International Forecaster Weekly

Real Estate Deathwatch And The Rise Of Foreclosures

Real estate deathwatch and the rise of foreclosures... other reasons for not going hunting with Dick Cheney or sleep over at the White House. 

Bob Chapman | June 3, 2006

It has been a year since we began to see signs of weakness in the real estate market. Obvious problems started to arise last September and today it should be plain for all to see that the growth has ended for the most part.

The bubble is breaking in the 30 hottest markets, such as New England, Washington, DC, Florida, Southern California and Las Vegas. Surprisingly the greatest devastation of households, foreclosures, loss of homes and bankruptcies is in the upper Midwest states of Illinois, Ohio, Indiana, upper New York state and Michigan, which is due to offshoring and outsourcing a result of free trade and globalization. The worst foreclosure rates are in Michigan, Ohio and Indiana. In the first quarter in Michigan the foreclosure rate was about 5% double the rate for 2005. In Ohio house prices have already fallen 6%.

Over the past two years interest rates have risen. The largest increase was in ARMS that have moved up from 4% to about 6%. The fixed rates are up approximately 1 1/2%. We see another rise of 3/8% to 1/2% by the end of the summer. As Treasury rates rise so do mortgage rates and in many instances payments increase $300 to $600 a month. The ARM’s are what former Fed Chairman Sir Alan Greenspan promoted to keep our economy from collapsing and ARMS were a main factor in the creation of the bubble. There are a number of variations of ARMS, interest only, option and adjustable rates, all of which could include no down payment. These types of exotic loans make up about one-third of loans outstanding. In California, they make up 62% of all mortgage loans. Generally home values in hot areas are off 10%, but some are unchanged, or are slightly higher. The state of prices vary widely. As the ARMS come up for renewal many are switching to fixed rate mortgages, but not at 6.6%. Most of these borrowers are sub-prime borrowers. In fact most shouldn’t have had a loan in the first place. They are paying 8% to 12% for the new loans, if they have equity, then they struggle to meet their payments. If prices in your region have stopped growing or are falling you may not be able to get a mortgage you can afford. Then there are those whose good paying job is now being done by someone in China, India or the Philippines, and no matter what the payments you cannot make them. Local, state and real estate taxes are rising taking away valuable funds and inflation is ravaging their buying power. The bottom line is there is no way out of this speculative, overextended bank debt except foreclosure, bankruptcy or both.

Experts tell us there will be 1.4 million foreclosures in 2006, or an increase of some 70% to 100% over 2005. Already in Indiana, one in 25 homes is in foreclosure, one in 30 in Ohio and one in 40 in Michigan. This occurs when mortgage payments are 90-days in arrears. In the upper Midwest, one out of 49 mortgages were in foreclosure in 2005. In Ohio, the foreclosure rate is up 20% a month and in Michigan it is double. In Indiana, they have tripled.

The Midwest region has been the hardest hit as free trade and globalization caused the loss of high-paying manufacturing jobs for low paying service jobs. People should have never been offered exotic loans ever, and at least 45% should never have been offered a loan in the first place. Lower wages and inflated costs have exhausted the withdrawal of equity from homes. The piggy bank, the ATM home cannot be tapped anymore. In 2006 alone, two million homeowners are at risk for foreclosure or 2.5% of the national total. Nationally, 1.6% were foreclosed in 2005. Sixty percent are in the Midwest and except for Chicago these homes have appreciated very little. This is the result of sub-prime lending. In a number of states, such as Pennsylvania, mortgages often are greater than the value of the home.

Twenty percent of sub-prime loans in Michigan, Missouri, Tennessee and West Virginia are in foreclosure. ARMS have put 14.7% of all mortgages in Michigan in foreclosure.

Freddie Mac says home sales will fall 8% in 2006 y-o-y, yet builders are still building and new and used home inventories are double what they were a year ago. Interest rates are moving higher and government is stepping in to curb the abuse on lending via exotic mortgages. Homeowners cannot for long spend more than 50% of their disposable income on mortgage payments. Real estate is in for a rough time over the next few years and Americans are about to pay a stiff price because the lending industry was directed by government to lend off the deep end.

Ninety percent of professionals still don’t really understand why base metals and gold and silver prices have gone up and are going higher. We have seen the formative base being formed for the biggest bull market in history. Unfortunately, the pros believe the government statistics on inflation and because of that they have missed the first 20% of the upward move. Hedge funds may be the leading force behind the commodity markets, but they sure haven’t influenced the gold and silver markets. Investment in commodities by hedge funds has risen from $15 billion three years ago to $100 billion. The size in investment in all commodities combined could be $250 billion, plus leverage of three to four times. This in part is the result of the carry trade, which could affect their participation. There is giant elitist money in the commodities market as well and that is one of the reasons we believe this group has a long way to go. The insiders have been accumulating base metals for ten years and this is a major hit for them. A bubble will eventually form, but not until the fundamentals are clearly pointing toward lower prices and we are nowhere near that yet.

There is no doubt of the murderous intentions of the pro-war elitist crowd that emanates from both the Republicans and the Democrats. The reports of the possible use of nuclear weapons are really nothing new. What we as Americans should be doing is to try to find ways to stop Bush/Cheney/Rumsfeld in their tracks. Moving via the court system is tedious and time consuming, so the only avenue open is Congress, and they either don’t have the time or don’t want to dethrone Bush and his neocons. The Democrats have said they won’t try to impeach Bush. What kind of a statement is that when there are several grounds for action? As you can see, both parties are cooperating to keep a corporate fascist government in power. Again, that is why in November you throw all the incumbents out with the exception of a few. We cannot do any worse than we are now. The dilemma is not hopeless. The longer we have turmoil in government the better it is for us. We must keep both the executive and legislative branches under fire until November. We must make them feel entrapped. Both Democrats and Republicans are arguing among themselves, and that is good because it means they can get very little accomplished and the less they accomplish the less injurious it is to us. We want them all screaming at each other, like Cheney did recently that people in the Republican Party were traitors. We presently have Republicans in revolt, mainly because the war for profit is going badly, the Senate immigration bill became a Democrat bill with limited Republican support and the polls tell Congress that a lot of incumbents are not going to be returning to Washington and that for Republicans that their president is a major detriment to their reelection. Challenging the President could in fact get them reelected. That is good for us because the more confusion and turmoil the less detrimental legislation gets passed.

This turmoil also keeps the elitists off balance and ineffective. Come out agaist the war; disagree with the Senate immigration bill and don’t let the conference committee come out with a new bill before election; speak out firmly against sanctioned torture and fiscal profligacy and above all, do not go hunting with Dick Cheney or stay overnight at the White House. We want the ground to simply fall away under Bush-Cheney and Rumsfeld. Leave them so they have no traction. Give them so much grief that they cannot possibly start another war to cover up the impending dollar, stock, bond and real estate collapses. It is going to be bad enough without a war. We predicted a 9/11 event ten months before it happened and we said it would be the catalyst for an attack on Afghanistan and Iraq and that is exactly what happened. The elitists are pulling the same thing again with Iran to cover up financial and economic decline. How do we know all these things, because we learned history and it is replete with one war after another for these very reasons? They do not care how many people die as long as they do not get blamed and they stay in power. We are facing a blowout and they are trying to slow it down and assess guilt and reason away from themselves. The elitists know $350 trillion in derivatives will shortly explode. They know most sovereign debt cannot be repaid, especially US debt. They know the financial system cannot be sustained. They know the only safe haven is gold and silver and you can bet they own lots of both.