Poster child for foreclosure

NEW YORK (CNNMoney.com) -- In Mesa, Ariz., President Obama picked an appropriate place to talk about the mortgage-default crisis: More than half the homes for sale in this sprawling suburban town are distressed properties.

In choosing Arizona as the backdrop for Wednesday's housing rescue announcement, Obama ventured to a state suffering from high foreclosure numbers. Arizona had the third-highest rate of foreclosure filings in the nation during 2008, according to RealtyTrac, which compiles foreclosure statistics.

Mesa itself, as Mayor Scott Smith often remarks, is the biggest city in the country that nobody knows. It's a young, sprawling bedroom community of Phoenix that has grown explosively since the end of World War II. With 452,933 residents as of July 1, 2007, it's now the 38th largest city in the nation: bigger than Cleveland, St. Louis or Oakland.

"Mesa is the largest suburban city in the country," said Scott Butler, the city's director of government relations, "and it's symbolic of how the suburbs have been impacted by foreclosures."

Founded originally by members of the Church of Jesus Christ of Latter-day Saints, the city lies on mostly flat land with some rolling hills in the Valley of the Sun. Most of it consists of a grid of streets and cul-de-sacs filled with well-kept single-family homes.

The main drags look like nearly every other American suburb, lined with fast food restaurants, gas stations and strip malls. There are a few blighted areas. There's not much industry, but Boeing manufactures the Apache helicopter here. And it's the winter home of the Chicago Cubs.

Foreclosure has hit Mesa hard. "For the first time in our history, we probably haven't grown the past two years," said Butler.

According to Lynn Murtagh, a real estate broker with Coldwell Banker Residential in Mesa, of the 3,149 current active home-for-sale listings on the market, 25% are bank-owned properties taken back from homeowners in repossessions or given back by borrowers unable to keep up with their mortgage payments.

Another 27% are short sales, in which lenders agree to accept a repayment amount less than what is owed on the mortgage and forgive the difference. That means more than half the homes on the market are so-called "distressed properties."

Foreclosure growth

The foreclosure problem has accelerated in the Phoenix metro area, which includes Mesa. More than 6% of Phoenix housing units received a foreclosure filing during the year, according to RealtyTrac. That's the fifth highest foreclosure rate in the nation.

There were 1,079 foreclosure filings issued in Mesa during January 2009, up 33% from 12 months earlier - and a whopping 318% from January 2007.

The entire Phoenix area was a fiercely expanding bubble market earlier in the decade as the population exploded and flocks of real estate investors from high-priced areas such as California looked to expand.

In those days investors grew rich as home prices crisply appreciated. The median home price for homes sold during the fourth quarter of 2005 was nearly 50% higher than 12 months earlier, according to the National Association of Realtors.

Mesa home prices have crashed since then; they fell 8.2% during the last three months of 2008 to a median price of $164,869, according to Zillow.com; they've declined 22.9% for the year. Peak to trough, they've fallen more than 37%.

In many neighborhoods price declines are much, much worse. "You have the situation with many people where they bought a home for maybe $225,000 in 2005 and they have it listed now for $75,000," Murtagh said.

The steep price drops have put many recent homebuyers "upside down" in their mortgages - meaning they owe more than their homes are worth - which makes them very vulnerable to foreclosure. More than 60% of the homes bought with mortgages in the past five years in the Phoenix metro area are now upside down, according to Zillow.

According to Murtagh, many Mesa borrowers used exotic mortgage products during the boom. Those option adjustable rate mortgage (ARMs), hybrid ARMs, no-doc loans and interest only loans are now failing at high rates.

Foreclosures there stem more from these unmanageable mortgages - and falling home prices - than from fundamental economic problems. The area's unemployment rate, while it has risen to 6.1% from 2.7% in May 2007, still trails the national average of 7.6%. And median household income in Mesa is nearly $50,000, close to the nation as a whole.

But the housing crisis has hit hard. Many local residents worked in the housing industry: 21% of male workers were employed in construction during 2007, the last year statistics were available. Many others worked in sales, lending, retail and other fields dependent on home sales.

"If we could stop the job losses and find ways to keep people in their homes - maybe by lining up loans with current values - that would be a big help," said Murtagh.

The housing bust seems to have shaken up Mesa a bit. But it still has many strengths, including its aerospace industry and its lovely climate, which attract many people there.

"The city has experienced nothing but growth in its entire history," said Butler. "We hope to get things turned back around." 


Obama may subsidize mortgage payments
Freddie, Fannie extend eviction freeze a month
Citi, JPMorgan temporarily halt foreclosures

Housing starts plummet

NEW YORK (CNNMoney.com) -- Initial construction of U.S. homes fell to the lowest level on record in January, according to a government report released Wednesday.

Starts fell to a seasonally adjusted annual rate of 466,000 in January, according to the Commerce Department. That's the lowest level since the government started keeping records in 1959.

The rate was down 16.8% from December's revised reading of 547,000, and 56.2% lower than January 2008. Economists were expecting housing starts to decline to 529,000, according to consensus estimates compiled by Briefing.com.

January marked the fourth consecutive month in which housing starts fell to a new record low. Starts have fallen nearly 80% from their peak of 2.3 million in January 2006.

"It's a weak report, but it's not all that surprising," said Mike Larson, an analyst at Weiss Research. "It reflects the state that the housing market has been in for over a year."

New construction of single-family homes reached an all-time low rate of 347,000, or 12.2% below December's level. Experts consider single-family homes to be the core of the housing market.

Housing starts were dragged down further by a 25% month-over-month drop in multi-family home starts during the last month. Construction of new multi-family housing fell to a rate of 114,000, down from 152,000 in December.

"Building activity is all dried up," said Larson. "Some of it is voluntary cutbacks, because the inventory is excessive. But there are also involuntary cutbacks, as lenders are cutting off funding for developers."

Applications for building permits, considered a reliable sign of future construction activity, fell by a seasonally adjusted annual rate of 521,000 last month - also an all-time low.

That's 4.8% below the revised 560,000 rate in December and 50.5% lower than year-ago levels. Economists were expecting permit applications to fall to 527,000.

The sharp decline in building activity suggests that home building will continue to drag on the economy for a while. Many economists have identified the battered housing market as the root of the problem behind the recent credit crisis.

But the drop in building could actually help the struggling market rebound. Homebuilders continued to construct new homes well after the housing bubble burst, leading to an enormous glut of unsold homes on the market. Rising foreclosures have added to the number of unoccupied homes for sale.

Since demand for homes remains weak, the glut will only ease if fewer new homes are built.

"Until you get that inventory down, going to see housing starts and permits decline," said Larson. "Arguably this is what has to happen." 


Nashville-area home sales hit 15-year low
Manufacturing (ISM)
U.S. home sales rise in December

Fed: Long view better, short term stinks

NEW YORK (CNNMoney.com) -- The economy stinks, and the Federal Reserve wants to tell you all about it.

The Federal Reserve, in painting a dour picture of the current situation, announced on Wednesday new initiatives to increase disclosure of its economic forecasts and unprecedented lending programs.

Federal Reserve Chairman Ben Bernanke, in a speech in Washington, D.C., said the central bank will begin to publish quarterly long-term economic projections. The outlooks will offer six-year forecasts on unemployment, inflation and economic output. Previously, the U.S. central bank only made public its estimates out to three years.

The first long-term forecast, released Wednesday, said that the economy would grow 2.5% to 2.7% in the several years after 2011. The Fed also predicted that the unemployment rate would fall to 4.8% to 5% and inflation would moderate at about 1.7% to 2% during that time span.

The forecast for 2009 was far less rosy. The Fed expects gross domestic product to decline by 0.5% to 1.3% in 2009, and the unemployment rate to rise to 8.5% to 8.8%. GDP fell by 3.8% in the fourth quarter of 2008, and unemployment stands at a 17-year high of 7.6%.

Consumer prices this year are expected to rise just 0.3% to 1%, well below the Fed's perceived target of 1% to 2%, according to the Fed.

Bernanke said that increased clarity about the Federal Open Market Committee's forecasts will ultimately help improve economic conditions.

"This further extension of the quarterly projections should provide the public a clearer picture of FOMC participants' policy strategy," Bernanke said. "Also, increased clarity about the FOMC's views regarding longer-term inflation should help to better stabilize the public's inflation expectations, thus contributing to keeping actual inflation from rising too high or falling too low."

Easier access to Fed lending data

Bernanke said that the central bank will improve disclosure amid heightened public concern about the enormous expansion of its balance sheet.

Accordingly, the Fed will unveil a new Web site in the coming days that will make clearer the public information the Fed already makes available. The Web site will give enhanced explanations of the recent Fed actions to boost lending and will analyze their effect on the financial markets.

In addition, Donald Kohn, vice chairman of the Federal Reserve Board of Governors, will head a committee to review the Fed's disclosure policies related to its lending practices, Bernanke said.

The Fed chief said the moves were made to improve public access to information.

"The presumption ... will be that the public has a right to know, and that the nondisclosure of information must be affirmatively justified by clearly articulated criteria for confidentiality," Bernanke said.

"I firmly believe that central banks should provide as much information as possible, both for reasons of democratic accountability and because many of our policies are likely to be more effective if they are well understood by the markets and the public," he added.

In the meantime, Bernanke sought to assure the public that the credit risk of the Fed's lending is "extremely low," saying that the Fed's assets pay interest, which generates a "significant" source of income for the Treasury. 


Government’s proposal for banks comes today
Fed’s Yellen: Economy similar to Great Depression

The stock market isn't as bad as you think

NEW YORK (CNNMoney.com) -- Happy Presidents' Day! Even if you have to work (like I do), the best part of this holiday is that the stock market is closed. And after last week, we all need a break.

The market tanked, with the S&P 500 falling 4.8%, putting it down 8.5% for the year. This despite a new bank bailout plan and the passage in Congress of the economic stimulus bill.

Still, there is a bit of good news

Unlike last year, much of the selling has been contained to shares in financial companies - the S&P Banking Index is down 46% so far this year.

In fact, 172 of the stocks in the S&P 500 are in positive territory.

Talkback: Will the stock market bounce back later this year?

That may not sound great. But in 2008, a mere 25 stocks finished in the black. It's promising to see that more than a third of S&P 500 stocks are holding up reasonably well.

It's not surprising that many of this year's winners are in defensive sectors, companies that should be able to fare okay during a recession.

Several healthcare stocks, for example, are among the market's leaders, such as managed-care provider Cigna (CI, Fortune 500), generic drug maker Mylan (MYL) and cardiovascular-device manufacturer St. Jude Medical (STJ).

There are also a handful of consumer-staples companies, i.e. firms that make everyday items like food, beverage and personal care products.

Shares of tobacco company Lorillard (LO), milk producer Dean Foods (DF, Fortune 500) and soft drink bottler Coca-Cola Enterprises (CCE, Fortune 500) are all up more than 10% this year.

But what you may not have realized is that shares of many more economically-sensitive companies that were pummeled last year have started to bounce back. That could be a sign that bargain hunters may be betting on an economic rebound later this year or in early 2010.

For example, shares of online retailer Amazon.com (AMZN, Fortune 500), which plummeted 45% in 2008, are up more than 23% so far this year. Other beaten down retailers, such as video-game seller GameStop (GME, Fortune 500) and grocery-store chain SuperValu (SVU, Fortune 500), are both up more than 20% in 2009.

A couple of brand name tech companies have also enjoyed a comeback: shares of Corning (GLW, Fortune 500), Google (GOOG, Fortune 500) and EMC (EMC, Fortune 500) are all up at least 15%. And according to fund tracker Morningstar, technology sector funds are up 2% year-to-date. The only other class of stock funds that have gained ground this year are healthcare funds.

Several companies in the oil patch have begun to recover as well -- despite a continued drop in crude prices.

Shares of Tesoro (TSO, Fortune 500), an oil and gas refiner, are up more than 40% this year following a 72% drop in 2008. Other beaten-down energy companies, such as oil-driller Noble (NE) and equipment provider National Oilwell Varco (NOV, Fortune 500), have also enjoyed double-digit percentage pops this year.

And even in the sector that everybody loves to hate -- finance -- there are a few standouts. Shares of Morgan Stanley (MS, Fortune 500) are up 43% while Wall Street rival Goldman Sachs (GS, Fortune 500) has gained 14%.

It's interesting that both stocks have rallied considering that shares of the other troubled big banks that received the first round of bailout money last fall, most notably Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500), have continued to sink. Even "healthy" banks such as JPMorgan Chase (JPM, Fortune 500) and Wells Fargo (WFC, Fortune 500) have been hit hard.

So what's this all mean? Of course, this is not to suggest that the financial pain will be over anytime soon. As I pointed out two weeks ago, the banking sector has to be fixed first for there to be a sustainable recovery in the economy and stock market.

But the fact that investors are bidding up some stocks and not just dumping all equities in favor of safer havens like gold and Treasury bonds is somewhat encouraging.

The indiscriminate selling that was a hallmark of the market at the end of last year appears to be over...hopefully for good. 


Large banks take beating on Wall Street
The market’s illogical rally

Job Loss

NEW YORK (CNNMoney.com) -- Employers slashed another 598,000 jobs off of U.S. payrolls in January, taking the unemployment rate up to 7.6%, according to the latest government reading on the nation's battered labor market.

The latest job loss is the worst since December 1974, and brings job losses to 1.8 million in just the last three months, or half of the 3.6 million jobs that have been lost since the beginning of 2008.

The loss since November is the biggest 3-month drop since immediately after the end of World War II, when the defense industry was shutting down for conversion to civilian production.

January's job loss was also worse than the forecast of a loss of 540,000 jobs from economists surveyed by Briefing.com

The rise in the unemployment rate also was worse than the 7.5% rate economists expected. The unemployment rate is now at its highest level since September, 1992.

As bad as the unemployment rate was, it only tells part of the story for people struggling to find jobs. Friday's report also showed that 2.6 million people have now been out of work for more than six months, the most long-term unemployed since 1983.

And that number only counts those still looking for work. The so-called underemployment rate, which includes those who have stopped looking for work and people working only part-time that want full-time positions, climbed to 13.9% from 13.5% in December. That is the highest rate for this measure since the Labor Department first started tracking it in 1994.

More job pain ahead?

Some economists are worried that the labor market is poised to get worse still.

"This has just begun," said Sung Won Sohn, economics professor at Cal State University-Channel Islands. He projects an unemployment rate rising above 9% by the end of the year, while the monthly job losses could soon top 800,000.

"Hiring is falling off dramatically and layoffs are accelerating," he said. "The layoffs have become an almost popular thing to do for corporations. Many businesses are scared. They want to take precautionary steps."

January was a brutal month for layoffs, as major companies ranging from Microsoft (MSFT, Fortune 500), Boeing (BA, Fortune 500) and Caterpillar (CAT, Fortune 500) to Home Depot (HD, Fortune 500) and Starbucks (SBUX, Fortune 500) all announced substantial job cuts.

Announced layoffs so far this year have already topped 300,000. In addition, payroll services firm ADP estimates that small- and mid-sized businesses trimmed 430,000 jobs in January.

"The breadth of job losses now surpasses the prior two recessions," said John Silvia, chief economist for Wachovia.

The report showed the already battered manufacturing sector shedding 207,000 jobs last month, while the construction industry cut 111,000 jobs.

But it's not just the goods-producing sector that is losing jobs. The services sector, which now provides more than two-thirds of the nation's employment base, also reported widespread losses.

Business and professional services, the sector that includes lawyers, accountants and tech services, lost 121,000 jobs. Retailers cut 45,000 workers, while the finance sector trimmed 42,000 workers and the leisure and hospitality sector lost 28,000.

The number of temporary workers, viewed as another indicator of business and labor market strength overall, fell by 76,000.

Among the only sectors posting narrow gains in jobs were education, health services, and the government.

Weak numbers to take center stage in stimulus debate

The jobs report comes as the Senate debates the Obama administration's proposal for a nearly $900 billion economic stimulus bill. During a debate late into the night Thursday Republicans and some Democrats questioned the bill's mix of measures and its size.

The White House released a statement saying the January report was proof that quick approval of the stimulus bill is needed.

"These numbers, and the very real suffering of American workers they represent, reinforce the need for bold fiscal action," said Christina Romer, the chair of the President's council of economic advisers. "If we fail to act, we are likely to lose millions more jobs and the unemployment rate could reach double digits."

Brian Bethune, chief U.S. financial economist for research firm Global Insight, said how quickly the stimulus plan is passed, and how effective it is in jump-starting the economy, will determine whether the recent job losses are the peak, or if they continue to climb.

He argues that stimulus needs to be for programs that get money into the economy as quickly as possible.

"Business confidence is extremely weak right now," he said. "They've taken a show-me-the-money attitude. What you need to stop more job losses is a series of very effective policies. That's the only thing that will help here." 


Fewer job openings, more layoffs
Employers cut 14,100 more jobs
Temp workers suffer job losses, too
As Tennessee job losses soar, Bridgestone plans cuts

Stimulus: What's in it for businesses

NEW YORK (CNNMoney.com) -- The $787 billion economic recovery package President Obama will sign on Tuesday contains more than $290 billion in tax provisions, according to estimates from the Joint Committee on Taxation.

Of that amount, $23 billion are breaks to encourage companies to invest in equipment or renewable energy initiatives, or to help them secure a cash cushion to get through the downturn and minimize layoffs.

But in some cases, the final business breaks are shadows of their former selves as originally conceived in earlier versions of the bill. The biggest example is the net-operating loss carryback extension -- a provision that broadens businesses' ability to make hay of their losses.

The provision was "gutted," according to Anne Mathias, policy director of research at the Stanford Group, a policy research firm. "As they say in Africa, in the battle of the elephants, it is the grass that gets trampled. And so it is for corporate America and the economic stimulus," she said.

That said, the bill contains numerous tax breaks that businesses will appreciate. In a statement late last week, Bruce Josten, the U.S. Chamber of Commerce's executive vice president of government affairs, said "the Chamber is disappointed that the net operating loss provision is not expansive enough to apply to all businesses, but we're pleased that the current bill will provide some help to smaller Main Street businesses."

Josten also noted that the Chamber supports another key provision that makes it easier for companies to buy back their own debt without getting hammered with a big tax bill.

"We support the cancellation of indebtedness tax provisions that will encourage businesses to restructure and reduce debt, enabling them to preserve jobs, renew investment, and begin to grow once again," he said.

Here's a rundown of some of the biggest business-related tax breaks and what they will cost the government in lost tax revenue.

Credits for renewable energy production: The bill extends a credit that businesses may take for electricity produced by wind energy through 2012 and for electricity produced by other renewable resources through 2013. The credit typically benefits those who fund wind farms and other renewable energy production sites. Estimated cost: $13 billion.

There is also a new credit created by the legislation for companies that produce the equipment used to generate renewable energy, such as wind turbines. Estimated cost: $1.6 billion.

Bonus depreciation: The bill extends for one year a special allowance that was in place last year. It accelerates how quickly companies can write off expenses by letting them deduct half the cost of new capital equipment purchases made in 2009 if the equipment is also put into service this year. The other half of the cost would have to be written off over time according to a fixed depreciation schedule. Estimated cost: $5.1 billion.

Delayed recognition of cancelled debt: The bill allows certain businesses that buy back their own debt at a discount in 2009 and 2010 to defer paying the income tax owed on the difference over 10 years. The companies may defer tax payments for the first four or five years and then pay the income tax due over the next five years. By repurchasing its own debt at a discount, a company can boost earnings. Estimated cost: $1.62 billion .

Small businesses loss write-offs: The bill temporarily broadens the "net-operating loss carryback" to five years, up from two years currently, for businesses with gross revenue of $15 million or less. Eligible companies could apply their 2008 losses to past and future tax bills so they can get money back on taxes they've already paid or would otherwise have to pay. Estimated cost: $947 million

That's a considerably reduced break from earlier versions of the stimulus bill, which had allocated $17 billion to make the NOL provision available to all businesses for two years of losses -- both 2008 and 2009.

"Our best estimate is that taxpayers with less than $15 million of gross receipts are 98% of all corporations, but only 5% of taxable income. So, they have covered most corporations, but not the ones who account for 95% of corporate activity," said Clint Stretch, managing principal of tax policy at Deloitte. 


Stimulus: What’s next
Tax cut plans: Sizing them up
Businesses cut back on tech buys

Final score: $8,000 for homebuyers

NEW YORK (CNNMoney.com) -- There's a nice windfall for some homebuyers in the economic stimulus bill awaiting President Obama's signature on Tuesday. First-time buyers can claim a credit worth $8,000 - or 10% of the home's value, whichever is less - on their 2008 or 2009 taxes.

A big plus is that the credit is refundable, meaning tax filers see a refund of the full $8,000 even if their total tax bill - the amount of witholding they paid during the year plus anything extra they had to pony up when they filed their returns - was less than that amount. But there has been a lot of confusion over this provision. Adam Billings of Knoxville, Tenn. wrote to CNNMoney.com asking:

"I will qualify as a first-time home buyer, and I am currently set to get a small tax refund for 2008. Does that mean if I purchased now that I would get an extra $8,000 added on top of my current refund?"

Not exactly. Billings won't get $8,000 on top of his current refund, but he would turn that small refund into a much larger one. If his total tax liability came to $6,000, but he had $7,000 withheld from his payroll, he would normally receive a $1,000 refund. With this credit, his refund would total $8,000. If the credit were non-refundable, as was originally proposed in the Senate version of the stimulus package, he would have only received $6,000, or the total amount he paid in.

To qualify for the credit, the purchase must be made between Jan. 1, 2009 and Nov. 30, 2009. Buyers may not have owned a home for the past three years to qualify as "first time" buyer. They must also live in the house for at least three years, or they will be obligated to pay back the credit.

Additionally, there are income restrictions: To qualify, buyers must make less than $75,000 for singles or $150,000 for couples. (Higher-income buyers may receive a partial credit.)

Applying for the credit will be easy - or at least as easy as doing your income taxes. Just claim it on your return. No other forms or papers have to be filed. Taxpayers who have already completed their returns can file amended returns for 2008 to claim the credit.

Lukewarm reception

The housing industry is somewhat pleased with the result because the stimulus plan improves on the current $7,500 tax credit, which was passed in July and was more of a low-interest loan than an actual credit. But the industry was also disappointed that Congress did not go even further and adopt the Senate's proposal of a $15,000 non-refundable credit for all homebuyers.

"[The Senate version] would have done a lot more to turn around the housing market," said Bernard Markstein, an economist and director of forecasting for the National Association of Homebuilders (NAHB). "We have a lot of reports of people who would be coming off the fence because of it."

Even so, the $8,000 credit will bring an additional 300,000 new homebuyers into the market, according to estimates by Lawrence Yun, chief economist for the National Association of Realtors.

The credit could also create a domino effect, he said, because each first-time homebuyer sale will lead to two more trade-up transactions down the line. "I think there are many homeowners who would be trading-up but they have had no buyers for their own homes," Yun said.

Who won't benefit, according to Mark Goldman, a real estate lecturer at San Diego State University, are those first-time homebuyers struggling to come up with down payments. The credit does not help get them over that hurdle - they still have to close the sale before claiming the bonus.

Instead, many may look at the tax credit as a discount on the home price, according to Yun. A $100,000 purchase effectively becomes a $92,000 one. That can reassure buyers apprehensive about purchasing and then watching prices continue falling, he added.

And it provides a nice nest egg for the often-difficult early years of homeownership, when unexpected repairs and expenses often crop up. Recipients could also use the money to buy new stuff for their home - a lawnmower, a rug, a sofa - and, in that way, help stimulate the economy. 


Tax cut plans: Sizing them up
U.S. home sales rise in December
Nashville-area home sales hit 15-year low
Stimulus: What’s next