Brown Shoots Abound

In this linked post, the author notes that the latest TARP Congressional Oversight Panel Report is a bit less than rosy. Now this panel has been criticized a bit for being too critical, but perhaps they are simply being realistic. Wow, that is truly something you do not expect from the government. I would say it is refreshing but the reality they are perhaps reporting is not refreshing. Perhaps depressing is a better description. Their big complaint seems to be about transparency. Lest you missed it, the government has taken numerous steps to actively avoid banks having to mark down or be honest about the value of their assets. Things do seem much better when you are allowed to lie about how bad they are and that is what this report demonstrates.

http://www.nakedcapitalism.com/2009/08/next-wave-of-financial-crisis-is-coming.html

Report aside, let us consider a couple of items for those that think the troubles are behind us. First, if you read the link above, you will note the Panel believes something like a crash in commercial real estate might worsen the problem. Guess what (you know where I am going here), commercial real estate in the U.S. is vastly overbuilt and taking a very nasty turn these days. Here is one indication:

http://www.calculatedriskblog.com/2009/08/cbre-retail-cap-rates-increase-sharply.html

The fact that we have twice the retail space of any other country might give you a good indication why commercial real estate is doing poorly. In short, we are way overbuilt in this area.

Well at least residential real estate has bottomed and is recovering, right? Again, you know where I am going here. Where do we start, there are so many places. Let's start in Illinois where foreclosures are increasing, yep increasing:

http://www.calculatedriskblog.com/2009/08/illinois-foreclosures-increasing-again.html

Mind you, Illinois has a lot of company. Indeed, foreclosure filings were up 7 percent in July from June overall, not just Illinois.

http://www.calculatedriskblog.com/2009/08/report-record-foreclosure-activity-in.html

How can this be you ask. I am reading that housing is bottoming out and perhaps improving in certain areas. Well let us consider a few contributors here. First, there are a lot of homeowners under water on their homes at the moment. Indeed, 15.2 million mortgages, i.e. 32.2 percent of all mortgaged properties, are in negative territory and that is a big negative.

http://www.calculatedriskblog.com/2009/08/american-corelogic-more-than-152.html

Now add to this continuing job losses and you have a boat load of homeowners who cannot pay their mortgage and who cannot sell their homes. Answer, foreclosure.

Are you ready for the really optimistic news? As if this were all not enough, we have a boat load of adjustable rate mortgages resetting the remainder of this year and next year. Many more than the first half of this year. And some of them are option ARMS, which were loans where the homeowner could choose to pay less than even the monthly interest such that they now owe more than when they took out the mortgage. Their payments are going to go through the roof unless they can refinance, which they cannot because their homes are under water. Add in the job losses and this leads to an explosive situation. And yes, we still have a lot of job losses.

http://www.calculatedriskblog.com/2009/08/weekly-unemployment-claims-increase.html

You decide: are those shoots green or brown?

Disclosures: None.