Existing Home Sales Plunge 27%, Worse than Every Economist Forecast; Treasury Yields Hit New Lows

In yet another clean sweep, the third in a week or so, sales of existing homes dropped twice as much as expected, worse than every economist forecast, to a 15 year low. Inventory soared to 12.5 month, the highest since 1999. Treasury yields plunged with yield on the 10-year note falling as low as 2.50 and the 2-year note hitting a new all-time low at .47%.

Please consider Sales of U.S. Existing Homes Drop More Than Forecast

Sales of U.S. previously owned homes plunged 27 percent in July, twice as much as forecast, evidence foreclosures and limited job growth are depressing the market.

Purchases plummeted to a 3.83 million annual pace, the lowest in a decade on record keeping and worse than the most pessimistic forecast of economists surveyed by Bloomberg News, figures from the National Association of Realtors showed today in Washington. Demand for single-family houses dropped to a 15- year low and the number of homes on the market swelled.

A tax credit of up to $8,000 boosted sales earlier in the year, pulling forward demand and indicating additional advances will prove difficult. Mortgage rates at record lows have provided scant relief to the industry as unemployment hovers close to 10 percent, foreclosures hold near record-highs and the economy cools.

“This is a devastating reading on the U.S. housing market,” said Derek Holt, an economist at Scotia Capital Inc. in Toronto. “There’s such an inventory overhang, it shows there will be pressure on prices” in the months ahead.

The pace of existing home sales is the slowest since comparable records began in 1999. Purchases of single-family homes dropped to a 3.37 million annual rate, the lowest since May 1995.

Range of Forecasts

Economists projected sales would fall 13 percent from June’s previously reported 5.37 million pace. The agents’ group revised the June sales figure down to 5.26 million. Estimates in the Bloomberg survey of 74 economists ranged from 3.96 million to 5.3 million. Previously owned homes make up about 90 percent of the market.

The number of previously owned homes on the market rose 2.5 percent to 3.98 million. At the current sales pace, it would take 12.5 months to sell those houses, the highest since at least 1999 and compared with 8.9 months in June. The months’ supply of single-family homes at 11.9 months was the highest since 1983, the NAR said.

Extend and Pretend

The only thing this administration knows how to do is extend and pretend. The latest gimmick offered on August 11, 2010 is HUD Offers Interest-Free Loans to Reduce Foreclosures.

The Obama administration will offer $1 billion in zero-interest loans to help homeowners who’ve lost income avoid foreclosure as part of $3 billion in additional aid targeting economically distressed areas.

The Department of Housing and Urban Development plans to make loans of as much as $50,000 for borrowers “in hard hit local areas” to make mortgage, tax and insurance payments for as long as two years, according to a statement released today. The Treasury Department will also provide as much as $2 billion in aid under an existing program for 17 states and the District of Columbia, according to the statement.

The initiatives will help “a broad group of struggling borrowers across the country and in doing so further contribute to the administration’s efforts to stabilize housing markets and communities,” Bill Apgar, HUD’s senior adviser for mortgage finance, said in the statement.

Fool's Offering vs. Free Rent

Anyone going $50,000 deeper in debt to "save" their existing underwater home is a complete fool. On the other hand, anyone who takes the cash as an offer for free rent with a plan to declare bankruptcy and walk-away later just may be thinking clearly.

Thus, it is likely that the fool in this case is the Obama administration. The only thing this stupid program will do is waste taxpayer money while pushing foreclosures into the future.

Meanwhile the number of negative surprises continues unabated.

Recent Surprises

• 58 out of 58 Economists Overoptimistic on Philly Fed Manufacturing Estimate; Median Forecast +7 Actual Result -7.7, a "Veritable Disaster"


• Weekly Unemployment Claims Hit 500,000, Exceed Every Economist's Estimate; No Lasting Improvement for 9 Months

Recession Never Ended

As I said in 3rd Quarter GDP Likely Negative, Recession Never Ended ...

While some people still think the odds of a double dip recession are close to zero, ironically, the only reason they may be right is if the first dip never ended.

Amazingly, economists are still clinging to estimates of 2.5% and up.

So expect to discover the vast majority of economists will be surprised at the forthcoming downward revisions, even after we point these things out well in advance and repeat them.

The ECRI is still touting the "flattening" of the Weekly Leading Indicators (WLI) at -10. With the collapse in treasury yields, a print of -500,000 on weekly claims, and a god-awful Philly Fed report, let's watch the next few weeks. I suspect this "flattening" period will soon be over.

Fooled By Stimulus

Nearly every economist has been Fooled by Stimulus even though the structural problems still remain.

It's time to face the facts: There never was a "recovery" by any rational measure. The alleged recovery was nothing more than inventory replenishment fueled by massive and unsustainable government spending waste with additional trillions of taxpayer dollars handed out in bank bailouts.

The plunge in existing home sales shows exactly what happens when free money handouts stop.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Dissent at the Fed, 7 of 17 Express Reservations about QE; Appeals Court Refuses Fed's Motion to Dismiss Bloomberg's Freedom of Information Request

Beneath the surface of a 9-1 vote in favor of continued quantitative easing, 7 of 17 Fed officials at the last FOMC meeting had at least some reservations about Bernanke's policy.

The Wall Street Journal reports Fed Split on Move to Bolster Sluggish Economy

The Aug. 10 meeting of top Federal Reserve officials was among the most contentious in Ben Bernanke's four-and-a-half year tenure as central bank chairman. With the economic outlook unexpectedly darkening, the issue was a seemingly technical one: whether to alter the way the Fed manages its huge portfolio of securities.

At least seven of the 17 Fed officials gathered around the massive oval boardroom table, made of Honduran mahogany and granite, spoke against the proposal or expressed reservations. At the end of an extended debate, Mr. Bernanke settled the issue by pushing successfully to proceed with the move.

Officials were clustered in two camps. In one camp, Mr. Dudley, and the presidents of the Boston and San Francisco Fed banks, Eric Rosengren and Janet Yellen, were distressed that the Fed was far from its objectives of low unemployment and stable inflation.

Richard Fisher, president of the Dallas Fed, and others expressed a concern that Fed moves might be ineffective, arguing that businesses weren't using already ample, cheap credit to fund investments because they were uncertain about many other problems, including government deficits and new financial regulations.

Narayana Kocherlakota, president of the Minneapolis Fed, argued that a large part of today's unemployment problem is caused by issues the Fed can't solve, such as the mismatch between the skills of jobless workers and the skills that employers wanted. "The Fed does not have a means to transform construction workers into manufacturing workers," Mr. Kocherlakota said in a speech after the meeting.

The president of the Philadelphia Fed, Charles Plosser, who has had misgivings before about Mr. Bernanke's initiatives, deemed the latest move premature because, though the Fed was lowering 2010 growth estimates, it wasn't significantly ramping down its estimates for growth in 2011 and beyond. Two other frequent dissenters, Thomas Hoenig of Kansas City, and Jeffrey Lacker of Richmond, Va., also objected. Fed governor Betsy Duke, a former commercial banker, also expressed reservations, according to participants.

Fed Worried Balance Sheet Might Shrink Too Fast

The concern of Bernanke and other Fed officials was the Fed's balance sheet might shrink too fast. According to the New York Fed, as much as $340 billion would be paid back including $55 billion Fannie and Freddie mortgages.

A shrinking portfolio in the face of slowing economic growth amounted to "prematurely applying the brakes" according to New York Fed President William Dudley.

Excuse me for asking but how the hell does repayment of Fannie and Freddie loans (with consumers refinancing at lower rates) constitute tightening?

Only in the perverted world of Fed minds with government backstopping all losses at Fannie and Freddie could mortgage paybacks be construed as tightening. The same applies to any balance sheet assets paid back because of favorable bond market conditions.

Indeed, the Fed should be thrilled to get rid of garbage on its balance sheet at a time when mortgage rates are dropping.

Exit Strategy Blown

Note how the Fed blew a chance at an exit strategy handed to them on a silver platter. They are unlikely to be so lucky down the road.

Quantitative Nothingness vs. Quantitative Easing

I discussed the FOMC decision in Quantitative Nothingness and the Yield Curve's Reaction

Bernanke's pledge to hold the Fed's balance sheet constant is certainly a new twist. However, given that quantitative easing will not do a damn thing as discussed in Quantitative Easing Take II; Uncharted Territory it is silly to think that Quantitative Nothingness will do anything.

When the equity market will figure this out remains a mystery, but the treasury market seems to have figured it out already.

For still more on the debate, please see Will Quantitative Easing Spur Inflation? Job Creation? Credit Expansion? Do Anything? written on August 6, before Bernanke opted for constant garbage.

Appeals Court Refuses Fed's Motion to Dismiss Bloomberg's Freedom of Information Request

In other Fed news, Bloomberg reports Fed Loses Bid for Review of Bailout Disclosure Ruling

An appeals court refused to reconsider a decision compelling the Federal Reserve Board to release documents identifying banks that might have failed without the U.S. government bailout.

The full U.S. Court of Appeals in New York, in a docket entry dated Aug. 20, denied a May 4 request by the Fed to review a three-judge panel’s unanimous March 19 decision requiring the agency to release records of the unprecedented $2 trillion U.S. loan program begun primarily after the 2008 collapse of Bear Stearns Cos.

Unless the court stays its decision, the Fed will have seven days to disclose the documents. In the event of a stay, the central bank and the Clearing House Association LLC, an organization of 20 commercial banks that joined the Fed in defense of the lawsuit, will have 90 days to petition the Supreme Court to consider their appeal. The Clearing House has already said it will ask the high court to rule on the case.

“We are reviewing the decision and considering our options for appeal,” David Skidmore, a Fed spokesman, said.

At issue are 231 “term sheets” documenting Fed loans to financial firms during 2008. The records, which include the banks’ names, the amounts borrowed and the collateral posted in return, were originally requested by late Bloomberg News reporter Mark Pittman through the Freedom of Information Act, which allows citizens access to government papers.

The amount the Fed and the U.S. government lent, spent and guaranteed to stem the recession and rescue the banking system peaked in March 2009 at $12.8 trillion, most of it following the September 2008 bankruptcy of Lehman Brothers Holdings Inc.

Fox News, a unit of New York-based News Corp., also sued the Fed to force the release of loan documents for transactions in 2008 and 2009.

The hypocrites at the Fed have promised more transparency and show it by fighting freedom of information requests all the way to the supreme court, which appears to be where this lawsuit is headed.

Should the Fed does deliver any data now, it will only be because the data is already entirely useless and/or they fear setting a supreme court precedent.

Fed's Transparency Policy Unveiled

The Fed's transparency policy amounts to a spoon-feeding of blatant lies, distortions, half-truths, and purposely overoptimistic guesses, along with a few smatterings of obvious truths hoping to make the entire package look legitimate.

The simple fact of the matter is it's Not Practical To Tell The Truth.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Epidemic of Thrift vs. Leap of Faith; Housing Slide Will Seal Recession Fate

I am reasonably certain that the economy is still in recession. If not (and this is ultimately up to the NBER to decide), the pending disaster in housing and commercial real estate will seal the double-dip deal.

Either way, the prognosis is not good, as economic conditions are deteriorating rapidly. With that thought in mind, please consider Housing Slide in U.S. May Drag Economy Into Recession

“If foreclosures continue to mount and depress home prices, that could send the economy back into a recession,” said Celia Chen, an economist who tracks the industry for Moody’s Analytics Inc. “The housing market and the broader economy are closely intertwined.”

With 14.6 million Americans out of work, homeowners are struggling to hold onto their properties. One in seven mortgages were delinquent or in foreclosure during the first quarter, the highest in records dating to 1979, according to the Washington- based Mortgage Bankers Association. Foreclosures probably will top 1 million this year, said RealtyTrac Inc., an Irvine, California-based data company.

Federal efforts to help have had little success. Of 1.31 million loan modifications started under the Obama administration’s Home Affordable Modification Program, 48 percent were canceled by the end of July, the Treasury Department said Aug. 20. More than half of all modifications defaulted again within 12 months, the Office of the Comptroller of the Currency said June 23.

Shadow inventory, or the number of homes repossessed or in default that eventually will be offered for sale, stood at 7.3 million in the first quarter, according to Laurie Goodman, an analyst in New York at mortgage-bond broker Amherst Securities Group LP. As those properties hit the market, prices will come under pressure and buyers will wait for better deals.

“The only thing that’s going to fix the housing markets right now is a work-through of what excess supply is on the markets and improvement in unemployment,” Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said today in an interview on Bloomberg Television’s “In the Loop with Betty Liu.” “That process is a very, very long-term process.”

Consumer spending rose 1.6 percent in the second quarter, down from 1.9 percent in the previous three months. Purchases of home furnishings and appliances fell 1.7 percent to an annual pace of $256.5 billion in June from a 2010 high in April, according to the Bureau of Economic Analysis.

“There is an epidemic of thrift,” said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts. “Households and businesses are super-cautious right now. Sometime in the next 6 to 12 months, we’ll start to see more movement on home and car purchases and greater willingness on the part of businesses to hire.”

Epidemic of Thrift vs. Leap of Faith

Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts correctly says there "There is an epidemic of thrift".

Indeed there is, and actually it is a good thing! Consumers need to deleverage and they are.

Unfortunately Behravesh blows it with "Sometime in the next 6 to 12 months, we’ll start to see more movement on home and car purchases and greater willingness on the part of businesses to hire."

Excuse me for asking but ... Small Businesses are Not Hiring - Why Should They?

As is typical of most economists, Behravesh displays an amazing and unwarranted leap of faith.

Structurally High Unemployment for a Decade

Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC has it correct: It will take a "very, very long-term process" to fix this mess.

Consumer demand is dead. That demand is not coming back anytime soon, and there is no driver for jobs if it doesn't. Unemployment and GDP will both be extremely weak for the duration.

Harsh Reality From Bernanke

In the Incredible Shrinking Boomer Economy I noted a harsh reality quote of Bernanke:

"It takes GDP growth of about 2.5 percent to keep the jobless rate constant. But the Fed expects growth of only about 1 percent in the last six months of the year. So that's not enough to bring down the unemployment rate."

I wrote that in July of 2009. Nothing has changed.

Indeed, 3rd Quarter GDP Likely Negative, Recession Never Ended

Pray tell what happens if GDP can't exceed 2.5% for a couple of years? What about a decade (or on and off for a decade)?

If you have come to the conclusion that we are going to have structurally high unemployment for a decade, you have come to the right conclusion. Ask yourself: Is that what the stock market is priced for?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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