The shocking number of foreclosed houses in July, over 90,000, has sent shockwaves through the economy – especially the Stock Market, as the Dow Jones Average has been near or below 10,000 the last few days (having reached highs just over 14000 a week ago). Investors worry about perceptions of future growth. The surprise of the number, which National Public Radio (NPR) reports is the second highest rate of monthly foreclosure since the crisis started, sent further ripples of fear of a double-dip recession through the markets.
And yet as NPR also pointed out in its report, “the number of homes in the early stages of foreclosure is down — more than 30 percent from the peak early last year.” This number suggests that the rate of foreclosures in the last months of 2010 and early 2011 might not be too high. What is driving the stock market down, then?
Many analysts seem to be treating the rate of foreclosures as a symptom, not a cause, of the problems. For example, aon Newsweek.com includes the harsh fact that Fannie Mae and Freddie Mac are hardly out of the woods yet, despite government bolstering beginning in 2008:
By 2009, Fannie and Freddie had lent or guaranteed almost $5.5 trillion in home mortgages, roughly half of the U.S. total. But the marriage between private profit and public purpose failed. In September 2008, the Bush administration took over Fannie and Freddie, which faced huge losses from bad mortgages. There’s a ferocious debate as to whether these losses stemmed from unrealistic “housing affordability goals” or lax lending in pursuit of higher profits. The correct answer is: probably both. Regardless, the GSE bailouts have cost almost $150 billion, with more to come.
These ‘government sponsored enterprises’ (GSEs) saw home mortgages as a safe investment because the houses themselves have (read: used to have) reclaimable value if indeed the borrower defaulted. “The irony is that, in failure, the GSEs have become more important than ever. Private lenders, which once regarded a mortgage secured by a home as a highly safe investment, now see it as highly risky.” As we pointed out in yesterday’s post, the Fed’s decision to keep its interest rates at 0% has meant that private lenders see easy/safe profit not in homes, but in lending that borrowed money back to the government.
The other harsh fact that is keeping the stock market bearish on the near future is the stubborn fact of unemployment. Few doubt that unemployment is really at 9.5%, given the numbers of people who have stopped searching or who have gone back to school while unemployed. The downward pressure of unemployment will drag on everything, because many of those who are getting by now are working through savings or are fearful of becoming unemployed in the near future (which will suppress their desire to make purchases).
Marietta Rodriguez, NeighborWorks America’s director of homeownership and lending, took part in the NPR report, and she believes that unemployment and underemployment will continue to drag down the housing market. She stated that many of her colleagues report that the numbers of people seeking mortgage and foreclosure counseling from NeighborWorks has not slackened over the last number of months, whatever the ultimate foreclosure numbers are. She also pointed out that those who get counseling generally find ways to save more on their mortgages than their neighbors who try to refinance on their own.
The ugly fact of unemployment numbers clearly are cause for the greatest concern, because unemployment is treated as a ‘lagging indicator’ that will only improve after other aspects of the economy improve. Yet until unemployment improves, few people have the financial resources to start consuming in ways that the US economy is so dependent – especially in the housing market. So the shock of foreclosures in July might be grounds for a quick panic in the markets and little more, but as Ms. Rodriguez argued, we should not be breathing a sigh of relief just yet.