International Forecaster Weekly

More News On Massive Job Losses In The Mortgage Industry

More news on massive job losses in the mortgage industry, CFO optimism about US economy takes a nosedive, GDP growth is slowing, junk bond crunch predicted by Moodys, sharpe decline in real estate sales, money expansion rates, compared to the 1970s and all the hidden liquidity...

Bob Chapman | September 17, 2007

The Financial Times of London says more than 100,000 jobs may be lost in the mortgage industry in the next few months.

Nearly 2/3’s of CFO’s optimism about the US economy has taken a nosedive. They are more pessimistic than they were three months ago. Only 13.6% of 580 US financial executives in the Duke University/CFO Business Outlook Survey reported feeling more optimistic than last quarter. These are the lowest numbers since the survey began in 2001. They revealed why their expectations were so bleak: they expect slow growth in earnings, capital spending and acquisitions and no growth at all in hiring. They are worried about the high labor costs and weak consumer demand. CFO’s see a gathering storm that includes slashed advertising spending, slow tech spending, and the most lethargic employment picture in years.

Then there is the credit crunch and its repercussions. The problems in the credit markets rank among CFO’s top anxieties. Of the 29% that said they have been directly affected by the recent turmoil, more than half reported seeing a higher cost of credit and 33% say credit is becoming harder to come by. As a result, nearly 1/3 have cut back on their capital spending plans and 16 have reduced their hiring plans. Three quarters expect M&A to slow down due to the higher cost of money. Barely 40% said they feel more optimistic, down from 49% in March.

The quarterly Anderson Forecast from UCLA predicts slow growth in GDP of just over 1% for the fourth quarter of 2007, and the first quarter of 2008.

They say a recession is two consecutive quarters of decline in GDP. Our interpretation is three quarters below 2%.

They expect housing starts to fall only 30% to 1 million and we see them lower. They see housing prices off 15% before a recovery in 2009. On a nationwide basis we concur, but we see the former hot areas down 30% to 60% dependent on the area growth and circumstances.

The MBA index of mortgage applications rose 5.5% for the week ended 9/7. Again that is misleading because almost all buyers file multiple applications. That is up 12.5% yoy. The 30-year fixed rate mortgage was 6.25%, down 0.17%. Their purchase index rose 5.2%. The index was 9.2% above its year-earlier level. The refi index was up 17.5% yoy. Refis were 42.1% of apps up from 41.4%. The 15’s were 5.99% off 0.2% from 6.1% and the one-year ARMs fell to 6.34% from 6.52%. ARM activity increased 13.2% up from 12.6%.

Moody’s says the widening credit crunch will cause a tripling of the current junk bond default rate in the US over the next year. The default rate could climb to 4.5% in 12 months. It is currently 1.4%.

They also projected that the issuer-weighted speculative-grade default rate will reach 4.1% a year from now, and 5.1% by August 2009. The global default rate is 1.4%. A 3% default rate is projected for Europe. The August default rate was 2.9%.

New issuance of junk bonds is grinding to a halt as investors go on strike.

Nearly 700 homes in Detroit will be auctioned on 9/21 to 9/23, one of the biggest home auctions ever. The prices will range from $5,000 to $600,000.

With the nation’s housing in a sump the mortgage market in a slump and disarray, many homebuilders are putting up fewer super size homes and offering smaller floor plans. Homes have plunged over the past year leaving builders saddled with staggering inventory, especially of larger, more expensive homes. In July, new home sales were running at a seasonally adjusted annual rate of 870,000 units, down sharply from 1.3 million in 2005. The median size of a newly completed single-family home is 2,248 sq. ft., up from 1,560 sq. ft. in 1974.

Following a second wave of default notices from its creditors, Atlanta-based Beazer Homes has asked a federal court to prevent them from collecting billions of dollars in outstanding loans.

Current monetary expansion rates reveal a striking similarity of those of the late 1970s. The broadest money supply measure, M3, expanded from $1583.9 in July 1979 to $1823.4M by January 1980. That’s $239.5M over the span of seventeen months, or a logarithmic growth rate of 14.1%. By way of comparison, estimated M3 has grown from $10376.9M in March 2006 to $1188.6 by August 2007. The same seventeen-month span has seen M3 grown $1511.8M or 13.6%.

This simple mathematical exercise suggests several things: (1) Broad money supply growth rates are closely tracking a comparable period in the late 1970s when the dollar was greatly depreciated, (2) Despite all the media rhetoric to the contrary, the current monetary response mirrors that of late 70s. That is to say liquidity, liquidity, and more liquidity behind the curtain of secrecy, (3) Rapid monetary expansion, double-digit interest rates across the yield curve, and monetary and fiscal policy changes were necessary to arrest the flight from the dollar in the early 1980s. Due to the vast economic and geopolitical differences between the late 1970s and today, do not expect either a similar outcome, or set of steps taken to resolve it.