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The housing
bubble aftermath has reached a new stage as banks sue homeowners, and China
looks more ready than ever for a property bust.
"Jingle
Mail" is a darkly comic phrase born of the housing
bubble and bust. It refers to the act of giving up a house -- leaving the
keys in the mailbox and walking away.
Now,
though, "Jingle Mail" could be changed to "Jingle Jail,"
because leaving the keys no longer brings freedom.
The
aftermath of the housing bubble has reached a new stage. Lenders are suing
homeowners... or rather, ex-homeowners who thought they had moved on.
The WSJ
tells the tale of Joseph Reilly,
highlighting this disturbing new trend:
LeHigh Acres, Fla -- Joseph
Reilly lost his vacation home here last year when he was out of work and
stopped paying his mortgage. The bank took the house and sold it. Mr. Reilly thought that was the end of it.
In June, he
learned otherwise. A phone call informed him of a court judgment against him
for $192,576.71.
It turned
out that at a foreclosure sale, his former house
fetched less than a quarter of what Mr. Reilly owed
on it. His bank sued him for the rest...
Forty-one
states and the District of Columbia allow lenders to sue borrowers for unpaid
mortgage debt, the WSJ reports. The leftover amount between the loan and the
foreclosure sale is known as a "deficiency judgment." If the amount
is large enough -- say, more than $100K -- the banks have incentive to try
and claw it back.
This is
grim news against a backdrop of stagnating wages. Median household income hit
its lowest levels in a decade in 2010, according to the U.S. Census Bureau,
as the poverty rate hit a 17-year high.
For the
stock market, the impact ties back into consumer spending trends.
At one
point, the "strategic default" option of walking away from one's
home actually contributed to consumer spending, as upside-down
homeowners ditched hefty mortgage payments and tapped the freed-up cash. That
headwind has now become a tailwind.
Consumer
psychology is another key factor. Those who gave up a house and thought they
were "free" now have to wonder what sort of "deficiency
judgment" might show up in the mail. And those thinking about
foreclosure -- keeping it as an option in the back of their minds -- have new
issues to contend with.
In relation
to consumer spending, an easy way to monitor the market's mood is via the S&P
Retail Index ETF (XRT:NYSE).
If the trend in discretionary spending points lower,
XRT will show it.
For Mr. Market, the most pressing near-term focus is perhaps
China. (Europe is still there, but taking a slight breather.)
The
Shanghai Stock Exchange composite is down more than 20% from its April highs
-- bear market territory. Not to be outdone, Dr.
Copper continued to plunge this week, highlighting the China concern message.
Oil has also tumbled, breaking below $80 per barrel.
"The
fabric of China's investment led growth is starting to fray and
unravel," says Patrick Chovanec of Tsinghua
University in Beijing.
Property
developers have been playing a game of chicken with the Chinese government.
It is a game the developers will lose, given the only way to win is for
prices to rise indefinitely.
The
government has slowly been choking off the developers' access to credit, via
state-owned banks, as alarming signs of bad loans and real estate Ponzi
schemes abound.
And so, as
the developers feel pressure from a credit squeeze, they grow ever more
tempted to liquidate inventory for cash.
But what
happens when a whole slew of players catch this notion at the same time? It
is the way of all bubbles -- a mad rush to the exits as sellers overwhelm
buyers. It's practically a foregone conclusion to the script, the main
question being when.
The
pressure on China is translating over to pressure on commodity-oriented hedge
funds. This is visible in industrial favorites like
Cliffs
Natural Resources (CLF:NYSE).
In late July, CLF was trading above $100 per share. Now it is below $50.
Or, for a
whole industry feeling the squeeze, look to the Global X
Copper Miners ETF (COPX:NYSE).
The copper miners have nearly been cut in half since August. There is a
contagion effect in play, as nearly all things China related and commodity
related get caught up in the sale.
These are
warning signs that a major driver of the global economy -- China's ability to
sustain growth through stimulus -- is rapidly breaking down. It comes as the
juggernaut of U.S. consumer
spending hits the breakdown lane too.
The good
news is, in the months ahead, we may finally get a break from the
Europe-dominated news cycle. Unfortunately, those headlines may be switching
over to a U.S. recession watch and China. Watch copper, oil and the consumer
retail indexes for tells.
Justice
Litle
Taipan
Publishing Group
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