Disgraceful Gloom at AP: Mortgage Crisis Could Lead to Depression

*****Update at end of post includes detailed response to unhappy e-mail messages concerning this subject.

As someone that has done a lot of economic writing and financial media analysis, I'm used to gloom and doom from journalists.

However, Saturday's Associated Press article concerning the credit crunch and how it's impacting the mortgage market could be the worst example of economic and financial misreporting and exaggeration I've seen since the press universally forecast an economic downturn after Hurricane Katrina hit New Orleans.

Entitled "Have We Seen the Worst of the Mortgage Crisis," Joe Bel Bruno's piece actually suggested that a depression could be looming, and that housing prices in some areas could decline by 40 percent (emphasis added):

Some 2 million homeowners hold $600 billion of subprime adjustable-rate mortgage loans, known as ARMs, that are due to reset at higher amounts during the next eight months. Subprime loans are those made to people with poor credit. Not all these mortgages are in trouble, but homeowners who default or fall behind on payments could cause an economic shock of a type never seen before.

Some of the nation's leading economic minds lay out a scenario that is frightening. Not only would the next wave of the mortgage crisis force people out of their homes, it might also spiral throughout the economy.

The already severe housing slump would be exacerbated by even more empty homes on the market, causing prices to plunge by up to 40 percent in once-hot real estate spots such as California, Nevada and Florida. Builders like Chicago's Neumann Homes, which filed for bankruptcy protection this month, could go under. The top 10 global banks, which repackage loans into exotic securities such as collateralized debt obligations, or CDOs, could suffer far greater write-offs than the $75 billion already taken this year.

Massive job losses would curtail consumer spending that makes up two-thirds of the economy. The Labor Department estimates almost 100,000 financial services jobs related to credit and lending in the U.S. have already been lost, from local bank loan officers to traders dealing in mortgage-backed securities. Thousands of Americans who work in the housing industry could find themselves on the dole. And there's no telling how that would affect car dealers, retailers and others dependent on consumer paychecks.

Based on historical models, zero growth in the U.S. gross domestic product would take the current unemployment rate to 6.4 percent. That would wipe out about 3 million jobs from the economy, according to the Washington-based Economic Policy Institute.

Unbelievable nonsense, so much so I really don't know where to begin.

However, before we get to the statistics, it needs to be noted that Bel Bruno chose not to identify the political leanings of the Economic Policy Institute which even Wikipedia defines as "progressive."

Nice oversight, wouldn't you agree?

Now to some more inconvenient facts: According to a report just released by the National Association of Realtors, the median sales price for an existing single-family home dropped 2.0 percent in the twelve months ending September 30. Yet, it is still above where it finished the year in 2005.

Hardly a catastrophe so far, wouldn't you agree?

Furthermore, according to an NAR press release on Wednesday (emphasis added throughout):

The vast majority of metropolitan areas showed rising or stable home prices in the third quarter with most experiencing modest gains compared with a year earlier, despite a broad decline in existing-home sales, according to the latest quarterly survey by the National Association of Realtors®.

In the third quarter, 93 out of 150 metropolitan statistical areas 1 [sic] show increases in median existing single-family home prices from a year earlier, including six areas with double-digit annual gains and another 21 metros showing increases of 6 percent or more; 54 had price declines, and three were unchanged. Regionally, prices rose in both the Northeast and Midwest, as did the national condo price.

Once again, hardly a crisis. In fact, as the report pointed out, most sellers in the third quarter booked respectable profits:

The typical seller purchased their home six years ago, with the median price in the third quarter of 2001 at $159,100. Despite the dip in the national median price over the past year, the median increase in value for home sellers who bought six years ago is 38.8 percent. "Nearly every market is showing positive long-term gains, with a home equity accumulation of $61,700 over the past six years for a typical U.S. homeowner," Gaylord said. "Even in most of the places that are undergoing a large price decline, long-term increases are quite respectable. For example, the Sarasota area of Florida is showing a median rise in home value of $112,000 over the typical holding period, and ranks well above norm for overall gains."

Hmmm. So, despite the recent softness, most sellers are still showing a gain.


Also of note, though Bel Bruno claimed, "The Labor Department estimates almost 100,000 financial services jobs related to credit and lending in the U.S. have already been lost," I'd love to know where he got that statistic from.

According to the October jobs report from the Bureau of Labor Statistics, the current number of employees working in "credit intermediation and related activities" is 2,907,000 (seasonally adjusted), down only 55,000 from February's peak.

Yet, financial institution employees have increased by 35,000 since February as the total number of non-farm workers in the nation expanded by over one million (seasonally adjusted all).

As such, to date, this credit crunch has yet to impact overall employment in any material fashion.

Maybe most important, regardless of housing softness the past couple of years, the economy has continued to grow while adding jobs and producing wage increases.

For instance, the Gross Domestic Product grew by 2.9 percent in 2006, and has surprised analysts by posting 3.8 and 3.9 percent gains in the past two quarters respectively. During this period, 3.5 million new non-farm jobs were created, and the average non-supervisorial employee has seen a 7.4 percent weekly earnings increase.

With depressions like these, who needs expansions?

Please be advised that I am not trying to belittle those experiencing mortgage difficulties, nor am I ignoring credit problems that exist at the nation's banks and lending facilities.

However, I believe suggesting that today's challenges "could cause an economic shock of a type never seen before" is irresponsible hyperbole from the nation's leading wire service, and is devoid of factual basis.

Our economy in the past six years has survived a significant terrorist attack on our nation, a 50 percent decline in stock prices, a war approaching its fifth anniversary, the most expensive national disaster in history, a doubling of gas prices, and a 400 percent increase in the cost of oil.

During this period, journalists have continually presaged a looming recession or worse as a result of these events.

As such, I've got some bridges to sell to anyone that believes they'll be right about the impacts of the current credit crunch.

*****Update: I’ve received some e-mail messages questioning why I would use NAR data in this – or any! – article. One felt the NAR is just a shill for realtors, and it lacks any credibility; another suggested what the anonymous author felt was a better index.

To begin with, as this is not a business or economics website per se, I have of late shied away from truly technical analyses feeling that this isn’t the proper venue, and folks here aren’t interested in reading a 4,000-word financial report.

This is, after all, a media bias site.

Moreover, there are a myriad of real estate indices currently out there which likely most readers aren’t at all familiar with. For instance, the one recommended by my anonymous critic was the Case-Shiller Index.

Without peeking at the Internet, how many of you have heard of this? Maybe nobody. So, referencing it might have been pointless.

This is likely also why so few major media outlets reference C-S. So far in 2007, this index has only been mentioned in about 300 articles or reports. By contrast, NAR has been referred to in 2000.

Big difference, right?

Even the financial press seem more comfortable citing NAR data, as it has been referred to in 68 Investor’s Business Daily articles this year, and eighteen Wall Street Journal pieces.

By contrast, IBD has cited C-S eighteen times this year, and WSJ only thrice.

In the end, citing C-S in a real estate piece would be somewhat akin to reporting stock market gains using the Russell 2000 or Wilshire 5000, both fine indices that most people have never heard of.

To be sure, the likely reason some folks prefer C-S is because it is presenting a much more bearish view of real estate than most other measurements, or didn't you know there are many people in this nation, mostly folks who missed the real estate boom, praying for house values to decline?

With that in mind, such folks love C-S, for in Standard & Poors’ October 30 press release, this index showed a 5 percent annual decline. This makes real estate bears very happy.

Yet, another housing index most people have likely never heard of comes from the Office of Federal Housing Enterprise Oversight, whose Housing Price Index as of the second quarter was still showing single-family homes appreciating, although at the slowest rate since the real estate recovery began in 1994.

Making bears really unhappy, this index has risen by 3.2 percent since the second quarter of 2006. That’s actually more bullish than NAR data.

As a result, I'll probably get more hate-mail for referring to it!

Which is right? Who knows?

However, on June 22, OFHEO issued a press release critical of C-S (emphasis added throughout):

OFHEO's House Price Indexes (the "HPI") and home price indexes produced by S&P/Case- Shiller are constructed using the same basic methodology. Both use the repeat-valuations framework initially proposed in the 1960s and later enhanced by Karl Case and Robert Shiller. Important differences between the indexes remain, however. The two models use different data sources and implement the mechanics of the basic algorithm in distinct ways.


An important first step in explaining differences is to ensure that the geographic areas covered by the indexes are identical. While an aggregate U.S. index is published by S&P/Case-Shiller, some details concerning the underlying coverage areas have not been released. Without such information, it is impossible to disentangle the various causes of national index divergences. Based on a review of the methodology documentation that is available, it appears that OFHEO's national index has broader geographic coverage than the S&P/Case-Shiller National Home Price Index. Although the current methodology primer produced by S&P/Case-Shiller provides no detailed information concerning coverage for specific states, the prior version of the methodology document (dated April 2007) supplies some information. If the S&P/Case-Shiller coverage has not changed substantially since April, it appears that the S&P/Case-Shiller National Index has coverage gaps relative to the OFHEO U.S. index. According to the methodology materials, the S&P/Case-Shiller index does not include house price data from thirteen states. Market conditions in those thirteen states have, on average, been stronger than in the rest of the nation. OFHEO's estimates indicate, for example, that three of the five fastest appreciating states in the nation (Idaho, Montana, and Wyoming) do not have representation in the S&P/Case-Shiller index. This missing information has likely caused some of the divergence between the trends shown in the two national indexes.

Interesting, wouldn’t you agree? But there’s more:

The S&P/Case-Shiller index also apparently has incomplete coverage in another 29 states. For these states with incomplete coverage, the documentation provides an estimate for the "percent of state covered by the index," but does not detail the specific areas for which data are unavailable. To the extent that the missing areas tend to be more rural counties, given that rural areas appear to be exhibiting stronger market conditions in recent periods, the missing data might partially explain why the OFHEO and S&P/Case-Shiller national indexes diverge.

In plain English, according to OFHEO – which unlike NAR is a government agency – the C-S index ignores significant areas of the country which just so happen to be some of the strongest in terms of real estate prices. As such, it makes sense why C-S is the most bearish of the three indices discussed here.

Something else the reader should understand is that the “Shiller” in this index is Robert Shiller of Yale University. This man is what many in the markets refer to as a perma-bear, inasmuch as he seems permanently bearish.

For instance, though he is credited for calling the top of the stock market in 2000 due to his book “Irrational Exuberance” which came out in March of that year, Shiller had been bearish on stocks in press reports as early as 1996. In fact, the following is from a February 17, 1997 San Francisco Chronicle article (emphasis added):

Robert Shiller, an economist at Yale University, recalls a similar survey of homeowners in California in 1988, at the height of the real estate boom. In both San Francisco and Anaheim, owners said they believed housing would appreciate more than 14 percent a year. They got a rude surprise when the California economy tanked. Shiller and a colleague at Harvard, John Campbell, figure there's a good chance the stock market won't grow at all over the next 10 years, based on current high levels of stock prices relative to corporate earnings.

This was more than three years before the top of that bull market. The S&P 500 was at around 780. Ten years later, in this February just passed, the S&P was at about 1500.

So, Shiller was at least three years early in calling a stock market top, and long-term investors would have missed about a 100 percent increase in their portfolios if they had listened to him when he first became bearish.

Coincidentally, it seems Shiller was almost exactly three years premature with calling a top to real estate. The following is from the October 2002 Money magazine (emphasis added): “‘We are more vulnerable to a national housing bust than ever before,’ Shiller declares.”

Forgive me, but I’m not interested in paying much attention to an index created by someone that seems always bearish, so much so that even a government agency questions his methodology.

How 'bout you?

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