Some news that, when taken together, sounds like a perfect storm.
This first one is most straightforward:
Home foreclosures leap 19 percent in May – Jun. 12, 2007
90% leap over last year; figure pushed up by slowing real estate market, subprime meltdown.
June 12 2007: 3:23 PM EDT
NEW YORK (Reuters) — Home foreclosures in May jumped 90 percent from a year earlier, reflecting a poor spring housing market and foreshadowing even higher levels later in 2007, real estate data firm RealtyTrac said Tuesday.
The May foreclosures – a sum of default notices, auction sale notices and bank repossessions – totaled 176,137, up 19 percent from April, the firm said in its May
‘After a barely perceptible dip in April, foreclosure activity roared back with a vengeance in May,’ James Saccacio, chief executive officer of RealtyTrac, said in a statement.
‘Such strong activity in the midst of the typical spring buying season could foreshadow even higher foreclosure levels later in the year,’ said Saccacio. ‘Certainly not every community nationwide is seeing an increase in foreclosures, but foreclosed properties are becoming more commonplace and adding to the downward pressure on home prices in many areas.’
RealtyTrac said there was a national foreclosure rate of one foreclosure filing for every 656 U.S. households during May.
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The message here is very basic. We are headed for some VERY bad times in real estate.
Even if one assumes a 24% YoY increase in foreclosures in the next three years, that puts foreclosures down to about 1 filing for every 328 homes at the end of that, and we have a few TRILLION in mortgage resets on adjustable rate mortgages coming down the pipe.
I’m not sure if the market will drop significantly, or just become illiquid. The latter is MUCH worse, becaude it means that you can’t sell a house period.
The next one is a bit more complex. Basically, the private equity frenzy is being squeezed by higher interest rates. This is yet ANOTHER bubble, in this case, it is driving the stock market, and it looks to be close deflating
The people who really drive these deals make their money on the transaction, and if they can’t buy, then they will sell.
Rising rates threaten the buyout boom
A shift in the bond market could signal an end to the cheap money that has fueled the surge in private equity buyouts.
By Grace Wong, CNNMoney.com staff writer
By Grace Wong, CNNMoney.com staff writer
June 12 2007: 1:08 PM EDT
LONDON (CNNMoney.com) — Stephen Schwarzman, CEO of the Blackstone Group, took home nearly $400 million in pay last year and stands to reap billions when his firm goes public – a reflection of the booming success of private equity firms.
But the favorable conditions that have lined the pockets of Schwarzman and other kings of the buyout business are running into headwinds.
For years, Blackstone and other private equity firms – which have become the new face of dealmaking on Wall Street – have basked in an era of cheap money and low interest rates. But turmoil in the Treasury bond market is raising worries that this golden age may be coming to an end.
Bond pricesfrom Tokyo to Frankfurt to New York have sold off in recent weeks amid concerns that interest rates are marching higher worldwide. That’s pushed up bond yields and fueled worries that it will be harder to borrow money. Bond prices and yields move in opposite directions.
“This is the end of the cheap money cycle,” said Marc Pado, U.S. market strategist at Cantor Fitzgerald.
In the United States, the yield on the benchmark 10-year Treasury note has kept pushing higher since it eclipsed the key 5 percent level last week. Early Tuesday, the yield was around 5.21 percent, up from 4.88 percent just two weeks ago.
Analysts say the rise in bond yields means bond investors are finally coming to terms with big changes in the global economy – such as rising commodity prices and rising labor costs in former low-cost countries like China – and many expect long-term yields to keep heading higher.
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Finally, we have inflation heating up in China. This means that the Chinese central bank will have have to raise interest rates, which will have the effect of strengthening the Chinese Yuan, which will have the effect of weakening the dollar, increasing US inflation.
This will likely, for both currency and inflation reasons, lead to increased rates from our central bank, the Fed.
Food costs send inflation in China to 27-month high – Jun. 12, 2007
Rising cost of pork sends food prices soaring in May; more interest rate hikes expected.
June 12 2007: 3:50 AM EDT
BEIJING (Reuters) — Surging food prices boosted China’s annual consumer price inflation in May to a 27-month high, extending a rising trend and reinforcing expectations that interest rates will rise further.
Inflation quickened to 3.4 percent from 3.0 percent in April, the National Bureau of Statistics said on Tuesday, as food prices, which make up a third of the consumer basket, rose 8.3 percent from a year earlier and a shortage of pork caused meat prices to jump 26.5 percent.
The overall inflation figure was in line with the median forecast of a Reuters poll of economists, but Shanghai’s benchmark stock market index fell as much as 2.1 percent at one point on expectations of tighter monetary policy. It recovered in early afternoon to stand 0.65 percent higher.
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