Oct 12 2009
Let’s just take off the partisan glasses for a few moments and note that current economic trouble actually began years ago with a terrible idea to risk the stability of the real estate market (what could go wrong, they can’t make more land?) by loosening all the controls for ensuring people who buy can afford what they are buying.
This one crazy fantasy – that everyone should own their home no matter their financial status – allowed millions and millions of people to buy property they were inevitably going to default on. Instead of providing a leg up to those on the lower rungs of the economic latter, the whacky scheme lined the pockets of a lot of power players who raked in billions on shaky mortgages.
But it was also a cancer, let in to feed on the foundation of our economy. Over the years more and more mortgage failures hit, consuming the reserves there were to weather such storms. Until finally, the failure rate of mortgages caused the collapse of some of the biggest financial institutions, drying up credit, panicking every sector, and bringing on the Great Recession of 2008.
This is the true history the Political Industrial Complex (which encompasses politicians, lobbyists, power brokers, media allies, etc) do not want the public to see. And only occasionally does it peek out from stories on the growing economic tsunami this one idiotic idea caused this nation – and this world.
Worse, it seems the risky scheme is not done claiming victims, as it is now starting to gnaw at the upper rungs of our economy:
About 30% of foreclosures in June involved homes in the top third of local housing values, up from 16% when the foreclosure crisis began three years ago, according to new data from real-estate Web site Zillow.com.
This one sentence is packed full of important details. First off, the foreclosure crisis is admitted to have started 3 years ago (at least). That is a very important bit of news, since that clearly indicates that large scale real estate foreclosures were really the first domino to bring on this massively deep and long recession.
It was not deficit spending, or wars in Iraq and Afghanistan, or low taxes, or even high taxes. It was a disastrous scheme to allow millions of people buy up homes they could not possibly afford, which saddled are banking system with billions in risky assets. These buyers started to fail in droves and consumed all the monetary reserves in place to deal with foreclosures. Reserves established assuming only solid buyers would be allowed the right to ‘own’ a home (which in reality is the responsibility to be financially stable enough to pay off the home over 30 years).
The next sentence proves this point:
The bottom one-third of housing markets, by home value, now account for 35% of foreclosures, down from 55% in 2006.
So, at the ‘start the cancer first ate through the sub prime markets where it got its foot hold, but has since moved upward to the middle and up class markets. There is no stronger indicator of where this economic mess all started.
And if people think we are ‘stimulating’ our way out of this mess, then think again:
The report shows that foreclosures, after declining earlier this year, began to accelerate in the late spring and that more expensive homes have more recently accounted for a growing share of all foreclosures. “The slope of that curve in recent months is much sharper than it was recently,” said Stan Humphries, chief economist for Zillow. Rising foreclosures among more-expensive homes could create added pressure for a housing market that has shown signs of stabilizing in recent months as sales of lower-priced homes pick up.
Note how the foreclosures began to accelerate again AFTER the so called stimulus bill passed. At this stage, foreclosures are not just the evidence from a mistake of good intentions gone horribly bad (most crimes are based on good intentions). They are now a sign the ripples of that horrible mistake are not done spreading out through the economy. If the top 3rd have seen a near doubling in foreclosures, the middle class must be in the midst of a huge wave as well (can’t get to the upper levels without first going through the middle). This is shown to be true later in this post.
The fact the curve is steepening means we have yet to find the economic bottom of this mess. The problem is too many people are out of work or working below their normal potential (i.e., income). Here are some graphs to emphasize the point.
The first graph shows the unemployment rate (U3) Â is at a 26 year low point at 9.8%. But it also shows the government’s underemployment index (which adds in those now working part time or at lower wages to make ends meet) is at whopping 17%, and rising. Â (click to enlarge)
Note how the stimulus bill’s passage did nothing to these two indicators.Â Recently I did a post showing how these numbers could be low, hiding a much worse picture than even this data shows. This could be the rosy scenario.
Second, here is the chart showing states with unemployment (U3) running over 10%. As the graph notes the so called economic stimulus bill passed last february has done nothing to stem the spreading wave of economic woe. (click to enlarge)
When the bill passed 7 states were experiencing unemployment over 10%, and only a tragic few were well above that line. Now the number has more than doubled to 15 states, and many states are plumbing new depths of economic pain. This trend is going to clearly result in more foreclosures in the middle and upper income regions. Just imagine what the underemployment (U6) index must look like for these states? For many it has to be reaching 30%.
And what is even worse is the fact more and more people are being added to the unemployment roles, while very few being taken off. While the number of newly unemployed has slowed a bit in the last few months, it is still racking up incredible numbers of lost jobs each month. Which means people are stuck on unemployment for longer and longer, as the third and final chart shows. (click to enlarge)
The graph shows the number of people who have already blown through the standard unemployment benefits and now are on the last edge of the safety net. The Emergency Unemployment Compensation (EUC) is the pool of long term unemployed who have gone over 27 weeks without work, and this pool has more than doubled since the so called stimulus bill passed (in fact, it took off just one month after its passage).
The average time on unemployment as risen from about 15 weeks for much of the last decade to a staggering 26 weeks last month. The longer people are stuck on unemployment, the more likely they are to fail to make their mortgage payments and foreclose.
When you see this level of under employment it clearly results in fewer goods being purchased, more companies tightening their belts, and no new jobs being created. It can directly correlate to foreclosures, which is seen in a graph provided with the original WSJ article linked at the start of this post.
This chart shows where the foreclosures are coming from, which also is an indicator of who is unable to make their mortgage payments. The graph shows more and more the foreclosures are coming outside the lower income levels (as their percentage of the total drops and the other two income levels increase their shares).
Obviously a key factor for Â those who cannot make payments is if they are unemployed or underemployed. As the chart clearly sh0ws, the upper class is spiking recently in the percentage of total foreclosures (which overall has not been slowing at all).
But the middle class’s percentage of foreclosures to the total has also grown. Foreclosures are not slowing, so the numbers of the middle and upper class going under has to be rising. Which tells me this nagging unemployment is rising higher and higher up the economic stratum, as well as spreading into more and more states.
This viscous economic feedback cycle may not be over yet.