Losing the Hearts and Minds

It's no wonder potential homebuyers are becoming a little nervous these days. It seems the Federal Reserve, the White House, Realtors, and CNBC economists are losing the media war for the hearts and minds of what has been perhaps the most resilient and unshakable economic force the world has ever seen - the American consumer, circa 2005.

A year ago, the thought of buying an overpriced home with a risky new mortgage product didn't seem like such a bad idea. Yes, there were a few winks and nods as the monthly payments came in just under what the loose qualifying guidelines demanded, but there was great hope of this gambit paying off with fast and hefty appreciation.

There wasn't this media frenzy of today - a steady stream of stories about housing bubbles, risky mortgages, $64 oil, soaring gasoline prices and health care costs, not to mention Ford and GM junk bonds and layoffs. It is as if today's media is trying to shut down the greatest wealth creation machine the world has ever seen. More likely, the media is just reporting on what the The Economist has dubbed, "The biggest financial bubble in history".

If yesterday's collection of news stories about housing, the economy, jobs, and prices are any indication, there is little that happy talk from the Fed, the White House, Realtors, or TV economists can do at this point to turn back the tide of a public becoming aware of some of the fundamental problems with today's economy - they may as well just throw in the towel and get about the business of developing crisis management strategies and bail out plans.

The Happy Talk

Federal Reserve Policy Statement

"Aggregate spending, despite high energy prices, appears to have strengthened since late winter, and labor market conditions continue to improve gradually. Core inflation has been relatively low in recent months and longer-term inflation expectations remain well contained, but pressures on inflation have stayed elevated."

President Meets with Economic Team

"The economy of the United States is strong, and the foundation for sustained growth is in place ... The economy is growing faster than any other major industrialized country. Job growth is strong. We added over 200,000 new jobs in July. This country has added nearly 4 million new jobs since May of 2003. The unemployment rate is 5 percent, which is below the average of the 1970s, 1980s, and 1990s."

Press Briefing by Chairman, Council of Economic Advisors, Ben Bernanke

"There's a lot of good news on housing. The rate of homeownership is at a record level, affordability still pretty good ... Housing prices certainly have come up quite a bit. But I think it's important to point out that house prices are being supported in very large part by very strong fundamentals. And particularly, we have a strong economy, we have lots of jobs, employment, high incomes, very low mortgage rates, growing population, and shortages of land and housing in many areas. And those supply-and-demand factors are a big reason for why housing prices have risen as much as they have."

U.S. house prices soar 16.5% in Q2 - No slowdown in housing market, Fannie economist says

"Recent data on home sales, mortgage applications and homebuilder attitudes "show no slowdown in the housing market," said Fannie Mae chief economist David Berson. Berson said price gains in the middle of the country "were relatively normal," but exceeded 20% in the Pacific, South Atlantic and Mountain regions. Price appreciation was also strong in New England and the Middle Atlantic states."

Preserve the Curve (Larry Kudlow at NRO)

"Spurred by lower tax-rates on capital and high output-per-worker productivity, along with a global anchor for prices and wages that stems from the intense competition brought on by India, China, and other emerging economies, the U.S. is enjoying non-inflationary prosperity with significant new job creation and low unemployment."

Realtors See Market Coasting For The Rest Of The Year

"But the people who sell real estate for a living predict a soft landing for the red-hot market, not a crash that could wipe out homeowners' gains of the last three years ... “The housing market is probably close to a peak right now in terms of sales activity, but there is tremendous momentum," said David Lereah, chief economist for the National Association of Realtors." ... “Home sales should be fairly stable in the near term,” Lereah predicts."

Ironicallay, later in this same article:

"It’s not often a real estate agent counsels patience, but that’s exactly what it sounds like NAR President Al Mansell, a Salt Lake City broker, is doing. "It's a great time to sell, but it may be a better time to buy about a year from now when the market should come closer to balance,” he said."

The Media Frenzy

Crude futures fall from a record high

"Crude-oil futures closed lower Tuesday, following a brief foray into uncharted territory above $64 overnight as traders continued to second-guess the issues related to supply and demand."

Ford reportedly eyes more job cuts

"The depth of the cuts was not disclosed by the company, according to the reports, but the News reports at least 15 percent -- or 525 -- of the 3,500 employees throughout Ford's marketing, sales and service staff will be affected, while the Journal reported that ultimately 20 to 25 percent of Ford's current sales and marketing staff could be affected ... In June, the Journal reported that Ford was eyeing cutting up to 30 percent of its salaried staff overall, or a reduction of 10,000 jobs, in the next few years, although Ford would not comment on the report at that time. "

For Many, Housing Prices Out of Reach

"Housing prices are far outstripping salary increases for low- and moderate-income jobs, putting the American dream of owning a home beyond the reach of teachers, firefighters and other community workers in many cities, said a study to be released today."

Despite Illegal Status, Buyers Get Home Loans

"But for years, because qualifying for a mortgage required a Social Security number, the only way for an illegal immigrant to do so was by using a false number ... Lenders have a powerful incentive to find ways to get around those barriers: tens of thousands of potential customers. The National Assn. of Hispanic Real Estate Professionals estimates that more than 216,000 undocumented immigrants, including many who have been in the country for decades, could buy homes if they had better access to the market."

Pay-Option Loans Explode At Countrywide

"From page 39, we find in the portfolio, pay-option loans in the 2nd quarter of 2005 at $15.01 billion versus $4.47 billion at the end of 2004, an increase of 235%. Here's the shocker. Pay-option loans with accumulated negative amortization finished June at $2.87 billion versus $32.8 million on December 31, 2004. That's an increase of 8,650%."

Foreclosures rising

"There were 6,159 foreclosed homes for sale in Colorado in July, ranking the state No. 5 in the nation, according to the study by Foreclosure.com, based in Boca Raton, Fla. And the market is expected to get worse before it gets better, experts agreed ... "In Colorado, I think it is a combination of a flat economy in the central U.S. and the fact that people are getting hit with the economic payment shock with their adjustable rate mortgages," said Marla Webb, senior adviser for the Foreclosure Economic Advisory Council in Boca Raton, which is supported by Foreclosure.com. An earlier report found that 54 percent of the home loans made last year in the Boulder-Longmont area were interest-only loans, while 50 percent in the Denver area were interest-only loans. "Interest-only loans are just horrific," Webb said. "When they start to amortize, a person can see their monthly payments rise from about $400 to $1,400. That's a significant payment shock."

Fannie Mae Missing Regulatory Deadline

"The government-sponsored company, which finances one of every five home loans in the United States, again missed a regulatory deadline for filing a financial report, this time for the second quarter. Federal regulators accused Fannie Mae last fall of serious accounting problems and earnings manipulation to meet Wall Street targets, and the Securities and Exchange Commission in December ordered the company to restate earnings back to 2001 _ a correction that could reach an estimated $11 billion. The Justice Department is pursuing a criminal investigation."

Fitch Affirms Fannie Mae's Senior Debt; Sub & Pfd Remains on Watch Negative

Fannie Mae anticipates its fiscal reports for 2004 will not be completed until the second half of 2006. This has the potential for resulting in a delisting of their stock from the New York Stock Exchange under a recent ruling requiring financial statements to be filed within twelve months of their original due dates.