Week that was: Housing, unemployment data show recession may be slowing, but far from over–better regulation needed

September 1st, 2009 by Mike Hinshaw

[Editor's note: Part One of  "The Week that was is here; Part Two is here.]

On August 21, Bloomberg ran a piece with the encouraging headline “Bernanke Says Global Economy Emerging From Recession,” echoing Web-wide reports suggesting the economy had turned the corner.

Citing “aggressive” action by big banks and governments, the Fed chairman said in a speech to bankers and academics at an annual symposium, “Economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good.”

Deeper in the story, we get this: ” ‘The worst of the credit crisis probably ended in March and the recession probably ended in the current quarter,’ economist David Jones, president of DMJ Advisors LLC in Denver, said today in an interview on Bloomberg Radio.”

Many other reports that week mentioned drops in unemployment, rising stocks, and improvements in the housing sector. One of the most widely published figures reflected this CNN report, showing that the “national unemployment rate fell to 9.4% from 9.5% in June, the first decline in that closely watched reading since April 2008.” Indeed the hed on that report was “State unemployment shows improvement.”

Reading more closely, we have to wonder whether some headline writers are reading the full stories–or are they simply trying to do their parts to bolster public confidence?

For instance, deeper in the CNN account, we get these two grafs:

“While the report showed improvement for the battered labor market, the changes in unemployment rates were very modest across the board: overall, unemployment rates didn’t change much from June to July.

Only two states, Vermont, at 0.5 percentage point, and Minnesota, at 0.3 point, showed what were considered significant decreases in unemployment rates.”

Then, after citing some of the states with the worst unemployment figures, here’s the takeaway: “Compared to the same time last year, all 50 states and the District of Columbia posted higher unemployment rates, with 15 states having double-digit unemployment percentages.”

The housing story seems very similar. Here’s a hed from a Reuters analysis by Julie Haviv, also posted August 21: “Housing’s solid spring, hotter summer.”

Haviv leads off with this gushy take: “What some expected to be a spring fling for the U.S. housing market turned into a white-hot summer.

“The typical spring fling for the U.S. housing market is turning into a hotter summer, as home buyers return to the market with help from foreclosures, tax incentives and abundant supply.”

Then Haviv says, “Improvement in this market bodes well for the U.S. economy, as it points to better demand in the sector where the first signs of the recession took root,” and goes on to quote a real estate professor:  ” ‘Seasonality no doubt helped improve housing sales in the spring, but I still think the worst is behind us,’ said Jeffrey Fisher, professor of real estate and director of the Benecki Center for Real Estate Studies at the Indiana University Kelley School of Business.”

Once again, though, the takeaway is deeper, in the graf where Haviv says: “But with the tax credit set to expire in several months and distressed properties making up a high proportion of sales, the recent flurry of activity masks uncertainty about the long-term outlook.”

Distressed property sales–what’s that about?

Well, although we’ve had plenty of occasion to disagree with Diana Olick, of CNBC’s “Realty Check,” she certainly dug up some interesting numbers here, in a piece labeled “Existing Homes: What’s Really Selling.”

“Existing home sales rose for the fourth straight month in a row,” writes Olick, “now to the highest pace in two years.”

But she quickly qualifies that with strongly bridled optimism: “Excellent news that buyers are getting off the fence, but they’re only getting off at a certain price point.”

Comparing housing sales to the gains of big box retail gains, she points out that “only the low end of the housing market is moving.” Then she supplies a table with data from the National Association of Realtors (NAR) showing that, categorized by price, only two sectors of existing housing were showing gains. Homes selling under $100,000 were up 38.8 per cent, while those priced $100,000 to $250,000 were up 8.7 per cent.

All the rest showed losses–the higher the price, the bigger the losses: houses from $250,000 to $500,000 were down 6.2 per cent; $500,000 to $750,000 were down 8.9 per cent; $750,000 to $1 million down 10.6 per cent; $1 million to $2 million down 23.3 per cent; and more than $2 million down 32.4 per cent.

Then here’s Olick’s cognizant takeaway: “A full one third of all sales in July were of foreclosed properties, and as more foreclosures hit the market, you can only expect more downward pressure on prices.  I spoke with Spencer Rascoff of Zillow.com today, who claims, ‘this is not a real recovery.’ Higher sales on one end of the market do not a full recovery make.  Until foreclosures peak and prices bottom, we can’t say housing is on its way back up.”

Now, that makes sense. But the following is even more encouraging, coming from such a big-time opinion influencer as Olick–who was four-square against legislation that would have allowed bankruptcy judges to modify loan terms on primary residences.  Noting that “. . . anyone who reads my blog regularly knows I am not a big fan of government bailouts in the housing market” she also argues for more help for home buyers.

Referring to the NAR data, she writes, “This pricing scenario seems like a no-brainer argument for extending the first time homebuyer tax credit . . . .  if something’s working, which this credit clearly is (30 percent of buyers in July were first timers), then we should give it a little more time.  Foreclosures are only increasing, as we saw from yesterday’s Mortgage Bankers Association report, and that will mean more inventory at the low end.”

Even more encouraging is the emerging awareness of the need to regulate derivatives trading, particularly credit default swaps. In short, the so-called “securitization” of mortgages has clearly been a major hurdle in the effort to help homeowners renegotiate bad home loans (see Part One of this series), and credit default swaps are so hard to understand that they nearly brought the global economy down. As discussed at an options trading site, the legal/regulatory system is simply too far behind the complicated deals that Wall Street trading institutions can dream up:

“Attempting to explain the inner workings of the U.S. derivatives market is akin to trying to explain a complicated mosaic from only a few feet away. The closer you get, the less sense it makes. The regulatory structure of the U.S. derivatives market stems from legislation that was written when our grandparents were in diapers. The enduring legacy of this antiquated legislation is an oversight system that is woefully inadequate for today’s complicated marketplace.”

Further into the argument, we get this: “The problems become even worse when the oversight function falls victim to our antiquated system. The world witnessed this firsthand when AIG imploded under the weight of poor derivatives risk management. AIG fell into the same premium writing trap that destroyed Barings PLC and caused many other infamous derivatives disasters. The steady stream of income generated by repeatedly selling derivatives contracts (in this case credit default contracts) quickly overcame any sense of proper risk management.

In a perfect world, AIG would never have been allowed to risk so much on one roll of the dice. But the critical function of oversight fell through the cracks of the great schism, this time with disastrous consequences.”

Indeed, the piece quotes the now famous analogy from George Soros, published among his other remarks in a June 12 Reuters account: “In both cases, some bondholders owned CDS and they stood to gain more by bankruptcy than by reorganisation.

“It’s like buying life insurance on someone else’s life and owning a license to kill,” he concluded.

Yup. Same dynamic as the foreclosure crisis: when the big boys stand to gain more by letting homeowners go into default rather than working out better loan terms, the whole country is in danger.

And we still are. We may be out of freefall, but that doesn’t mean we’ve hit bottom yet.


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