Disturbing Federal Debt Trend
Dshort has a disturbing chart showing the gross federal debt, as well as 6-year estimates.
The financial crisis that began in 2008 changed everything. Government policies to deal with the crisis have significantly altered the OMB estimates, as the two Obama budgets (2010 and 2011) dramatically illustrate. The 2010 budget (presented February 26, 2009, 11 days before the market low) included a forecast for the fiscal-year-end debt that proved to be 8.3% higher than the 2009 final number, a fact that illustrates the magnitude of uncertainty introduced by the financial crisis. The 2011 six-year forecast has scaled back the numbers for 2010 and 2011, but it closely tracks the later trend of the previous budget.These federal debt forecasts confirm we what already know — 2008 was a major economic turning point, a metaphoric fork in the road. However, the chart helps us quantify the magnitude of the new direction. The current 2015 forecast of a 19.68 Trillion debt is about 46% higher than the equivalent point (about 13.5 Trillion) on the road not taken.
If you didn't already know, we are on an unsustainable course. This will hurt the poor and middle class the most, as it already is.
Australia's "Boom"
A Bloomberg headline caught my eye the other day regarding Australia. BIS Shrapnel apparently feels that "Australia’s economy will accelerate over the next two years before building 'into a boom' amid a surge in business investment."
Gross domestic product will rise 2.7 percent in the 12 months through June 2010, 3 percent in fiscal 2011 and 3.8 percent the following two years, the Sydney-based forecaster said today.
A surge in house construction and government investment in infrastructure such as schools and roads will help stoke economic growth, BIS Shrapnel predicts. Inflationary pressures, leading to higher interest rates, will increase in three to four years as a mining expansion intensifies.
I am no expert on Australia, but I am a regular reader of Steve Keen's blog, and happen to agree with his theory that Australia is in the middle of a massive credit bubble. Though Mr. Keen recently lost a bet with respect to Australia's housing market, I still believe he has the right idea longer term. Interested readers will want to check out his new site on the topic. From this site:
The first graph above shows the continuing housing bubble that I believe exists in Australia. While BIS Shrapnel suggests "A surge in house construction...will stoke economic growth," I happen to believe that Australia may run into the same problem plaguing the U.S with housing and construction right now -- Australia's bubble may even be bigger! The third graph shows Australias rising private debt to GDP, and the second graph shows where the debt is rising the quickest --mortgages.
Central Bank Signaling Weakness?
I have no idea when the housing bubble will actually burst, but all of these graphs provide strong evidence that there may be a bubble. These are not the only signs we have, however. On February 2nd, the Australian Central Bank failed to raise interest rates as was the overwhelming general consensus among economists.
“The rapid adjustment process is over and the rate hikes, when they do come, will be further apart,” said Matthew Johnson, an interest-rate strategist at UBS AG in Sydney. “The overarching message from the Reserve Bank is that while things are better than we thought, we’re not out of the woods just yet.”
It appears that Australia's Central bank may be beginning to fear the future, and the bursting of this bubble. It may not be long before the Australian Central bank finds itself racing towards 0% interest rates as the US and other parts of the world were doing in 2008. Also, with regards to not being "out of the woods" yet, I would say this is probably very understated. Not only is Australia "not out of the woods just yet," but the worst is probably ahead of them rather than behind them. The article continues:
“Three consecutive hikes late last year coupled with out- of-cycle increases by commercial banks appeared to have stung,” said Prasad Patkar, who helps manage about $1.5 billion at Platypus Asset Management in Sydney. Today’s decision “reduces the serious risk of a policy blunder. A pause is welcome.”
Sorry Prasad, but a serious policy blunder has already been made. Interest rates were kept too low for too long, and a credit bubble has already been blown. It has to be unwound eventually, It's just a matter of how bad Australia's politicians are willing to make the problem before it blows up.
Politicians Haven't Helped
Australian Politicians have been extending, increasing, and extending its First time home buyer "grant" for nearly a decade. To think this hasnt been a huge factor in the housing bubble is simply ignorant.
On 1 October 2009 to the 31 December 2009, $7000 will be provided only to home owners buying new homes or building a new home on top of the regular $7000 once off payment. $3500 will be given to home owners buying established homes.
On January 2010, the scheme will default to $7000 for all first home owners.
Type Scheme Eligible Dates Benefit Established Homes First Home Owner Grant 1 July 2000 - present $7000 New Homes / Construction First Home Owner Grant 1 July 2000 - present $7000 Established Homes First Home Owner Boost 13 Oct 2008 - 30 Sept 2009 $7000 New Homes / Construction First Home Owner Boost 13 Oct 2008 - 30 Sept 2009 $14000 Established Homes First Home Owner Boost 1 Oct 2009 - 31 Dec 2010 $3500 New Homes / Construction First Home Owner Boost 1 Oct 2009 - 31 Dec 2010 $7000
We can see the politicians have been at it for a while, offering up to $14,000 dollars as recently as September 2009!
Boom or Bust?
Australia is in a bubble, and judging from what the housing bubble brought to America, it is likely to bring a period of economic hardship to Australia, and very likely a prolonged recession combined with a period of deflation. Credit is beginning to tighten in Australia, and people are burdened with too much debt that cannot be paid off.
BIS Shrapnel thinks that Australia is poised for a "boom," I think they are primed for a "bust."
Standard & Poor's on Shadow Housing Inventory; Mortgage Delinquency Rates at All Time High
Standard & Poor's released a good report yesterday on the state of the housing market and the shadow housing inventory.
The current "shadow inventory" (including all delinquent loans, not only those that are real estate owned [REO]) of troubled mortgages will likely take about 33 months?or nearly three years?to clear at the current rate of liquidations. Moreover, we believe this estimate is conservative, as we do not assume any loans that have yet to show any serious signs of distress to date will default in the future and further increase the overhang of homes. Nonetheless, we believe that in reality additional loans will default in the near future due to the weak economic environment, distressed residential home values, and the resulting contraction in the supply of mortgage finance.
We believe that the recent reversal in housing prices is the result of a temporary constriction in the supply of foreclosed homes on the market. This temporary constriction ensued because servicers have completed fewer foreclosures due to court delays, servicing backlogs, and political pressure to keep borrowers in their homes. However, there is a rapidly growing shadow inventory of properties where borrowers are delinquent but foreclosure has not been completed. Overall, it is our opinion that recent positive housing reports should not be construed as a sign that the distress in the residential housing market is abating, but rather should be attributed to the temporarily limited supply of homes on the market.
I don't think housing is turning around anytime soon, and S&P seems to agree. The article is chock-full of interesting charts and graphs, interested readers should definitely check out the entire thing.
S&P Concludes:
We believe that the recent constriction in the supply of foreclosed homes on the market is a temporary one. Loan modifications and the observed extension of time distressed loans remained as such may simply have delayed the inevitable, creating the demonstrated shadow inventory of troubled loans. Ultimately, the majority of the properties these distressed loans represent will likely have to be liquidated.
Our estimate of $473.4 billion in loans that will eventually need to be liquidated corresponds to approximately 1.75 million individual properties. This number represents almost 50% of the existing homes available for sale as of December 2009, and moreover, only accounts for expected defaults for mortgages outstanding in the private securitization market which makes up less than a third of the total securitization market and less than 5% of the total mortgage market. While we do not expect all of these distressed properties to liquidate at the same time, the significant percentage of the current supply that these distressed loans represent does reveal the potential future increase in housing supply. An influx of liquidated properties is likely to prompt a decline in prices if unaccompanied by a comparable increase in demand (see chart 15).
I couldn't agree more that loan modifications and other measures have only "delayed the inevitable." The current inventory level of homes will take quite some time to clear, and even once it does clear, lack of demand (as well as availability!) for credit will likely lessen the demand for housing further.
Additionally, once mortgage rates do start to rise, this will slowly lessen the prices that new buyers will be able to afford, thus keeping downward pressure on house prices for some time after that. The Fed is set to exit its mortgage buying program soon, and if they exit and stay out (still not guaranteed) it will definitely cause mortgage rates to rise, probably by around 0.3-0.5% in my estimation.
Mortgage Delinquency Rates at All Time High
Transunion also has a report stating that mortgage loan delinquencies are reaching all time highs.
TransUnion's quarterly analysis of trends in the mortgage industry found that mortgage loan delinquency (the ratio of borrowers 60 or more days past due) increased for the 12th straight quarter, hitting an all-time national average high of 6.89 percent for the fourth quarter of 2009. This quarter marks the first time the mortgage delinquency rate increase did not decelerate after doing so for three consecutive periods.
This statistic, which is traditionally seen as a precursor to foreclosure, increased 10.24 percent from the previous quarter's 6.25 percent average. Year-over-year, mortgage borrower delinquency is up approximately 50 percent (from 4.58 percent).
To recap, we have a massive shadow housing inventory that won't be cleared for likely 3 years or more, we have a lessening supply of credit as well as a lowered demand for credit, we have the Fed exiting its mortgage buying program, and we have mortgage delinquencies hitting all time highs. All this data translates to an extremely prolonged rut in housing. I think the best case scenario for housing over the next 3 years or so is probably flat, with decent risk to the downside.
Everyone ready to invest in home builders?