Housing markets and the broader economy: sniffles, or, flu? by gimleteye

Florida mainstream media is struggling to get its hands around the biggest bust in housing markets since 1926. So you have to look elsewhere for views unfiltered by the demands of advertising revenue supported by local developers and the growth machine.

Two questions emerge as relevant to the outcome of the housing slump.

If you listen to the builders, and to the Florida legislature, those two questions are: property taxes and insurance.

That view was expressed in today’s New York Times, In Florida, a Home Market Still in Flux , “Nancy Riley, a broker in St. Petersburg and president of the Florida Association of Realtors, says the market is returning to preboom “normal conditions.” She is confident that sales would gain more ground if issues like Florida’s high property taxes and soaring post-hurricane home-insurance premiums are resolved. Then, “we will see another boom like we have never seen before.”

While property taxes and insurance are on the tip of everyone’s tongue, what should be in the pit of everyone’s stomach are two other questions: how long will it take for housing markets to recover if consumer demands substantially falters, and, if US consumer demand follows the housing markets, what will the impact be to the global economy?

The uncertainties piling up around these questions mean that there will not be another building boom in the foreseeable future, notwithstanding the determined optimism of the Florida Association of Realtors.

“Michael Larson, a real estate analyst at Weiss Research in Jupiter, says it could take up to three years, at the current sales rate, to deplete the huge inventory that accumulated after speculators jumped ship, new home buyers walked away from contracts and nervous sellers flooded the market.”

But the problem for future growth and investment is not just the massive piling up of unsold inventory, noted by instance in staccato quarterly warnings from publicly traded production homebuilders hemorrhaging cash in an effort to keep production homebuilding pumps and pipelines primed.

In three years at the current sales rate, the number of foreclosures on personal real estate will rise dramatically. The overhang of unsold inventory in a multi-year implosion of housing markets calls into question how upper crust markets will fare.

The NY Times noted (March 11, "Crisis Looms in Mortgages) the importance of mortgage securitization to Wall Street managers. "The issuance of mortgage-related securities, which include those backed by home-equity loans, peaked in 2003 at more than $3 trillion... Last year's issuance, reflecting as lowdown in home price appreciation, was $1.93 trillion, a slight decline from 2005... The average daily trading volume of mortgage securities issued by government agencies like Fannie Mae and Freddie Mac, for example, exceeded $250 billion last year. That's up from about $60 billion 2000."

The irony is that as income from securitization of home and commercial mortgages shrinks, Wall Street and hedge funds are pressing into newer, and more imaginative financial derivatives--mostly unregulated--thus preserving year-end bonuses indifferent to impacts on the direction of the economy.

More important to the broader economy is what happens, over this period of time, to families who invested far beyond the standard yardsticks for home ownership relative to disposable income. Call it the disappearing middle class.

So far, most of the damage has been noted in the subprime mortgage sector, where more than 50 financial institutions have closed down, including New Century Financial which was, as recently as six months ago, touted as a good buying opportunity by one of the nation’s premier investment managers.

The over-leveraged US consumer can be urged to borrow more, with lower interest rates, cutting property taxes or insurance reform in Florida and everywhere else. But the Wall Street Journal (May 4, 2007 "Boom Times for Productivity Lose Steam") reports that in the first quarter, gross domestic product grew at its slowest pace in four years and productivity has also slowed.

The Orlando Sentinel tells the story from a different angle ("Perfect storm' of debt puts Floridians in bankrupcy", May 3, 2007). "Some people are just drowning in everything, whether it's debt, job loss, divorce or some health issue," says George Janas, a credit counselor and managing partner of Orlando-based Consumer Debt Counselers... They've been living so close to the edge financially--when something big hits, it's enough to put them behind,' he said, 'And they can't catch up again.'"

Personal bankrupcy cases in the Orlando area have jumped nearly 80 percent in the first quarter, compared with the same period a year earlier, according to the Sentinel.

The growth machine that ran away with the US economy was built on real estate development, just as today's slowdown is almost entirely accounted for by the housing industry. It chewed up wetlands, the environment, and the quality of life for millions of urban residents in Florida. In addition, the growth machine was a political event that secured power and influence in local, state, and federal legislatures.

Miami is the index case for the fallout, its thoracic cavity filled to the point of bursting with liar loans, mortgage fraud, incestuous dealings between builders and lenders, and repetitive zoning decisions by local city and county commissioners controlled by big developers, lobbyists, and black hat lawyers.

Sunday's New York Times reports, “Today, as the gavel comes down on everything from vacant lots to multimillion-dollar estates, sales are still off and foreclosure and mortgage delinquency rates are rising. … In Miami, once the epicenter of giddy buying and selling, the inventory of unsold homes in April was up 58 percent over the same period last year, but real estate brokers and agents say there are some properties that are still attracting buyers. Smaller condo units in prime locations and large luxury condos are in demand, they say, especially those designed by a star architect and loaded with hotel services. Prices for homes on prime waterfront lots, including exclusive islands like Hibiscus and Sunset, which are favored by celebrities, are also stable.”

But how long can the upper crust remain stable, if the foundation built on the voracious appetite of the US consumer for too much debt starts to falter?

Stratospheric prices for New York City residential real estate depend on wealth generated in the financial sector of the economy—huge bonuses, for instance, to Wall Street managers taking a slice from securitized, collateral debt obligations that fueled the growth machine, running now on fumes.

“The glut of high-priced condos in Miami will intensify this year with some 8,000 additional units expected to be completed and 12,000 more coming online in 2008, according to Jack McCabe of McCabe Research and Consulting in Deerfield Beach, Fla.,” the New York Times reports. “To a certain degree, the upper crust hasn’t been affected,” Mr. McCabe said. “But that’s a lot of housing stock, and I question whether every multimillionaire in the world will want to buy a second or third residence in Miami.”

But that isn’t the question. The question concerns the point made in the Sunday Times business section, Does it even matter if the U.S. has a cold , “Consumer spending in the United States, which is still on the rise, accounts for an astonishing 20 percent of the global economy. David Rosenberg, an economist at Merrill Lynch, said “A U.S. recession would dramatically slow growth in China and India.”

Consumer spending hasn’t fallen for a single quarter since the fourth quarter of 1991. With so much of the US economy dependent on crater housing markets, how long can consumer spending remain unaffected?

The anxiety of over-leveraged homeowners, weighed down by for sale signs that will take years to disappear, could push the Fed to lower interest rates later this year. This time around, lower interest rates will not re-prime the growth machine pump any more than insurance or property tax reform in Florida.

We are in an economic cycle and a downdraft made all the more severe by the nation’s fiscal policies that promoted financial bubbles in the first place, bubbles now replicated in China's sizzling property markets.

The US equity exchanges, clearly, don’t care that in Florida, condo sales fell 32 percent in March and single-family existing homes were off 28 percent, compared with the same period a year ago, according to the Florida Association of Realtors. The Dow Jones Industrial Average is agnostic which country generates profits for multinationals corporations, so long as they keep coming.

It should be noted, too, that in Florida hurricane season starts June 1st.