested that demand was weak up and down the ladder of production, from consumer goods to intermediate goods like chemicals and rubber to raw materials.

Producer prices declined a record 6.8 percent from last July, when crude oil prices soared above $145 a barrel and pushed the costs of fuels, food and other products sharply higher, before they fell back amid the global financial crisis. The decline in the last 12 months is the largest drop in 60 years, since the government starting keeping such records.

So-called core prices excluding food and energy costs fell 0.1 percent, their second monthly decline of the year.

...

Despite several glimmers of rising prices and increased activity in the housing market, the Commerce Department’s report on housing starts and building permits showed that the market for new homes remained weak with building loans tight and so many foreclosures on the market.

New-home construction fell a seasonally adjusted 1 percent in July from a month earlier, to an annual rate of 581,000, the government said, and building permits were down 1.8 percent from June. Housing completions also dropped, falling 0.9 percent for the month.

The housing piece is not particularly surprising, as that market remains weak overall. At a time when unemployment is so high and houses so diminished in value, now seems an unlikely time for people to sell their homes to move for a new job and therefore have a house built.

While the economy seems to be getting worse more slowly, it is still getting worse and remains incredibly unstable. The one element able to raise producer prices most quickly, a rise in energy prices, could be disastrous.

Tremendous excess capacity remains in the economy, and many of the pieces of the stimulus that have yet to come online, namely infrastructure spending, are needed in the coming months (despite what we may hear on conservative cable networks). These projects will be noticed and helpful, both to the economy and the politicians who made them happen.

Today President Obama is conducting a town hall meeting in New Mexico focusing on the issue of credit card debt.  This is a welcome turn in the national economic conversation from the plight of big institutions and the financial system to what is perhaps the most important part of the story of the Great Recession still not adequately understood - the weakened state of the American consumer prior to the recent recession and financial collapse. 

We've told this story many times - despite robust growth in the Bush Era, incomes for a typical family fell.  Most measures of consumer health during the Bush went in the wrong direction.  We saw an increase in those without health insurance, in poverty, incomes fell.  The lack of income growth - coupled with a flood of cheap money - helped drive increased consumer indebtedness - mortgages themselves, credit cards, home equity loans.   People borrowed to maintain their lifestyles, and to keep up with the Jones.  The continued consumption and borrowing was justified in the minds of consumers by the power of the wealth effect brought about the rapidly increasing value of homes and stocks.  But we know what happened next.  Assets fell.  Incomes did not appreciably rise.  The debt remained.  People lost jobs.  The already very weakened balance sheet of a typical family grew much much worse. 

And then the inevitable happened - consumption plummeted.  Repeatedly throughout this crisis the "experts" have been surprised by the weakness of the typical American consumer.  They are not acting like consumers in a typical recession because for consumers the recovery they just experienced was not a typical recovery.  Typical Americans have been in their own "recession" for almost a decade.  Look at the Post headlines today: "More Homeowners Getting Aid, But Demand Keeps Rising," and "Weak Retail Sales Dash Recovery Hopes."

The reason that this matters so much is that consumer spending in the US is 70 percent of GDP, and it has been the mighty American consumer who has been fueling the recent global expansion.  The length and depth of the current Great Recession will be driven to a great degree by the ability of consumers to start buying things again.  We maintain that given their weakened home balance sheet that this could be a while.  Which is why the next stage of our recovery will not be so much about liquidity or confidence.  It will be about actually improving the financial position of the typical American consumer, which inevitably lead us to discussions of "deleveraging," or reducing the amount of debt on the balance sheets of American families.

Which is why what the President is doing today is so important.  He is beginning a conversation now about what is happening with American families.  What is best for American families now - to spend or save?  Do we really want, as a matter of national policy, Americans to spend, to take on more debt? Or is it best for them to save, pull back, spend less, pay down their debts, get their own balance sheets in order?  The answer to this question - being put on the table by the President today - will have a lot to do with how the current global recession ends. 

My own view is that just as we have tried to figure out how to get the debt off the balance sheet of the banks so they can resume their work, we will have to talk about how to reduce the indebtedness of American consumers, and encourage those nearing retirement to save much more to replenish the losses in their retirement savings.  This may mean a period of slower growth and less consumption of course - but what other choice do we have?

Update: Just found this Christina Romer quote from an interview earlier this week:

The economic recovery, Ms. Romer said, will be driven by business investment in sectors like renewable energy rather than consumer spending. She echoed the views of other economists who expect a long-term economic shift.

“The chance that consumers are ever going to go back to their high-spending ways is not very plausible, nor do I think they should,” she said. “We were a country that needed to start saving more.”

The New York Times has a must read article by Eric Dash and Andrew Martin this morning which looks at the crushing burden credit card debt has become for many American families, and how worsening financial conditions is driving many into credit card default.  The article once raises a fundamental question we've been raising for months - what is the best course for consumers now? should they borrow and spend, helping fuel a recovery, or should they pay down their debts and clean up their own balance sheets? The answer will help determine how deep and long the Great Recession will be:

It used to be easy to guess how many Americans would have problems paying their credit card bills. Banks just looked at unemployment: Fewer jobs meant more trouble ahead.

The unemployment rate has long mirrored banks’ loss rates on card balances. But Eddie Ward, 32 and jobless, may be one reason that rule of thumb no longer holds. For many lenders, losses are now starting to outpace layoffs.

Mr. Ward, of Arkansas, lost his job at a retail warehouse in April and so far has managed to make minimum payments on his credit card debt, which he estimates at $15,000 to $20,000. Asked whether he thinks he will be able to pay off his balance, he said, “Not unless I win the lottery.”

In the meantime, he said, “I’m just doing what I can.”

Experts predict that millions of Americans will not be able to pay off their debts, leaving a gaping hole at ailing banks still trying to recover from the housing bust.

The bank stress test results, released Thursday, suggested that the nation’s 19 biggest banks could expect nearly $82.4 billion in credit card losses by the end of 2010 under what federal regulators called a “worst case” economic situation.

But if unemployment breaches 10 percent, as many economists predict, the rate of uncollectible balances at some banks could far exceed that level. At American Express and Capital One Financial, around 20 percent of the credit card balances are expected to go bad over this year and next, according to stress test results. At Bank of America, Citigroup and JPMorgan Chase, about 23 percent of card loans are expected to sour.

Even the government’s grim projections may vastly understate the size of the banks’ credit card troubles. According to estimates by Oliver Wyman, a management consulting firm, card losses at the nation’s biggest banks could reach $141.5 billion by 2010 if the regulators’ loss rate was applied to their entire credit card business. It could top $186 billion for the entire credit card industry.

In the official stress test results, regulators published losses only on credit cards held on bank balance sheets. The $82.4 billion figure did not reflect another element in their analysis: tens of billions of dollars in losses tied to credit card loans that the banks packaged into bonds and held off their balance sheets. A portion of those losses, however, will be absorbed by outside investors.

What is more, the peak unemployment level that regulators used to drive their loss estimates is roughly what current rates are on track to reach. That suggests that if the unemployment rate gets much worse, credit card losses could be worse than what regulators projected.

And many economists expect the number of job losses to climb even higher. On Friday, the unemployment rate reached 8.9 percent as the economy shed 539,000 jobs. The unemployment rate and the rate of credit card charge-offs, or uncollectible balances, have been aligned because consumers who lose their jobs are more likely to miss payments.

Banks wrote off an average of 5.5 percent of their credit card balances in 2008, while the average unemployment rate was 5.8 percent. By the end of the year, the rate of credit-card write-offs was 6.3 percent; more recent data was not available.

Experts predict that the rate of credit-card losses could eventually surpass the jobless rate because of the compounding effects of the housing crisis and lackluster consumer confidence. Shortly after the technology bubble burst in 2001, credit card loss rates peaked at 7.9 percent.

“We will blow right through it,” said Inderpreet Batra, a consultant at Oliver Wyman, which specializes in financial services.

Unlike in prior recessions, cardholders who recently lost their jobs are unlikely to be able to extract equity from their homes or draw down retirement accounts to help pay off their debts. That means borrowers who fall behind on their bills are more likely to default, leading to higher losses.

Throughout this Great Recession analysts have been repeatedly suprised by the gravity of the economic decline.  But as this article points out, one of the central dynamics driving this downturn was the unusual economic circumstances of this decade prior to the Wall Street collapse and recession - that in a period of sustained growth incomes in America dropped.  The American consumer was in an already terribly weakened state prior to the slowdown, and this is why it is critical - as the President is doing with his new credit card initiative - to begin to focus much much more on getting the balance sheet of the battered American consumer in better shape.  

For without the typical American family getting back in the game we could see this far-reaching global recession last much longer than of any of us would want.

This week, the White House release results of the "stress tests" and President Obama presented a vision for retraining the American workforce. NDN is pleased to present a number of recommended pieces on rebuilding the financial system, the American workforce, the housing market, and a number of other important items on America's economic future.

• Short Sales and the Market Meltdown by Dr. Robert Shapiro, 5/7/2009 - Reflecting on a recent speaking engagement with SEC commissioners, Shapiro argues for additional regulation of short sales.

• Obama: Upgrade Worker Skills Through Community Colleges by Jake Berliner, 5/5/2009 - In a recent interview, President Obama advocated using the nation's community colleges as a resource for worker IT training, an NDN proposal that Rep. John Larson introduced as legislation.

• Should We Try to Save the Damaged Brands? by Simon Rosenberg, 4/30/2009 - Rosenberg asks if these mainstay, now troubled American brands - AIG, Chrysler, Citi, GM - can be saved by being propped up by the government or if their brands are permanently insolvent.

• The Administration Goes Out on a Limb for GM -- and the Rest of Us by Dr. Robert Shapiro, 4/29/2009 - Shapiro says that the Obama Administration's plans for General Motors are a dismal idea, except for all the alternatives.

• The Housing Crisis and Our National Attititudes Toward Saving by Dr. Robert Shapiro, 4/17/2009 – Shapiro observes that, as a result of the burst of the housing bubble, the Millennial generation will likely be more interested in saving than investing in homes.

• Time to Face the Facts: The Economy Probably Won’t Get Better For Quite a While by Dr. Robert Shapiro, 4/9/2009 – Shapiro's most recent economic analysis says that the economy could be stuck in the Great Recession for long period of time, and that a v-shaped recovery is unlikely.

• Carbonomics by Michael Moynihan, 4/2/2009 - Moynihan looks at the connection between pricing carbon and the future of the American automobile industry.

• Spend? Save? The debate continues by Simon Rosenberg, 2/11/2009 - Building on a previous post, Rosenberg follows the growing debate about whether American families should be focusing on saving.

• The Utter Bankruptcy of Today's Republican Party by Simon Rosenberg, 1/28/09 - Rosenberg argues that Republican opposition to the economic recovery package represents the ideological bankruptcy of the party.

• The Global Economic Crisis and Future Ambassadorial Appointments by Simon Rosenberg, 11/26/2008 - With the mammoth task of rebuilding international financial architecture and recovering from a global recession awaiting the new President, Rosenberg points out the the ambassadors to the G20 nations will be key members of the economic team.

• A Stimulus for the Long Run by Simon Rosenberg and Dr. Robert Shapiro, 11/14/2008 – This important essay lays out the now widely agreed-upon argument that the upcoming economic stimulus package must include investments in the basic elements of growth for the next decade, including elements that create a low-carbon, energy-efficient economy.

• Accelerating the Development of a 21st Century Economy: Investing in Clean Infrastructure by Michael Moynihan, 10/18/2008 – NDN Green Project Director Michael Moynihan outlines a strategy for investing in clean infrastructure that will help create long-term prosperity.

• Back to Basics: The Treasury Plan Won't Work by Dr. Robert Shapiro, 9/24/2008 - As the financial crisis unfolded and the Bush Administration offered its response, Shapiro argued that, while major action was needed, the Treasury's plan would be ineffective.

• Keep People in Their Homes by Simon Rosenberg and Dr. Robert Shapiro, 9/23/2008 – At the beginning of the financial collapse, NDN offered this narrative-shaping essay and campaign on the economic need to stabilize the housing market.

• Making the Struggle of Every Day People the Central Focus of the National Debate by Simon Rosenberg, 8/17/2008 - As the 2008 presidential campaign entered a crucial phase, Rosenberg argued that political leaders must focus on raising the wages and incomes of Americans.