Black Monday: The end of the financial world as we know it….
If you watch any of the financial TV shows one would think that we are on the verge of an epic economic implosion… Well, the world didn’t end, though you wouldn’t have known it by watching TV or reading the paper. Pessimistic, drama laced hyperbole sells newspapers and drives up viewership ratings. It also confuses people to what the hell is really going on.
Being that AgentGenius is a real estate professional centric community, the natural question is ‘What does this mean to the real estate and mortgage markets?‘
The Bazillion Dollar Question
Long term, that’s a tough question that can’t easily be answered. If I could, I would be a Bazillionaire, own many private islands and wouldn’t be writing this article.
Short-term, it probably means lower interest rates as investors shift their assets out of some huge equity brokerages and into cash and/or more stable bonds. What are ‘more stable bonds’? Ironically: Mortgage Backed Securities, especially since the Treasury backed Fannie Mae and Freddie Mac.
However, lower rates do not mean faster, looser underwriting standards and it will probably take longer to close a loan due to the uptick in mortgage applications. With all the staff cuts in the industry, an uptick in business will bog down most mortgage lending operations. Patience is a virtue that is wisely practiced in today’s market.
Back In The Day
Mortgage qualification has moved to ‘back in the day’, where borrowers must have (at the very least) 5% down (under the best of circumstances), provable income and assets in line with the loan amount being requested, and a credit score above 700.
During the refi boom, if a borrower had 2 out of the 3 major components of mortgage qualification: credit, cash (down payment or true equity) or income, they got approved somewhere. Today, a borrower must be strong in all three. If they are not, there will be issues. Back in the day, lenders did whatever they could to make a loan work. Today, they are looking for reasons to turn them down. It is The State of the Union.
Anyway, back to ‘Black Monday’…the Lehman Brothers Bankruptcy filing, Merrill Lynch and BoFA’s engagement and AIG walking on marbles. I’m going to try and be as succinct and clear as possible, leaving out the minutia that can cause ones head to explode in confusion.
The Government can’t bail everyone out and it looks like Lehman Bros got to be the first major brokerage to receive the pink slip. Why? They had the baddest of the bad assets, especially from a mortgage perspective, Lehman owned Aurora Loan Services and BNC Mortgage. These two sub-divisions lent sub-prime mortgage money on some of the most ridiculous terms I’ve ever seen. 100% LTV on investment properties with a 640 score, no need to prove income or assets… A+ paper, for the bathroom.
In the end it was cheaper and easier to let Lehman Bros get gobbled up in Bankruptcy by Goldman Sachs and other private equity players than have the Treasury shore them up. Someone had to be the first to get the shiv.
Merrill Lynch and BoFA
As it became evident Lehman Bros was going down, Merrill Lynch scrambled to make a deal with what ended up being cash deposit rich Bank of America (rumors had them courting Wachovia too). Good for Merrill, bad for BoFA, who apparently didn’t learn their lesson when they acquired Countrywide (IMO). Merrill started going sideways when they aggressively entered and became one of the top issuers of *drum roll please* the sub-prime mortgage market. The way it’s being spun is BoFA is strong in banking and lending and wanted Merrill’s wealth management pundits…spin-spin…
The world’s largest insurer (for now) appears to be in a bit of trouble as well, although the trouble should be confined to their holding company and not affect their individual insurance company subsidiary’s ability to conduct business and pay claims. AIG (as most insurance companies do) invest a portion of their premiums into other assets, and guess where AIG invested heavily? *Drum roll please* the sub-prime mortgage market…
AIG is significant in all of this for a few reasons, they’re part of the DJIA and a staple of many mutual funds. So as AIG goes, it drags the Dow and many others (down) with it.
The Common Denominators
Someone’s got to pay the piper. The common denominators here are how vested these companies were/are in the sub-prime mortgage market, how bad those poor performing assets really are and what other upside is there to mitigate the crap…
Lehman Bros appears to have been the worst of the bad and was subsequently voted off the island.
Black Monday and the Housing Market
So, anyway…again: what does ‘Black Monday’ mean to the real estate and housing market? Probably very little. The corollary seems to be that these entities heavy investment in high-risk sub-prime mortgage loans led to their unwinding and/or demise.
Unless you live in California, Las Vegas, South Florida, or the Rust Belt…which either experienced high levels of mortgage fraud, illogical appreciation, or economic tough times due to indigenous ‘industrial age’ industry…your local housing market is no worse off than it was before Wall Street’s most recent ‘Black Monday’.
Mortgages are still widely available under ‘back in the day’ make sense underwriting guidelines and conforming (Fannie Freddie backed mortgage) rates are falling through the floor. With the government backstopping the two GSEs, foreclosures and the subsequent depreciation they cause should lighten up.
Even at the risk of sounding like NAR’s talking heads, it is a great time to buy real estate…they’re just not giving money away anymore…
Boomers retirement may be the true reason behind the labor shortage
(ECONOMY) Millennials and Gen Z were quick to be blamed for the labor shortage, citing lazy work ethic- the cause could actually be Boomers retirement.
In July, we reported on the Great Resignation. With record numbers of resignations, there’s a huge labor shortage in the United States. Although there were many speculations about the reasons why, from “lazy” millennials to the number of deaths from Covid. Just recently, CNN reported that in November another 3.6 million Americans left the labor force. It’s been suggested that the younger generations don’t want to work but retiring Boomers might be the bigger culprit.
Why Boomers are leaving the labor force
CNN Business reports that 90% of the Americans who left the workplace were over 55 years old. It’s now being suggested that many of the people who have left the labor force since the beginning of the pandemic were older Americans, not Millennials or Gen Z, as we originally thought. Here are the reasons why:
- Boomers are more concerned about catching COVID-19 than their younger counterparts, so they aren’t returning to work. Boomers are less willing to risk their health.
- The robust real estate market has benefitted Boomers, who have more equity in their homes. Boomers have more options on the table than just returning to work.
- Employers aren’t creating or posting jobs that lure people out of retirement or those near retirement age.
As Boomers retire, how does this impact the overall labor economy?
According to CNN Business, there are signs that the labor shortage is abating. Employers are starting to see record number of applicants to most posted jobs. FedEx, for example, just got 111,000 applications in one week, the highest it has ever recorded. The U.S. Bureau of Labor Statistics projects that the pandemic-induced increase in retirement is only temporary. People who retired due to the risk of the pandemic will return to work as new strategies emerge to reduce the risk to their health. With new varients popping up, we will have to keep an eye on how the trend ultimately plays out.
Is the real estate industry endorsing Carson’s nomination to HUD?
(BUSINESS NEWS) Ben Carson’s initial appointment to HUD was controversial given his lack of experience in housing, but what is the pulse now?
NAR strongly backs Dr. Carson’s nomination
When President-Elect Donald Trump put forth Dr. Ben Carson’s name as the nominee for Secretary of Housing and Urban Development, NAR President William E. Brown said, “While we’ve made great strides in recent years, far more can be done to put the dream of homeownership in reach for more Americans.”
At the time of nomination, the National Association of Realtors (the largest trade organization in the nation) offered a positive tone regarding Dr. Carson and said the industry looks forward to working with him. But does that hold true today?
The confirmation hearings yesterday were far less controversial than one would expect, especially in light of how many initially reacted to his nomination. Given his lack of experience in housing, questions seemed to often center around protecting the LGBT community and veterans, both of which he pledged to support.
In fact, Dr. Carson said the Fair Housing Act is “one of the best pieces of legislation we’ve ever had in this country,” promising to issue a “world-class plan” for housing upon his confirmation…
Job openings hit 14-year high, signaling economic improvement
The volume of job openings is improving, but not across all industries. The overall economy is improving, but not evenly across all career paths.
Job openings hit a high point
To understand the overall business climate, the U.S. Labor Department studies employment, today releasing data specific to job vacancies. According to the department’s Job Openings and Labor Turnover Survey (JOLT) for April, job openings rose to 5.38 million, the highest seen since December 2000, and a significant jump from March’s 5.11 million vacancies. Although a lagging indicator, it shows strength in the labor market.
The Labor Department reports that the number of hires in April fell to 5 million, which indicates a weak point in the strong report, and although the volume remains near recent highs, this indicates a talent gap and highlights the number of people who have left the labor market and given up on looking for a job.
Good news, bad news, depending on your profession
That said, another recent Department report notes that employers added 221,000 jobs in April and 280,000 in May, but the additions are not evenly spread across industries. Construction jobs rose in April, but dipped in professional and business services, hospitality, trade, and transportation utilities. In other words, white collar jobs are down, blue collar jobs are up, which is good or bad news depending on your profession.
Additionally, the volume of people quitting their jobs was 2.7 million in April compared to the seven-year high of 2.8 million in March. Economists follow this number as a metric for gauging employee confidence in finding their next job.
If you’re in the market for a job, there are an increasing number of openings, so your chance of getting hired is improving, but there is a caveat – not all industries are enjoying improvement.
If you’re hiring talent, you’ll still get endless resumes, but there appears to be a growing talent gap for non-labor jobs, so you’re not alone in struggling to find the right candidate.
Economists suspect the jobs market will continue to improve as a whole, but this data does not pertain to every industry.
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