Monday, July 28, 2008

Signs of the Economic Apocalypse, 7-28-08


Gold closed at 926.80 dollars an ounce Friday, down 3.4% from $958.00 for the week. The dollar closed at 0.6371 euros Friday, up 0.9% from 0.6312 at the close of the previous week. That put the euro at 1.5697 dollars compared to 1.5842 the week before. Gold in euros would be 590.43 euros an ounce, down 2.4% from 604.72 at the close of the previous week. Oil closed at 123.41 dollars a barrel Friday, down 4.4% from $128.82 for the week. Oil in euros would be 78.62 euros a barrel, down 3.4% from 81.32 at the close of the Friday before. The gold/oil ratio closed at 7.51 Friday, up 0.9% from 7.44 for the week. In U.S. stocks, the Dow closed at 11,371.92 Friday, down 1.1% from 11,496.57 at the close of the previous Friday. The NASDAQ closed at 2,310.79 Friday, up 1.2% from 2,282.78 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.09%, unchanged for the week.

Gold and oil were down sharply last week. Over the last two weeks, oil fell 17.5% on lower probability of war in Iran and growing evidence of a serious global economic downturn. It may be that the commodities bubble will be short-lived and that we are shifting back to risk of deflation due to collapse in demand.

Bad news in the U.S. housing sector continued to pile up. Foreclosures have doubled from a year ago and existing housing sales hit a ten-year low:

U.S. Economy: Sales of Existing Homes Decline to 10-Year Low

Bob Willis

July 24 (Bloomberg) -- Sales of previously owned U.S. homes fell in June to the lowest level in a decade as tumbling real- estate prices and consumer confidence signal no end in sight to a housing recession now in its third year.

Resales dropped 2.6 percent to a lower-than-forecast 4.86 million annual rate from a 4.99 million pace the prior month, the National Association of Realtors said today in Washington. The median home price dropped 6.1 percent from June of last year.

The housing slump may deepen further after mortgage rates climbed to the highest in a year this month and turmoil engulfed Fannie Mae and Freddie Mac, which account for more than two- thirds of new home-loan financing. A record 18.6 million homes stood empty in the last three months as the industry's recession reverberated through communities, separate figures showed today.

The NAR report “is, unfortunately, not telling us about an end” to the slide, said David Resler, chief economist at Nomura Securities International Inc. in New York. “Housing is going to be a non-contributor, if not a drag, on the overall economy.”

The Standard & Poor's Supercomposite Homebuilding Index dropped 4.9 percent to 480.61 at 10:33 a.m. in New York. By comparison, the Standard & Poor's 500 Stock Index lost 0.6 percent, to 1,274.06.

Economists forecast home resales would fall to a 4.94 million pace, according to the median of 77 projections in a Bloomberg News survey. Estimates ranged from a 4.79 million pace to 5.1 million rate.

Jobless Claims

The Labor Department earlier today reported that first-time claims for unemployment benefits rose last week to the highest in almost four months, a sign the slowing economy is weakening the labor market. Applications increased by 34,000 to 406,000 in the week ended July 19.

Compared with a year earlier, existing home sales were down 16 percent in June. Purchases are down by about a third from a record of 7.25 million reached in September 2005.

The number of previously owned unsold homes on the market at the end of June rose to 4.49 million from 4.482 million in May. The total represented 11.1 months' supply at the current sales pace. The agents' group has said that a five-to-six month's supply reflects a balanced market.

“The biggest problem is that we've not yet seen inventories come down,” Paul Puryear, managing director of Raymond James & Associates Inc. in St. Petersburg, Florida, said in an interview with Bloomberg Radio yesterday. The housing market isn't likely to recover until at least 2009 or 2010, he said.

Property Types

Sales of existing single-family homes declined 3.2 percent to an annual rate of 4.27 million. Purchases of condos and co-ops increased 1.7 percent to a 590,000 pace.

The median sales price fell to $215,100 from $229,000 in June 2007. The median cost of a single-family home decreased 6.7 percent to $213,800, while that of condominiums and co-ops fell 2.2 percent to $224,200.

Purchases decreased in three of four regions, led by a 6.6 percent decline in the Northeast. Sales rose 1 percent in the West, which also showed a 17 percent drop in the median price, the biggest of any region.

The glut of homes may be even greater because not all foreclosed properties are counted by the Realtors group. The group only includes foreclosures that have been listed on the multiple listings service…

Since the U.S. economy has been propped up this decade by war and housing, the pain from the collapse of the housing bubble and the rise in energy prices is spreading to any sector affected by consumer spending:
Commercial bankruptcies soar, reflecting widening economic woes

Tony Pugh McClatchy Newspapers

Sat, Jul. 19, 2008

WASHINGTON — Driven by a sour economy and skittish consumers, U.S. business bankruptcies saw their sharpest quarterly rise in two years, jumping 17 percent in the second quarter of 2008, according to an analysis by McClatchy.

Commercial filings for the first half of 2008 are up 45 percent from last year, as the national climate for commerce continues to deteriorate amid rising energy and food costs, mounting job losses, tighter credit and a reticence among consumers to part with discretionary income.

From April through June, 15,471 U.S. businesses called it quits, according to data from Automated Access to Court Electronic Records, an Oklahoma City bankruptcy management and data company.

States that saw the biggest increase in filings were Delaware, Montana, Oregon, Maryland and Connecticut, suggesting that the economic gloom is spreading beyond large population centers.

It was the 10th straight quarter that business bankruptcy filings have increased. Nearly 29,000 companies filed in the first half of 2008.

Another 60,000 to 90,000 others probably have closed, because roughly two to three businesses fold for every one that files for bankruptcy, said Jack Williams, resident scholar at the American Bankruptcy Institute.

The vast majority of these failed companies are among the nation's 23 million small businesses, with fewer than 100 employees. Their fortunes have tumbled as the national economic downturn has deepened.

"The climate is turning desperate for small businesses," said George Cloutier, founder of American Management Services, a consulting firm that helps small companies increase profits. "They are in crisis, and, as these numbers show, it's getting worse and worse."

Larger enterprises typically have more capital to weather downturns, but many of them also are reeling from the sputtering economy.

"I've been doing this for 36 years, and this is clearly the worst I've ever seen," said Harding Dawahare, the president of the Lexington, Ky.-based Dawahare's clothing store chain, which employs more than 400 people.

It was 1907 when Dawahare's Syrian immigrant grandfather, Serur Dawahare, began packing his mules with bags of fabric and linens and peddling his goods door to door to coal miners in Eastern Kentucky.

From those modest beginnings, Dawahare's grew to a 32-store clothing chain with outlets throughout Kentucky and a few stores in Tennessee and West Virginia.

However, Harding Dawahare did the unthinkable recently and filed for bankruptcy after amassing more than $9 million in debts. He said his problems began after a tough year in 2006, but it was the 2007 holiday season that did him in.

"We had a great third quarter, but if you don't have a good fourth quarter, you're not gonna make it. And that's essentially what happened. The economy tanked in late November and it never came back, and we just couldn't overcome it."

More than 20 percent of the newly shuttered businesses were in California, which logged 3,141 bankruptcies in the second quarter.

Texas fielded the next highest number of bankruptcies with 1,168, followed by Michigan with 702 and Florida with 635. New York was next, with 618 petitions, and Colorado had 547.

Commercial bankruptcy filings reported by Automated Access to Court Electronic Records are typically higher than official government figures due to a more thorough reading of the petitions.

Robert Lawless, a law professor at the University of Illinois and a bankruptcy expert, has researched and written about the federal government's underreporting of business bankruptcies. He estimates that roughly one in seven people who file for consumer bankruptcy do so in connection with their businesses.

Tom Clements' pet shop in Tampa, Fla., started seeing steep declines in business in April of last year.

"We didn't know what it was at the time, so we were trying to work through it," Clements said.

But as sales stayed flat for the next 15 months, Clements, 62, realized that the economy was forcing customers to make tough choices. "Obviously a puppy isn't something that everybody has to have."

With listed assets of about $2,605, Clements filed for Chapter 7 bankruptcy in June, owing more than $260,000 for back taxes, a property lease, auto leases, unpaid inventory, dog food, phone service, advertising, pest control, waste removal and other services.

"I absolutely loved that business," Clements said wistfully. "It's the kind of business where people were happy. You come, get a puppy or a dog, you go home happy. Unfortunately, I'm not a philanthropist."

Clements said the lingering debt and the money he invested had jeopardized his and his wife's retirement.

"That's why I wouldn't ever consider going back into something like that again," he said.

Williams of the bankruptcy institute said that because bankruptcies were lagging economic indicators, they probably would "continue to increase at least for the next year to 18 months at the rate that we're seeing right now."

Cloutier wants the federal government to create a $10 billion emergency-loan fund to help struggling small businesses avoid bankruptcy. Williams is skeptical.

"I think most of the business problems are not simply market-driven, they're operational. So there's a mix. Throwing more money at a poor operation means you just spent more money, but the operation is still poor."

Jodi and Steven Carbaugh of Waynesboro, Pa., ended up in bankruptcy court after they tried to expand their Cupo' Joe coffee shop in Greencastle, Pa.

In 2006, the couple used their home as collateral to buy a nearby Amish-owned bakery. "Big mistake," Jodi Carbaugh said.

As their debt increased, the couple tried to juggle four business-related loans and their home mortgage as well as pay vendors, employees, utilities and insurance. At the same time, business at the coffee shop began to slow.

Some 70 miles outside Washington, the Cupo' Joe was a favorite morning launching pad for residents who drive to work in the nation's capital. But as gas prices increased, Jodi Carbaugh noticed that business began to wane, falling 40 percent since last year.

"People had to spend more money to buy gas to get to D.C. instead of buying lattes and specialty breads," Carbaugh said. At the same time, food prices spiked. A case of eggs tripled to $60 and a 50-pound bag of flour went from about $20 to more than $50.

"The price of goods increased so drastically that we couldn't ask folks to pay what it cost to make the products," Carbaugh said.

Their fortunes bottomed out in June, when they filed for Chapter 13 bankruptcy protection.

"We worked as hard as we could for as long as we could," Carbaugh said of their failed ventures. " . . . Some of life's lessons aren't so easily learned, but we learned our lesson."

The result is a lot of personal pain and shattered lives. In the Boston area last week a woman committed suicide before her house was going to be reposessed.

US housing slump “without precedent”: foreclosures up 121 percent over 2007

David Walsh

26 July 2008

Foreclosures in the US continued to climb in the second quarter of 2008, experts acknowledge that the current housing slump is “without precedent” in the modern era, and the resulting stress is taking both an economic and emotional toll: a 53-year-old Massachusetts woman committed suicide July 22 only hours before her family’s home was to be put up for auction.

In the three-month period April through June, some 740,000 foreclosure filings were recorded in the US, an increase of 14 percent over the first quarter and 121 percent over the same period in 2007. According to RealtyTrac, one in every 171 US households received a filing, which includes notices of default, auction sale notices and bank repossessions.

The banks took back some 220,000 homes in the second quarter (and 370,000 in the first six months of the year) and there are presently 18.6 million homes in the country standing empty, the highest number in history. The number of vacant houses has jumped nearly 7 percent in the last year.

California’s Central Valley “remains ground zero” for foreclosure filings, as CNNMoney notes, with one in every 25 houses in Stockton affected, for example. Riverside-San Bernardino, east of Los Angeles, had the second highest rate with one filing for every 32 households. Las Vegas, Nevada and Bakersfield and Sacramento, California were the others among the top five regions.

California as a whole witnessed another 203,000 foreclosures; Nevada had the highest rate, one in every 43 households. Phoenix, Arizona saw a 534 percent increase in foreclosures in the first half of 2008. Its west and southwest sides had increases of 700 percent or more.

Outside the Sun Belt, Detroit is suffering the most of any major center, with one filing for every 66 homes in the second quarter. In Ohio, Toledo (one in 92), Akron (one in 93) and Cleveland (one in 108) have also been hit very hard.

RealtyTrac, the Irvine, California-based data company, reported that 48 of the 50 states and 95 of 100 major city regions witnessed year-over-year increases in foreclosure activity.

The firm has doubled the projected number of foreclosures in 2008 to about 2.5 million.

Previously foreclosed homes are now making up a growing percentage of existing home sales in some areas. In San Joaquin and Merced counties in California, seven in ten existing-home sales in the second quarter involved properties that had experienced foreclosure in the previous year. Foreclosed houses and condominiums made up 41 percent of existing-home sales in California in April, May and June.

The National Association of Realtors reported Thursday that sales of existing homes in June were lower than expected and had hit their lowest level in a decade. Sales by homeowners declined last month to a yearly rate of 4.86 million, down 2.6 percent from the 4.99 million annual rate in May. This is slowest pace since the first three months of 1998.

The existing home sales rate is down 15.5 percent from June 2007. Economists had predicted sales at an annual rate of 4.95 million.

The median price for a house sold in June 2008 was down 6.1 percent from one year earlier.

Despite lower house prices, mortgages rates are increasing, so that “the total mortgage price is under upward pressure,” notes CNNMoney, further discouraging sales. The 30-year fixed rate mortgage rose to 6.63 percent in the week ending July 24, up from 6.26 percent the week before.

Bill Gross, manager of the world’s largest bond fund at Pacific Investment Management, estimates that as many as 25 million US homeowners risk owing more than the values of their homes, a condition known as “negative equity.” This will lead to further foreclosures and widespread financial hardship. The bill currently being passed in Congress may assist at most 400,000 homeowners, according to the claims of its own advocates. In any event, Brian Bethune, an economist at Global Insight, points out that while the bill “has some very positive elements ... it would be very easy to negate those elements if mortgage rates keep rising.”

Gross of Pacific Investment estimates that financial firms have already suffered $467 billion in credit losses and asset writedowns. He argues that a total of $5 trillion worth of mortgage loans are in “risky asset” categories, and that “nearly [$1 trillion] of cumulative losses will finally mark the gravestone of this housing bubble.” If financial firms write down this massive amount, it will result in sharply reduced bank lending and produce a fire sale of assets.

A special commentary prepared by the Wachovia Bank’s Economics Group, “How Far Will Housing Prices Fall?” released July 14, revealed the current perplexity of the banking and financial experts. The report noted: “We are repeatedly asked how far housing prices will fall and when home prices will bottom out. The answers to these questions are complicated. The current housing slump is without precedent, both in terms of breadth and magnitude.”

According to the National Association of Realtors, the authors explain, the median price for an existing home “has fallen 6.8 percent over the past year and has been down on a year-to-year basis for the past 22 months. Prior to the recent string of declines, the median price of an existing home had never declined for more than two months in a row, except once back in 1990.”

Wachovia’s analysts tentatively estimate that housing prices will ultimately have dropped anywhere from 22 to 29 percent from their peak in 2005, a massive decline in the value of the only significant asset most American families own.

Impending foreclosure led to suicide

Knight Ridder’s Washington bureau noted July 20, “For many homeowners, the deep housing slump feels like a drop off a skyscraper. Every time another 15 floors have passed, there seems to be more room to fall.”

It seems to safe to predict that the suicide of Carlene Balderrama in Taunton, Massachusetts, southwest of Boston, will not be the last such tragedy produced by the housing slump.

The distraught woman, mother of one son, shot herself Tuesday afternoon after sending a fax to her mortgage company alerting them of her intention. The company was planning to sell her foreclosed home at 5 pm.

Taunton Police Chief Raymond O’Berg read a portion of the fax to the media: “By the time you foreclose on my house I’ll be dead.” In a suicide note, she asked her family to use the life insurance money to pay off the debt.

Horribly, Balderrama’s husband, a plumber, arrived home from work to discover police with his wife’s corpse, unaware of the impending auction. “He told us she handled all the finances,” Police Chief O’Berg said. “He had no idea the house was being foreclosed on.” Potential buyers also arrived while the dead woman’s body was still inside the home.

The media reports that since John Balderrama bought the $232,000 three-bedroom house in Taunton in 2002, he had attempted to file for bankruptcy three times, and the mortgage company had twice launched foreclosure proceedings. Balderrama was earning about $95,000 a year as a plumber. He said that in her suicide note his wife explained “that it got overwhelming for her.”

O’Berg told the media, “It is a tragedy ... There’s victims all around in this ... Something’s wrong with the system when you have working people being foreclosed on.” The housing crunch, the police chief said, “is inflicting real pain on middle-class America. Put yourself in her shoes. You handle the finances, and you’re hiding everything from family. It’s a lot of pressure.”

WHSM television reported, “Neighbors said it is a sign of the times.”

Bruce Marks, chief executive of the Neighborhood Assistance Corporation of America, told the Boston Globe that it was not uncommon for homeowners to contemplate suicide when they were not able to keep up their mortgage payments.

“What gets us so angry is that people blame themselves,” Marks observed to the newspaper. “They can’t see past their sense of responsibility to see the responsibility and the predatory nature of these lenders. The fact of the matter is, unless something dramatic happens, there’s going to be more and more people like her taking their lives.”

Emails from readers posted by the Taunton Call about the episode provide some indication of popular sentiment.

Wrote one reader: “My heart goes out to this family. How tragic that she felt that she needed to take her life. Mortgage companies are so heartless that I am sure they still care more about auctioning off this house than the family of this poor woman. I am sure buyers will be lined up tomorrow. What a very sad sign of the times!”

Another commented: “I have pleaded in the past with my mortgage company to work with me on my rates because I was stupid not to read the whole 10 thousand pages when I bought my house and now I’m stuck with a mortgage that will go up every 6 months. I’m on my way to foreclosure and I don’t know where to go as a single parent with 3 kids. A mortgage company shouldn’t feel sorry for people, but have a heart if someone is trying the hardest to pay the mortgage—then give them a little time.”

A third wrote: “Most people who read this article will probably say to themselves ‘of course they foreclosed the house, it’s the law, they had too.’ The sad truth is that they are right because that is how the world works. This article should be an eye-opener to anyone who reads it. It clearly shows how disgusting and ridiculous the system of government we live under is. Just the fact that people are driven to suicide simply because of ‘financial pressure’ is horrible. In America people are supposed to have a right to life, liberty and the pursuit of happiness, but this story revokes all those rights. Situations like these disgrace the good intentions that the fathers of this country once fought for. I see this as banks (and other money collecting companies) having the right to take from clients even when it may result in death.”

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