The Banking Sector Meltown of 2008 - The Debt Crisis
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A look back at the "Great Recession" and the factors that lead to the banking collapse in 2008.
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The Banking Sector Meltown of 2008 - The Debt Crisis
- 1. The Real Estate Bubble and Banking Sector Meltdown Section III – The Ticking Time Bomb on the Next Financial Sector Meltdown
- 2. Review of The Banking Sector Meltdown • The Housing Bubble (2001-2005) • The Sub-Prime Explosion (2001-2005) • The Housing Market Peaks (2005-2006) • The Subprime Crisis (2007) • Banks & Markets React (2007-2008) • Financial Collapse (2008) • Government Reaction (2009)
- 3. Source: Amherst Securities Pre-Tax Income Borrowing Power 2.8 times Borrowing Power of a Typical Home Purchaser
- 4. Mortgage Resets Trigger for the Next Financial Meltdown Source: Loan Performance, Amherst Securities 10/2010 9/2011
- 5. New Home vs. Existing Home Sales January 1999 – October 2011 0 1000 2000 3000 4000 5000 6000 7000 8000 1999 2001 2003 2005 2007 2009 2011 0 300 600 900 1200 1500 EHS NHS Data Source: Bloomberg, US Census Bureau ExistingHomeSales(inthousands) NewHomeSales(inthousands) 1st Time Home- Buyer Tax Credit The “Distressing” Gap
- 6. 0 50 100 150 200 250 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 -55% -65% -33% Average US Home Prices Case-Shiller 10 City HPI: Jan 1994 – Sept 2011 Source: Standard & Poor’s Case-Shiller US 10-City Home Price Index SeasonallyAdjusted InThousands
- 7. 100 120 140 160 180 200 220 2000 2002 2004 2006 2008 2010 2012 Source: Standard & Poor’s Case-Shiller US 20-City Home Price Index SeasonallyAdjusted InThousands Average US Home Prices Case-Shiller 20 City HPI: Jan 2000 – Sept 2011
- 8. Total 90-Plus Delinquencies and Foreclosures Source: Information provided by LPS Applied Analytics DataasofJuly2011 84,219 – 6/2011
- 9. Delinquent Loans (2x) and Foreclosures (8x) Pre-Crisis Levels Source: Information provided by LPS Applied Analytics
- 10. 40% of Loans in Foreclosure have not made payment in 2 years Source: Information provided by LPS Applied Analytics
- 11. Foreclosure Starts outnumber Sales by a Factor of 3:1 Source: Information provided by LPS Applied Analytics
- 12. U.S. Private Debt Growth vs. Real GDP 1985 – 2010 0 10 20 30 40 50 1985 1988 1991 1994 1997 2000 2003 2006 0 10 20 30 40 50 GDP Private Debt Data Source: Bureau of Economic Analysis, St. Louis Fed In$Trillions In$Trillions GDP = 306% Debt = 812% Debt 2.73x GDP
- 13. 0 10,000,000,000,000 20,000,000,000,000 30,000,000,000,000 40,000,000,000,000 50,000,000,000,000 60,000,000,000,000 1977 1982 1987 1992 1997 2002 2007 Federal Govt Trust Funds Federal Govt State and Local Govt Financial Sector Foreign Corporate Household Other Consumer Credit Home Mortgage Source: Federal Reserve Flow of Funds Report Government $14Trn Financial $17Trn Corporate $11Trn Consumer $14Trn Total U.S. Debt, 2008 Total: $56 Trn !
- 14. U.S. Debt Since 1929 as a percentage of GDP by category Source: SG Global Strategy, Bloomberg, US Federal Reserve
Editor's Notes
- Video Presentations Additional Economic Topics The Banking Sector Meltdown Key Concept: The Borrowing Capacity of the Typical Homeowner between 2000-2006 it went up 2.8x from 3.3x went to be able to borrow 9.2x their income. Banks took advantage of low interest rates (fed helped push it too) and lent like crazy which led to increase in home prices.
- New home sales and existing home sales are released each month at about the same time. Many comparisons are made between the two series, but before doing any comparisons, one must be aware of some definition differences that affect the timing of the statistics. The Census Bureau collects new home sales based upon the following definition: "A sale of the new house occurs with the signing of a sales contract or the acceptance of a deposit." The house can be in any stage of construction: not yet started, under construction, or already completed. Typically about 25% of the houses are sold at the time of completion. The remaining 75% are evenly split between those not yet started and those under construction. Existing home sales data are provided by the National Association of Realtors®. According to them, "the majority of transactions are reported when the sales contract is closed." Most transactions usually involve a mortgage which takes 30-60 days to close. Therefore an existing home sale (closing) most likely involves a sales contract that was signed a month or two prior. Given the difference in definition, new home sales usually lead existing home sales regarding changes in the residential sales market by a month or two. For example, an existing home sale in January, was probably signed 30 to 45 days earlier which would have been in November or December. This is based on the usual time it takes to obtain and close a mortgage. Effective with January 2005, the National Association of Realtors created a new monthly series to overcome the lagging effect of the existing home sales definition. This new series is called Pending Home Sales and is based on sales of existing homes where the contract has been signed but the transaction has not been closed, making it roughly equivalent to the new home sales definition. Monthly estimates are expressed as an index where the year 2001 has been set to equal 100.0.
- Down 28% since the peak – but Foreclosure Inventory is at historic highs