A little more than two months ago, banking analyst Meredith Whitney said on CNBC, “Unequivocally, I see a double-dip in housing. There’s no doubt about it . . . prices are going down again.” I’d say unequivocally she was spot on. A few of the hellish headlines dragging the economy down include: Existing home sales dropped 27.2 percent from June. That is a record drop and a 15 year low. One in ten mortgage holders in America face foreclosure, according to a new report by the Mortgage Bankers Association. U.S. home prices fell 1.6 percent in the second quarter from a year earlier as record foreclosures added to the inventory of properties for sale.
Two months ago, in a post called “Double Dips Coming Everywhere,” I wrote, “Whitney warned as foreclosures and short sales go north, bank profits head south.” The news stories, just this week, confirm Whitney was right again.
A tanking housing market is not just a local issue. Recently, one news paper in Myrtle Beach, South Carolina, explains succinctly how sour real estate problems on Main Street are traveling straight to Wall Street. It said, “The role that mortgage-backed securities played in this nation’s economic meltdown is well-documented, both in congressional hearings and on the best-seller list. That meltdown has led to a landmark lawsuit filed last month by an investment group that claims banks knew the securities were worthless but, driven by greed, sold them anyway. But the Myrtle Beach area’s contribution to those toxic investments has largely been hidden in the minutiae of paperwork filed at Horry County‘s register of deeds office. As more of the homes tied to those investments go through foreclosure, however, the path from here to Wall Street is becoming clearer.” (Click here to read the entire article from The Sun News.)
Falling home prices and rising foreclosures are not the outcomes the Fed was looking for after spending more than $1.4 trillion buying mortgage debt. Now, the Fed is at is again, this time, making an announcement to spend at least $10 billion a month buying U.S. Treasuries. According to a recent Bloomberg article, it will be much more than that. The article says,“JPMorgan Chase strategists estimated the Fed will buy about $284 billion in Treasuries during the next year.” (Click here for the complete Bloomberg article.)
The Fed buying debt helps to suppress interest rates by creating demand. It is no small wonder that mortgage rates fell to the lowest level on record this week! 30-year fixed-rate mortgages averaged just 4.36 percent according to government mortgage giant Freddie Mac. Some of those cheap rates are due to low demand; but some, no doubt, are due to the Fed buying debt. These kinds of actions by the Fed are not even close to signaling the end of a bad housing market—quite the opposite.
My favorite chart on housing says it all in one picture. Billions of dollars in mortgage interest rate resets will be hitting the market from now until the fall of 2012.
This chart must scare the Fed as much as anything out there. Higher interest rates due to resetting adjustable rate mortgages will mean more defaults as people are unable to make the higher payments. The mortgage market makes up the lion’s share of the more than $600 trillion Over-The-Counter derivatives market. This is what some call dark pools of debt with few rules, guarantees, regulations and zero public market. This dark pool of debt is worthless, or worth a lot less, than the original sales price. (Some experts say the true size of the OTC derivatives market is more than $1,000 trillion.) If these securities start going sour in mass, it will be “deja vu all over again.” Another financial meltdown would occur, and there is no guarantee the Fed could stop it as it did in 2008.
According to John Williams of Shadowstats.com, the recent bad housing news is signaling what he calls an “intensifying depression.” The Fed is looking, once again, like the buyer of last resort by printing money to buy trillions in debt from Treasuries to mortgage backed securities. This is very dangerous and could spiral out of control, according to Williams. He’s been warning about this kind of scenario for a couple of years. In May, he wrote, “. . .eventually domestic and foreign balking at buying U.S. Treasuries should become widespread, with Fed becoming the buyer of last resort, monetizing that federal debt. Coincident with that likely will be heavy dumping of the U.S. dollar and dollar-denominated paper assets. Such should spike U.S. money supply and dollar-based oil prices. The pace of inflation would tend to pick up significantly in response to these circumstances, setting the stage for . . . hyperinflation.”
I think the choice is coming down to defending the dollar, or printing money to buy debt, which will stem defaults and hold interest rates down. With zero interest rates and massive money printing, it sure looks like the dollar is damned. The only question–how much will it fall?