When it comes to the economy, the national mood is a combination of dissatisfaction and fear. A recent Gallup poll found that 66 percent of Americans think national economic conditions are “only fair” or “poor.”
Even though unemployment stands at 4.5 percent, down from the peak rate of 6.3 percent four years ago that does not paint a correct picture of the job market. Six years ago, unemployment was 4.5% also; but the jobs were paying a higher salary. What the employment figures fail to mention is that the new jobs created by the Bush administration are low paying jobs. In spite of the fact that Mr. and Mrs. Average American are both working, they can barely keep up.
You see, when the Fed rates were at 1.25%, a very large number of Americans refinanced their homes and went on a shopping spree. What’s worse, even under-qualified Americans refinance their homes at subprime rates. Most took ARM mortgages or interest-only mortgages because there was a housing boom and house values kept going up. If they overspent, they went again and took more money out of their homes.
The results are now beginning to take effect. Ben Bernanke acknowledged for the first time on Wednesday that credit concerns were spreading beyond the subprime mortgage market as investors showed their worries with a flight to quality, seeking refuge in government bonds and other, safer assets.
This has created a real estate nightmare. The head of one of the largest US housing builders on Tuesday warned that prices have further to fall in order to restore consumer confidence in the troubled sector. The glut of existing homes has become an increasing concern for builders, who have cut construction and increased discounts in an effort to clear an inventory of single-family houses now at its highest level since 1992.
So now, Mr. and Mrs. Average American can’t afford to go back and ask for more money on the value of their homes. They can’t afford to pay their higher mortgage payments, nor can they sell their over-valued homes. They are trapped, and the only alternative is foreclosure.
The share of all mortgages entering foreclosure rose to 0.58 percent in the first quarter from 0.54 percent in the fourth quarter, according to a quarterly report from the Mortgage Bankers Association. Subprime loans entering foreclosure jumped to a five-year high of 2.43 percent from 2 percent in the fourth quarter, and prime loans rose to 0.25 percent, the highest ever, from 0.24 percent. It was worse for subprime borrowers who took out adjustable-rate mortgages. The association said the percentage of payments that were 30 or more days past due for subprime ARMs jumped to 15.75 percent in the first quarter. That's the highest level ever and up from 14.44 percent in the fourth quarter. The percentage of subprime ARMs that started the foreclosure process climbed to 3.23 percent, also a high, from 2.70 percent. People who have taken out subprime mortgages, especially ARMs, have been clobbered as rising interest rates and weak home prices have made it increasingly difficult for them to keep up with their monthly payments. Some lenders in the subprime market have been forced out of business. Analysts estimate that nearly 2 million ARMs will reset to higher rates this year and next. Some subprime borrowers were lured by initially low "teaser" rates offered during the five-year housing boom that ended in 2005. But those rates can spike upward after the first few years, causing payment shocks.
I believe that we have bought the rose-colored view of our current administration to our detriment. The coming catastrophe is not going to surprise everyone, but it will surprise quite a few.
