The Return of the Misery Index (Michael Pento)

Consumers that don’t happen to have

direct access to a government bailout

or who aren’t in line to receive a huge

Wall Street bonus are indeed feeling the pain.

Wednesday, February 9, 2011
By: Michael Pento

The website Zillow.com reported today that YOY home price declines were 5.9% and that of those homeowners with a mortgage, 27% were underwater on their property. Maybe this concrete evidence of a double-dip in the real estate market has something to do with surging borrowing costs. Today, the cost of a 30 year mortgage hit 5.13%, up 32bps in just one week

Not only is the cost of homeownership rising but so is the cost of food. Thanks to the government’s genius decision to burn 40% of the corn crop on ethanol production, corn stocks are now the lowest in 15 years—with a stock to use ratio of just 5%. That means corn prices are set to increase yet again from their already lofty levels.

Consumers that don’t happen to have direct access to a government bailout or who aren’t in line to receive a huge Wall Street bonus are indeed feeling the pain. In fact, the Misery Index hit a 26 year high for 2010. The index—which is simply the addition of the unemployment and inflation rate—reached 11.29. You have to go all the way back to 1984 to eclipse such a level of pain. Only back then, inflation was calculated without the “benefit” of the manipulations of the Boskin Commission. Therefore, the Misery Index should be, in reality, much higher than 11.29 and is probably closer to the pain we felt under Jimmy Carter.

America’s citizenry are experiencing rising food and commodity prices, rising interest rates, falling home prices and stagnate wages and job growth. But so far Mr. Bernanke has only managed to bail out his buddies on Wall Street and in Washington. Maybe he just doesn’t realize that he is in the process of wiping out the middle class by destroying the value of our currency and rendering those without financial means, helpless to guard themselves against inflation. Too bad questions regarding the benefits of a sound currency weren’t on his SAT exam. Link to other Michael Pento Posts-worth the visit

Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.

Zillow: Home values have fallen 27 percent since they peaked in June 2006 (how's your bottom Cramer?).

Negative Equity Rises to 27%;

Foreclosure Moratoriums at Least

Partly Responsible for Increase,

According to Q4 2010 Zillow®

Real Estate Market Reports

SEATTLE, Feb. 9, 2011 /PRNewswire/ -- Home values in the United States posted their largest quarterly decline since the first quarter of 2009, falling 2.6 percent as the temporary stimulus of the home buyer tax credits wore off, according to Zillow's fourth quarter Real Estate Market Reports. The Zillow Home Value Index declined 5.9 percent year-over-year in the fourth quarter to $175,200. Home values have fallen 27 percent since they peaked in June 2006.

Accelerating home value declines, as well as a slowdown in the nation's foreclosure rate following the late-2010 robo-signing controversy, contributed to an increase in negative equity. At the end of the fourth quarter, 27 percent of single-family homeowners with mortgages owed more on their mortgage than their homes were worth, up from 23.2 percent in the third quarter.

Less than one in every 1,000 (0.09 percent) U.S. homes were liquidated in foreclosure in December, down from 0.12 percent in October, when foreclosure liquidations peaked. Foreclosures are expected to increase again in early 2011, which may cause negative equity to fall as some underwater homeowners lose their homes to foreclosure and are no longer in negative equity.

With the end of the homebuyer tax credits in mid-2010, home value declines accelerated toward the end of the year. When they were in effect, the credits tempered home values declines – nationally, home values fell only 0.9 percent from the first to the second quarter of 2010 – but values resumed their decline after the credits' expiration, falling 2.6 percent from the third to the fourth quarter.

"While the tax credits did not hurt the housing market, they did delay its bottom by interrupting the housing correction that was taking place," said Dr. Stan Humphries, Zillow chief economist. "Home value trends in the fourth quarter remained grim, but the good news is that these declines, while painful in the short-term, mean we're getting closer to the bottom. The housing recession is likely in its death throes, and we expect to see sales pick up in early 2011. That will lead the way to home values stabilizing and an eventual bottom later this year, although it will take several months of increased sales activity before values begin to respond."

And who could forget Jim Cramer's

housing market bottom call (June 2009)...

"I am frantically trying to buy multiple properties right now." Cramer went so far as to definitively declare a bottom to the housing market. His words: "This is patently obvious."

Ever Closer to a Failed Auction (Michael Pento)

Tuesday, December 28, 2010
Michael Pento
By: Michael Pento

Yesterday was a rather depressing day on the economic data front. The S and P/Case-Shiller home price index fell 0.8% in the month of October from the year ago period. Even more troubling was the MOM decline of 1.3%. 18 of 20 cities were down and the index is off 30% from its peak. The real estate sector has most assuredly resumed its decline. The progenitor and nucleus of the credit crisis was the overleveraged real estate market. Now that home prices are falling once again there will more homeowners underwater on their mortgages and the incentives to walk away from the loans will increase. This will cause a further increase in foreclosure activity and further downward pressure on home prices.

To make matters worse, an auction of five-year US bonds went poorly and the yield on the 10-year bellwether bond is back to 3.49%. That auction is just a taste of what’s ahead. Soaring borrowing costs are the future for U.S. sovereign debt issuance. We are fast approaching the day when the U.S. will either have to pay an astronomical interest rate on borrowed funds or be unable to issue the debt at all.

China, Russia, and Brazil have felt it necessary to raise interest rates as inflation is hurting the middle class and their economies. At lease those countries are dealing with the problem. The U.S. is not only ignoring inflation but actually doing everything in its power to encourage it. More and more debt, soaring commodity prices and massive money printing are the prescription our government has given us.

All this and they want you to believe that all is ok just because retail sales were up?

Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.

Robert Shiller interview by WSJ discussing falling home prices

Professor Robert Shiller interviewed by Wall Street Journal discussing yesterday's Case-Shiller Report. (20-City Composite fell 0.8% from their levels in October 2009)
 If prices continue to fall at this rate, Shiller expects Congress will issue another home-buyer tax credit or other emergency measure to stop the fall, despite the fact that it's an unfair gift of taxpayer money to a group of people that simply buy a house. When the ship is sinking this fast, Shiller says, you do what you have to do.

Wall Street Gives Uncle Sam Too Much Credit (Michael Pento)

By: Michael Pento
More Michael Pento
Monday, December 13, 2010

Despite the fact that the S and P is up over 80% in the last 21 months, US financial firms are currently tripping over each other in their zeal to raise their S and P 500 and GDP targets for 2011. JPMorgan's chief US equities strategist, Thomas Lee, came out on December 3rd with a target of 1425 on the S and P for 2011, which would be a 15 percent gain.

Barclays Capital last Thursday released a 1420 estimate. Not to be outdone, Goldman Sachs also recently released its forecast, and it sees a more-than-20 percent increase next year, to 1450. Meanwhile, PIMCO’s idea of a “new normal” has translated into a 2011 GDP forecast raised from 2-2.5% to 3-3.5% due to “massive” government stimulus.

In the midst of this collective 'hurrah,' very little attention is being paid to what is going on over in the bond market. With my due condolences to Fed Chairman Bernanke, the yield on the 10-year Treasury note has increased from 2.33% on October 8th to 3.29% today. And, if there is any notice at all given to that recent run-up in yields, it is merely explained away as a sign of robust growth returning to the economy.

In reality, growth doesn’t cause an increase in interest rates; it is either lack of savings or inflation that is responsible. To refute the 'robust growth' reasoning, turn your attention to the fact that the spike in yields just happened to coincide with the news that the unemployment rate jumped to 9.8% in November.

A slightly broader explanation for the surge in borrowing costs might be the failure of the Bowles-Simpson deficit commission to implement any cost cutting measures. Or, perhaps it was the intimation from Bernanke himself that QE III may already be under construction in his infamous interview on 60 Minutes. Or, maybe it is the fact that the $150.4 billion November budget deficit was the highest total for that month... ever, and was the 26th straight month of red ink! I often wonder to myself, where in the midst of all this good news do I summon a bearish attitude?

I think it's pretty clear that 'robust growth' is going the way of 'green shoots' and knickers – right into the dustbin of history.

So, what will the increase in interest rates – ignored by all of Wall Street – actually mean for the economy in 2011?

For starters, the National Home Price Index already fell 2% in the third quarter of 2010. On a national basis, home prices are 1.5% lower year-over-year, and 15 out of the 20 cities measured were down over the last 12 months. On a month-over-month basis, 18 cities posted a price decline in September, compared to 15 MoM drops in August, and just 8 cities experiencing price reductions in the July report. Therefore, home prices, which were already headed lower before this recent spike in mortgage rates, are set to take another tumble downward. According to Freddie Mac’s weekly survey of conforming mortgages, the average rate on the 30-year fixed is at its highest level in six months. 30-year rates averaged 4.61% for the week ending Dec. 9, up from 4.46% last week.

It’s the fourth week in a row that the mortgage rate has increased. The ramifications for the real estate market and bank lending are clear. Lower home prices will send more mortgages under water and force many more homes into foreclosure. Higher borrowing costs will lower the demand for borrowing and place more strain on the capital of lending institutions.

On top of that, household debt as a percentage of GDP still stands at a lofty 91%. It should be clear that with near double-digit unemployment, the last thing consumers can now tolerate is a significant increase in debt-service payments.

The rising cost of money is even worse news for the federal government and its chronically ballooning debt problem. According to the Federal Reserve’s Flow of Funds Report, total non-financial debt reached an all-time high of $35.8 trillion in the third quarter of 2010. In fact, household debt, business debt, and government debt increased at a 4.2% annual rate last quarter.

To put that record level of nominal debt into perspective: in 1980, the total non-financial debt-to-GDP ratio was 144%. In the height of the credit boom, at the end of 2007, that figure was 226%. Today, the figure stands at a mind-blowing 243%! So you can forget about all that deleveraging talk. The US is in fact still leveraging up, both in nominal terms and as a percentage of GDP.

I think the rising cost of money will become the story of 2011. Its effect on consumers, the real estate market, and government borrowing costs will be profound. Apparently, most major brokerage firms have no fear of soaring interest rates causing our economy to implode. However, it's clear to me that the bond market has already started to crack due to inflation and massive oversupply from the Treasury. Prudent investors should think twice before overlooking what could be the initial holes in the biggest bubble in world history – the full faith and credit of the United States.

Total Home Value Lost Since Market Peak hits $9 Trillion

SEATTLE, Dec. 9, 2010 /PRNewswire/ -- U.S. homes are expected to lose more than $1.7 trillion in value during 2010, which is 63 percent more than the $1 trillion lost in 2009, according to analysis of recent Zillow Real Estate Market Reports.

That brings the total value lost since the market peaked in June 2006 to $9 trillion. By comparison, from 2001 to the end of September 2010, the war in Iraq has cost $750.8 billion, according to a September report by the Congressional Research Service.

The bulk of the total value lost during 2010 was in the second half of the year. From January to June, the housing market lost $680 billion. From June to December, Zillow projects residential home value losses will top $1 trillion.

Less than one-fourth (31) of the 129 markets tracked by Zillow showed gains in total home values during 2010. Among those were the Boston metropolitan statistical area (MSA), which gained $10.8 billion in value, and the San Diego MSA, which gained $10.2 billion.

"Despite a strong start to 2010, by the end of the year homes lost more of their value in 2010 than they did in 2009," said Zillow Chief Economist Dr. Stan Humphries. "Government interventions like the homebuyer tax credit helped buoy the market during the second half of 2009 and the first half of 2010, but we saw a renewed downturn in the last half of this year. It's a testament to the nearly irresistible force of the overall market correction that government incentives can only temporarily hold back the tide, and that the market will ultimately find its natural equilibrium of supply and demand.

"Unfortunately, with foreclosures near an all-time high in late 2010 and high rates of negative equity persisting, it does not appear that the first part of 2011 will bring much relief."

Declines in home values have led to increases in the percentage of homeowners in negative equity. At the end of 2009, 21.8 percent of single-family homeowners with mortgages were in negative equity, meaning they owed more on their mortgage than their home was worth. In the third quarter of 2010 – the last time Zillow calculated negative equity – 23.2 percent were underwater. Complete report

Zillow: Pecentage of Homeowners Underwater Reaches New Peak

By Christine Ricciardi
Housing Wire
11/10/10
Predictions for the fourth quarter housing market continue to dim as Zillow's third quarter market report released Wednesday suggests further house price depreciation through the end of the year.

September home prices depreciated 0.4% from August and 4.3% from one year a go to a national average of $179,900, according to the report. This is the 17th consecutive quarter of home price declines.

Zillow reported that nearly two-thirds (64.2%) of homes in the U.S. lost value between the third quarter of 2009 and the third quarter of 2010, and 27.3% of home sold in September were sold for a loss.

On Tuesday Foresight Analytics said residential, commercial, and construction loan delinquencies are excepted to rise.

Delaware witnessed the most home price depreciation since 2009, down 18.5% to $174,700 in September 2010. California's home prices appreciated since 2009, up 1.9% to $337,200.

Approximately one in every 1,000 mortgaged homes in the U.S. was liquidated in September, according to Zillow, marking the highest liquidation rate the firm has recorded since it started tracking data in 1996.

The firm sees the liquidation rate remaining elevated because of an increase in negative equity rates. According to the report, the negative equity rate during the third quarter was 23.2%, up from 22.5% in the second quarter.

Foreclosure resales reached a near-peak level in September accounting for 20.1% of all sales made during the month. The peak percentage of sales attributable to foreclosure resales was in March 2009 at 20.5%.

Zillow said the firm doesn't expect home prices to hit rock bottom until the first half of 2011, but concluded that "the length and severity of the current turndown is fast approaching the length and depth of the Depression-era."

Zillow data is based on real-time mortgage quotes from lenders registered with the company. The third quarter report is available on their website and includes interactive charts and graphs broken down by state and by metropolitan statistical area.

Zillow

"The high percentage of homeowners in negative equity continues to be troubling, in that it represents a huge number of people who are not only more vulnerable to foreclosure, but who are essentially trapped in their current homes and are prevented from selling and buying a new home. This has profound implications for future demand and will be a millstone around the neck of the housing market."

Additionally, more than one-quarter (27.3 percent) of homes sold in September were sold for a loss, marking a near-peak level. Homes sold for a loss peaked in February 2010, with 27.7 percent. Zillow Complete Report