Housing Market Is Booming!

Posted on December 20, 2017 by Popular Economics Weekly

The Mortgage Corner

Both new and existing-home sales are highest since the end of the Great Recession, thanks to interest rates that are still at historical lows, and in spite of the Fed’s latest 0.25 percent rate hike. It looks like there are still plenty of homebuyers out there—actually, more buyers than homes for sale.

Sales of previously-owned homes surged 5.6 percent to an annual 5.81 million pace in November, the third month of increases and the strongest since December 2006, reports the NAR. Sales were 3.8 percent higher compared to a year ago in November.

This surpassed all predictions, and shows sales are far outdistancing supply. Unsold inventory would take 3.4 months to sell at the current pace, well below the 5-6 months’ worth of supply that normally signals a balanced market.

Lawrence Yun, NAR chief economist, says home sales in most of the country expanded at a tremendous clip in November. “Faster economic growth in recent quarters, the booming stock market and continuous job gains are fueling substantial demand for buying a home as 2017 comes to an end,” he said. “As evidenced by a subdued level of first-time buyers and increased share of cash buyers, move-up buyers with considerable down payments and those with cash made up a bulk of the sales activity last month. The odds of closing on a home are much better at the upper end of the market, where inventory conditions continue to be markedly better.”

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Graph: Econoday

This is while housing starts and permits matched their unusual October strength with stronger-than-expected results for November. Starts rose 3.3 percent to a 1.297 million annualized rate and though permits fell 1.4 percent to 1.298 million, they show a 1.4 percent gain for the key single-family category to a 862,000 rate. And starts for single-family homes, up 5.3 percent to 930,000, are the highest of the expansion, since 2007.

Total completions fell 6.1 percent to a 1.116 million rate which is bad news for supply where thin conditions have held back sales. But homes under construction rose, up 1.0 percent to 1.110 million. Regional data show start strength in the West and South where permits were also strong in possible evidence of a hurricane reversal.

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Graph: Econoday

“A welcoming trend is developing in the housing sector as builders are able to bring more supply to the market on a consistent basis,” said the NAR chief economist Lawrence Yun. “The latest monthly figure of near 1.3 million annualized housing starts is solid, and the growth is mostly coming both in the West and for single-family homes. 

“(But) There is still more room for improvement, as the latest figure is still not yet at the long-term 50-year average of produce 1.5 million units per year. If this rising trend continues, the worst of the supply shortage could soon end, which would help slow price appreciation in 2018. That would be a huge, welcoming relief for renters seeking to become homeowners.” 

Why are interest rates still at historical lows, in spite of Fed attempts to tighten credit with their four rate hikes, and more predicted to come? Money is still extremely plentiful and cheap, to put it bluntly. Major central banks are only now beginning to sell the $trillions they have amassed during the various Quantitative Easing programs that would reduce the money supply. 

This will continue to boost the housing market, needless to say. The only problem will be affordability for first-time homebuyers. The National Association of Realtors reports they constituted just 29 percent of all buyers in November, down from recent months and well below the long-term average of about 40 percent.

More buyers paid in cash in November, a trend that NAR said “continues to add a layer of frustration to the supply and affordability headwinds aspiring first-time buyers are experiencing.”

Harlan Green © 2017

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Republican’s Tax Reform = U.S. Bankruptcy?

Posted on December 18, 2017 by Popular Economics Weekly

Popular Economics Weekly

We know most of the sordid details, by now. The Repubs’ about-to-be-approved tax bill will drive the U.S. into a defacto bankruptcy. It contains very little for the middle and lower income tax brackets that do the most to boost economic growth with their spending, and lots for the 1 percent that spend the least, including doubling the inheritance tax exemption and lowering both personal and corporate taxes.

This will not generate enough tax revenue to pay for the additional debt, so foreign governments and individuals will become more reluctant to invest in U.S. debt, as the deficit continues to grow and interest rates rise, crowding out other, important investments.

It also cuts Medicare and Medicaid benefits by approximately $1.5 trillion to pay for this huge tax cut. But that isn’t really paying for it, since this takes income away from those supported by our social programs.

How does that make sense, when financial markets are already flooded with cash, and all kinds of bubbles are popping up? Bond valuations are at all-time highs (meaning interest rates are still at historical lows), corporations are already making record profits, and stocks’ price-to earning levels resemble those of the 1929 market crash that led to the Great Depression.

Everything is already overvalued, in other words, yet the Republican congress wants to give even more money to the wealthiest, who plan to use it to boost their paychecks, and that of their stockholders.

There will be little money left to boost wages and salaries, according to CEOs that have been surveyed. And why should they boost their workers’ incomes? Most new jobs are low paying, warehouse jobs for the likes of Amazon.

 

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Graph: Econoday

It fantastical thinking to believe otherwise. A lack of skilled workers is very likely a key factor why high levels of employment have not led to meaningful wage improvement, says Econoday. Inflation is not rising because real average hourly earnings are barely rising, which is why discounting is still prevalent.

So congress is really reducing tax revenues that are needed to pay for all that debt. This is what GW Bush tried to do in 2001-2 with his tax cuts, which led to the record budget deficit, bursting of the original housing bubble, and Great Recession.

And it can happen again. It is suicidal economics, in that the U.S. won’t declare bankruptcy, since it can print all the money in our own currency to pay for the inflated debt levels. But it will saddle future generations with an impossible debt load, and prevent much needed public and private investment that would increase productivity and boost growth.

Harlan Green © 2017

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Treasury Yield Curve Too Flat, As Fed’s Raise Interest Rate

Posted on December 13, 2017 by Popular Economics Weekly

Popular Economics Weekly

The Federal Reserve FOMC meeting ended with the predicted 0.25 percent rate hike; but it’s happening at the wrong time.  This is the rate that controls credit card interest and the Prime Lending Rate banks use on short term loans, which will now become more expensive, slowing consumer spending, and hence economic growth, for starters. 

Few follow the trajectory of the so-called Treasury yield curve which graphs the difference between short and long-term interest rates. The curve is flattening at present—not a good sign for future growth. Instead, it’s historically a sign of slowing growth. 

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Graph: FRED

DoubleLine Capital CEO Jeff Gundlach said this morning on CNBC the flattening yield curve is becoming worrisome, even with all signs pointing to no recession on the horizon. It will hurt junk bonds, for starters, as well as investors that are highly leveraged.

Why? The Fed is tightening at the same time as the Repubs’ proposed tax bill will add at least $1.5 trillion to liquidity with the increased budget shortfall. So Republicans are fighting Fed policy, and we know where that will end. Federal Reserve policy always wins!

Short term rates are the cost of money to banks, and longer-term interest rates are what they earn on loans. When the difference narrows, bank profits plunge and they lend less to businesses, which shrinks available credit, even with the additional liquidity.

But CEOs are saying they will return most of the increased profits from any tax cut back to their investors, rather than boosting employees’ incomes. And wages and salaries are two-thirds of product costs, which means no meaningful inflation happens if incomes don’t rise.

Where will the money come from to do some of the $2 trillion in deferred infrastructure maintenance, according to the ASCE, not to speak of modernizing our power grids, airports, and transportation network?

Some good news is that factory orders are soaring. Econoday reports factory orders have had a respectable year, moving to roughly $480 billion per month and near a 3-year high. “Year-on-year, orders are up $17 billion or 3.7 percent. Vehicle orders have been showing recent strength and reflect the rush of hurricane-replacement sales, yet the big contributor has been capital goods where annual gains are approaching 10 percent. And investing in capital goods are needed to expand production and even labor productivity.

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So we have the Fed wanting to slow down what they see as accelerating inflation, which is probably because they anticipate the increased federal budget deficit (and decreased tax revenues) from Republicans single-minded obsession with tax cuts that may or may not help economic growth.

But if corporate CEOs keep their profits in-house, and won’t spend a substantial amount on increasing wages and salaries, there is no inflation increase, and so no acceleration in GDP, ever.

Harlan Green © 2017

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Another Great Jobs Report

Posted on December 8, 2017 by Popular Economics Weekly

The Mortgage Corner

Total nonfarm payroll employment increased by 228,000 in November, and the unemployment rate was unchanged at 4.1 percent, the U.S. Bureau of Labor Statistics reported today. Employment continued to trend up in professional and business services, manufacturing, and health care.

The jobs boost from hurricane rebuilding showed up with 55,000 new jobs in construction and manufacturing. Professional/business services and education/health services added 100,000 jobs, and the service sector added 159,000 jobs overall.

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Graph: Marketwatch/BLS

The unemployment rate held at 4.1 percent in November, and the number of unemployed persons was essentially unchanged at 6.6 million. Over the year, the unemployment rate and the number of unemployed persons were down by 0.5 percentage point and 799,000, respectively, which means the U.S. economy will continue to grow into 2018, and economic growth could top 3 percent in this fourth quarter, as well.

The best news this week was the second estimate of labor productivity remained at 3 percent rate, which means workers are producing more—though their wages aren’t rising any faster. Annualized output increased 4.1 percent, while labor costs, including benefits, increased just 1.1 percent.

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This means businesses are increasing capital expenditures to make up for the lack of skilled workers. The meager rise is labor costs is helping productivity, and not boosting inflation. But as the so-called tax reform bill worming its way through congress indicates, there are very little benefits being doled out to those not in the top 1 percent.

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) at 4.8 million is down by 858,000 over the year, which shows progress in employment for the marginally employed. These individuals, who would have preferred full-time employment, were working part time because their hours had been cut back or because they were unable to find full-time jobs.

And the Federal Reserve will now raise interest rates another 0.25 percent next week at its FOMC meeting, even though there is a greater danger of disinflation and falling prices.

That’s what happens when $1.5 trillion in tax cuts benefit just the few, and are paid for with $1.5 trillion in benefit cuts for the many—that include Medicare and Medicaid.

Harlan Green © 2017

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U.S. Taxes Are Not High!

Posted on December 6, 2017 by Popular Economics Weekly

Financial FAQs

No, our taxes are not too high, and Americans suffer for it. In fact, the non-partisan Tax Policy Center says U.S. taxes at all levels of government represented 26 percent of GDP, compared with an average of 34 percent of GDP for the 34 member countries of the Organisation for Economic Co-operation and Development (OECD) in 2015.

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Graph: TPC

Then why do Americans complain so much about high taxes? It’s because we have to pay for services out-of-pocket that other developed countries’ governments provide—including universal health care, tuition free colleges; services that developed countries consider to be their citizens’ rights.

“In many European countries, taxes exceeded 40 percent of GDP. But those countries generally provide more extensive government services than the United States does,” says the TPC report. “Among OECD countries, only Korea, Chile, Mexico, and Ireland collected less than the United States as a percentage of GDP.”

Actually, the ‘other’ developed countries provide public services as well, including such mass transit conveniences as high-speed trains (in Europe, Japan, and China), and worker-friendly laws—including decent minimum wages, paid maternity leave, and at least 4 weeks paid vacations—the list goes on and on.

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The best way to look at this is what typical American households pay. A 2016 PEW Charitable Trust analysis showed how financially stretched we are.

“After declining during and after the Great Recession, expenditures increased between 2013 and 2014 in particular,” said the study. “…In 2014, the typical American household spent $36,800, but median household income continued to contract. By 2014, median income had fallen by 13 percent from 2004 levels, while expenditures had increased by nearly 14 percent.”

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Graph: PEW

In other words, declining American household incomes mean Americans are spending more out of pocket for the essential services, such as education and healthcare than other developed countries. About two-thirds of families’ spending goes to core needs: housing, food, and transportation, said PEW.

Alas, it will take an American electorate that finally wakes up to these facts to call for the benefits others enjoy. Why should we deserve less? One reason that hasn’t happened yet is our huge federal deficit—due to the fact that 60 percent of the federal budget goes to the military and defense spending.

Harlan Green © 2017

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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Dear Fed—Please Don’t Raise Interest Rates Again!

Posted on December 5, 2017 by Popular Economics Weekly

Popular Economics Weekly

The Federal Reserve FOMC meeting this week is expected to conclude with another 0.25 percent rate hike; but it’s happening at the wrong time.  This is the rate that controls credit card interest and the Prime Lending Rate that banks use on short term loans.

Few follow the trajectory of the so-called Treasury yield curve which graphs the difference between short and long term interest rates. The curve is flattening at present—not a good sign for future growth. Instead, it’s historically a sign of slowing growth.

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Graph: FRED

Why? Short term rates are the cost of money to banks, and longer term interest rates are what they earn on loans. When the difference narrows, bank profits plunge and they lend less to businesses, which shrinks available credit.

Now is not the time to be shrinking the credit, when we are in the ninth year of this very long-toothed recovery. Especially when the new Republican tax reform bill would increase taxes for anyone earning less than $70,000 per year by 2027, according to the CBO, non-partisan The Tax Policy Center and Joint Committee on Taxation—and this is most of us; more than 80 percent of consumers earning wages and salaries rather than ‘rents’ (i.e. passive income from investments).

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Graph: TPC

The Fed’s Board of Governors must be focusing on the proposed corporate tax rate cut from 35 to 20 percent, which the Fed predicts will flood the markets with more cheap cash, thus raising the specter of inflation.

But what inflation? The 10-year Treasury is yielding less than 2.4 percent today, as it has been for at least the last three years; still a record low. And that means bond traders see no inflation is even on the horizon, since bond holders look at least 6 months’ ahead for any inflation tendencies. In fact, Fed Chair Janet Yellen said recently she is more worried about disinflation, because they haven’t been able to goose the inflation rate above 2 percent since the end of the Great Recession, when it has been 3 to 4 percent when growth rates were at historical averages.

The Personal Consumption Expenditure Index (PCI) is the Fed’s preferred inflation indicator and still too low to increase demand. It came in at 1.4 percent in October, which is a sign of insufficient demand, even though corporations already are hoarding more than $4 trillion in excess cash and liquid investments.

The culprit is incomes of the 80 percent wage earners. Their average incomes have remained at $37,000 per year for decades with inflation factored in; which means they will continue to shop for bargains. That won’t push prices or inflation any higher.

Harlan Green © 2017

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New 2018 Conforming Loan Limits

Posted on December 2, 2017 by Popular Economics Weekly

The Mortgage Corner

There is a huge jump in conforming loan limits for 2018 in line with housing price rises, folks. Here are the new numbers. In line with the Federal Housing Finance Agency (FHFA) announcement yesterday, they are increasing their maximum base conforming and high-cost area loan limits on January 1, 2018.

Freddie Mac and Fannie Mae will purchase mortgages secured by properties not located in designated high-cost areas with original loan amounts up to the following limits:

Number of Units

Maximum base conforming loan limits for properties NOT in Alaska, Hawaii, Guam & U.S. Virgin Islands

Maximum base conforming loan limits for properties in Alaska, Hawaii, Guam & U.S. Virgin Islands

2018

2017

2018

2017

1

$453,100

$424,100

$679,650

$636,150

2

$580,150

$543,000

$870,225

$814,500

3

$701,250

$656,350

$1,051,875

$984,525

4

$871,450

$815,650

$1,307,175

$1,223,475

For super conforming mortgages secured by properties located in designated high-cost areas, we will purchase mortgages with original loan amounts up to the following limits:

Number of Units

Maximum loan amount for properties NOT in Alaska, Hawaii, Guam & U.S. Virgin Islands

Maximum loan amount for properties in Alaska, Hawaii, Guam and the U.S Virgin Islands

2018

2017

2018

2017

1

$679,650

$636,150

$1,019,475

$954,225

2

$870,225

$814,500

$1,305,325

$1,221,750

3

$1,051,875

$984,525

$1,577,800

$1,476,775

4

$1,307,175

$1,223,475

$1,960,750

$1,835,200

Stay tuned, as it looks like Santa Barbara County’s super conforming limits are unchanged. We will learn more in coming weeks!  

Harlan Green © 2017

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Q3 Economic Growth Jumps to 3.3% (Revised)

Posted on November 30, 2017 by Popular Economics Weekly

Popular Economics Weekly

It looks like the U.S. economy is charging ahead for the next few quarters, as Q3 Gross Domestic Product was revised from 3 percent to a 3.3 percent growth rate, due to higher exports and capital expenditures.

“The increase in real GDP in the third quarter reflected positive contributions from PCE, private inventory investment, nonresidential fixed investment, and exports that were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP,” said the BEA.

Businesses are spending more on equipment such as robots to make up for the labor shortage, and we are exporting more manufactured goods, a sign that the manufacturing sector has finally recovered from the Great Recession.

Good economics says this is an opportunity to pay down our $20 trillion in federal debt. So why are Repubs cutting taxes, which will result in at least $1.5 trillion added to that debt; just when they have to raise the debt ceiling in 9 days, or risk a government shutdown?

Cutting taxes at this time reduces tax revenues, which will also increase the annual budget deficit, and make the debt ceiling negotiations more difficult. Responsible economics should mean finding more ways to pay down that debt, such as closing some of the huge tax loopholes with industries like oil and gas exploration ($6 billion), but one-half of congress that used to be budget hawks now wants even more government debt to pay for their tax breaks?

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Graph: BEA.gov

Sad, there is no fiscal responsibility in DC at the moment. Monthly retail sales are helping to boost GDP due in large part to the hurricanes. An upward revision to September puts the monthly retail sales jump at 1.9 percent and a 2-1/2 year high, as consumers in Texas, Florida, Puerto Rico and the Virgin Islands replace autos and everything else lost in the storms. Sales in October understandably slowed but did remain in the plus column at 0.2 percent, said Econoday.

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Graph: Econoday

What should have been done to bring some fiscal responsibility? Raise the national minimum wage from $7.25/hr where it has been since the last raise in 2009, for starters. This would boost consumer spending, which accounts for two-thirds of economic activity at present.

Across the country, 29 states and Washington, D.C., currently have wages above the federal floor, according to the National Conference of State Legislatures. California and New York are set to soon have the highest minimum wages in the nation, after deals were struck by their governors to raise them to $15 an hour by 2022 and 2018, respectively, with slower increases for smaller businesses.

It’s a simple bit of economics that many do not seem to understand, and it’s hurting economic growth. Henry Ford raised his workers’ daily wages to $5 per day in 1914 so they could afford to buy his cars. He could do this because he had reduced the time to build a Model A Ford from 12 hours to less than 1 hour with a better-designed production line.

Corporations are making record profits, with Q3 profits up 10 percent annually. So raising their workers’ incomes today will do the same thing—allow workers to buy more products, which increases company profits, which grows our economy!

Harlan Green © 2017

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New-Home Sales at 10-yr High

Posted on November 27, 2017 by Popular Economics Weekly

The Mortgage Corner

Sales of new single-family houses in October 2017 were at a seasonally adjusted annual rate of 685,000, according to estimates released jointly today by the U.S. Census Bureau and HUD. This is 6.2 percent (±18.0 percent) above the revised September rate of 645,000 and is 18.7 percent (±23.5 percent) above the October 2016 estimate of 577,000.

Graph: Calculated Risk

It is the highest sales rate in 10 years, when it reached its 1.4 million unit peak in 2007 at the height of the housing bubble. Such soaring sales tell us homebuyers are hurrying to buy before prices and interest rates rise any higher. But it’s still a meager supply, as there is just a 4.9-month supply of new homes on the market at the current sales rate, which is below the more normal 6-month total.

Graph: Econoday

So there just are not enough homes to satisfy the surging demand for housing in a fully employed economy with wages and household incomes rising substantially for the first time since the Great Recession, as I’ve been saying for weeks. Part of the reason for higher demand—the Gen Y-er, millennial generation want their own living space. They now comprise 42 percent of homebuyers. And first-time buyer total is 32 percent, up from 30 percent last month.

There aren’t enough existing homes to meet demand, either. Total existing-home sales, https://www.nar.realtor/existing-home-sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 2.0 percent to a seasonally adjusted annual rate of 5.48 million in October from a downwardly revised 5.37 million in September. After last month’s increase, sales are at their strongest pace since June (5.51 million), but remain 0.9 percent below a year ago.

“There is solid growth in the number of sales contracts signed before construction has begun, a strong indicator that new single-family home production should continue to grow as we look ahead to 2018,” said NAHB Chief Economist Robert Dietz.

 

New home sales increased in all four regions. Sales rose 30.2 percent in the Northeast, 17.9 percent in the Midwest, 6.4 percent in the West and 1.3 percent in the South. Some of it may be replacement homes damaged or lost from the Hurricanes, there is clearly still a housing shortage.

And mortgage rates remain at historical lows. The 30-year fixed conforming rate is 3.50 percent, at one origination point. The Hi-balance conforming 30-year fixed is 3.625 percent for the same one origination point.

Harlan Green © 2017

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Thanksgiving For All!

Posted on November 24, 2017 by Popular Economics Weekly

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Let Us Count Our Blessings!

We need to thank so many for what we have—full employment, faster economic growth, higher consumer sentiment and retail sales for the holidays! 

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What more do we need?  Perhaps a few more homes built, and tax cuts that will actually help real households.

Harlan Green

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