A couple items in the news suggest that the new normal of sluggish growth is making its way through the troubled U.S. economy.
On Oct 16, one hundred or so members of the United Auto Workers picketed their own union headquarters in Detroit to protest an agreement that allows the new General Motors to pay some workers half of what had been a $28 per hour union wage. This second tier wage structure is set to take effect at GM plant near Pontiac, Michigan that will assemble small cars that were to have been manufactured in South Korea.
Unemployment in Pontiac is 30% and the financial situation there is so dire that the police department is to be disbanded and public safety turned over to the county in order to save $2 million per year. The idled GM plant ten miles north of Pontiac at Lake Orion would employ 1,500 workers. Michigan lawmakers and the business community lobbied aggressively to persuade GM to manufacture the new small-size Chevys and Buicks in Michigan. The company, which received billions from taxpayers to recover from last year's bankruptcy and still majority owned by the government, finally agreed but said the Lake Orion plant wouldn't be profitable unless the lower wage scale was in place.
Welcome to the new normal in manufacturing.
In Chicago last Thursday, Jamie Dimon, head of JP Morgan Chase presented a particularly gloomy economic outlook prepared by the chief economists of 150 of the nation's biggest companies. Dimon said business confidence had fallen by a third in just the past six months. He worries that the economy is growing so slowly that unemployment is likely to remain above 9% throughout 2011.
Bank stocks meanwhile plummeted as investors pondered the latest debacle in the residential mortgage market where botched documentation procedures by mortgage servicers have led a de facto moratorium on residential foreclosures. The prospect of huge additional losses on bad mortgage loans sent shares of Bank of America down 11%.
Several housing economists worry that a delay in foreclosures will prolong the three-year-long devastating slump in residential housing. They argue that foreclosures need to be sped up not slowed down. Joshua Shapiro, housing specialist at MFR in New York, says, "the best thing is for prices to get to a level that clears the market."
Currently, many realtors say that since the government's tax credit on home purchases expired in April prospective buyers have been staying out of the market on the expectation that prices will fall further. That is a sentiment share by housing economist Mark Zandi in West Chester, Pennsylvania who believes home prices are likely to decline another 5% before the market begins to slowly recover probably in 2013. Zandi likewise says, "the sooner we work through this (foreclosure inventory) the sooner the economy can take off." Tony Downs, a housing specialist at Washington's Brookings Institution, is more pessimistic saying that home prices may keep declining for another five years.
Nationally, home prices are down about 30% from their 2006 peak and 25% of all homeowners are underwater on their mortgages. Zillow, the housing data company, says that there are 8 million empty or foreclosed homes in the country and that 3.8 million more could slip into that category. Christopher Whalen of International Risk Analytics says only 25% of likely foreclosures have yet occurred.
Mortgage interest rates, meanwhile are at their lowest levels since 1951 with a 30-year mortgage now available at 4.19%. Despite a high affordability index and extraordinarily low rates, the property market remains depressed. Calling the housing market a disaster, John Makin of the American Enterprise Institute in Washington jokes that the best way to price a home is to take the assessed value and multiply by .5.
Mark Fogarty of the National Mortgage News dryly observed recently that because so many homes have been repossessed, banks are selling more homes than builders. If, as Fogarty asserts, housing typically leads the nation into recession and also leads it out, the hard times will be with us quite a while longer.
Welcome to the new normal in housing.