The U.S. housing market may well have been straying through a clearing in the woods, and will soon reach the dark, dense forest, as experts are expecting 2012 to be a monumental year for foreclosures. Five years into the housing crisis, Americans have had to deal with the sub-prime mortgage crisis, robo-signing fraud, foreclosure fraud, refinancing fraud, and fraud on a systemic level ad nauseum with no more than a slap on the wrist given to offenders, while they have seen housing prices drop precipitously without a bottom in clear sight. So it is hard to imagine that the worst may yet be to come. Signs that the shadow inventory, property in forbearance but not yet marked to market on bank balance sheets, will flood the housing market are particularly ominous.

At Reuters, Nick Carey asserts that the faint glimmer of hope for housing market vitals will be extinguished by coming foreclosures. Pundits pushing the resurgence of the U.S. housing market may very well have to explain why the complete opposite is on the horizon.

Five major banks eventually struck that settlement with 49 U.S. states in February. Signs are growing the pace of foreclosures is picking up again, something housing experts predict will again weigh on home prices before any sustained recovery can occur.

Mortgage servicing provider Lender Processing Services reported in early March that U.S. foreclosure starts jumped 28 percent in January.

More conclusive national data is not yet available. But watchdog group, which helped uncover the “robo-signing” scandal, says it has turned up evidence of a large rise in new foreclosures between March 1 and 24 by three big banks in Palm Beach County in Florida, one of the states hit hardest by the housing crash

Although foreclosure starts were 50 percent or more lower than for the same period in 2010, those begun by Deutsche Bank were up 47 percent from 2011. Those of Wells Fargo’s rose 68 percent and Bank of America’s, including BAC Home Loans Servicing, jumped nearly seven-fold — 251 starts versus 37 in the same period in 2011. Bank of America said it does not comment on data provided by other sources. Wells Fargo and Deutsche Bank did not comment.

Housing experts say localized warning signs of a new wave of foreclosure are likely to be replicated across much of the United States.

Online foreclosure marketplace RealtyTrac estimated that while foreclosures dropped slightly nationwide in February from January and from February 2011, they rose in 21 states and jumped sharply in cities like Tampa (64 percent), Chicago (43 percent) and Miami (53 percent).

RealtyTrac CEO Brandon Moore said the “numbers point to a gradually rising foreclosure tide as some of the barriers that have been holding back foreclosures are removed.”

One big difference to the early years of the housing crisis, which was dominated by Americans saddled with the most toxic subprime products — with high interest rates where banks asked for no money down or no proof of income — is that today it’s mostly Americans with ordinary mortgages whose ability to meet payment have been hit by the hard economic times.

“The subprime stuff is long gone,” said Michael Redman, founder of “Now the folks being affected are hardworking, everyday Americans struggling because of the economy.”

One of the most important aspects of the new foreclosure wave is the last bit, that it has morphed from the sub-prime crisis of 2006. The context for this new kind of crisis are the global recessionary pressures that are forcing many, many Americans, to fall behind on their mortgages because of under or unemployment. At the NY Fed’s Liberty Street Economics Blog, Joshua Abel and Joseph Tracy delve into today’s foreclosures. Sub-prime mortgage loans are no longer the big problem, instead the country’s economic woes have led to prime mortgage defaults.

Abel and Tracy explore the data behind home prices and unemployment to understand the underpinnings of the changing conditions:

They explain that surveying the two graphs above gives a good sense of how economic conditions turned originally reliable homeowners with 30-year fixed rate mortgages into defaulters. Housing prices here are based on the percent change from when the mortgage was signed to when it was foreclosed upon, averaged by year and quarter. The chart above demonstrates that until 2008, local housing prices were still rising. Both unemployment started to rise and housing prices started to fall  at very close times. So the non-prime foreclosures of 2006 and 2007 happened during periods of falling local unemployment rates and rising local housing prices. The 20% decrease in housing prices and mid-single digit unemployment increases reflect on how prime mortgage foreclosures became the majority of the share since 2009. It is no longer just about irresponsible loans to borrowers financially unfit for those loans, but previously stable mortgages are being affected by local unemployment and housing prices.

The authors also correlate the evolution by examining the time before a mortgage went delinquent. They looked at the 25th, 50th, and 75th percentiles of time before missed payments. They also look at the quartile percentiles of FICO scores too, which demonstrate mortgage owners with good credit ratings are being driven to foreclosure and those ratings have plateaued since mid 2009.

Initially, when most foreclosure starts were associated with nonprime mortgages, 25 percent of the borrowers had been in the house fewer than eight months before falling behind on their payments, and 50 percent fewer than eighteen months. However, more recently, as the composition of foreclosures shifted to prime borrowers, 75 percent had been in the house more than three years, and 50 percent more than four years. This suggests that as the recession hit, foreclosures shifted from borrowers who often could not afford their houses to borrowers who had demonstrated that they could (by virtue of making payment for several years) but began to fall behind on their payments when they were hit by the dual crises of house price declines and high unemployment.

This wave of foreclosures hits hard to the core of the housing market and the U.S. economy as a whole. 30 year fixed rate mortgages from reliable borrowers have been turning up with negative equity. The trend rose from 2006 and plateaued in 2009, staying near half the share of foreclosure starts. Policymakers need to tackle the current foreclosure problem as it should tackle the economy, with a robust movement towards lowering unemployment and hoping a construction boom will drive the fundamentals of our economy. Keeping the prime borrowers in their homes may also be of priority via large scale refinancing. The Federal Reserve’s current zero interest rate policy is supposed to be a boon for the housing market, but that impetus just has not been effective. Even with mortgage rates at historically low levels, prospective buyers remain weary. When interest rates inevitably rise, all hell may break loose. Perhaps the rapidly rising cost of renting will drive people to starter homes. But maybe the previously foreclosed houses, now being turned into rentals, will keep prices low and the construction of new homes depressed. The market still needs to clear too, and with the foreclosure hiatus seemingly over, courtesy of a crooked settlement deal, as bad as this little clearing has been,  the dark forest is extremely foreboding.

Southern California real estate expert G.U. Krueger cites USC’s Casden Multifamily Forecast’s prediction that rental growth will continue for the next two years in the area. Krueger explains that the rising rents may push prospective renters into homeownership because of the cost. The story varies widely nationally, but certain areas may The falling number of foreclosures, which in March, as per RealtyTrac, hit a five year low, is keeping distressed homes off the market and further propping up the rental market. But the boom will eventually come, and when the distressed property market gets flooded with foreclosures, the rental market will see its bull run end. Brandon Moore, CEO of RealtyTrac gives his view of the March numbers;

“The low foreclosure numbers in the first quarter are not an indication that the massive reservoir of distressed properties built up over the past few years has somehow miraculously evaporated. There are hairline cracks in the dam, evident in the sizable foreclosure activity increases in judicial foreclosure states over the past several months, along with an increase in foreclosure starts in many judicial and non-judicial states in March. The dam may not burst in the next 30 to 45 days, but it will eventually burst, and everyone downstream should be prepared for that to happen — both in terms of new foreclosure activity and new short sale activity.”

The impending rash of foreclosures must be dealt with though, and eventually the housing market will stabilize to a degree. Perhaps investors will see many opportunities to convert foreclosures into rentals and drive down the price in the rental market. Meanwhile, even though housing prices will fall for the foreseeable future, once the distressed market gets bought up and rehabilitated, neighborhoods once damaged by foreclosures can see elevated prices and rejuvenation.

I suspect the mercurial nature of our economic outlook has a pronounced effect on how prime mortgages may just become an even larger share of foreclosures. Employees can hardly ever be certain they will be, not even at the same job, but employed ten years down the road. Locking into a 30-year mortgage is just something not many people have the privilege of knowing they will be able to pay off. A stable income is less and less the norm for a large swath of the American labor force. This uncertainty for much of the mid to tail end of the millennial generation may create an entirely different and unknown landscape for the U.S. housing market.


Via Al Jazeera;

The United Nations Security Council has adopted a statement backing joint UN-Arab League envoy Kofi Annan’s plan for ending the year-long violence in Syria, as a government crackdown on opposition strongholds has continued.

The statement adopted on Wednesday expressed the council’s “full support” for Annan’s efforts, and called upon both the government and the opposition “to work in good faith with the envoy towards a peaceful settlement of the Syrian crisis” and to fully implement his six-point proposal.

The statement threatened “further steps” if the government failed to comply with the proposal.

Anan’s plan calls for a ceasefire, specifically a “daily two hour humanitarian pause,” to be established, as well as for both sides to engage in political dialogue and to allow humanitarian aid agencies access to areas where citizens have been caught up in an increasingly militarised conflict.

It also calls for those detained during a government crackdown on protests to be released, and for restrictions on the freedom of movement of foreign journalists to be removed.

The 15-member UNSC, including China and Russia who have vetoed previous moves, called on the Syrian government to commit to working with “an inclusive Syrian-led political process to address the legitimate aspirations and concerns of the Syrian people”.

Speaking in Berlin, Sergei Lavrov, the Russian foreign minister, said that the text of the statement “reflects the reality in Syria and supports Annan’s aims. We support it fully”.

“The document does not contain any ultimatums, threats or assertions about who is guilty,” he said,

Earlier, Lavrov told radio station Kommersant-FM that Russia believed that “the Syrian leadership reacted wrongly to the first appearance of peaceful protests and … is making very many mistakes”.

Lavrov also spoke of a “future transition” period for Syria but continued to reject calls from most Western and Arab states for Assad to resign, saying this was “unrealistic”

How will this affect the opposition’s willingness to reach a diplomatic end to the warfare? Opposition leaders have already rebuked Kofi Annan’s call for diplomacy, a plan which seems foolish in the face of the more than ten thousand dead Syrian citizens. So will this give nothing more than token aid to distressed citizens, and perhaps inflame the international community if there are no ceasefires, or broken ceasefires, that kill U.N. workers attempting to get aid into bombarded areas. Will a ceasefire be broken by the opposition, prompting outrage against them? Or will this be a watershed moment, as Russia and China drop their previous veto, that manufactures a peace between warring parties? Perhaps “further steps” will be necessary against the recalcitrant Assad regime.

More via Andrew Sullivan;

Neuroscientist Mark Changizi explains how e-books, like much of the web, lack spatial navigability, which can be key to remembering information:

We don’t navigate the web so much as beam hither and thither within it. Can’t find your way to the ticket site? No matter, you can Google-beam directly there by typing in the name. And not only is the web not spatial or navigable, but the new reading experiences within documents have lost their spatial sense as well. … Need to jump to that part of the book where they discussed cliff jumping? You will get no help from the local topography, but you can beam yourself directly there via a within-document text search. 

Screen size also matters:

[Jakob Nielsen, a web “usability” expert,] says that studies show that smaller screens also make material less memorable. “The bigger the screen, the more people can remember and the smaller, the less they can remember,” he says. “The most dramatic example is reading from mobile phones. [You] lose almost all context.”

I recently too wondered about the effects that E-book reading has on one’s ability to recall. I have recently read a few books on my 4.5 inch phone. The reading itself was fine and the environment not straining or difficult, but I have felt a measurably drastic loss of context. In my personal experience, the actual spatial dimensions of different pages of a book seem very important to memorability. It is as if having an physical thing helps create stops in your mind where you can remember the end of a chapter, or the timeline of the plot itself. I can remember the plot well enough, as it wholly engrossing, but that missing “local topography” makes all the difference in terms of being able to piece together what happened around a specific plot point. It is no wonder reading and jotting down notes in the margins is held highly in esteem as the best way of fully imbibing in a text by many famous writers. My lamentation is that the books I have read on my phone were absolutely wonderful; and I now have to resolve to go back and read them in their physical form one day soon. It is too easy to download a book off the internet and start reading it right then and there. Perhaps we will come to a point where physical book and e-book sales will meet at equilibrium due to the contextual dearth e-books create. I wonder what this says about our culture as a whole; that we will increasingly become myopic, or that there will be a drive against the proliferation of material on screens. Will this affect children now who are learning with tablets and iPads?

Via Andrew Sullivan;

Nona Willis Aronowitz explores restaurant work:

Nearly half of people ages 16 to 29 do not have a job. A quarter of those who do work in hospitality—travel, leisure, and, of course, food service. A study of 4 million Facebook profiles found that, after the military, the top four employers listed by twentysomethings were Walmart, Starbucks, Target, and Best Buy. The restaurant industry in particular is booming; one in 10 employed Americans now work in food service—9.6 million of us. Those numbers are growing each year. Even though more and more laid-off, middle-aged Americans are turning to restaurant jobs, as of 2010 about two-thirds of food service workers are still under age 35. And the industry’s workforce is more educated than it was just 10 years ago. In major U.S. cities, about 9 percent more food service workers have been to college.  

Matt Yglesias comments on Willis Aronowitz’s article as well:

If owning a Quiznos franchise becomes systematically more profitable than owning a Subway franchise due to some labor arrangement, then what will happen is Quiznos franchises will proliferate across the land as Subway withers and dies. Meanwhile, one of the main reasons why the food service sector has become our “employer of last resort” in the United States is precisely because the jobs are bad and the wages are low. Firms have not yet invested a lot of time and energy in figuring out ways to get by with fewer fast food workers, but in France I saw that McDonalds outlets had installed touchscreen kiosks where you could place your order without needing to visit a cashier. American manufacturers got remarkably good over the decades at producing more stuff with fewer workers, precisely because one man’s good job is another man’s employee I’d like to find a way to lay off. 

The more promising thing about food service is that some of the same characteristics that make it a poor venue for large-scale labor organizing—relatively low startup costs and relatively few barriers to entry—make it feasible to experiment with new models. You can start a brewpub coop or take your talents on the road with a food truck or leverage a reality TV appearance to escape wage slavery and become a local entrepreneur. But all this kind of thing requires some modicum of skills—real cooking ability or understanding of business principles or both. It’s important for the country to start taking food service seriously as an industry and major element of the labor market, because the ongoing rise of e-commerce is going to mean that more and more of our commercial space will be dedicated one way or another to these things.

We all know that as globalization progresses, the more developed nations will have less in the way of a manufacturing sector, unless wages rise so low as to keep them globally competitive. But that really does not seem possible as there will be a bottom for the foreseeable future; rising wages in China will force movement to Bangladesh and India. Focusing on the service sector, especially the food service industry seems prudent. Those are the types of jobs that will not diminish in number due to offshoring. There’s no reason we cannot be seen as a culinary destination, and although there surely have been individual attempts to try, the current demographics can spur a new push. Maybe skilled workers who have been are are getting laid off will put their mental capital, education, and experience, into innovations for food service. With luck, there will be some successful entrepreneurial endeavors out of these young and middle aged workers who now make up the bulk of the hospitality industry.

Yglesias explores the factors behind Willis Aronowitz’s discussion of organized labor too. He credits industries where windfall profits which create an incentive for workers to organize and negotiate a share of the higher up’s profit to be a driving criterion. I would say that a tighter labor market is more of a factor than just windfall profits. There needs to be a highly competitive labor market to spur workers to organize. Windfall profits are probably more of a correlated offshoot though.

At Yglesias’ Moneybox blog:

Lately I’ve seen a lot of chatter about the idea that maybe the mistakes aren’t as terrible as they seem because actually the CBO’s estimates of “potential output” are wrong and all this suffering is due to a generalized productivity collapse rather than policy errors.

I thought the idea could be usefully explored by examining the specific details of the decline through the lense of the old GDP = C + G + I + NX framework, while separating residential investment from fixed investment since housing is obviously an important part of the story of the recession. What we see is that in 2007, Personal Consumption Expenditures were 71% of Potential GDP, Government Purchases were 19%, Residential Investment was 4%, and Non-Residential Investment was 12% and then you knock off -5% for imports and it all adds up to 100%. Since that time, a total output gap equal to 6% of potential GDP has opened up. That’s composed of a 4 percentage point decline in PCE relative to potential, a 1 percentage point decline in government purchases, a 2 percentage point decline in residential investment, and a 2 percentage point decline in non-residential investment but it’s all offset by a 2 percent increase in net exports. In other words, in 2007 when housing had already decline a lot we were operating at CBO-estimated potential. Since then we’ve seen a further decline in residential activity that’s been precisely offset by an increase in net exports. But then over and above that we’ve seen a large decline in personal consumption expenditures, and small declines in government purchases and non-residential investment.

At Project Syndicate, Raghuram Rajan explores the correlation of the declining pre-Great Contraction U.S. household savings rate and income inequality.

Bertrand and Morse find that in the years before the crisis, in areas (usually states) where consumption was high among households in the top fifth of the income distribution, household consumption was high at lower income levels as well. After ruling out a number of possible explanations, they concluded that poorer households imitated the consumption patterns of richer households in their area.

Consistent with the idea that households at lower income levels were “keeping up with the Vanderbilts,” the non-rich (but not the really poor) living near high-spending wealthy consumers tended to spend much more on items that richer households usually consumed, such as jewelry, beauty and fitness, and domestic services. Indeed, many borrowed to finance their spending, with the result that the proportion of poorer households in financial distress or filing for bankruptcy was significantly higher in areas where the rich earned (and spent) more. Were it not for such imitative consumption, non-rich households would have saved, on average, more than $800 annually in recent years.

This is one of the first detailed studies of the adverse effects of income inequality that I have seen. It goes beyond the headline-grabbing “1%” debate to show that even the everyday inequality that most Americans face – between the incomes of, say, typical readers of this commentary and the rest – has deep pernicious effects.

This is a type of consumption that I have always heard of anecdotally but never seen personally. But it is a type of pathological response of the middle class to a society bend on ostentatious consumption. Once the bank grants the mortgage you cannot really afford on a house in a nice neighbor you probably become hell-bent on displaying belonging. So you borrow on that shaky mortgage to lease a luxury car to park in your driveway and get a weekly maid service, and max out some credit cards to fill your house with expensive technological goods and cloth yourself in designer brands. This process is something we could all probably acknowledge if we really looked deep into our habits and inner longings, but when credit is loose and pressures for “imitative consumption” are constant, there is apparently no stopping until you hit bankruptcy. Looking at household savings rates, you can see that these would plunge as people spent more than their income to fuel their consumption. Leveraged over their eyeballs when the recession hit, the middle class had to deleverage since 2008.

Revolving credit (e.g. credit cards) has plummeted down from 2008 Q4 highs to but the rate of change has rolled over and credit started to rise again from 2011 Q2 lows. Deleveraging halted performed an about face. As Bertrand and Morse hypothesize, the middle class debt overhang emerged well before the Great Recession, and it has since dogged middle class balance sheets ever since. As inflation hits the goods the lower rungs of income distribution need to survive; energy, food, and health care. Credit is needed to buy the same amount of goods and services they once used. Rising revolving credit, stagnant or declining real wages, and declining personal consumption expenditures is creating a maelstrom of debt just to survive. Imitative consumption is a problem of the past. Now inequality has brought a rash of borrowing to get to work, borrowing to put food on the table (or applying for SNAP), and borrowing for a roof over your head. This now is the crux of American inequality.

Since gasoline prices are so important during an election year, the U.S. has decided to release some emergency oil reserves from its strategic petroleum reserve and is requesting that the UK do so as well. From The Telegraph – Debt crisis: as it happens

15.26 Reuters is reporting that the UK expects a formal request shortly from the US to release its emergency oil reserves. Brent has fallen on that news.

Although sooner afterwards, an Obama aide declared the release as “inaccurate.”

And stocks stayed up on this news from ratings agency S&P:

16.26 S&P has said that the outlook on the US remains negative. Ratings agency says it is improbably any economic improvement would bring back AAA.

US markets still in positive territory though. Dow up 0.3pc, S&P 500 up 0.5pc, Nasdaq up 0.5pc.