The Wall Street Journal-20080215-Ahead of the Tape

Return to: The_Wall_Street_Journal-20080215

Ahead of the Tape

Full Text (545  words)

[Today's Market Forecast]

Housing Rests

On a Negative

Equity Problem

Amid the hand-wringing about complicated credit turmoil lately, the economy's fate still hangs largely on something simple and understandable: the value of your home. When housing stabilizes, consumers and banks will be able to breathe easier about their balance sheets and start thinking about the future. Yet deeper housing risks loom.

Sales of previously owned homes fell 21% in the fourth quarter from a year earlier. Prices declined in 77 out of 150 metropolitan areas, says the National Association of Realtors.

As prices fall, more homeowners are finding they owe more on their mortgages than their homes are worth. Economists call this "negative equity." The problem with negative equity is that it gives people an incentive to walk away from their homes and their mortgages, making the debt the problem of the banks.

Some homeowners did that in Texas in the 1980s. It is hard to prove it's happening now to any large degree. But many bankers see it as a problem.

Wachovia and Bank of America executives have pointed to the trend, as does Fitch Ratings. In Las Vegas, half the homes listed for sale are vacant, according to Ivy Zelman, an independent housing analyst. Many of these homes were originally bought by investors. They thought they were getting an appreciating asset and have little attachment to the homes now.

It is easy to imagine how walkaways could lead to an insidious process, putting more downward pressure on prices, and in turn giving more homeowners an incentive to pack their bags and leave their keys in the mailbox for the bank.

Goldman Sachs Chief Economist Jan Hatzius estimates home prices will slide 10% nationwide in 2008, meaning 15 million mortgages, 30% of all outstanding, will be attached to negative equity. That implies about $3 trillion worth of mortgages could be worth more than the homes they finance, he says.

These are scary numbers from a bearish economist who might be proven wrong. But given the risk, it's no wonder Federal Reserve Chairman Ben Bernanke has left the door open to more rate cuts aimed at healing an economy with lots of downside risks.

It Is Hard to Ignore

Soaring Food Prices

Three major food companies report earnings today after having had their lunches eaten by soaring commodity prices.

Costs at Campbell Soup, J.M. Smucker and Hormel Foods rose faster than sales in the prior quarter ended in October, helping to push their share prices lower at a time when such defensive stocks ought to be in high demand.

Campbell reported 6.7% year-over-year revenue growth in the prior quarter. Its cost of goods sold rose 8.7%. Smucker suffered a 19% jump in costs, topping its 17% sales growth. Spam-maker Hormel enjoyed an 11% drop in hog prices, but high feed prices hurt its Jennie-O Turkey Store division.

The companies are trying to pass this pain to customers. A survey by AC Nielsen found eight U.S. branded-food companies, including Campbell, raised prices by more than 2%, on average, in the 12 weeks ended Jan. 26.

This is all hard to ignore . . . unless of course you're an economist. They often disregard food prices when measuring inflation.

-- Mark Gongloff

---

Email [email protected] or [email protected]