Subprime crisis scarier than terrorism

A survey performed by the National Association of Business Economics found that experts believe loan defaults and the ensuing financial crisis are the biggest short-term threat to the U.S. economy. Until recently, terrorism was considered the #1 threat. 32% of the participants of the survey named the subprime crisis as the biggest threat to the economy. Terrorism came at #2 with 20%. Other issues on the list included inflation, government spending and the account deficit. The cost of health care was also mentioned as a major concern.

And now that everyone admits that subprime is indeed a problem and that it is already contaminating the entire economy, we don’t really see a solution coming from any of the usual suspects. What we’re seeing is more panic, because the current situation is unprecedented, so analysts don’t know what to expect. Nothing good in any case, I guess.

“No value left” in Bear Stearns funds

Bear Stearns estimates that its two troubled hedge funds that invested in securities backed by subprime mortgages are nearly worthless today, after “unprecedented declines” in the value of underlying collateral. The smaller, “enhanced leverage” fund has “effectively no value left” in it while the older High-Grade Structured Credit Strategies Fund has lost 91% of its value. Shares of Bear Stearns dropped $2.47, or 1.8% to $137.44.

As markets watch everything that has “subprime” on it collapse, fears are spreading among consumers who don’t know exactly what their retirement savings are invested in. Now that securities backed by Alt-A loans are getting downgraded, many are beginning to realize how problems in the lending sector could affect nearly everyone. Moody’s, the rating agency which recently started downgrading the securities, says it is not being hired by issuers of commercial mortgage-backed securities. Underwriters are “rating shopping” and the agencies that get hired are the ones most likely to give higher ratings.

I can’t help but wonder if there will be a significant difference between ratings done by Moody’s and other companies. After all, ratings agencies need a good reputation so giving false ratings doesn’t make much sense. It seems that more downgrades are inevitable, so this “rating shopping” trend shouldn’t really last for long. But who knows…

David Seiders: Home construction may take until 2011 to recover

David Seiders, chief economist for the National Association of Home Builders (NAHB), said the current bust in home construction may last until 2011. Until then, construction will probably stay below last year’s levels.

Latest economic data on home prices and home construction has been more than gloomy, suggesting that the housing “slump” is far from over. Construction starts were 1.53 million in April according to the Commerce Department, compared to 2.29 million in January 2006. According to Seiders, “We’ve fallen way below trend”, because activity was especially strong during boom times. Unsold inventory is at the highest levels since 1999 when the National Association of Realtors started keeping track of it.

New-home sales increased in April, driven up by sharp declines in home prices. In addition to offering various incentives to home buyers, developers are now slashing prices by 10-20 percent and even more. The median price of a new home fell 11 percent year-over-year in April, to $229,100. Sales of previously owned homes fell to the lowest level in nearly four years, bad news for anyone hoping to sell their home at a reasonable price.

Bad time for home builders so far, but with inventory this high, it seems that things are going to get even worse. Staying in the business and avoiding losses is hard enough already, and making any profit in 2007 seems out of the question.