The Financial Bottom: Are We There Yet? Nope

I have two kids. And I love them dearly but when we go on family vacations to far-off destinations using the van after an hour or two the youngest one, Katherine, will ask, "Are we there yet?" or a slight variation on that question: "When are we going to get there?"

When it comes to the economic downturn, housing prices and the like, I sometimes get the same line of questioning from friends and family. That's what happens when you write a few books and a web column, er, I mean, blog.

I've written this before and I'll tell you once again: any recovery in housing (and the overall economy) is dependent on the employment picture improving. As this edition of Mortgage Servicing News went to press the national unemployment rate was at 9.5% and if you factor in a category that includes part-timers who can only dream of full-time work then the national unemployment rate is really 16.5%.

Subprime mortgage delinquencies are north of 34%, according to the Quarterly Data Report. If you multiply outstanding subprime loans ($944 billion) by the late payment rate, which means consumers are delinquent on $324 billion of A- to D loans. On 'A' paper and all other loans, late payments are at 9.5% which translates into $817 billion of mortgages. Add the two figures together and the ugly total is: $1.14 trillion.

Of course, just because someone is late on a mortgage that doesn't mean the loan will go into foreclosure. We can talk about loan modifications until the cows come home but if Americans don't find new jobs to replace the ones they lost, the foreclosure picture will continue to look ugly.

There are days when I think the only thing that will revive the abysmal job market is if all the Baby Boomers (80 million citizens strong) decide to retire at the same time, opening up positions for all the youngins out there. Then again, Boomers are those born between 1945 and 1960, and if I do my math correctly the older Boomers are just turning 64.

In short, it's impossible to predict when the economy will turn because it's impossible to predict when employment will improve. With the private sector cutting 400,000 to 500,000 heads a month that's a lot of lost jobs to make up. The housing and construction industries are flat on their back. Consumers aren't buying cars like they used to for the obvious reason: it helps if you have a job before you buy a big-ticket item like a car. Airlines and resorts are hurting because, well, the unemployment rate is high. Families are spending their vacations at the local pool instead of renting that beach house. Even families I know with "secure jobs" (government jobs, that is) are cutting back because they feel it's the right thing to do in these tough times. They're saving money - just in case.

A few weeks ago I saw an alarming statistic: the U.S. savings rate is now at 7%! A few years ago it was zero - or even negative. We arrived at a negative savings rate by having scores of consumers engage in cash-out refinancings and then running out and spending that money. Now that home price appreciation has stopped the days of cash-out refis are over.

As we ponder the job market situation - and the subsequent effect on housing and mortgages - I need to state a few obvious facts, which I learned from this asset bubble: Two to three million Americans (maybe more) bought homes that should not have bought homes; millions had the ability to bid up the price of housing because of loose lending standards (payment option ARMs, stated-income loans, etc.); millions of people worked at inflated salaries because of the overall rise in national wealth, which later turned out to be false. Those jobs have now evaporated. And most aren't coming back.

Paul Muolo is executive editor of Mortgage Servicing News. He can be emailed at: Paul.Muolo@SourceMedia.com.

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