by Addison Wiggin & Ian Mathias
- The new victim of the credit crunch: The faux rich… jumbo loans in deep trouble
- Even farmland can’t escape… Chris Mayer on the first fall in farm value in 22 years
- Tax receipts suffer record crash… Addison Wiggin on the ever-closer financial reckoning day
- Plus, Alan Knuckman’s getting bullish on this unloved resource
Now that the subprime, low-income crowd has taken their lashings, there’s a new Great Recession victim — the faux rich.
Jumbo mortgages — home loans exceeding $417,000 — now have the fastest rising default rates of any mortgage class. According to recent data from First American CoreLogic, 7.4% of these larger-than-life mortgages are currently in some form of default, nearly three times the rate at the start of 2008.
As you can see, when stocks tanked in late 2008, the market for super-sized mortgage loans followed suit:
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(Heh, we love the “exclude option ARMs” note… no need to worry about them!)
Is there any reason for this trend to improve? The Obama administration has done plenty to help out their beloved middle-class homeowner… like the $8,000 first-time homebuyer credit, artificially low FHA mortgage rates and several mortgage modification programs. But those programs don’t apply to jumbo loans. Even Fannie and Freddie, masters of mortgage speculation, will no longer stand behind jumbo mortgages.
And the market is blowing jumbo loans a stiff head wind, too. Mortgage rates are roughly 100 points higher for jumbos and inventory — geesh — this is pretty remarkable:
So… an accelerating rate of default; a government cold shoulder; higher-than-typical lending rates; and a huge, growing glut of supply? Could get interesting.
Not even good ’ol-fashioned American farmland can escape the housing bust. U.S. farmland has fallen in value for the first time in 22 years, the USDA says today. Farmland averaged $2,100 an acre at the end of 2008, they claim, down 3.2% from 2007. That’s the first drop since 1987. But given the 19% drop in urban home prices over the same period, farms still seem like a fine store of wealth.
“U.S. farmland values got ahead of themselves,” says Chris Mayer, “but if I owned farmland, I wouldn’t worry. Also, American farmland is very expensive — deservedly so, in most cases. There are cheaper options overseas. Heck, north of the border, you can buy Saskatchewan farmland, which is still among the best bargains in the world. (I wrote about this in Mayer’s Special Situations, and I told readers how they could participate. Click here for the details.)
“I think farmland will be one of the best performing asset classes over the next 10 years. Maybe not the U.S. variety, but there are pockets of cheap farmland. Put that together with a rising demand for food and a falling supply of arable land and you’ve got a winner.”
Back in Washington, the jokers running up the federal budget deficit still have their heads in the clouds. As they debate on how many billions to spend on health care reform, this little detail falls on deaf ears:
Federal tax receipts are on track to fall 18% this fiscal year. That would be the worst year for government tax revenue since 1932… just as our annual budget deficit crests a record $1.8 trillion.
“It was bad enough when the Feds were spending more than they took in during the bubble years,” writes our executive publisher Addison Wiggin (still recovering from Vancouver, we think). “When are they going to realize that their trillion-dollar deficits can’t possibly get funded?
What a mess. Not like it’s a surprise, though. “Our tax system is already inadequate to support the promises made by the government,” understates our friend Gene Steuerle, vice president at the Peterson Foundation, to The Associated Press, “this just adds to the problem.”
”They’ll be left with the one recourse followed by all bankrupt governments in the end,” Addison adds, “debase the currency as fast as possible. Unfortunately, this morning, that day of reckoning just rumbled a little closer.”
Two new editions of Addison and Bill Bonner’s books on the subject just hit the shelves this week. Be sure to check out Financial Reckoning Day Fallout and The New Empire of Debt. And spread the word.
More fuel for the budget inferno: “We’ll pass ‘cash for clunkers,’” promised Senate Majority Leader Harry Reid today. Reid is referring to the $2 billion extension of the program, which will likely be made official before the Senate goes on vacation Friday.
The private sector shed another 371,000 jobs in July, ADP reports today. (That’ll do wonders for those tax revenues, eh?) That’s a bit higher than the 350,000 the Street had expected, and doesn’t bode well for Friday’s jobs report from Uncle Sam.
Of course, the ADP is consistently inconsistent at predicting the government jobs number (which has plenty of statistical oddities of its own). But recall last month’s ADP/BLS combo: ADP said the economy lost 473,000 jobs in June, roughly 80,000 more than expected. Then the government reported 467,000 lost jobs — also more than expected, and surprisingly close to ADP’s guess.
The U.S. service sector shrank for the 10th consecutive month in July, says the ISM with today’s other major data point. Their nonmanufactuing index fell to 46.4 in July, from 47 in June, suggesting that not only did the service economy contract (scoring below 50), but it shrank at a faster pace. The Street was hoping for a bump up to 48.
Thus the stock market is off to a timid start today. The Dow and S&P 500 opened down about 0.3%.
That’s taking some wind out of oil’s sails, too. Light sweet crude is down a buck today, to $70 a barrel.
“A neglected sector that has gotten my attention is natural gas,” says our resource trader Alan Knuckman. “The last few months have shown resurgence in crude with the global economy stabilizing and demand picking up. Crude has more than doubled from the lows, with natgas lagging far behind.
“For me, the risk on natgas is on the upside. In other words, I don’t want to risk missing a big upturn. Prices have already fallen from $12 down to under $4 — which is a $40,000 move per futures contract. For my taste, the upside potential far outweighs the chance of the downtrend continuing much lower. Gas cannot go to zero. It will always have some value, and many fundamentals can change the present landscape of low, low prices.
“Thankfully, very few ‘sheeple’ are grazing on the green, green grass from natural gas demand. Significant supplies are used to produce the fertilizer necessary to feed the world. Natgas also provides much of the electricity to cool our cities in the dog days of summer.
“Plus, the hurricane season is always a wild card that can add risk premium. Any weather disruption can spark an explosion in prices. Katrina and Rita sent prices to all-time highs just a few short years ago. You don’t go shopping for an umbrella after the rain starts.
“Think of your reaction to possible oil plays back in February when no bottom was in sight — that’s how natgas feels now. Being ahead of the energy curve is the place I want to be. When things don’t develop as planned, the losses at lower levels are manageable. Probability is on our side that eventually natgas prices will move up.”
If you aim to trade this trend, you gotta check out Alan’s Resource Trader Alert before midnight tonight. We’re offering a hefty discount on RTA, one of our most profitable high-end trading services… take advantage here before it’s back to full price.
After falling to a 2009 low Monday, the dollar index has been trading flat as a pancake. It’s at 77.7 as we write, just 2/10ths of a point above its yearly low.
That means gold is keeping to a tight range as well. The spot price has been bouncing between $955-970 all week.
“Your reader who suggests the burning of repossessed homes to assist the real estate market has overlooked a truly wonderful opportunity,” writes a reader in response to yesterday’s inbox. We’ve gotten a wave of sarcastic, parable of the broken window-style responses after word got out that dealers are being forced to destroy “cash for clunker” engines.
“That is, the many unemployed workers could be hired by the government at a far lower cost than bailing out bankers to carefully disassemble such houses, turning the whole structure into useable materials that could be used to erect new homes later when things improve. This would also be a much ‘greener’ option than burning, which could seriously impact the carbon problem.”
“My wife is hot on the idea of trading in our 1992 BMW on this program,” writes another reader. “Yes, it’s old and has some rust, but it runs like a top and never fails to start, after 165,000 miles.
“I started calling around all the Jeep dealers in Detroit, and no one has what she wants. They’re all sold out — Compass, Liberty, Patriot, all sold out. Sure, she could get a Sebring, but that’s not her choice at all. While calling around, a car salesman told me this is a total bust for them. He tells me they are fielding calls all day long telling every customer they are out of this model and that model. He told me Chrysler has been shut down basically for two months, so the demand that the ‘cash for clunkers’ created can’t be replenished.
“He went on to say Ford must be loving this, as it is the only American car company still in full production. So guess who I called today? You got it: My Ford dealer, and it is more than happy to get me in a car today.
“As a final note, a Chrysler salesman said if Chrysler were in full production, he would be actually working with a product to sell, instead of doing all the work with no product.”
Cheers,
Ian Mathias
The 5 Min. Forecast
P.S. Last call for a hefty discount on Resource Trader Alert. All week, we’ve been showing you how editor Alan Knuckman has been making millionaires of his readers with a simple, no-brainer trading strategy. This is your last chance to join his ranks on the cheap… after tonight, it’s back to full price. Grab the deal here.