BNN: Top Picks

John Hood, President & Portfolio Manager, J.C. Hood Investment Counsel, shares his top picks.

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A Tale of Two Housing Recoveries

Believe it or not: The housing market is recovering in most states. Home price indexes for 38 states ended 2011 above their early-year lows. And while prices aren’t yet up to prerecession levels, 30 states had more than two quarters of growth under their belts by the end of 2011, according to data from the Federal Housing Finance Agency.

But the national index is still falling, dragged down by pricing drops in the worst-hit states. It’ll drop another 2% in the next six months before starting to climb in the second half of the year. There are just a handful of states dragging down the national average…Arizona, California, Florida, Michigan and Nevada…all of which saw home prices drop by more than 50% from 2006 levels. These five states are home to 46% of the inventory working through the foreclosure process.

Furthermore, “almost half of the shadow inventory [homes which could come on the market in the near future because owners are in default on their loans] is not yet in the foreclosure process,” says Mark Fleming, chief economist at data analysis firm CoreLogic. “Also, shadow inventory remains concentrated in states impacted by sharp price declines and states with long foreclosure timelines,” he says.

The pace of a state’s housing recovery depends largely on how it handles foreclosures. Twenty-four states require a judicial review, calling for a judge to sign off before a house can be transferred to the lender. The foreclosure backlog clogging the pipeline in states with judicial review is 2.6 times larger than in states without judicial review, says Florida mortgage analysis firm Lender Processing Services.

And states without judicial review are selling off foreclosed homes faster -- up to three times faster in January than those with judicial review. “In January, you could have had some seasonal impact,” says Herb Blecher, vice president of LPS Applied Analytics. “But if it continues, it really is a resolution of this pipeline issue we’ve seen for some time.” In late 2010, several large banks, including Bank of America, J.P. Morgan, Wells Fargo and Citigroup, halted foreclosures in some states because of improper documentation. Afterwards, states without judicial review saw the resolution of foreclosures pick up relatively quickly, while foreclosures in “states with judicial reviews have been largely flat for well over a year,” Blecher says.

In many cases, home prices are already ticking up in states where foreclosures work through the process faster. Texas, for example, has the shortest foreclosure timeline, 90 days, and it saw home prices climb 1.2% in the fourth quarter of 2011, according to the FHFA. In Delaware, the time between missing a mortgage payment and foreclosure averages 106 days, and prices grew 0.6% in the fourth quarter. In New York, however, where judicial reviews and mortgage mediation requirements stretch the foreclosure time to a whopping 1,019 days, prices fell 1%.

Even where there is a huge overhang of housing inventory, there is a big difference. Take Florida and Arizona, two states bearing the brunt of the housing bubble burst. It takes an average of 806 days to complete foreclosure in the Sunshine State, which requires judicial review. In the Grand Canyon State, which doesn’t, it takes less than 200 days. As a result, Arizona’s market is already turning the corner. Phoenix home prices, for example, gained 2.7% in the fourth quarter of 2011, after plunging a staggering 55% from the 2006 peak. In Florida, prices are still falling.

That’s not to say some delays aren’t justified. The robo-signing fiasco and other cases validate the need to be diligent in the foreclosure process. Mediation is justified if there is an actual chance the homeowner can afford to make future payments on a house. But if not, the faster inevitable foreclosures can be concluded, the faster prices can rebound, because foreclosed-upon homes are often listed at a 40%-50% discount to comparable houses and vacant, blighted homes depress the prices of those nearby.

Florida is trying to cut damaging foreclosure delays with legislation to let lien holders request an expedited process. But it appears the move will be put off until next year. Although a bill passed in the state House of Representatives this year, it did not clear the state Senate. Odds are it will come up again in the next legislative session. Other states, though, are headed in the opposite direction, imposing new requirements for mediation between homeowners and lenders, which will add more months of delay. New York’s required mediation, for example, adds about one year to the process, according to one estimate.

Nationally, there is some movement to help clear excess inventory. Lenders’ recent agreement with state attorneys general will provide relief for about 500,000 homeowners, keeping many of them from going into foreclosure. And a pilot program at Fannie Mae to sell off foreclosed-upon homes in bulk, with the requirement that they be rented out for five years, is getting a warm reception from the market. Fannie Mae is selling 2,500 homes in the hardest-hit areas, such as Atlanta, South Florida, Phoenix and Las Vegas. Look for the government-sponsored entity to expand the program later this year and for other mortgage holders, including Freddie Mac, to follow suit.

Shiller: Housing Has “Chance” to Bottom But Suburban Prices May Not Recover “In Our Lifetime”

The battered housing market continues to struggle and talks of a housing bottom may be premature.

Home prices in January were flat compared to the prior month, suggesting stabilization in the market, but home values fell for the fifth-straight month and prices dropped to their lowest levels since 2003, according to the Standard &Poor's/Case-Shiller Home Price Index. Housing prices declined 3.8 percent on a year-over-year basis. The index measures the value of home prices in 20 U.S. metropolitan cities.

Sales of existing homes rose 0.3 percent in February and prices for new homes jumped 6.1 percent last month, yet demand for housing remains weak. There are 4.4 million homes for sale in the U.S.

Robert Shiller, a professor of economics at Yale University and co-creator of the Standard & Poor's/Case-Shiller Index, says the market has "a chance" of rebounding even though the downward momentum in the real estate market has accelerated in the past five years.

Shiller has become an authoritative voice on the housing market after making prescient calls about the housing bubble, before it burst in 2006. Before housing can bottom, the problems facing mortgage giants Fannie Mae and Freddie Mac must be resolved, Shiller says in an interview with The Daily Ticker. There is speculation that Fannie and Freddie could sell bundles of foreclosed homes to hedge funds; NPR and ProPublica reported last week that both Fannie and Freddie are leaning toward principal mortgage write-downs and loan forgiveness.

As economists and housing insiders continue to analyze every grain of housing data, most would agree that housing will continue to drag down the overall economic recovery in the near future. Many young people are choosing to live at home for a longer period of time instead of buying. Moreover, would-be homebuyers are settling into modern apartments and condominiums, further hindering a housing rally. Shiller says the shift toward renting and city living could mean "that we will never in our lifetime see a rebound in these prices in the suburbs."

A perpetually sluggish housing market, which Shiller believes has become "more and more political," might push the country in a "Japan-like slump that will go on for years and years."

MACQUARIE: BUY GOLD NOW: It's About To Rocket To $2250

BUY THE DIP.

That's the advice of Macquarie Private Wealth in respect to gold.

Gold has certainly come off quite a bit, form a high of around $1900/oz. late last summer, to around $1650/oz. now. And the improving economy and the rise in real interest rates has made a lot of people turn negative on the metal.

Macquarie advises getting in now for 5 reasons:

• Sentiment towards gold has no reached "extreme pessimism" levels.
• March is seasonally the weakest month for gold.
• Excess slack in the US economy will prompt the Fed to say on hold until 2014, as indicated, keeping short rates low.
• The extent of the long-term rate rise is over. The Fed will ease some more.
• Sovereign risk is not over.

Ultimately, they see it going to $2250/oz.

These two charts underpin their argument.

Macquarie

Macquarie

Chinese Business Media Cautions Japanese Bond Bubble Is Ready To Burst, Anticipates 40% Yen Devaluation

zerohedge.com,
It is a fact that when it comes to the oddly resilient Japanese hyperlevered economic model, the bodies of those screaming for the end of the JGB bubble litter the sides of central planning's tungsten brick road. Yet in the aftermath of last month's stunning surge in the country's trade deficit, this, and much more may soon be finally ending. Because as Caixin's Andy Xie writes "The day of reckoning for the yen is not distant. Japanese companies are struggling with profitability. It only gets worse from here. When a major company goes bankrupt, this may change the prevailing psychology. A weak yen consensus will emerge then." As for the bubble pop, it will be a sudden pop, not the 30 year deflationary whimper Mrs. Watanabe has gotten so used to: "Yen devaluation is likely to unfold quickly. A financial bubble doesn't burst slowly. When it occurs, it just pops. The odds are that yen devaluation will occur over days. Only a large and sudden devaluation can keep the JGB yield low. Otherwise, the devaluation expectation will trigger a sharp rise in the JGB yield. The resulting worries over the government's solvency could lead to a collapse of the JGB market." It gets worse: "Of course, the government will collapse with the JGB market." And once Japan falls, the rest of the world follows, says Xie, which is why he is now actively encouraging China, and all other Japanese trade partners of the world's rapidly declining 3rd largest economy to take precautions for when this day comes... soon. (more)

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What Inflation Could Look Like in 2014

By Jeff Clark, Senior Precious Metals Analyst

Most economists, especially those from the mainstream, will tell you that inflation is widely expected to remain benign for the foreseeable future. And for those who think it could climb higher, it's usually because they think it should be higher. History has a message for them: be careful what you wish for.

There are plenty of examples in history showing that once inflation takes hold, it can quickly spiral out of control. That's the danger we face now. Here's what I mean…

A recent article about sudden inflation by Amity Shlaes, a senior fellow of economic history at the Council on Foreign Relations and a best-selling author, provides some examples from the past century of US inflation that was at first subdued but then abruptly rocketed to alarming levels. I put them into a chart so you could see how quickly inflation rose within just two years from "benign" levels. I then made some projections for us today based on these historical examples.

(Click on image to enlarge)

According to Shlaes, US inflation was 1% in 1915 (based on an earlier version of the CPI-U). Over just two years, it hit 17%. As she states, it happened because the Treasury "spent like crazy on the war, creating money to pay for it…"

Given the fact that our spending and money-printing is now out of control, I projected what our inflation rate would be if we matched the inflation rates of these time periods. The first striped bar to the right represents what the CPI would register if we matched the 1915-1917 rise. Inflation would hit 19% by 2014. (Yes, the CPI has been tinkered with many times, but this is at least what "unofficial" or "authentic" inflation would register.) (more)