The United States of Subprime

Yesterday, the National Association of Realtors cheerfully forecast that Improvements in Mortgage Markets Bodes Well for Housing in 2008.

Buried deeper in this sunny prediction were their revised expectations for existing
home sales; The NAR now expects a steeper than previously anticipated
drop of 10.8%.

This revision marks the eighth consecutive downwardly revised forecast from the NAR.

What is the cause of all this hosuing angst? Perhaps a clever front page headline in today’s WSJ provides a clue: The United States of Subprime. (free WSJ)

Its an article on just how surprising widespread the sub-prime mortgage usage was over the past 10 years:

"As America’s mortgage markets began unraveling this year, economists
seeking explanations pointed to "subprime" mortgages issued to
low-income, minority and urban borrowers. But an analysis of more than
130 million home loans made over the past decade reveals that risky
mortgages were made in nearly every corner of the nation, from small
towns in the middle of nowhere to inner cities to affluent suburbs . . .

The Journal’s findings reveal that the subprime aftermath is hurting a
far broader array of Americans than many realize, cutting across
differences in income, race and geography. From investors hoping to
strike it rich by speculating on condominiums to the working poor
chasing the homeownership dream, subprime loans burrowed into the heart
of the American financial system — and now are bringing deepening woe.

The data also show that some of the worst excesses of the subprime
binge continued well into 2006, suggesting that the pain could last
through next year and beyond, especially if housing prices remain
sluggish. Some borrowers may not run into trouble for years."

There’s a nice interactive map at the (free) WSJ:



So while we learn today that the sub-prime debacle is even broader and deeper than previously realized. This makes yesterday’s NAR release look all the more like the furious spinning it really was.

Here’s how they put lipstick on the pig:

Conditions in the mortgage market are improving for consumers, which should help to release some pent-up demand in early 2008, according to the latest forecast by the National Association of Realtors.

Lawrence Yun, NAR senior economist, notes that widening credit availability will help turn around home sales.  “Conforming loans are abundantly available at historically favorable mortgage rates.  Pricing has steadily improved on jumbo mortgages since the August credit crunch, and FHA loans are replacing subprime mortgages,” he said.

Yun said it’s important to place the current housing market in perspective, and that 2007 will be the fifth highest year on record for existing-home sales.  “Although sales are off from an unsustainable peak in 2005, there is a historically high level of home sales taking place this year – a lot of people are, in fact, buying homes,” he said.  “One out of 16 American households is buying a home this year.  The speculative excesses have been removed from the market and home sales are returning to fundamentally healthy levels, while prices remain near record highs, reflecting favorable mortgage rates and positive job gains.”

Let’s put the NAR spin aside, and look at the relative strength and weakness of construction:

Two years ago, Residential construction was about $688B per year, while Commercial Building (non-residential) was well under $300B. Residential has now fallen about 25%, while commercial has gained over 30%. Commercial construction has picked up some — indeed, much — of the slack of residential slippage — at least in terms of GDP.    

There is an element to the Residential boom not picked up by Commercial construction: The secondary effect on consumer spending. A major impact of the boom has been housing driven consumer spending. While there is still plenty of MEW going on, it is definitely attenuating. We see revolving credit partially substituting, but that is only a temporary solution.

Back to school season as disappointing, and that typically bodes poorly for the holiday shopping season

chart courtesy of AdvisorIntelligence


The United States of Subprime
Data Show Bad Loans Permeate the Nation;
Pain Could Last Years
WSJ, October 11, 2007; Page A1

Same article at Free WSJ

Existing home sales expected to drop 10.8%
National Association of Realtors says rate will be the lowest since 2002.
AP, October 10 2007: 1:18 PM EDT
Improvement in Mortgage Market Bodes Well for Housing in 2008
National Association of Realtors, October 10, 2007

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What's been said:

Discussions found on the web:
  1. Marcus Aurelius commented on Oct 11

    NAR’s tips on what to do when you encounter a crash in residential RE prices due to subprime lending:

    1. Drop to the gound
    2. Assume the fetal position
    3. Don’t make eye-contact
    4. Put your fingers in your ears and hum, “La la la la…”
    5. Repeat until the danger has passed.

  2. Winston Munn commented on Oct 11

    Today’s headlines.

    Foreclosures double.
    Winnebago sales rise 59%.

    On the road again, I just gotta get on the road again….

  3. me commented on Oct 11

    Georgia and Texas, red neck heaven and Bush’s highest polls to the charts. Go figure. The Georgia republican delegation telling their voters how good they have it. Land of Boortz, Bush, Zig Zag Zell Miller, fair tax Linder, no health care for children (Dr.) Tom Price R. Nice.

  4. Marcus Aurelius commented on Oct 11

    “The Georgia republican delegation telling their voters how good they have it.”

    Posted by: me | Oct 11, 2007 9:28:42 AM


    Jesus saves. Everybody else gets a sub-prime mortgage.

  5. Stuart commented on Oct 11

    from another blog. The fugly housing numbers have started now to roll in. Add this morning’s weak retail….. time to go get a cup of coffee (while it’s still under a buck)

    latest DC numbers are out :

    YOY for Sept:

    Total dollar volume: -37%
    Avg sold price: -3.65%
    Median sold price: -17.58%
    Total units sold: -34.61%

    inventory clearing ratio: 8.39 months
    (last seven months it had been below 5)

  6. michael schumacher commented on Oct 11

    the worse the news is, from a housing perspective, the higher the market goes.

    It’s too bad that we have short sighted greedy bastards running the banking system. We’re all going to pay for that sooner or later…


  7. km4 commented on Oct 11

    Quotes on Banking and the Federal Reserve

    “It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning” – Henry Ford

    “Most Americans have no real understanding of the operation of the international money lenders. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States” — Sen. Barry Goldwater

    “We have, in this country, one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board. This evil institution has impoverished the people of the United States and has practically bankrupted our government. It has done this through the corrupt practices of the moneyed vultures who control it”. — Congressman Louis T. McFadden

  8. shawn commented on Oct 11

    Here’s my 2 cents to stocks and housing and economies:

    1) Dollar could rebound substantially due to sentiment extreme, and world-wide speculation in China. Do you realize that China reserve has been soaring lately much mroe than the trade surplus? The current theory is that too many chinese firms borrowed US dollars and turn around and throw it back into china — why not? Even a brain-dead know Chinese Yuan is going to appreciate, coupled with the hot Real Estate and Stock Bubble!

    Same thing to India, and many other places in Asia. When this carry trade un-wind, dollar will bottom.

    2) Watch for Asia, or particularly China stock market implosion, which will strengthen dollar, kill those stupid SP500 earnings-beating sequence. Imagine if Dollar goes from 78 cash index to 90s, that’s 20% appreciation, and it means probably 10% loss in earnings (assuming SP500 50% earnings are derived from oversea).

    3) The ARM reset is going to kill consumptions much more than many expected — the key is the RE-FINANCING. And ARM reset is increasing each month, with the monster share coming due end of the year and beginning of next year.

    Another note, the Realty Track data said foreclosures dropped 8% in Sept from Aug. I think this is easily explained by the Monthly ARM reset picture — The ARM reset had a slight dip in June 2007, and coupled with 60 to 90 days delay, you would see this dip in Sept. But watch out for ARM Reset biggie in Nov and December. Real Biggie. Every reset will lower consumptions, and foreclosure will impact neighborhood prices.

  9. Chief Tomahawk commented on Oct 11

    CNBC just interviewed Ohio Attorney General Mark Dann, who wants to sue Wall St. firms for the housing bust fallout in Ohio…

  10. Christopher Laudani commented on Oct 11


    Larry Kudlow told me housing doesn’t matter; it’s only 5% of the economy. So you are wasting valuable cyberink.

    All those real estate losses can easily be made up by daytrading Google, Apple, RIMM and a few Chinese stocks.

    People who lost their homes (or who are about to lose their homes) should look on it as a valuable learning experience.

    With Cramer’s $750 price target on GOOG, all those former homeowners have plenty of time to make-up those real estate losses.

    Heck, who knows, with proper amounts of leverage and some lucky trades, they will probably make more money daytrading from the homeless shelter than they ever did working.

    This could be a huge win-win for the economy and its not even factored in to the current economic forecasts!!

  11. Stuart commented on Oct 11

    “CNBC just interviewed Ohio Attorney General Mark Dann, who wants to sue Wall St. firms for the housing bust fallout in Ohio…”

    Good for him. What went on was outright fraud. The deliberate and willful hiding of risky assets sold to unknowing purchasers. And you can kiss my arse with any argument that it’s the buyer’s responsibility to know what they’re purchasing. If I leave my house door unlocked, yes, perhaps that was stupid, but it doesn’t negate any accountability on part of a thief to enter. Opportunity and greed are never a strong defence. The issue is plain and simply that through false representation and financial alchemy, lead was turned into gold, mixed in with gold and marketed as 100% pure gold. Good for Mark Dann. Wall St. will employed Paulson, Bernanke and company. Dann doesn’t have a chance.

  12. MarkTX commented on Oct 11

    “Heck, who knows, with proper amounts of leverage and some lucky trades, they will probably make more money daytrading from the homeless shelter than they ever did working.”


    There is a hell of a lot of truth in that statement for most Americans…

    As for housing, stock market, et al….

    lather, rinse, repeat………..

    It really does feel like last year doesn’t it?????

  13. michael schumacher commented on Oct 11

    This is just like the options “issue”…as long as no one was hurt then it’s all ok.

    The brokerage industry has spent untold millions in making sure that no one directly connected to them is going to feel any of the pain that they created….but as long as the perception exists that “no one got hurt” then it is now Ok to repeat this practice under the guise of “Hope Now”……

    I thought for sure they would have a name with “america” in it……people like that patriotic association.


  14. Sam Park commented on Oct 11

    NAR couldn’t forecast tomorrow’s lunch time.

  15. MarkTX commented on Oct 11

    “NAR couldn’t forecast tomorrow’s lunch time.”

    Yea, but to them it doesn’t matter, as long as


  16. Stuart commented on Oct 11

    Subprime catalyst has exposed an underworld of rot. State sales taxes are falling significantly now. Debts are coming home to roost.

    California Retail Sales and Use Taxes
    Sept 2007: $2,038,416,000
    Sept 2006: $2,201,717,000

    September sales tax revenue was off 7% compared with last year.

  17. Dave commented on Oct 11

    Yup, you convinced me the subprime market, bad, bad, bad (for the umpteenth time). Of course for the growing numeber of seniors (who own their homes outright) to the new entrants into the market who are getting houses for a song…

    Why does no one mention the lousy box office results which should hit CA (and to a smaller extent NY), with no good beneficiaries?

    Anyhow there’s always a poor performing sector of the US economy somewhere.

  18. blam commented on Oct 11

    I am becoming convinced the financial industry needs a MAD response from the Federal Reserve to get their attention – Mutually Assured Destruction.

    Nuke one major wall street player.

    They will then be ready to help to refinance the mess they made while Dinko was sitting in the big person’s chair. He will soon be gone and this country needs to begin salvage operations – now.

  19. Winston Munn commented on Oct 11

    GIT ER DONE – A love story

    The scene opens with a wide shot of a dented, single-wide trailer with flat tires. Cut to a cramped, front room with a man in soiled undershirt, sitting on the couch, watching NASCAR, and drinking beer from a can. Beside him on the couch, a woman shuffles though the day’s mail.

    Woman: “Why look at this, Snookums. We can buy a house for no-money down.”

    Man: “Git er done!”

    Cut to a two-story, Victorian style, 3000 square foot house with a realtor’s for sale sign in the front yard. The man and woman and realtor stand beside the sign.

    Woman: “And you said we could get one of those 2/28, ARM, interest only loans?”

    Realtor: “Git er done!”

    Cut to a loan officer at the local bank. The man and woman are seated across from his desk.

    Woman: “And all we have to do is sign this paper and we can move in this weekend?”

    Banker: “Git er done!”

    Cut to interior of a ratings agency, where banker is speaking to a 30-year-old wearing a gold Rolex.

    Banker: “So if we put these loans into this tranche, they’ll be AAA bonds?”

    Ratings Kid: “Git er done!”

    Cut to Ratings Kid seated across from a Funds Manager.

    Ratings Kid: “And these AAA bonds will yield 3 points more than you are presently earning.”

    Funds Manager: “Git er done!”

    Cut to the man and woman sitting in a luxurious front room of the 3000 square foot Victorian style 2-story.

    Woman: “Snookums, we have to make a choice. We either can pay the mortgage bill or buy those Talledego tickets we’ve been wanting.”

    Man: “Git er done!”

    Cut to a wide shot of the Victorian House, a pickup in the driveway, and two men are carrying out of the house a stained sofa. The man watches from the porch, a can of beer in his hand.

    Cut to a wide shot of a dented, single-wide trailer, its tires flat. Cut to a cramped front room. A man in a dirty undershirt is sitting on the couch, watching NASCAR, and drinking beer from a can. A woman appears at the kitchen door.

    Woman: “Snookums, I guess we just weren’t cut out for the high life. But I guess it was worth it to see Dale Jr. kick some ass. Can I get you another beer?”

    Man: “Git er done!”

  20. blam commented on Oct 11

    Cut to GW squinting incessantly…..

    GW: The problum is the democlats are tri’un to rAse tackes. [ grimiss smial]

  21. marianne commented on Oct 21

    I could not agree more. I realize that many of the residential subprime and stated income loans have been problematic. However, there is a commercial lending benefit to keeping this loan type alive. Financial institutions like Ocean Capital in Rhode Island maintain an up close and personal policy with the commercial lending that they do to folks trying to start a business and who may not have a portfolio substantial enough to make them attractive borrowers to the big box lenders. Sometimes, you have to purchase the gas station, auto repair shop or motel to generate revenue. Subprime commercial lending is oftentimes the only opportunity for certain new business developoment and should be retained.

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