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Mortgage Delinquencies Continue To Rise


Parsad
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Just some stunning stats on mortgage delinquencies in the four hardest hit states.  Can you say years of stagflation?  Cheers!

 

http://finance.yahoo.com/news/Mortgage-delinquencies-hit-apf-3335040403.html?x=0&sec=topStories&pos=1&asset=&ccode=

 

The statistics, which are culled from TransUnion's database of 27 million consumer records, show that mortgage delinquencies remain highest in the four states where the crisis has hit the worst.

 

-- In Nevada, the rate reached 14.5 percent, up from 7.7 percent a year ago.

 

-- In Florida, the rate was 13.3 percent, up from 7.8 percent last year.

 

-- In Arizona, the rate hit 10.4 percent, up from 5.5 percent in 2008.

 

-- In California, the rate jumped to 10.2 percent, from 5.8 percent last year.

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Why do you say that this will lead to years of Stagflation?

 

I think stagflation is a best case scenario.  I'm just of the opinion that we have record amounts of housing stock, and prices while stable, aren't about to rise any time soon.  Consumers are saving and paying down debt.  With all the stimulus being thrown, we are still finding that businesses are retrenching and trying to run more efficient operations.  Thus the bottom line for businesses will improve, but unemployment and wealth creation will continue to suffer, especially in light of all the regulatory burden that will be instituted and higher taxes going forward.  While deflation remains a risk if the stimulus is removed, I think slow growth with elevated levels of inflation from the stimulus will be around for many years.  We said a couple of letters ago, that we think businesses will prosper modestly over the next several years.  That being said, investors should be looking at individual investments, not the broad market or macroeconomic environment.  Cheers! 

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At the tail end of the 1982 recession (late 82), mortgage delinquencies wavered between 5.5 - 5.75%.  But didn't really peak until about 1.5 years after the recession was over (mid 84 -- see chart below).  And that peak was around 6%.

 

Obviously the situation is even uglier this time around .... but once again mortgage delinquencies will likely be a lagging indicator. The labour picture needs to improve before delinquencies go down ..... and in every recession, the unemployment peak has always occurred after the recession is over.

 

The aftermath of the 1982 recession also involved record amounts of housing stock, consumers were also saving and paying down their debts, businesses were also retrenching, etc, etc  ... but this is not what caused Stagflation.  Quite to the contrary ... it stomped out the Stagflation from the 70's.  I agree with possible concerns of stimulus this time around ... but maybe an even bigger concern should be energy prices.  

 

The catalyst for Stagflation in the 70's was the Oil Shock .... causing wage pressures to spiral (a necessary ingredient of Stagflation).  Right now with 10%+ unemployment, there is no immediate threat of out-of-control wage pressures.  However, once the labour market improves ..... energy supplies could once again get very tight.  The 70's supply problem was political (the middle east turning off the taps) .... the recession of 82 changed that (the taps were turned back on).  This time around those taps are more or less turned on.  Reducing demand through efficiency and development of alternative sources will be key .... but if it cannot be done within a timely manner then we are likely to again see significant wage pressures and of course Stagflation.  With unemployment at 10%+ ... wage pressures are likely a long ways off in my view.  You could start seeing some inflation costs being passed on, but at this point I'm not worried about Stagflation until the unemployment picture improves dramatically.  And a final point on Stimulus ..... I find it a much easier critter to tame than an all out energy crisis.  

 

http://4.bp.blogspot.com/_N_vrglIqnJs/RfbOK1RQ71I/AAAAAAAAAHU/KeehQbmBB-g/s400/q4%2B07%2Bdelinquency%2Brate%2Bchart.bmp

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Why do you say that this will lead to years of Stagflation?

 

.  That being said, investors should be looking at individual investments, not the broad market or macroeconomic environment.  Cheers! 

 

Have to disagree with you here...with the high level of uncertainty, volatility and currency risk, there was never a time where hedging one's investments against macro risks was more important.

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UncommonProfits, does your data for historical delinquencies cover all delinquencies and foreclosures started? The 6.25% figure from TransUnion only covers 60 days and over.

 

Loss severity might distinguish the current period delinquency rate.

http://www.housingwire.com/2009/08/24/cure-rates-plunge-among-prime-rmbs-fitch-says/

 

They make some good points ... lots of ways to extrapolate the data.  I didn’t mean to debate (or confuse) the data itself [i have edited the second paragraph of my post].  My prime points are as follows:

 

  • Mortgage delinquencies from the aftermath of 1982 did not peak until 1984 – delinquencies were a lagging indicator.  In the next couple years you have more sub-prime mortgages (issued in the 2006/2007 era?) coming up for loan resets --- expect more delinquencies.  But once again, I think a case can be made that Mortgage Delinquencies are likely to be a lagging indicator.
     
     
  • Stagflation.  Again with unemployment at 10%+ (and still rising) – I fail to see the risk. However, with the US$ falling and energy costs persisting – there is the potential of Inflation.  Moreover, I fail to see the correlation of Stagflation to morgage delinquencies.  If Stagflation like in the 70's comes about -- expect it to be tied to energy supply.
     
     
     
  • If you want/need something to worry about regarding economic recovery .... make it Energy supply.  The US does not have the luxury of ‘simply’ getting a foreign country to turn back on it’s oil taps.  The current risk is for rising energy costs to push things back into recession.  
     
     
     
  • Stagflation only becomes a problem when you see wage pressures ... and that only happens when you see rising employment.  But unemployment always rises after a recession is over ... when it peaks this time around is yet to be seen.
     
     

UCP / DD  

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There are some significant differences between the 1982 recession and now.  Mortgage rates were at an all time high during the '82 recessions with nowhere to go but down.  This along with the spending from the baby boom generation (in their peak spending years) had a significant impact on growth in the US over the past generation.  Now interest rates have nowhere to go but up and the baby boomers are switching to savings mode.  I also don't think we will see the increase in house prices like we did after the '82 recession (higher interest rates and the baby boomer generation will help with this) further limiting future consumer access to credit.  We may still see a further double dip in the economy over the next couple of years as governments cut back on spending and lay people off.  The best we can hope for is a very long 'L" shaped recovery.

 

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and the baby boomers are switching to savings mode. 

 

Don't worry, they had children.

 

 

http://en.wikipedia.org/wiki/Echo_Boomers

 

In the United States the actual "Echo Boom" was a thirteen year span between 1980 and 1995[40] when for the first time since 1964, the number of live births reached over four million. It wouldn’t be until 1985 that the live birth number would even match that of 1965 at 3.760 million. Also it should be noted that the birthrate of 1971’s 17.2% has yet to be reached according to the 2000 census. [41]

 

One analysis of American demographics locates the increase in births between 1979 and 1992. By this calculation there are 60 million members of the generation, more than three times the size of Generation X, and just shy of the 78.2 million baby boomers

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There are some significant differences between the 1982 recession and now.  Mortgage rates were at an all time high during the '82 recessions with nowhere to go but down.  This along with the spending from the baby boom generation (in their peak spending years) had a significant impact on growth in the US over the past generation.  Now interest rates have nowhere to go but up and the baby boomers are switching to savings mode.  I also don't think we will see the increase in house prices like we did after the '82 recession (higher interest rates and the baby boomer generation will help with this) further limiting future consumer access to credit.  We may still see a further double dip in the economy over the next couple of years as governments cut back on spending and lay people off.  The best we can hope for is a very long 'L" shaped recovery.

 

Raise interest rates --- and people are going to save even more.  Not only that --- but how do you pass along increased interest costs when an already strapped nation is further burdened with higher inflation costs (a lot of which will have to do with energy demand).  Inflation might just have to run it's course like it did in the 40's .... for long term bonds that meant a negative real rate of return.  

 

A little while back, I took a look at the history of negative real bond returns ..... as IMO that is the road we are headed.  The 40's was by far the most dismal decade in terms of real yields for bonds.  The yield on the average LT corporate AAA bond remained in a range of about 2.5-2.8% --- averaging about 2.7% for the decade.  Inflation averaged 5.6%.  Therefore, the negative real rate of return for LT AAA corporate bonds was about -2.9% (I can't imagine the real return on a short term government backed treasury!!).  Meanwhile, it was a very strong period economically.  Gross Domestic Product for the decade compounded at about 11.3% (or about 5.7% Real).

 

Why would our current era be anything like the 40's?  Well it was preceded by a previous long term stretch of very good times for bonds (in real yield terms)..... and also preceded the drastic economic environment of the 30's.  Now one could argue that the success of the 40's is explainable from the fact that the 30's was longer and harsher ... hence the pent up demand stronger .... and it's probably true.  But there is right now a couple years of pent up demand happening to this point from the current crisis.  

 

The real rate of return for LT bonds during the 30's stayed positive throughout (thanks to deflation). If we get deflation -- then perhaps a 40's scenario gets delayed .... but IMO once inflation perks up this is where we are headed.  Perhaps we don't see real economic activity of 5.7% --- but it might be much better than many expect (except for those holding treasuries!!).  

 

UCP / DD

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Good post, Hoodlum.  I agree.  We are seeing different environments than the 70-80 period and now.  The interest rates were much higher back then, there was a major oil shock, and inflation was rampant.  

 

In terms of the employment picture, this is anecdotal, but I've been seeing alot more jobs available in my field in the past several months.  I just checked again today, and the amount of posts from last month jumped by a staggering amount.  Almost a 50% increase in California alone.  We'll see how it pans out by next year.  I'm on the bandwagon that the economy is improving, and will get better throughout the next year.  

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I like the Job Losses in recent recessions graph. The dips are very symmetrical, which gives some insight on how much longer we need to wait before the job bleeding stops. It looks somewhat between the 8-15 month outlook. There is indeed a lot of optimism in the markets, but it doesn't mean not to buy anything. It just means to discount your IV accordingly.

 

BeerBaron

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The more I read about pre-1930 history, the more I think that what is going to happen is higher real rates in the US which will constrain growth.  The real question is will increased US productivity be able to overcome the higher real interest rates. 

 

I think the 1940s to the 1970s is not applicable because in each case you had a large portion of the world following non-competitive (communist/socialist policies) which leads to inflation as those portions of the world are not producing very efficiently or are being destroyed by war but they are still consuming driving up prices.  Since the 1980s, with many more competitive situations, inflation will be a passing phenomena associated with shocks and hopefully rare events like world wars.   

 

Packer

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"I think the 1940s to the 1970s is not applicable because in each case you had a large portion of the world following non-competitive (communist/socialist policies) which leads to inflation as those portions of the world are not producing very efficiently or are being destroyed by war but they are still consuming driving up prices."

 

There is always the chance that current conditions result in similar inefficiencies in the future. 

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Lets hope not.  I was referring the idea of planned economic models which try to allocate resources by edict versus allowing prices to allocate resources.  More to the topic of this thread, I was reviewing Tilson's book and its interesting how based upon each of the high risk resetting loan types (Alt-A, Jumbo and Option ARM) each will have peak resets from the boom origination period of 2004 - 2007 during 2009 - 2012.  This would imply higher delinquencies to come.

 

Packer 

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At the tail end of the 1982 recession (late 82), mortgage delinquencies wavered between 5.5 - 5.75%.  But didn't really peak until about 1.5 years after the recession was over (mid 84 -- see chart below).  And that peak was around 6%.

 

We're at 14% now.  Cheers!

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At the tail end of the 1982 recession (late 82), mortgage delinquencies wavered between 5.5 - 5.75%.  But didn't really peak until about 1.5 years after the recession was over (mid 84 -- see chart below).  And that peak was around 6%.

 

We're at 14% now.  Cheers!

 

I think you are missing the point.   What I don't get is how you feel this could possibly lead to years of Stagflation???  Did you perhaps mean Stagnation?  Obviously this situation is uglier than 1982 -- that is understood.  And as pointed out -- in 1982, mortgage delinquencies kept rising until well after the recession was over.  Why would it be any different this time?  Before you see these delinquencies peak --- you will have to see the unemployment rate peak (in addition employers expanding hours/wages previously cut back).   There is also a couple more years of sub-prime resets  .... no question that mortgage delinquencies go higher before they peak.

 

If 1982 did not ignite stagflation (in fact did the reverse by stomping it out) .... how possibly could this crisis which is so much worse?   I don't understand your concern with Stagflation.  Again, 'if' there were another energy crisis--- this could perhaps ignite stagflation.  However, that would Not be a result of this housing crisis.  If we are really lucky, this financial crisis 'might' temper some of the energy subsidies (OPEC + BRIC) ..... but at some point a recovery will likely lead to more demand for energy in the emerging world.  At some point I can certainly see inflation .... just don't understand your concern with Stagflation (at least in the context of this housing crisis).  Again, IMO I think we are headed to a similar situation like the 40's where Inflation will have to run it's course.  Perhaps a decade of negative real rates of return for high quality fixed yeild instruments .... something we have not experienced for about 50 years.   The 40's was a period of relentless loss of buying power --- yet a very good period economically.  At the end of the 40's equities had faired reasonably well ..... their underlying value even better.  Cash, Government Treasuries or AAA Corporate Bonds was dismal.

 

UCP / DD

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I think you are missing the point.  What I don't get is how you feel this could possibly lead to years of Stagflation???...

 

...If 1982 did not ignite stagflation (in fact did the reverse by stomping it out) .... how possibly could this crisis which is so much worse?  I don't understand your concern with Stagflation.  Again, 'if' there were another energy crisis--- this could perhaps ignite stagflation.  However, that would Not be a result of this housing crisis.  If we are really lucky, this financial crisis 'might' temper some of the energy subsidies (OPEC + BRIC) ..... but at some point a recovery will likely lead to more demand for energy in the emerging world.  At some point I can certainly see inflation .... just don't understand your concern with Stagflation (at least in the context of this housing crisis)

 

A potential energy crisis has nothing to do with it.  It's the monetary policy that is being implemented to stem the demise in housing that is the problem:

 

A purely neoclassical view of the macroeconomy rejects the idea that monetary policy can have real effects. Neoclassical macroeconomists argue that real economic quantities, like real output, employment, and unemployment, are determined by real factors only. Nominal factors like changes in the money supply only affect nominal variables like inflation. The neoclassical idea that nominal factors cannot have real effects is often called 'monetary neutrality' or also the 'classical dichotomy'.

 

Since the neoclassical viewpoint says that real phenomena like unemployment are essentially unrelated to nominal phenomena like inflation, a neoclassical economist would offer two separate explanations for 'stagnation' and 'inflation'. Neoclassical explanations of stagnation (low growth and high unemployment) include inefficient government regulations or high benefits for the unemployed that give people less incentive to look for jobs. Another neoclassical explanation of stagnation is given by real business cycle theory, in which any decrease in labour productivity makes it efficient to work less. The main neoclassical explanation of inflation is very simple: it happens when the monetary authorities increase the money supply too much.

 

In the neoclassical viewpoint, the real factors that determine output and unemployment affect the aggregate supply curve only. The nominal factors that determine inflation affect the aggregate demand curve only. When some adverse changes in real factors are shifting the aggregate supply curve left at the same time that unwise monetary policies are shifting the aggregate demand curve right, the result is stagflation.  Cheers!

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Uncommon:

- Assume a desirable US street of 100 houses where the average price is USD600,000 each; knocked down from USD1,100,000 because there are no more new jobs being created in this community, & the US is in recession.

- I live in hard-currency land & the USD has just devalued 20%. The USD600,000 price looks like USD480,000 to me; my friends & I think its cheap, as we anticipate that at some future point the US will come back. We start competing with each other to buy our US 'summer cottage', & bid USD620,000. Inflation.

- Some of the houses are < average, so the homeowner hires a contractor to fix it up prior to selling. As there are only 100 houses, the contractor only works for maybe 2-3 months. Low growth.

- If this community does not generate its own new jobs on a sustainable basis, there is no way that it can get past this low growth. Employment.

 

SD

 

 

 

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There going to be a shortage of qualified labor in the U.S starting this decade...Japan has very low unemployment and we're heading the same direction.

 

These "corrections" do wonders for efficiencies, production per working hour was rising at a 9% rate in the U.S last quarter...will probably be even higher this quarter.    The question than is...will the increase in efficiency offset the loss in income...well if 95% of the people employed last year are still employed and on average they received a 2% raise the net loss of income is only 3% overall. If a 3% drop in income results in a 10% increase in delinquencies...does than a 3% gain U.S total incomes results in a 9% drop in delinquencies? (Hell No!)

 

Unemployment does not explain a 9% rise in delinquencies.

 

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