Fannie “Fires Back”

Fannie “Fires Back”
-US housing said “flatulent”; Fannie Mae full of it

(SEATTLE) 08/23/2004 – In what may amount to an unexpected reversal, new signs are emerging on an almost daily basis that the booming US housing industry is stealing resources away from the economy, rather than contributing to it. That is, rather than going out with a “fizzle” or “pop”, the housing bubble is going out with a dirty economic “thud.” This makes perfect sense—few bubbles collapse simply because they are big; instead, gas under pressure first leaks out. Yet, amidst this natural seepage, comes denial from those who should have smelled it coming, and are sitting on a “big pile” of mortgage debt.

And so it is with one large Fannie--

Four days ago, based on some simple calculations, a story ran on the Liberty Whistle website suggesting that rather than gasoline prices, mortgage payments were beginning to weigh heavily on consumer budgets—a stark reversal from the recent past, in which “cashing out” of homes added to consumer budgets (see “US Soft Patch Only Slightly Slippery” below, 08/18; this story was carried on several web news feeds).

The day after the “Soft Patch” story was published on the Liberty Whistle, Fannie Mae, the largest purchaser of US mortgages, was interviewed in a Bloomberg News story (see “Home Prices To Rise, Fannie Mae Predicts” 08/19). In this story, Fannie specifically commented on changes in mortgage payments over a longer period--in a very qualified fashion--rather than commenting on the negative mortgage payment trend of the last year. In doing so, Fannie is holding back the deeper truth; that being, what was once a fresh boon to the economy is now a stinky bane. Oh, yes, and speaking of stinky--the very next day, 08/20, Fannie Mae was subpoenaed by its regulator (see “Fannie Mae Subpoenaed by its Regulator”, WSJ, 08/20).

Indeed, a housing bubble need not pop simply due to size, or rising interest rates--as almost everyone expects. What if flat interest rates, instead of rising ones, lead to an unsustainable (er, “flat-ulent”?) condition--as housing embarrassingly consumes more and more resources, capital, and attention?

Despite Fannie Mae’s dangerous and misleading statement about mortgage trends, evidence has since surfaced coincident with a national retail sales slowdown and “soft patch.” Indeed, new reports strongly underscore how consumer budgets are being sapped by housing; according to an August 21 report quoting the California Association of Realtors, home loans are now being made assuming a larger monthly payment than ever before (on top of fancy mortgages, no less). In fact, earlier this year, mortgage giants such as Washington Mutual have seen fit to withdraw from lending under these risky conditions. It’s pretty simple--with more being spent on housing, less money is left over for discretionary purchases, so a retail slowdown necessarily follows. Nevertheless, the mainstream press (apparently not having done the math) continues to print smelly stories that suggest gasoline prices are a main factor slowing down the consumer.

But California is not the world. Yet, looking at retails sales nationwide, all the way from the low end at Wal-Mart, to the high end at Nordstrom, shortfalls are cropping up. About the only national retailer left smelling like a rose is trendy Urban Outfitters--and even they had a suspicious inventory jump of late. Moreover, in sniffing overseas, it turns out the “English equivalent of Alan Greenspan” has plainly admitted a housing bubble--even while the UK is in less dire straits than the US. You see, unlike the US, the UK has strong income growth, and is very limited in real estate space. So high housing prices are much more justified in the UK. But they admit a problem over there, and we don’t--this amounts to a “silent but deadly” pressure emerging right under our noses, for which we have no excuse. Di-Gel, Mr. Greenspan?

Finally, as if there was any doubt remaining related to the stench which is so imminent, the most recent edition of Fortune Magazine (08/23, online) has a home builder stock(Pulte) as one of its “Stocks to Buy Now”—a company which sells to high-end home buyers, among others. A person of average intelligence might question why they should “Buy Now” the stock of a company which thrives on capital from recently-subpoenaed Fannie, and whom sells homes to the same high-end buyers who apparently can no longer afford shopping at their favorite retailer, Nordstrom. Indeed, apparently the pressure is high, and surely there is much to let go of--for some, a rather unpleasant Fortune will surely be let loose.

[Moderator]

1. Locking.

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