U.S. Economic/Financial News

Merrill Lynch: Housing Market 'Over-Leveraged'

Real estate has accounted for 70% of the rise in U.S. household net worth since 2001, and over 40% of the private-sector jobs created since 2001 have been housing related, according to a recent study by Merrill Lynch economist David Rosenberg. Calling the housing market "over-leveraged," the study says that the subprime market has accounted for 28% of new mortgage funding in the past six months, versus 5% five years ago; that an estimated 42% of first-time buyers made no down payment on their home purchases last year; in the hottest price areas, adjustable-rate mortgages (ARMs) now account for over 50% of new mortgages; over 60% of new mortgage loans in California this year have been interest-only loans or option ARMs; and the Fed's loan-officer survey shows that mortgage standards "have eased a massive 13 percentage points" in the past three years.

Under the heading "Affordability Stretched," Rosenberg notes: The FDIC reports that 38 of 50 states in the past year have seen home-prices increase far faster than personal incomes, and grow 6.7% faster nationwide; from 1955 to 1995, home prices rose with inflation, or 0% in real terms, while since 1996, home values have risen 45% in real terms, creating a $5 trillion increase in "housing-bubble wealth"; over a third of homeowners are spending over a third of their income on monthly mortgage payments, and 12% are devoting over half their income; homeowner affordability is now at a 13-year low and the total household debt-service ratio in the first quarter hit a peak 13.4%; housing starts at 2 million units a year are now outpacing the 1.6 million of new household formations, with the excess supply suggesting speculative buying.

Under the heading "Speculation Rampant," the study says: National Association of Realtors data show that 23% of the home sales in the last year "were investor (read: speculative) based," and another 13% were second properties (another proxy for speculative buying); units sold but not yet started, are up 47% year over year, a record high; and nearly one in four Americans think it is a good time to buy because it's a good investment and/or prices will continue to appreciate. Rosenberg calculates that a decline from double-digit growth to no growth would trim at least 1% from GDP next year.

On the latter point, Abelson noted that such a "drastic change" in housing values "would reverberate through the length and breadth of the economy, and its real effects would be as profound as they are unfathomable."

Bush's Pension 'Reform' Will Raise Employer Costs

New figures from the Pension Benefit Guaranty Corp. (PBGC) indicate that President Bush's so-called "pension reform" will significantly increase costs to employers, the Washington Post reported July 29. Rep. George Miller (D-Calif) released figures obtained from the PBFC, under the Freedom of Information Act, that show Bush's plan would require employers nationwide, over the next ten years, to contribute $430 billion more to their pension funds, than under current law. In addition, it would increase their premium payments to the PBGC by about $3.6 billion annually.

"It's a stunning increase," Miller said. "Do these increases cause companies to want to terminate ... in whatever fashion, their defined-benefit pension plans? Lawmakers don't have a clear picture of the true impact of the proposed changes. We are rushing forward with this [Boehner/Johnson] legislation ... without any information," the Congressman pointed out.