On the housing front (see more below), the NAHB has switched from its bullish forecast and now sees the 2Q spring selling season coming down — the sixth consecutive quarter of negative sales growth. Moody’s agrees with us with a statement that “the correction will last another year” in the aftermath of the subprime slide. While nonfarm payrolls have held up due to more government and health care/education jobs, economic-sensitive jobs are now contracting and we see that mortgage-related employment losses are mounting (there are still 7,000 New Century Financial employees waiting to see if the lender survives). University of California-Berkley economist Ken Rosen sees sub-prime home values dropping between 10% and 15% and that 1.5 million homeowners (out of a total of 80 million) will lose their homes through foreclosure. The Mortgage Bankers Association is predicting that the number of mortgage lenders that are likely to fail this year will breach 100. This housing downturn is far from over and the full impact across the economy has not been felt — and this will come as a surprise, we believe, to a Fed and consensus forecast of 3% second-half GDP growth. And as with most bubbles, this one is started with loosening credit guidelines, excessive price appreciation, classic performance-chasing, speculative fervor and now ends in fraud, lawsuits
and re-regulation (the OCC’s John Dugan warned last year that this cycle would end with court action) — and remains gripped with overcapacity (sound familiar?). As more capital chased real estate this cycle, we now have a situation where,
according to the Federal Financial Institutions Examination Council (we got this from Bloomberg) that the number of US financial institutions in the mortgage business jumped 16% in the past four years to 8,848.
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