Bankruptcy & Foreclosures

Here in New York we have an expression: “Don’t like the weather? Give it five minutes.” Perhaps that’s a bit of a stretch but lately news of the economy isn’t all that far off. Since today’s Monday (yes the beginning of the work week again so soon), we have a mixed bag of news to report on the state of current affairs to get things started.

After six straight months of tumbling, sales of existing homes somhow posted an unexpected increase in February. There is a good possibility this is a result of more aggressive price cutting by sellers in some parts of the nation.

According to the National Association of Realtors sales of existing homes rose by 2.9 percent in February to a seasonally adjusted annual rate of 5.03 million units. It was the biggest increase in a solid year and since economists were actually expecting a decline, this news came as a surprise.

Don’t pop the cork off the champain just yet. Analysts are cautioning against reading too much into this single month sales increase. Popular economists theory states that the steep slump in housing will not bottom-out until later this year after prices fall even further which will cause large levels of unsold inventories to be reduced.

The inventory of unsold homes dipped to 4.03 million units in February. This means if house sales continued on the same pace that they did in February, it would take 9 and a half months to get all of the unsold houses on the market to sell.

Here’s the kicker: Sales may have been up but prices are on the slide. The median sales price for a single-family home (and condomiums) dropped to $195,900, a fall of 8.2 percent from last year at this time (sadly the biggest slide in the current housing slump). That’s down 8.7 percent from a year ago which represents the biggest decline in four decades.

I suppose news of these opposing curves does make sense. The most logical explanation for the increase in sales is directly related to a decrease in pricing. It’s true that individuals today are facing difficulties securing loans, these are times where good deals on property purchases can be had. We’ll be keeping close watch on March’s figures as more longterm patterns will be easier forcasted should a multi-month pattern appear.

Each day I like to check all of the usual financial news sources: CNN, local news, Yahoo Finance, the Associated Press, Bloomberg, etc. and if I were to summarize the theme of all of their reports of late you would likely say something like “duh!” I will risk being labeled Captain Obvious and proceed to share some of the latest.

Further evidence that the U.S. economy is slipping into the gutter of recession comes from a rise in jobless claims. According to The Conference Board (a business-backed research group) its index of leading economic indicators fell in February for the fifth consecutive month. And why not? The US Economy has been experiencing what some view as a sandwiching effect by rising fuel costs, falling home prices and tightening credit markets. Does it really come as a surprise to hear that consumers and businesses have reduced spending as a result?

Here’s the catch, reduced spending is troublesome in and of itself but the problem is further compounded on the lending side of the equation. These economic turbulence equal times when consumers simply need banks to lend more freely. American consumers often recover from personal economic slowdown by borrowing. Today’s version of “saving for a rainy day” has become “borrow until a sunny day”. Sadly the lending industry is making it harder to borrow even for individuals with good credit.

Banks that have lost billions because of what boils down to essentially bad bets during the housing boom are now reverting to lending standards as strict as they’ve been in nearly 20 years. A popular rumor is that this proverbial tightening of the belt affects only homebuyers in need of a mortgage. Unfortunately the reality is that current homeowners seeking refinance or home equity lines of credit are going to experience additional hurtles to clear as well. The situation can result in higher down payments and higher bars for credit scores not to mention acceptable proof of income and employment, something they often did not require during the housing boom (a process commonly called stated income).

Naturally the toughest restrictions will be found in markets where home prices are falling although sadly regions where property values are rising are still not immune.

Here’s a statistic to consider: Mortgage insurers have flagged over 9,600 ZIP codes in at least 34 states where they won’t insure certain types of home loans due to value risks.

Unlike many of the popular financial news sites, I will refrain from offering solutions to the sandwich effect until there’s signs of early economic stabilization on at least one of the sides.

Well it appears as though the Fed’s course of action in slashing rates is yielding impressive results to the stock market. The question on everybody’s mind now is for how long?

Today the Fed announced but another cut to interest rates, this time some three quarters of a percentage point. No sooner was this announcement made the market witnessed quite a hike in direct relation. In fact the Dow Jones Industrial Average jumped 300 points.
This latest slash has reduced the federal funds rate (the interest that banks charge each other) down to 2.25%, the lowest it’s been since 2004! It also marks the second back-to-back cuts of three-fourths of a percentage point. While there have reports of conflicting views within the Fed itself as to whether these rate cuts truly help the economy in the long run, this action caps an unprecedented period of Fed actions aimed at trying to stabilize the market and prevent full-blown recession.

On the flip side of this economic stimulation is the inevitable truth that rising yields is causing domestic inflation as well as a slumping dollar value on the global scale. The Wall Street Journal reports that Wholesale prices rose again in February due in part to another hefty increase in energy costs that more than offset falling food prices. Aside from food and energy, prices shot up at the fastest pace in 15 months. They conclude that this represents a stark reminder that inflation risks remain despite the economic slump.

When the Fed announces rate cutes, I typically try to include how this news affects consumers in their daily lives. The truth is that rate cuts usually take months to fully circulate through the economic cycle, but there is a chance that consumers and businesses could benefit quickly. The cut will have a major influence on short term lending (particularly overnight loans) as again this is the interest banks charge each other.

About the only negative to this announcement is that it confirms suspicions that that the nation’s chief economists are clearly concerned about the economy enough to take drastic measures despite a cool poker face in their press conferences.