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Trouble In The Real Economy

The User's Profile Chris Martenson October 25, 2008
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While I was driving home today, the airwaves were filled with happy news of credit markets unfrozen and signs of renewed liquidity in the paper markets.  Specifically, NPR had a 10-minute piece that was nothing but one high level money manager after another saying things were better.

Lost in this "news" was any sense that our economy is something more than the flow of billions between and among various debt markets.  The implication was clear: Now that our ability to lend more freely has been fixed, we’ve turned the corner.  Whew!  

Glad that’s behind us!

Unfortunately, it’s not so easy.  In a debt-based market economy, there are two parties involved – a willing lender and a willing borrower.  It would seem that the willing lender part is being fixed, but what about the willing borrower?

Here, the signs are decidedly less favorable.

US Foreclosure Filings Up 71 Percent in 3Q (NYT)
WASHINGTON (AP) — The number of homeowners ensnared in the foreclosure crisis grew by more than 70 percent in the third quarter of this year compared with the same period in 2007, according to data released Thursday.

Nationwide, nearly 766,000 homes received at least one foreclosure-related notice from July through September, up 71 percent from a year earlier, said foreclosure listing service RealtyTrac Inc.

By the end of the year, RealtyTrac expects more than a million bank-owned properties to have piled up on the market, representing around a third of all properties for sale in the U.S.

The housing markets in all the so-called "sand states" (CA, FL, NV, AZ) are still falling at unheard-of rates, with almost no signs of recovery yet.  I was dismayed to see, yet again this week, that the media reported the NAR’s claim of a tidy rise in existing homes sales for September.  Dismayed, because they still refuse to break out the most important statistic of them all:  What proportion of these "increased home sales" are actually bank repossessions (which get counted by the NAR as a "sale" as long as a Realtor was involved)?

As Mr. Mortgage makes clear, the truth is both easy to report and very far from what is being put out by most mainstream news sources:

Today, the daytime financial market variety shows are simply giddy over the DataQuick report saying ‘SOUTHERN CA HOME SALES ARE UP 65% OVER LAST YEAR’.

Sorry to rain on the pom-pom parade, but how I see it home sales worsened yet again last month. Let me explain.

[L]et’s talk about real ‘organic’ sales and not foreclosure-related sales, as organic sales are at all-time multi-decade lows.

In Sept 2007, there were 12,455 sales of which 12.6% (1570) were foreclosure related. This means last Sept there were 10,885 ‘organic’ sales, which is ‘me selling a home to you’.

In Sept 2008, total sales were in fact up 65% in SoCal over last year at 20,497. But, 50% were foreclosure related meaning only 10,249 organic sales went off. This is significant and worse than a year ago.

In truth, fewer homes are being sold by people to people, which is what will be required to demonstrate that we’re in an improving situation.  For now, the increase in "sales" represents institutions taking homes from people by repossession.

As this drama plays out in the real world, the opportunity mounts for another "flagship" US company to slip under the waves while we’re waiting for the magic government money to filter to all the right places. 

There’s a very high chance that GM will be that company.  Certainly this has to count as a sign of overt desperation:

GM suspends payments into 401K plans
DETROIT (Reuters) – General Motors Corp is suspending matching payments to employee 401K plans as of November 1 and continues to assess its staffing needs as part of efforts to conserve cash amid a deep downturn in sales, the automaker said on Thursday.

I don’t know how much cash this saves GM, but it can’t be a ton….meanwhile, the workers there must be steamed that GM very recently paid off a dividend.  

While I know that we will get to a bottom sooner or later, I still don’t see the right signs to justify calling for one here and now.  I suspect that we are near a tradeable bottom in stocks, as a bear market rally is overdue, but all the signs from the ‘real economy’ are pointing to more downslope directly in front of us.