The Case-Shiller index today reported a further erosion in home values, which put more pressure on the U.S. economy. In addition to a drop in the major asset of most U.S. households, the CHICAGO PMI came in much weaker than expected as consumer confidence showed renewed weakness. Even with record low interest rates, the U.S. housing market cannot find any support for prices. As I have argued for years, if employment stays weak then housing will struggle … and so it goes.
The policymakers in D.C. need to take all of the ADJUSTABLE RATE MORTGAGES (ARMS) and lock then in to long-term mortgages at very low rates. A 15-year mortgage at 3.5% would greatly reduce the amount of stress in foreclosures as it would lock in many borrowers at a secure rate that they could afford. This should have been done long ago and let the lenders absorb the hit. I know that property rights advocates will yell that the securitization market is a sacrosanct contract between private parties. I say, nonsense. The banks need to take a hit on the aggressive loans they made to unworthy borrowers.
The EXPLODING ARMS have wreaked havoc on many borrowers and pushed massive amounts of foreclosed homes onto the stockpile of new and previously lived-in homes. The U.S. housing market is every bit a sham equivalent to the DEBT charade being played out in Europe.
The EURO was strong today as investors fell victim to the rumors of Germany moving to negotiate a further Greek bailout, thus putting to bed for the moment any near term threat of a Greek “DEFAULT.” The markets gave the rumors credibility and all global equity markets found some strength on month end, which led to an even greater rally in the EURO against all currencies. The EURO even shrugged off a story out of Ireland that the Bank of Ireland, not the national bank, was going to haircut the holders of its subordinated debt by 80%-90%. This story received little notice today but it is something to pay close attention to for if it gains adherents, many of the holders of bank debt in the PIIGS are going to suffer severe losses. Europe is a continuing cesspool of uncertainty but yet it still can rally against the U.S. DOLLAR.
Markets seem content to believe that recent U.S. economic weakness will keep the FED on the defensive, which would keep the DOLLAR weak and sustain the U.S. equity market as the only alternative to the preposterous low rates of the corporate and U.S. Treasury markets. Bernanke, the portfolio balance channel is your baby. Continue to breast feed the “wealth effect “machine with low rates. The markets are not showing that they are ready to be weened as its legs are far too wobbly to walk.
Tags: adjustable rate mortgage, ARMS, Bernanke, Case-Shiller index, Chicago PMI, Debt, default, Euro, exploding ARMS, Fed, Greece, Ireland, PIIGS, portfolio balance channel, U.S. Dollar
June 1, 2011 at 11:38 am |
Housing is Still Looking for a Foundation of Support… QE3?
June 1, 2011 at 12:52 pm |
Arthur –I don’t know that it is necessary –The FED can just maintain their present balance sheet and shift the responsibility to Washington to foster a plan for housing.If the FED maintains the present balance sheet the emphasis for budget austerity will diminish and then we have a new problem
June 1, 2011 at 2:49 pm |
… but remember Christina Romer: Bring on QE3! “We can´t afford not to do more”.
June 1, 2011 at 5:01 pm |
Yes that is true–we will have to wait for the unemployment data over the next few months before the politicos begin to panic
June 1, 2011 at 9:54 pm |
Yes, I´m paying a lot of attention to unemployment data. We´re living in an amazing global macro era. Thanks to share your thoughts with us.
June 2, 2011 at 9:33 am |
Yra, I immediatly thought your idea about the 3.5% mortgage was not realistic; but I would have said that about the AIG bailout! Years from now we might know what actions should have been taken that weren’t. Your idea will probably be one of them.