by Addison Wiggin & Ian Mathias
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Is “shadow inventory” about to exit the shadows? Ominous macro and micro numbers…
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HAMP, ha, ha, ha! Permanent modifications leave homeowners with 60 cents of debt service for every pretax dollar of income
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World’s biggest oil consumer warns of massive oil shortages by 2015
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An “alternative currency”… gold outflanks euro, pound, yen, even a rising dollar
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Readers plead for a “FairTax”… our reservations, below
We begin this morning with a renewed raison d’etre.
Why? Well, because our morning stroll through the newswires revealed a columnist from Bloomberg who sees a “sign of growing confidence that sales will stabilize.” Likewise, someone at Reuters feels “hope the housing market recovery remain[s] on course.”
The source of sunny optimism for both stories is the latest report on housing starts from the Commerce Department, the same folks who bring you growing GDP numbers. Builders broke ground and filed for permits at the fastest pace since the fall of 2008, we’re told.
Shall we ignore the fact that we’re only now back to levels seen just after the Lehman implosion, a time when credit markets had seized up? How about the fact the increase from February to March was 1.6% — which is about the least you’d expect given a meteorological phenomenon especially conducive to homebuilding known as “spring.”
For an anecdotal look at what’s really happening, we reach into the mailbag. Our reader is both a CPA and a realtor in the Dallas area, where “a high percentage of homes for sale are short sales contingent on bank approval (sometimes other realtors use euphemisms such as ‘pre-foreclosure,’ but the status is the same).”
“My guess,” he continues, “is half the homes that are listed in the MLS banks have started the foreclosure process on these homes but appear to be taking no action to make it happen.”
Ah yes, the “shadow inventory” phenomenon. “It is shocking,” our reader continues, “to see very reasonable market offers that are simply refused by the banks after weeks of agonizing waiting. Are the banks stalling the recognition of losses on loans that should be in REO? The net result: There are a great number of homes for sale that are not on the market for all practical purposes.
“What would happen to prices if all these homes were really put up for sale at market values?”
Great question. And as it happens, we may not have long to find out.
Foreclosures set a record in the first quarter of this year, according to RealtyTrac. By that, we mean actual foreclosures, where the sheriff shows up to evict the former homeowner, the bank takes possession of the property for auction and the bank has to write down the value of said property.
The total is 35% higher than a year ago, and it puts the nation on track for 1 million repossessions this year.
Micro-level numbers confirm this “real foreclosure” trend. The San Diego-area newspaper North County Times just crunched local foreclosure data and discovered the following: Bank of America sent letters last month to 621 homeowners, notifying them that their homes could be sold at auction in as little as three weeks. That compares with just 31 such notices in March of last year.
This is the same Bank of America that has 250,000 mortgage customers nationwide who haven’t paid a dime in more than a year. Maybe they should notify relatives they might be moving in soon, and on short notice. As one agent told the North County Times, "My Bank of America asset manager told me we'd really start to get hit with [foreclosure] inventory in mid-May to June."
Should make “prime selling season” interesting, eh?
Still, don’t get the idea the government and the banks are finally ready to clear the rot and let housing prices reach a bottom. So far, we’ve been talking about inventory that’s been festering for a year, or two years, or longer.
There’s also the distressed mortgage paper of more recent vintage, the stuff that now sits in housing purgatory under our good friend HAMP, the Home Affordable Modification Program.
Yesterday, we brought you the latest numbers from that exercise in futility. But we had time to hit only the highlights. After digging into Treasury’s report more in depth, we turned green.
Let’s sum up the relevant numbers, highest to lowest:
• Number of homeowners in default or foreclosure: 7 million
• Number of homeowners the White House hopes to help with HAMP: 4 million
• Number of homeowners who’ve gotten trial modifications under HAMP: 1.4 million
• Number of homeowners who’ve gotten permanent modifications: 230,801
So that’s 3.3% of homeowners in trouble that HAMP is actually helping.
Oh, but wait.
Once a homeowner is approved for permanent modification, what kind of debt load is he or she left with? You know, that might lend a clue to whether the borrower can keep up the new lower payments.
Traditional lending standards — those in place before the mortgage market took leave of its senses — dictated a mortgage payment should be no more than 28% of gross income, and the overall debt load (once you include credit cards, car payments, etc.) should be no more than 36%.
The typical homeowner who got a permanent modification now has a mortgage payment equal to 31% of gross income. Not too out of line with reason. But once you throw in all the other debt, the “back-end ratio,” as they say, what do we have?
Drumroll, please…
61.3%.
So that’s three dollars out of every five — before taxes! — servicing debt. Doesn’t leave a whole lot for groceries, gas or anything else.
Before they were approved for their permanent modification, their total debt load amounted to 75.7%. That’s 1.2 million people who are now emerging from purgatory and headed to Hades. Sooner or later, anyway. They have yet to receive their final notices.
We may “hope the housing market recovery remains on course.” But as our mothers told us, we “hope for the best,” but prepare for reality. We may be comfortably in the minority, but we believe housing and commercial real estate are about to get another shellacking and have arrayed our investment recommendations accordingly: Please review them here.
(On the other hand, we may just be hysterical. We need a front to continue our work producing snuff films for entitlement programs, so we’re throwing the housing market in there for good measure.)
A housing footnote: Mark Zandi from Moody’s Economy.com shares our suspicion: Consumers skipping out on their mortgages are driving a degree of consumer spending.
Says Zandi: “With some 6 million homeowners not making mortgage payments (some loans are in trial mod programs and paying something, but still in delinquency or default status), this is probably freeing up roughly $8 billion in cash each month. Assuming this cash is spent (not too bad an assumption), it amounts to nearly 1% of consumer spending.”
We wouldn’t be surprised if the percentage is higher. But we’ll take our corroboration where we find it.
U.S. stocks opened down this morning, thanks to an outlook from Google that indicated a coming profit squeeze. But then they turned up after the Reuters-University of Michigan consumer confidence numbers. They were unchanged from February to March. Hooray. No news apparently IS good news.
Breaking News Update: So much for that. The SEC has charged Goldman Sachs with fraud. The Dow is back below 11,000 and the S&P has broken 1200. We’ll unpack this story and what it means on Monday.
Gold is clinging for dear life to the $1,150 mark. And it may be headed to its first down week in a month.
But the longer-term trend remains in place, says U.S. Global Research chief and perennial Vancouver favorite Frank Holmes. “We continue to be encouraged by the price action of gold in the face of a strengthening U.S. dollar,” Frank says, confirming a trend we’ve been tracking since February.
“Typically, gold and the dollar move in opposite directions, but so far this year, gold is up more than 6%, reaching a year-to-date high on Monday. At the same time, the dollar has appreciated about 4%.
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“Gold has also been appreciating against other major currencies in the developed world, as the chart above shows. The eurozone, Britain and Japan are all struggling with rising fiscal deficits and the aftereffects of the global financial crisis.
“In our view, this gold breakout against the world’s primary paper currencies highlights gold’s growing allure as a store of value against further currency debasement caused by governments spending with little restraint. Gold appears to be reassuming its role as an alternative currency unencumbered by political liabilities.”
Frank will be back for this year’s Agora Financial Investment Symposium, along with a host of others, including Marc Faber, Bill Bonner, and Doug Casey. We’ve convinced our Symposium director Bruce Robertson to keep early bird registration open. But we’ve also gotten on his case about making the symposium profitable… which is always a dicey proposition, given its customary opulence. So while we’ve convinced him to keep the discounts open for now… we can’t guarantee he’ll agree next week to do the same. Grab your discount today. Reserve members still attend free.
A leading research institute is warning of crippling oil shortages within the next five years. They have a vested interest in getting the projection right… as they’re an arm of the world’s biggest oil consumer, the U.S. military.
"By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day," says the report from the U.S. Joint Forces Command.
The resulting economic slowdown “would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse and perhaps have serious economic impact on both China and India."
And this scenario doesn’t even take into account more immediate factors — also directly affecting the U.S. military — that could drive oil from $85 to $220 in no time. If you haven’t read that side of the story yet, better do so now.
“How about a progressive national sales tax to replace ALL government taxes?” a reader asks, since we happened to be discussing taxes on April 15. “Say a 1% tax on items costing up to $200, 2% on each dollar cost from $201-500, etc. Except food and medicine. Customize the top end to make it flexible enough to balance the budget, say 15% on each dollar of cost over $10,000. Make it law that the posted/advertised price is the total price, including all taxes.
“This would promote savings, help pay down the deficit, get all citizens in the game, make shopping easier, reverse our national apathy, create a large, well-trained available talent pool of accountants and tax experts and make Europe envious.”
The 5: We’re perpetually baffled by the idea that a sales tax — or a value-added tax, as some in Washington are peddling — would “promote savings.” Discouraging consumption is not the same as promoting savings. Savings is what the nation will need to climb out of the mess it’s in. (There we go again being hysterical.)
“Regarding the talk on a ‘flat tax’,” a reader writes, “there should be only one kind of tax — the FairTax — and it is on consumer spending. Do not penalize a worker's income, a corporation's profits, a saver's interest, an heir's inheritance or an investor's dividends and capital gains.
“Abolish the IRS, Social Security and Medicare taxes and keep what you earned.” The reader urges you to see "FairTax" on Wikipedia or read The FairTax Book for more info.
The 5: Abolish the IRS, hell yeah. But better hope politicians repeal the 16th Amendment authorizing an income tax first. Otherwise, you’d be asking for trouble. You’d get the bull… and the horns.
“I have some OTC [stocks], but have to watch them and wonder if I should sell, even as they go up. And watch some real winners rise, but restrain from buying because of fear of a crash later this summer.
“What's the thing to do here: Stay out of the market, or assume a crash in 2010 will be milder and go ahead and buy a few more OTC's I want?”
The 5: You couldn’t have timed your question any better. Next Tuesday at 4 p.m., our microcap specialist Greg Guenthner will answer reader questions just like yours in an exclusive Webcast. No charge, no obligation. You can sign up for Greg’s broadcast for free right here.
Enjoy your weekend,
Addison Wiggin
The 5 Min. Forecast
P.S. Alan Knuckman just recorded a short video that explains how Resource Trader Alert delivers outsize gains with limited risk too. Learn how you can take advantage of what he calls “the best trading year I’ve seen in my career,” right here.
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We just got an urgent e-mail from our friend Greg Stemm, the proprietor of Odyssey Marine, about a pending government crackdown on coin collectors. You may recall we’re making a new documentary film about Odyssey’s fight with the Spanish government over $500 million worth of gold and silver coins it found off the coast of Gibraltar. He finds himself at odds with the U.S. Justice Department over the issue, too.
This morning, Greg forwarded news — and a plea — on an impending ruling from rare coin industry veteran Scott Schechter: “The U.S. government is about to decide whether certain cultural property from Italy should be restricted from entry into the U.S. unless accompanied by Italian export permits. This includes coins and, if it passes, will have a devastating effect on the ancient coin market in the U.S.”
The practical effect of this is that an ancient Roman coin found in Britain, identical to one found in Italy, would have to have the Italian government’s blessing if you wanted to buy it and keep it for yourself.
The regulation is not final; the public comment period is under way now.
“Please voice your opposition to these import restrictions,” Mr. Schechter writes. “The best way to comment is by fax, and this is VERY easily done. Simply go to this Web site. You will be guided through a brief process that sends a free fax to the State Department registering your views.”