U.S. Economic/Financial News
November Housing Data Puzzle Economists
Housing starts rose 5.3% in November, even as mortgage applications fell last week to an 11-month low. Permits for future home building also increased 2.5%, driven by speculative construction, in spite of skyrocketing home prices and rising interest rates. The chief economist at the National Association of Home Builders said he was "a little surprised," and that the statistics raise the question of "what the heck is going on." He cautioned that "single-family housing starts are probably heading for an erosion," saying the gains were largely tied to orders placed during the summer. Likewise, the chief economist for the National Association of Relators called the data "a little eyebrow-raising."
"This reckless overbuilding will only exacerbate the magnitude of the price collapse in the coming housing bust," warned the president of brokerage firm Euro Pacific Capital, Inc.
U.S., Asian Auto Sales Post Steep Declines
U.S. auto sales fell across the board in early December, down sharply for the Big Three automakers, while Asian car sales also posted declines. Overall sales fell 14% in first 11 days of December compared to last year, according Power Information Network, a division of J.D. Power and Associates. Despite launching a new round of discounts, GM's sales dropped 17%; Ford's sales plunged 25%; and Chrysler's fell 19%. Sales for Toyota slid 6%; Honda's declined 3%; while sales at Hyundai and Nissan fell 20% and 14%, respectively.
Meanwhile, the biggest maker of light-truck axles, Dana Corp will eliminate 800 jobs at four plants, slashing 500 jobs at a plant located in Thorold, Ontario; with the remainder to be cut at three plants in Australia.
S&P Threatens More Auto Downgrades in 2006
According to Standard & Poor's "Industry Report Card: Global Automakers," published Dec. 21, GM and Ford, "which are being challenged both operationally and financially, will encounter difficulty in the coming year," as sales continue to fall. This carries the implicit threat of further downgrades. S&P also upped the pressure on auto suppliers, saying the outlook for 2006 would be "cloudy at best." "Even more downgrades are forecast in the near term for auto suppliers, and they will continue to outpace upgrades," S&P bellowed in a separate report card for suppliers. Among key concerns S&P cited, were that a potential strike at Delphi would halt GM's production and plunge its already fragile supplier base into severe financial hardship.
Risky Home Loans Point to Housing Bubble Explosion
Approximately 13.4% of all U.S. home mortgages at the end of June were contracted to borrowers considered most likely to default, the Mortgage Bankers Association reported in December. Since the size of the U.S. residential mortgage market is $7.6 trillion, this means that $1.09 trillion of home mortgages are "likely to default." Yet, the housing bubble has several layers of leverage. Many mortgages are packaged into pools, and against them are issued bonds. The amount of bonds backed by these high-risk loans more than doubled since 2001, to a level of $476 billion. Thus, there are two mutually feeding branching-points of potential housing bubble explosion. First, the home mortgages themselves; second, the bonds issued against the mortgages.
The market "will deteriorate as housing slows down," said Christopher Flanagan, who runs debt-backed research at JP Morgan Chase & Co. (which bank is the fourth largest issuer of mortgages in the U.S.) The dollar volume of mortgage loans made, may fall by as much as 25% next year, he said.
At the same time, the monthly Housing Market Index, compiled by the National Association of Home Builders and Wells Fargo Bank, a gauge of builder confidence in the single-family home market, declined four points to a reading of 57, its lowest level since April 2003.
Fitch Downgrades Ford Debt to Junk Status
Fitch's rating service cut its rating on the debt of Ford Motor Companywhich totals $142 billionto junk status (which in its system is BB+)on Dec. 20. Standard & Poor's and Moody's Investors Service had already cut Ford's debt rating to junk. As a result, five-year credit default swaps on Ford Motor Credit shot up to a bid of 545 basis points. That means that it would cost someone $545,00 a year to insure $10 million of the company's debt against default.
Meanwhile, the value of Ford stock has fallen 44% so far this year; the value of GM's stock has fallen by 47%. Speculators and asset-strippers are said to be licking their chops in anticipation of devouring the carcass.
U.S. Mayors: Hunger, Homelessness on the Rise
The U.S. Conference of Mayors' "Hunger and Homelessness Survey" for 2005 found increases in both categories in surveyed cities. Highlights from report which, this year, surveyed 24 cities:
Hunger: Demand for emergency food increased in 77% of the cities, with the average increase at 12%. But the increases ranged from 35% in Charleston (S.C.), 30% Detroit, 28% Miami, 25% Los Angeles, and 15% Philadelphia, to a low of 4% in Santa Monica (Calif). Overall, in 43% of the cities, food aid facilities had to turn people away due to lack of resources, with an estimated 18% of all requests unmet. Causes of hunger were led by unemployment, followed by high housing costs, overall poverty, and costs for medical/health care, transportation, childcare, or utilities.
Homelessness: Demand for shelter rose in 71% of the cities. The increase ranged from 30% in Los Angeles, 28% in Trenton, and 22% in Detroit, to a low of 1% in Cleveland. In 88% of cities, the shelters often turned away homeless families; 79%, homeless individuals; due to lack of resources. In addition to the homeless, requests for housing assistance by low-income families and individuals grew by 86% in these cities. Causes of homelessness were led by lack of affordable housing, followed by low-paying jobs, mental illness, domestic violence, unemployment, poverty, and prisoner re-entry. This past year 11% of the homeless were veterans, and 15% were employed people.
Unemployment Among Black Americans Shot Up in November
"Black Joblessness Grows to Record Levels," was the headline of a wire story Dec. 21 covering the November unemployment report of the Bureau of Labor Statistics, which showed that unemployment among black Americans had officially reached 10.6%. This was a huge leap from October's 9.1%, while the overall national unemployment rate "officially" stayed the same at 5.0%. Rep. Mel Watt (D-N.C.) of the Congressional Black Caucus, in a statement, warned that the black unemployment rate is actually significantly higher than that: Watt says the sustained displacement of hundreds of thousands of Katrina evacuees is making it very difficult for them to look for jobs, so that the percentage of labor-force drop-outs in the black population has grown sharply.