Builder Optimism + Affordability Higher

Posted on May 15, 2017 by Popular Economics Weekly

The Mortgage Corner

Some good news is that rising wages and moderating home prices offset a rise in mortgage interest rates to give housing affordability a slight boost in the first quarter of 2017, said the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index (HOI) last week.

And In a further sign that the housing market continues to strengthen, builder confidence in the market for newly-built single-family homes rose two points in May to a level of 70 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This is the second highest HMI reading since the downturn.

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NAHB.org

“The HMI confidence measure of future sales conditions reached its highest level since June 2005, a sign of growing consumer confidence in the new home market,” said NAHB Chief Economist Robert Dietz. “Especially as existing home inventory remains tight, we can expect increased demand for new construction moving forward.”

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But housing construction is not yet catching up to demand, as I said in a recent column. The first quarter ended with a thud for housing starts which fell a very steep 6.8 percent to a 1.215 million annualized rate which is the weakest since November, said the NAHB. Posting similar declines were both single-family homes, at an 821,000 pace, and multi-family, at 394,000. But housing construction does show nearly double-digit year-on-year growth, though quarter-to-quarter movement is barely perceptible. 

It looks like employment is now ahead of housing, hence demand exceeds the supply of new housing, a good sign.

“Ongoing job growth continues to fuel demand for housing, while wage growth is helping to offset the effects of rising mortgage rates and keep home prices affordable,” said NAHB Chief Economist Robert Dietz. “NAHB anticipates that housing will continue on a gradual, upward path throughout the year.”

In all, 60.3 percent of new and existing homes sold between the beginning of January and end of March were affordable to families earning the U.S. median income of $68,000. This is up from the 59.9 percent of homes sold that were affordable to median-income earners in the fourth quarter.

The national median home price fell to $245,000 in the first quarter from $250,000 in the final quarter of 2016. Meanwhile, average mortgage rates rose nearly half a point from 3.84 percent in the fourth quarter to 4.33 percent in the first quarter.

But mortgage rates have fallen since then, which will increase affordability for first-time homebuyers, in particular. The 30-year fixed conforming rate today is 3.625 percent with a 1 point origination fee in California, which means fixed mortgage rates have returned to rates last available in the 1950s.

So, once again, interest rates are not rising with expectations of higher inflation. Inflation is not even showing up in housing prices. So let us hope this continues, even if the Fed does raise short term rates a third time in June, as it has hinted it would do.

Harlan Green © 2017

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The Declining Treasury Yield Curve—Recession Looming?

Posted on May 11, 2017 by Popular Economics Weekly

Financial FAQs

We are basically at full employment with a 4.4 percent unemployment rate, which should tell us we are nearing the end of this growth cycle. Econoday reports, “The total number of employed Americans, and this includes both the self-employed and those on payrolls, is 153.2 million and a new record. This total has been rising steadily since falling to a cycle low in December 2009 of 138.0 million. Doing the math here means that 15.2 million jobs have been added during this expansion. The upward slope has been steady and is showing no sign of letting up. The peak in the prior cycle was 146.7 million, hit in November 2007.”

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Graph: Econoday

So how do we know we have reached a peak in growth? The National Bureau of Economic Research that tracks growth cycles tells us by using 4 economic indicators: including unemployment, real personal income and real GDP growth (less inflation), and industrial production. Those indicators have already surpassed their last peaks that were reached in 2007, so the question is how much higher can they go before they reach this cycle’s peak.

It is possible the economy may continue to grow with Congress and the White House politically deadlocked and unable to pass any stimulus spending, but that would mean the private sector starts spending more of their $4 trillion plus in unspent profits they have been hoarding, rather than wait for the tax cuts that Republicans have been promising. But don’t bet on that bridge to nowhere, as the saying goes.

On the NBER’s faq page, they define the beginning and end of recessions. “We identify a month when the economy reached a peak of activity and a later month when the economy reached a trough. The time in between is a recession, a period when economic activity is contracting. The following period is an expansion. As of September 2010, when we decided that a trough had occurred in June 2009, the economy was still weak, with lingering high unemployment, but had expanded considerably from its trough 15 months earlier.”

So June 2009 was identified as the end of the Great Recession (the trough in activity), which began in December 2007 (its prior peak). Calculated Risk’s Bill McBride has followed those NBER recession indicators, and as of April, 2015, they have all exceeded their past highs.

I believe the most important indicator has been personal income, which exceeded its past peak in 2012, but has fluctuated a bit since then.

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Graph: Calculated Risk

Employment is also important, but has tended to lag the other indicators in predicting a recession. It didn’t peak until several months into the Great Recession, but is now 2 percent above its last peak.

All four recession indicators are now above their pre-recession peaks. The problem now is we and the NBER Business Cycle Dating Committee aren’t sure that economic activity tops out until months later when the NBER sees a sustained drop in activity, as their 2010 example showed. This past quarter’s meager 0.7 percent GDP growth is still growth, by the way.

So another indicator that might indicate a looming slowdown is the decline in slope of the so-called Treasury Yield Curve, which shows the difference between short term rates regulated by the Federal Reserve, and long term fixed Treasury yields determined by the bond markets—such as the 10 and 30-year Treasuries.

The difference between those 2 yields is basically the profit margin made by lenders that have to borrow at short term rates and lend at the longer term interest rates. It is no longer as steep as it has been, which means lenders become more restrictive, which shrinks available credit, always a sign of slower growth.

So, if the Fed continues to raise short term rates, and because of market uncertainty or low inflation long term rates don’t rise from their lows, then it could mean a looming recession.  But that is a big ‘if’.

Harlan Green © 2017

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TrumpCare–The Un-American Health Care Act

Posted on May 8, 2017 by Popular Economics Weekly

Popular Economics Weekly

It’s incredible. Why have House Republicans just voted for a health care bill that only does one thing in the words of MIT Professor Jonathan Gruber, primary architect of the Massachusetts single-pay healthcare program and Obamacare?

He stated on Lawrence O’Donnell’s Last Word that it gives the wealthiest what could be the single largest tax cut in history—almost $1 billion for those earning $200,000 plus per year—but cuts benefits to everyone else.

And this is when 23 percent of Americans have pre-existing medical conditions. The answer in the words of Paul Krugman has to be pure greed. Tax cuts are more important than protecting Americans from loss of coverage due to pre-existing conditions and soaring premium for everyone but the youngest and healthiest among US.

It was also an attempt to make the President look good, regardless of his broken promises that Obamacare benefits wouldn’t be reduced. Trump doesn’t care who loses, in other words, so long as he doesn’t look like a ‘loser’.

But what does it do for the white blue collar male Trump supporters who have suffered most from their loss of jobs, and whose mortality rate due to drugs and suicides is double that of other developed countries that lived through the same Great Recession?

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Graph: CBO

The CBO graph pictures the suffering of 45-54 year-old white working class males in our post-industrial age. The rising red line is white USA males, the falling lines are white males in other developed countries with Sweden having the lowest mortality rate “for all causes”. Even US Hispanics (blue line) had a falling mortality rate.

The House wouldn’t wait for the Congressional Budget Office latest ‘scoring’ of the costs of the bill, which confirms that House Republicans weren’t even concerned about its effects on federal and state budgets, much less on how many would lose their coverage, if taken off Obamacare.

The Congressional Budget Office projections on earlier House attempts to repeal projected that the revised GOP bill would realize $150 billion in reduced federal spending through 2026, which is less than half of the $337 billion in deficit reductions that the CBO had estimated for the bill’s first version, said a CNBC summary of the report.

“But the newer version, like the first, is expected to lead to 14 million fewer people having health insurance in 2018, and 24 million fewer insured Americans by 2026 than would be covered if Obamacare remained as law in its current form.

“And an estimated total of 52 million people nationally would lack health coverage by 2026 if the revised bill becomes law, according to the CBO’s projection. However, if Obamacare remained in effect, 28 million Americans would not have insurance by that year, according to the CBO.”

It cuts almost all Obamacare benefits, including to childcare, Medicare and Medicaid; even employers’ health care plans by turning over implementation to individual states. This is basically returning healthcare to the broken system it was before Obamacare that made US the unhealthiest developed country.

There were 20 mostly moderate Republicans that didn’t vote for the bill. The defectors were primarily centrists who had trepidations about voting for the bill after the addition of an amendment to let states apply for waivers from certain Obamacare provisions that prevent insurers from charging sick people higher premiums and mandate which services insurance plans must cover, said the Washington Post.

What are the effects of 24 million losing their health insurance? The New York Times Charles Blow cites a 2009 study conducted by the Harvard Medical School and Cambridge Health Alliance: “nearly 45,000 annual deaths are associated with lack of health insurance,” and “uninsured, working-age Americans have a 40 percent higher risk of death than their privately insured counterparts.”

Republican House members seem to have no idea that President Trump is leading their re-election chances over a cliff—just so he won’t look like the loser he really is.

Harlan Green © 2017

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April Employment Up, Q1 Consumer Spending Weak

Posted on May 6, 2017 by Popular Economics Weekly

Financial FAQs

Total nonfarm payroll employment increased by 211,000 in April, and the unemployment rate fell to 4.4 percent from 4.5 percent in March, reported the U.S. Bureau of Labor Statistics today. Job gains occurred in leisure and hospitality, health care and social assistance, financial activities, Business and Professional Services, and government.

Both the unemployment rate, at 4.4 percent, and the number of unemployed persons, at 7.1 million, changed little in April, says the BLS. But over the year the unemployment rate has declined by 0.6 percentage point, and the number of unemployed has fallen by 854,000.

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Graph: Marketwatch

That is progress, and probably why the Federal Reserve will raise rates again in June. It said in its FOMC press release of this week’s meeting that it left a key borrowing rate unchanged and dismissed a weak first quarter GDP growth as temporary, meaning it is still on track to raise interest rates at a gradual pace.

“The [Federal Open Market Committee] views the slowing in growth during the first quarter as likely to be transitory,” the statement said. Job gains were described as “solid,” as were the fundamentals underpinning the continued growth in consumer spending. Business fixed investment “firmed,” the central bank noted.

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) declined by 281,000 to 5.3 million in April. 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. Over the past 12 months, the number of persons employed part time for economic reasons has decreased by 698,000, a good sign.

That may be due to very strong growth in both the service and manufacturing sectors. The 16 non-manufacturing (service) industries reporting growth in April include Construction, Retail, Healthcare, Real Estate, Finance & Insurance. The only industry reporting contraction in April is Agriculture, Forestry, Fishing & Hunting.

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Graph: Econoday

And in manufacturing 16 of the 18 industries reported growth in April. All parts of the survey registered above 50 percent, meaning most sectors were expanding, signaling continued growth. “The New Orders Index registered 57.5 percent, a decrease of 7 percentage points from the March reading of 64.5 percent,” said the ISM Manufacturing report “The Production Index registered 58.6 percent, 1 percentage point higher than the March reading of 57.6 percent. The Employment Index registered 52 percent, a decrease of 6.9 percentage points from the March reading of 58.9 percent.”

So, business activity is still growing in most of the U.S. economy. Then why doesn’t’ this translate to higher economic growth? Q1 GDP expanded at just 0.7 percent, while Q4 2016 GDP growth wasn’t much better at 2.0 percent. The culprit was lower consumer spending in Q1.

There was a drop in exports, and increase in imports. In other words, consumers bought more from overseas that it produced in the U.S. So, consumers are spending, but it doesn’t help domestic production, and hence GDP growth, so that consumer spending rose just 0.3 percent for the most embarrassing annualized pace since 2009, said Econoday.

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Unemployment is unusually low and consumer confidence unusually high making the results difficult to explain. The effect of seasonal adjustments are exaggerated during the winter and may very well be holding back the results. Yet even for a first quarter, this one was slow.

Harlan Green © 2017

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Housing Recovery Still Uneven

Posted on May 4, 2017 by Popular Economics Weekly

Financial FAQs

Fresh data from real-estate website Trulia show that just 34.2 percent of homes have returned to the peak levels registered before the onset of the recession in 2008, reports Marketwatch’s Andrea Requier. What’s more, Trulia estimates it could take until 2025 for a true national recovery in home prices.

That’s almost twice the length of the S&L housing crash that lasted from 1986 to approximately 2006. Why the difference? Because the Great Recession was much worse, with many more homes lost, and incomes for most Americans still below that time. The Great Recession exacerbated already record income inequality, in other words.

Sam Khater, deputy chief economist for CoreLogic, agrees, says Requier. “What’s unusual about this recovery is that it’s been lopsided. Wealth — home equity and financial equity — have recovered. Incomes have not. One-half of all households have participated in the massive run-up of stocks, two-thirds have participated in the gains from home ownership. The flip side is the inverse, the people who have not participated. How has their recovery been?”

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Not very good, as mortgage debt has barely dropped from recession highs. As Regions chief economist Richard Moody pointed out in a research note, 30 percent of all owner-occupied households have no mortgage debt at all, meaning that the 50 million households that do have mortgages have less than the 57 percent equity that’s presented in the flow of funds data from the Federal Reserve in December.

“We are absolutely not out of the woods as far as home-value recovery is concerned,” Trulia’s chief economist, Ralph McLaughlin told MarketWatch. “The housing-market crash was pretty monumental. The scarring of the housing market has not gone away and will be visible for the indefinite future.”

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Graph: Marketwatch

That means some two-thirds of homes are still below housing bubble prices that prevailed in 2006-07. Three cities in California, Las Vegas and Tucson, Arizona have suffered the most, but two cities in Florida—Daytona Beach and Ft. Lauderdale—aren’t far behind.

More enlightened economic policies would help—such as universal health care, a major cause of poverty; more spending in education and the research and development of new products, which would increase labor productivity, one of the 2 major ingredients for higher growth. The other ingredient is a growing workforce, and if Republicans succeed in reducing immigration, which supplies most of new workers, it will also dampen growth.

The homeownership rate slid 0.6 percentage point to 62.9 percent in the second quarter, the Census Department said Thursday. Will the homeownership rate continue to decline? Good question. There are many reasons for lower levels of homeownership, as we know, including delayed marriages, higher student loan debt, flat incomes since the recession, for starters.

So unless more is done to boost incomes (e.g, higher minimum wages), to introduce tuition-free public colleges (only in New York at the moment), more progressive taxation, and other stimulus measures, homeownership will not be able to significantly contribute to future economic growth.

And a whole generation may be left out of the housing market.

Harlan Green © 2017

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Consumer Spending Down, Recession Looms?

Posted on May 2, 2017 by Popular Economics Weekly

Popular Economics Weekly

Wow! First-quarter GDP was paltry enough at 0.7 percent but consumer spending was even more paltry, at only 0.3 percent for the most embarrassing annualized pace since 2009. Unemployment is unusually low and consumer confidence unusually high making the results difficult to explain.

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Graph: Econoday

Could it be that nothing is happening in Congress and the White House on all those promised initiatives? The 5-month budget agreement left all spending priorities in place for the rest of this fiscal year (i..e., until September). That meant no money for a border wall, no defunding of Obamacare (as promised), or Planned Parenthood, or cuts in the EPA budget that protects our environment.

All the post-election euphoria for change hasn’t translated into actions, in other words. So, consumers may be keeping their powder dry, as their savings rate rose 0.2 percent to 5.6 percent.

Another worrisome indicator is almost no inflation, as core Personal Consumption Expenditure prices had the weakest showing in 16-1/2 years, according to Econoday. Core PCE prices fell 0.1 percent to take down the year-on-year rate by a sizable 2 tenths to 1.6 percent.

And if there’s no inflation, or falling inflation, it means there’s falling demand, which means falling profits. And that’s when a business cycle ends. So unless Congress and the Trump White House decide to stop playing with people’s minds on repealing Obamacare, or trying to pass a budget that cuts taxes for the wealthiest, while cutting benefits to seniors and the sickest, we could see a looming recession.

The ineptitude of government is at the moment startling. The budget agreement leaves everything in place, which includes, thanks to the Washington Post’s Daily 202:

1. There are explicit restrictions to block the border wall, but final agreement goes further, putting strict limitations on how Trump can use new money for border security (e.g. to invest in new technology and repair existing fencing). Administration officials have insisted they already have the statutory authority to start building the wall under a 2006 law. This prevents such an end run.

2. Non-defense domestic spending will go up, despite the Trump team’s insistence he wouldn’t let that happen. The president called for $18 billion in cuts. Instead, he’s going to sign a budget with lots of sweeteners that grow the size of government. Mitch McConnell made sure $4.6 billion got put aside to permanently extend health benefits to 22,000 retired Appalachian coal miners and their families.

Nancy Pelosi made sure $295 million was included to shore up Medicaid in Puerto Rico. Chuck Schumer got $61 million to reimburse local law enforcement agencies for the cost of protecting Trump when he travels to his residences in Florida and New York. There is also another $2 billion in disaster relief money for states, which bought a couple votes. (Kelsey Snell, our lead budget reporter, has more examples.)

3. The administration asked to slash spending at the National Institutes of Health by $1.2 billion for the rest of this fiscal year. Instead, the NIH will get a $2 billion boost – on top of the huge increase it got last year. Republican appropriators who care about biomedical research, including Rep. Tom Cole (R-Okla.) and Sen. Roy Blunt (R-Mo.), delivered.Trump also failed in his efforts to cut money for other kinds of scientific inquiry. For example, he proposed defunding the Advanced Research Projects Agency–Energy. Instead, it is getting a $15 million increase.

4. Trump fought to cut the Environmental Protection Agency by a third. The final deal trims its budget by just 1 percent, with no staff cuts. As part of a compromise, the EPA gets $80 million less than last year, but the budget is $8 billion.

5. He didn’t defund Planned Parenthood. Despite the best efforts of social conservatives, the group will continue to receive funding at current levels.

6. The president got less than half as much for the military as he said was necessary. Trump repeatedly prodded Congress to increase military spending by $30 billion. He’s getting $12.5 billion, with an additional $2.5 billion if/when he delivers a detailed plan on how to defeat the Islamic State.

7. Democrats say they forced Republicans to withdraw more than 160 riders. These unrelated policy measures, which each could have been a poison pill, would have done things like get rid of the fiduciary rule and water down environmental regulations. On the other side of the ledger, this budget blocks the Justice Department from restricting the dispensing of medical marijuana in states where it has been legalized.

8. To keep negotiations moving, the White House already agreed last week to continue paying Obamacare subsidies. This money, which goes to insurance companies, reduces out-of-pocket expenses for low income people who get coverage under the Affordable Care Act. The Trump administration justifies giving up on this because of the potential to resolve the bigger issue by repealing Obamacare.

Need we say more?  If ideology trumps common sense; such as the promised $1 trillion infrastructure bill, we can see the confidence balloon also lose its air. Then watch out below, as I’ve said.

Harlan Green © 2017

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Slow Q1 GDP Growth Means What?

Posted on April 28, 2017 by Popular Economics Weekly

Financial FAQs

Real gross domestic product (GDP) increased at an annual rate of 0.7 percent in the first quarter of 2017, according to the “advance” estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2016, real GDP increased 2.1 percent.

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Graph: BEA

The first estimate of first quarter economic growth usually means little. Consumer weren’t spending, and they never seem to spend much in Q1, as in past years, as the BEA graph show. But with consumer confidence still sky high because of optimism that President Trump and Congress might still agree on some stimulus, spending may pick up.

There were signs of higher growth in Q1 outside of the consumers, particularly in real estate. “The deceleration in real GDP in the first quarter reflected a deceleration in PCE and downturns in private inventory investment and in state and local government spending that were partly offset by an upturn in exports and accelerations in both nonresidential and residential fixed investment,” said the BEA.

So consumer sentiments can be deceptive, even misleading, given the lack of higher consumer spending in Q1. The Conference Board reported the consumer confidence index eased back to 120.3 in April vs a revised 124.9 in March with these two months the best of the 8-year expansion. “Readings remain strongly favorable including jobs-hard-to-get which is steady at a very low 19.1 percent and points to strength for the April employment report,” said Econoday.

Weak vehicle sales are a major negative in the quarter’s consumer breakdown, pulling durable sales down at a 2.5 percent rate and offsetting a 1.5 percent rise in non-durables and a slow 0.4 percent showing for services. Weakness in consumer spending is worrisome but not other data in the GDP report. Residential investment posted a second straight very strong quarter, up 13.7 percent. And in a rare show of strength, nonresidential investment, which has been subdued, jumped at a 9.4 percent rate with both structures and equipment showing unusual strength. A surge in mining investment is a standout of the report, said the BEA.

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Graph: Econoday

There are more signs that growth could pick up in coming quarters. The Institute for Supply Management’s Chicago Business Barometer, a proxy for Midwest growth, ticked up 0.6 Points in April to 58.3 in April from 57.7 in March, the highest level since January 2015. New orders are the highest since May 2014, and in a sign of ongoing strength deliveries continue to slow. 

Optimism among firms about business conditions rose for the third month in a row. Three of the five Barometer components led April’s increase, with Production and Order Backlogs receding, said the report. Third Consecutive Rise in Business Confidence, New Orders Highest Since May 2014, Inflationary Pressures Ease Slightly, Prices Paid fall, as the MNI Chicago Business Barometer increased to 58.3 in April from 57.7 in March, the highest level since January 2015.

“The April Chicago report showcased another impressive month, with firms reporting solid growth. Rising demand and firm production led to a pick-up in hiring by firms. Although the employment indicator has been bumpy, in and out of contraction, if the current month’s rise is sustained, it could provide a boost to the labor market,” said Shaily Mittal, senior economist at MNI Indicators, compiler of the report.

But optimism doesn’t always translate to spending, as we know from past reports. Consumers’ incomes keep rising and were very solid in the fourth quarter at a 3.5 percent pace, but rose at only 0.3 percent in first-quarter 2017 on weak vehicle sales and lower heating bills. This is by far the worst showing since no change in fourth-quarter 2009, and would be the lowest showing for consumer spending in 5 years. What will it take for consumers to spend again?

Harlan Green © 2017

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No “Art of the Deal” in 100 Days

Posted on April 26, 2017 by Popular Economics Weekly

trump art

Popular Economics Weekly

It’s 100 days into the Trump Presidency and looking more and more like President Trump is no more effective at running the country than his business interests. His book, The Art of the Deal was meant to tout his negotiating skills, but the results were never very successful.

And neither are his legislative efforts; with no repeal of Obamacare, tax reform, an immigration ban, new trade policy, and sanctuary city victories in the offing anytime soon because of poorly thought out strategies. Instead, he threatens judges, sanctuary cities, Congress, and even other countries when they don’t support his various executive orders.

His multiple bankruptcies of the Trump Casinos when other Atlantic City Casinos were successful, Trump University charged as a criminal enterprise (under RICO), and the fact that he had to rely on Russian Oligarchs to finance his real estate empire when U.S. banks would no longer lend to him, are just the tip of the iceberg of business incompetence.

These are the acts of a bully, rather than leader, which is why he seems to have so much in common with V Putin, Marine Le Pen, and other demagogues. Acting tough can be a plus when dealing with North Korea, or even Russia, but not when dealing with Americans who don’t like him or his very anti-American policies.

It’s sad, really, that he doesn’t have the skills to really shake up the Washington establishment, which needs it badly, as the election showed. But being a successful negotiator requires more than bully tactics, even in business. He so badly stiffed his own employees, as well as states such as New York (back taxes), charities, and well as U.S. banks that they want nothing more to do with him, except in court.

This is why he is involved in more than 4,000 lawsuits at last count, according to USA Today, and more are yet to come with mounting Federal court rulings against his executive orders.

Fortune Magazine reported last June on candidate Trump’s negotiating tactics: “The legal actions provide clues to the leadership style the billionaire businessman would bring to bear as commander in chief. He sometimes responds to even small disputes with overwhelming legal force. He doesn’t hesitate to deploy his wealth and legal firepower against adversaries with limited resources, such as homeowners. He sometimes refuses to pay real estate brokers, lawyers and other vendors.”

And, “As he campaigns, Trump often touts his skills as a negotiator,” says Fortune. “The analysis shows that lawsuits are one of his primary negotiating tools. He turns to litigation to distance himself from failing projects that relied on the Trump brand to secure investments. As USA TODAY previously reported, he also uses the legal system to haggle over his property tax bills. His companies have been involved in more than 100 tax disputes, and the New York State Department of Finance has obtained liens on Trump properties for unpaid tax bills at least three dozen times.”

There may be even be more troubles ahead for President Trump, now that he is also stiffing a Republican-run House Oversight Committee investigation into General Flynn’s activities as an unreported lobbyist, which wasn’t apparently disclosed in his application for renewal of his Top Secret security clearance.

So, could this lead to his impeachment?

Harlan Green © 2017

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Why Is Mortgage Lending Still Restricted?

Posted on April 25, 2017 by Popular Economics Weekly

The Mortgage Corner

We can thank the Great Recession for most of it. Banks have become much more conservative, and builders are building approximately 50 percent fewer residences vs. the 2 million housing units at the height of the housing bubble.

And the very Great Recession was in some ways worse than the Great Depression, when FDR’s New Deal created jobs for those that couldn’t find work. Whereas conservative economic ideologies have triumphed since President Reagan under austerity policies (such as the 2011 government shutdown over raising the budget cap), which have restricted government spending at a time when the private sector has refused to reinvest in productive growth, even though corporate profits have soared to record levels as a percentage of GDP.

The Urban Institute has dug even deeper into the causes of tight credit. Since private sector lending dried up after the Great Recession, government GSEs, such as Fannie Mae, Freddie Mac, FHA and VA; all with some form of government guarantee, have had to step in to revive the housing market. So they account for more than 80 percent of all residential lending.

And because the US Treasury completely appropriated all the assets and profits of Fannie and Freddie in 2012, which account for 60 percent of all residential loans, they have imposed additional fees on any but the best credit risks to protect taxpayers. This in effect raised the cost of qualifying, which in turn reduces the pool of eligible homebuyers and borrowers.

How much, asks the Urban Institute? “According to our estimates, an additional 1.25 million loans would have been made in 2013 if the cautious standards of 2001, rather than the severe standards of 2013, had been in place. Between 2009 and 2013, the number of “missing” loans grew from 0.50 million to 1.25 million annually, for a total of more than 4 million missing loans over the five years.”

Behind all this data lies another, more sobering fact—the record income inequality that occurred since the 1970s and was the major cause of the Great Recession. Incomes have flowed so fast to the upper income tiers since its end in 2009 that 96 percent of all income gained since then has gone to the top 1 percent.

This is in part because of the stock market rebound and loss of all those homes from the housing bust. It resulted in some $4 trillion in lost housing assets for middle-class homeowners in the main, the main source of their wealth.

It’s a phenomenon named Monopsony by economists, or the increasing monopoly power of Big Business in particular to control labor costs due to marked lack of competition. This is explained in lucid detail by Kate Bahn, an economist at the Center For American Progress, a progressive think tank.

“While overall the labor market looks fairly solid, it’s still lacking on measures of competitiveness that are giving employers outsized ability to set low wages,” says Prof Hahn. “They can reap higher profits by exploiting their workers who don’t feel confident enough to leave their current job in search of a better one. (It’s evidenced) by the historically low rates of people moving across geographies.”

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Graph: BLS/Econoday

The Labor Department measures it as the quits rate in their JOLTS report (Job Openings and Labor Turnover Survey) that tabulates the number of Hires and Separations each month. There was a 1 tenth downtick in the quits rate to 2.1 percent, “a subdued reading that points to lack of movement between jobs and lack of wage pull for employees,” said Econoday. The separations rate also fell, down 1 tenth to 3.5 percent.

The gap between openings and hiring first opened up about 2 years ago signaling that employers are having a hard time finding people with the right skills, said Econoday. The current spread between openings and hirings is 429,000, the widest since September. But remember, the US economy is so large that more than 5 million jobs are created and lost per month.

One would think the high number of available jobs means higher wages for all, as employers bid up salaries to attract them, but not so; just for the highly skilled. Those blue collar and service jobs that require less skill don’t have the competitive advantage of higher education and training that would boost their salaries.

And that is why the credit and housing markets have skewed towards the highest income earners, and will remain so, unless more New Deal-type programs (such as promised infrastructure spending, universal health care, stronger labor laws) help to bring back the middle class.

Harlan Green © 2017

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Low Inflation Boosts Housing Sales

Posted on April 21, 2017 by Popular Economics Weekly

Financial FAQs

Existing-home sales are now accelerating to new expansion highs, says the NAR. Sales rose a very sharp 4.4 percent to a higher-than-expected annualized rate of 5.710 million. This is the best rate since February 2007. Both components show strength with single-family sales up 4.3 percent to a 5.080 million rate and condo sales up 5.0 percent to a 630,000 rate. And year-on-year sales are moving higher, up 5.9 percent divided between 6.1 percent for single-family homes and 5.0 percent for condos.

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Graph: Econoday

Lawrence Yun, NAR chief economist, says existing sales roared back in March and were led by hefty gains in the Northeast and Midwest. “The early returns so far this spring buying season look very promising as a rising number of households dipped their toes into the market and were successfully able to close on a home last month,” he said.

“Although finding available properties to buy continues to be a strenuous task for many buyers, there was enough of a monthly increase in listings in March for sales to muster a strong gain. Sales will go up as long as inventory does.”

Why the great interest rates? It’s mainly because there is still very little inflation, and the bond market that determines mortgage rates likes low inflation. A March contraction of the CPI led to sizable slowing in year-on-year rates. The total rate is 2.4 percent, down 3 tenths from February and sliding back to the Fed’s 2 percent target. The core rate, which excludes food & energy, is down 2 tenths and is right at the target line. Energy comparisons are very easy right now given low prices this time last year. This makes the decline in the core a special concern.

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Graph: Econoday

The median existing-home price for all housing types in March was $236,400, up 6.8 percent from March 2016 ($221,400). March’s price increase marks the 61st consecutive month of year-over-year gains.

And total housing inventory at the end of March increased 5.8 percent to 1.83 million existing homes available for sale, but is still 6.6 percent lower than a year ago (1.96 million) and has fallen year-over-year for 22 straight months. Unsold inventory is at a 3.8-month supply at the current sales pace (unchanged from February), signaling a very high demand that is outstripping new-home construction, stuck at 1.22 million annual units.

The conforming 30-year fixed rate mortgage is now 3.50 percent and the so-called Hi-Balance conforming 30-year fixed rate is 3.75 percent these days for a 1 percent origination fee. This is what has kept the demand for housing on a tear, in spite of low inventories and tepid economic growth, as I said yesterday.

Harlan Green © 2017

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