Housing Markets and Mortgage Markets Hinge on Jobs

Mortgage and Housing Markets Now Hinge on Jobs

Mike Larson takes a closer look at the housing and mortgage market crunch and how it is continuing to negatively affect the U.S. economy. In this issue of Money and Markets, Mr. Larson examines the U.S. economy and the problems that it's continually facing.

Jupiter, FL  -  March 9, 2008 -- Mike Larson takes a closer look at the housing and mortgage market crunch and how it is continuing to negatively affect the U.S. economy. Mr. Larson examines the U.S. economy and the problems that it's continually facing.

The most amazing thing about the housing and mortgage market crunch is that it has unfolded in the context of a decent employment backdrop and a growing economy. Home sales collapsed, inventories ballooned, and mortgage delinquency rates and foreclosures exploded. All this despite the fact the unemployment rate was falling and gross domestic product was steadily rising. The computer models that many lenders and ratings agencies relied on said this couldn't happen. That's one reason the depth of the housing and mortgage market meltdown caught Wall Street by surprise. As a newsletter put out by the Dallas Fed noted in late 2007:

"Subprime loan problems had surfaced just before and at the start of the 2001 recession but then rapidly retreated from 2002 to 2005 as the economy recovered. This pre-2006 pattern suggested that as long as unemployment remained low, so, too, would default and delinquency rates.

"This interpretation ignored two other factors that had helped alleviate subprime loan problems earlier in the decade. First, this was a period of rapidly escalating home prices. Subprime borrowers who encountered financial problems could either borrow against their equity to make house payments or sell their homes to settle their debts. Second, interest rates declined significantly in the early 2000s. This helped lower the base rate to which adjustable mortgage rates were indexed, thereby limiting the increase when initial, teaser rates ended.

"Favorable home-price and interest rate developments likely led models that were overly focused on unemployment as a driver of problem loans to underestimate the risk of nonprime mortgages ... When the favorable home-price and interest rate factors reversed, the past-due rate rose markedly, despite continued low unemployment."

Up until very recently, the vast majority of the mortgage market's problems were driven by the private recession in housing. The rest of the economy, particularly those sectors tethered to strong global growth, chugged along just fine. That prevented a broad-based rise in unemployment, with all its ramifications for credit quality. The unemployment rate is starting to rise off its low, hitting 4.9% in January 2008. Job creation in many sectors is grinding to a halt, while other sectors are seeing outright declines. Also a private report from ADP Employer Services estimated that the economy lost 23,000 jobs in February, the worst reading since April 2003. And an employment index that measures manufacturing sector hiring fell to 46 last month, the lowest in almost five years.

"Fresh figures from the Mortgage Bankers Association show the late payment rate on U.S. home loans jumped to 5.82% in the fourth quarter of 2007. That's up from 4.95% a year earlier and the highest since 1985. Even worse, 2.04% of U.S. mortgages are now in some stage of foreclosure. That's roughly double the levels of a year and a half ago, and the highest in U.S. history," Mr. Larson states.

Keywords: Mike Larson, housing, mortgage, markets, jobs, unemployment, credit

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About Mike Larson and Money and Markets

Mike Larson joined the company in 2001, and has more than 10 years of experience researching and writing about personal finance, investing, and the housing and mortgage industry. In 2003, Mr. Larson was named associate editor of the company's monthly Safe Money Report. In this role, he is responsible for writing and editing as well as analyzing trading opportunities for clients. Mr. Larson is also a regular contributor to the company's daily e-letter, Money and Markets.

Before joining Weiss Research, Mr. Larson was a personal finance reporter for Bankrate.com, where he wrote extensively on mortgage lending, banking, residential real estate, and Federal Reserve Board policy. His responsibilities included analyzing economic data and interest rate trends for a weekly column and developing rate forecasts for a regular index feature. Previously, Mr. Larson held positions at Bloomberg News and the Boston Herald.

Recognized as an interest rate and mortgage market expert, Mr. Larson's views have been quoted in the Washington Post, Chicago Tribune, Dow Jones Newswires, Reuters, Sun-Sentinel and the Palm Beach Post. He has also appeared as an investment expert to discuss the housing market on CNBC, CNN, and Bloomberg Television. His writing has been acknowledged by both the National Association of Real Estate Editors and the Massachusetts Press Association.

Among the first analysts to call the housing slide, Mr. Larson's new policy paper, "How Federal Regulators, Lenders and Wall Street Created America's Housing Crisis: Nine Proposals for a Long-Term Recovery" has received broad media coverage following its July 2007 submission to the Federal Reserve and FDIC. Mr. Larson holds B.A. and B.S. degrees from Boston University.

Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.


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