Debt Free

Many banks and other financial institutions have stopped lending, either completely or for the most part. Cash available to mortgage (and other) lenders is drying up. As investors shy away from supplying money for real estate loans and calling in credit lines after mortgage companies restate the value of their loan portfolios, the money available to lend for you and I to buy or refinance homes is getting a bit scarce.

In the news this morning was the fact that one of the largest U.S. mortgage lenders, Countrywide Financial, has completely drawn down one of their available credit lines due to the unavailability of cash for mortgages. The scary thing is that the credit line wasn’t small potatoes either, it had a limit of $11.5 BILLION! The news of the complete exhaustion of the credit line helped Countrywide stock to an 11% single day drop. Looks like another shorting opportunity in the mortgage industry. The larger question however, is what happens if one of the engines that’s been fueling our economy, mortgage money, evaporates like so many raindrops in the Sonoran?

We may be about to find out. Fannie Mae and Freddie Mac, the largest mortgage loan buyers are bound by statutory limitation to $1.4 trillion in total mortgage debt. They are awfully close to that now, and if they reach it will be unable to purchase any additional loans. This will further deepen the problems faced by Countrywide and others who must sell their loans as part of their normal business operations.

If no one is available to purchase the loans, the lenders will be stymied. So will you, the potential homebuyer. Yesterday Senator Charles “Chucky” Schumer out of NY said he’d introduce a bill for at least a temporary abolition of the $1.4 trillion debt limit faced by Mae and Mac. Where, or if there would be a new, higher limit imposed is unknown.

While fewer buyers in the existing home market would be a problem, in the new home market it could spell economic disaster. Already homes are sitting on the market as builders struggle to rid themselves of unsold inventory. This is a great opportunity for potential homeowners who can get a mortgage, but not so good for the hundreds of thousands of workers who rely on the homebuilding industry for their paychecks.

After steadily rising since 1992, the number of new housing starts has dropped precipitously in the last year, down from a high of just over 2 million in 2005 to 1.8 million last year. In the first 6 months of 2007. Figures released by the Census Bureau yesterday for July residential unit starts indicate that it’s not over yet. Far from it. July figures are on pace for an adjusted annual figure of only 1.381 million units. Obviously that’s a hefty drop from over 2 million, but even more telling is that it’s 20.9% down from the revised June estimate of 1.47 million annual units. To further illustrate the decline, the value of private, residential construction dropped from $694 million and $678 million in March and April of 2006 to $555 and $551 million in the same 2 months of 2007. This says nothing of the decline in existing home sales and remodeling projects, all sure to adversely affect the economy, and your wallet.

That will spill over into the economy in many different ways. If you work in the real estate, mortgage, construction, building supply, or appraisal industries, you’ve probably noticed a drop. However, construction jobs for both home builders and specialty trades have yet t experience the magnitude of decline that the drop in new housing starts would suggest. In fact, the number of those employed in residential construction

(I have no idea how they correlate this figure with the huge number of illegal aliens employed as sheet rockers, landscapers, carpenters, laborers, insulators, and roofers in this country. To what percent these official government figures reflect those workers, I have no idea. I have no doubt that the argument “They only take jobs Americans don’t want” will be a much tougher sell, as the number of unemployed American skilled and unskilled construction trades people grows.

Lest you think I’m exaggerating, just take a walk around the job site in any large scale housing development in this country [the few that are left]. Get there about 11:00am and see who shows up at the mobile burrito van for lunch. Count the number of those who speak any semblance of Englais. You could just as well be at a job site in Mexico City. I’m not discounting their work ethic or ability. They work very hard, and for the most part, do a good job, in record time. They’re just not legal and bring with them all the problems that represents, and more.)

sits at over 3 million, down only slightly from its peak in the summer of 2006. This fails to count employees and business owners in related industries that may, in fact, be feeling the pinch already. So far there has been about a 10 to 1 disparity in the housing starts to lost construction jobs number. Starts are down about 20%, while jobs have fallen only about 2%. It won’t stay that way forever. Builders won’t keep employees if they aren’t building homes. Buckle down.

Oh, and have a great weekend!