Record Post-Recession Home Sales, Construction, Case-Shiller Prices in July

Posted on August 25, 2015 by Popular Economics Weekly

The Mortgage Corner

With all the bad news coming from the stock market, it’s good to know that this hasn’t affected the housing market. In fact, it’s pushing interest rates lower, so that a conforming 30-year fixed mortgage rate has dropped to 3.50 percent in California. And that will continue to boost home sales (and prices, of course). That’s why Case-Shiller shows two cities already above their bubble highs, and the Conference Board’s Index of Leading Economic Indicators (LEI) shows continued strong growth ahead.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased a whopping 2 percent to a seasonally adjusted annual rate of 5.59 million in July from a downwardly revised 5.48 million in June. Sales in July remained at the highest pace since February 2007 (5.79 million), have now increased year-over-year for ten consecutive months and are 10.3 percent above a year ago.

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Graph: Econoday

Lawrence Yun, NAR chief economist, says the increase in sales in July solidifies what has been an impressive growth in activity during this year’s peak buying season. “The creation of jobs added at a steady clip and the prospect of higher mortgage rates and home prices down the road is encouraging more households to buy now,” he said. “As a result, current homeowners are using their increasing housing equity towards the downpayment on their next purchase.”

And demand is well ahead of thin supply, at 4.8 months at the current sales rate vs 4.9 and 5.1 in the two prior months and 5.6 months in July last year. Sales are up 10.3 percent year-on-year, well ahead of the median price which, at $234,000, is up 5.6 percent.

The S&P/Case-Shiller U.S. National Home Price Index recorded a higher year-over-year gain with a 4.5 percent annual increase in June 2015 versus a 4.4 percent increase in May 2015. The smaller 10-City Composite had marginally lower year-over-year gains, with an increase of 4.6 percent year-over-year. Denver and Dallas are the two cities now above their 2007 bubble highs, while Denver (+10.2%), San Francisco (+9.5%) and Dallas (+8.2%) had the biggest year over year increases in this graph that dates from January 1988 and 3 recessions (1991, 2001, and 2007).

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Graph: Calculated Risk

This mismatch of supply vs. demand means even higher existing-home prices ahead. Especially since housing construction is just beginning to play catch up after years of low growth—no coincidence, given the rising demand for housing of any kind—rental as well as for prospective homeowners. Led by a strong jump in single-family production, nationwide housing starts inched up 0.2 percent to a seasonally adjusted annual rate of 1.206 million units in July, according to newly released data from the U.S. Department of Housing and Urban Development and the Commerce Department. This is the highest level since October 2007.

It’s also why the Conference Board’s Index of Leading Economic Indicators (LEI) continues to show moderate growth for the next 6 months, and is up 1.7 points from January to July. “The U.S. LEI fell slightly in July, after four months of strong gains. Despite a sharp drop in housing permits, the U.S. LEI is still pointing to moderate economic growth through the remainder of the year,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board.

Swings in housing permits have been distorting recent LEI readings including for July. Permits, which fell 16 percent in Tuesday’s housing starts report, more than offset what are a run of mostly neutral readings among other components. Given the uncertainties of measuring housing data (readings with plus or minus 11 percent variations are common) the index could have added another 0.54 points to the July indicator, instead of subtracting that amount, for a much stronger reading.

The strongest component is the rate spread which reflects the Fed’s ongoing accommodative policy. Also pointing to strength are initial jobless claims, which are at rock bottom lows, and the report’s credit index which points to a rise ahead for lending.

So what’s happening in China and the so-called emerging markets (including the Petro states, and Russia) will help to keep interest rates low, housing strong, and maybe the Fed from raising their short-term rates for some time to come.

Harlan Green © 2015

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Higher Birth Rates Are Here

Posted on August 19, 2015 by Popular Economics Weekly

The Mortgage Corner

The mellennial generation, now aged 18 to 36 years, are beginning to drive higher birth rates. And that means more households being formed, which will ultimately create a higher demand for housing. Actually, a 4 million birth rate was breached in 2007, and births then declined due to the Great Recession. But the millennials are back above the 4 million birth rate again.

And housing construction is surging—no coincidence, given the rising demand for housing of any kind—rental as well as for prospective homeowners. Led by a strong jump in single-family production, nationwide housing starts inched up 0.2 percent to a seasonally adjusted annual rate of 1.206 million units in July, according to newly released data from the U.S. Department of Housing and Urban Development and the Commerce Department. This is the highest level since October 2007.

“This month’s drop in the more volatile multifamily side is a return to trend after an unusually high June,” said NAHB Chief Economist David Crowe. “While multifamily production has fully recovered from the downturn, single-family starts are improving at a slow and sometimes intermittent rate as consumer confidence gradually rebounds. Continued job and economic growth will keep single-family housing moving forward.” 

Births had declined for five consecutive years prior to increasing in 2013. They are about 7.7 percent below the peak in 2007 (births in 2007 were at the all-time high – even higher than during the “baby boom”). “I suspect certain segments of the population were under stress before the recession started,” says Calculated Risk’s Bill McBride, “- like construction workers – and even more families were in distress in 2008 through 2012. And this led to fewer babies.”

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Graph: Calculated Risk

The above historical graph dates back to 1909, and the largest dip was before and during the Great Depression. It hit bottom in 1933, before beginning to rise again until it hit the baby boomer bulge of the 1950s and 60s.

This has to be the main reason home builder sentiment is at a 10-year high. The new home sector is increasingly a central source of strength for the economy and builders are increasingly optimistic, says the NAHB. The housing market index rose 1 point to a very strong 61 in August with the future sales component leading the way at 70. Current sales are at 66 with traffic continuing to lag but less so, at 45 for a 2 point gain in the month.

“Today’s report is consistent with our forecast for a gradual strengthening of the single-family housing sector in 2015,” said NAHB Chief Economist David Crowe. “Job and economic gains should keep the market moving forward at a modest pace throughout the rest of the year.”

Single-family starts rose 12.8 percent to a seasonally adjusted annual rate of 782,000 units after an upwardly revised June reading while multifamily production fell 17 percent to 424,000 units. And rising single family starts is another sure sign that more families and households are being formed.

What age group is having the most births? It is women in their 30s. The preliminary birth rate for women aged 30–34 in 2014 was 100.8 births per 1,000 women, up 3 percent from the rate in 2013 (98.0). The rate for this group has increased steadily since 2011. The number of births to women in their early 30s also increased in 2014, by 4 percent.

The rate for women aged 35–39 was 50.9 births per 1,000 women, up 3 percent from 2013 (49.3). The rate for this group has increased steadily since 2010. The number of births to women in their late 30s increased 5 percent in 2014.

Need we say more about the rising birth rate? All signs point to another upsurge in new household formation, needless to say, the main driver of real estate sales and the concomitant sectors that aid and drive RE—jobs in construction, insurance, professional fields, and banking, for starters.

Could it be that the real estate industry will drive 3 percent plus GDP growth for the rest of 2015, even if interest rates rise slightly? Rates are still at record lows with the conforming 30-year fixed rate at 3.625 percent for 1 origination point, and purchase mortgage applications still up 19 percent year over year, reports the Mortgage Bankers Association.

Harlan Green © 2015

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Unemployment Rate Stuck

Posted on August 10, 2015 by Popular Economics Weekly

Popular Economics Weekly

The U.S. pumped out another 215,000 new jobs in July, but it doesn’t look like this is enough to convince the Fed to begin to raise rates in September. Workers still aren’t getting decent raises and millions of Americans are working parttime, or have stopped looking for work.

The steady flow of new jobs during the late spring and summer offer some evidence the economy is moving again after growth slipped earlier in the year during a harsh winter, for the second successive winter. The U.S. has added an average of 235,000 jobs a month since May, up sharply from a 195,000 pace in the first quarter.

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Graph: Marketwatch

The numbers are good, but neither wages nor inflation are rising enough to show any sign of 3 percent plus GDP growth, which is what it takes to reach full employment. Non-farm payrolls rose just about as expected, up 215,000 in July with upward revisions adding 14,000 to the prior two months. But the unemployment rate is unchanged at 5.3 percent.

Wages show some traction, up 0.2 percent in the month with the year-on-year rate over 2 percent at 2.1 percent. The average workweek is up, rising to 34.6 hours from a long run at 34.5. The labor force participation rate, which dropped sharply in June, held at 62.6 percent.

But, the employment cost index that measures both income and worker benefits rose only 0.2 percent in the second quarter, far below expectations and the lowest result in the 33-year history of the report. Year-on-year, the ECI fell 6 tenths to plus 2.0 percent which is among the lowest readings on record.

Why is the question plaguing economists. The Fed’s Vice-Chairman Stanley Fischer believes it is temporary, due to the oil glut and falling energy prices. “The interesting situation in which we are is that employment has been rising pretty fast relative to previous performance and yet inflation is very low. And the concern about the situation is not to move before we see inflation as well as employment returning to more normal levels,” he said.

The record ECI low is plus 1.4 percent back in the early recovery days of 2009 when, apparently unlike today, there was enormous slack in the labor market. The ECI’s two components both fell back sharply with wages & salaries moving down to plus 0.2 percent from 0.7 percent in the first quarter and benefits to plus 0.1 percent vs the first quarter’s plus 0.6 percent. Year-on-year, wages & salaries are up 2.1 percent  with benefits,  despite  Obamacare, below the 2 percent threshold at 1.8 percent. The data are a reminder of the big decline in average hourly earnings during June, which fell 3 tenths from May to 2 percent even.

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Graph: Econoday

Other details in the employment report look surprisingly solid with payrolls rising 60,000 in trade & transportation, for a third straight strong gain, and professional & business services rising 40,000 to extend their long healthy run. Retailers continue to add jobs, up 36,000 for their third straight strong gain with the motor vehicle subset up 13,000 and reflecting the strength of car sales. Manufacturing, which is usually weak, rose a notable 15,000 in the month with construction, where lack of skilled labor is being reported, showing a modest gain of 6,000.

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Graph: Econoday

Why won’t the Fed from a September rate hike? Inflation is still too low, in part because wages and salaries aren’t yet rising. Inflation in June as measured by the core PCE price index, rose only 0.1 percent for a very low 1.3 percent year-on-year rate that won’t be moving up expectations for the Federal Reserve’s rate hike. The year-on-year rate is at a 4-1/2-year low and has remained below 1.5 percent since November. The overall price index rose 0.2 percent in June with its year-on-year rate, reflecting the collapse in oil prices, at only plus 0.3 percent.

So the collapse in oil prices, and Iran Nuclear deal seem to be keeping more than inflation in check. It is reducing employment in the energy sector, though helping consumers in other ways. So other areas in the economy will have to take up the slack.

Harlan Green © 2015

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Who’s To Blame For the Great Recession?

Posted on August 5, 2015 by Popular Economics Weekly

Popular Economics Weekly

Why has economic growth been so slow since the Great Recession? This is the question haunting many economists these days. Second quarter 2015 real GDP growth (after inflation) was just 2.3 percent six years after its end. This is better growth than any other developed economy, but still much too low for a sustainable recovery.

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Graph: Trading Economics

New York Times columnist and White House advisor Steven Rattner blames in part his own generation of baby boomers for their spendthrift ways that have run up so much debt, and made it harder for their millennial children to earn and save as much as their parents.

“Just to complete a dismal picture, millennials will also be the victims of the irresponsible fiscal policies pursued in large part by members of my generation. The massive budget deficits of recent years and projected needs to meet future obligations to retirees will result in a steady increase in federal debt, from less than 80 percent of gross domestic product today to an estimated 181 percent of G.D.P. by 2090.”

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Graph: The Atlantic

We know that members of the millennial generation are earning less than their parents—even those college-educated, per this graph of the decline in millennial median incomes 2007-13. And real personal incomes aren’t increasing more than 2 percent, which is also the inflation rate, these days. That has to be the major reason so-called aggregate demand—the overall growth in demand for domestic goods and services—is now less than 3 percent annually, mirroring current GDP growth rates.

And it is changes in the amount of aggregate demand (the sum of consumer spending + government spending + investment + net exports) that determines the rate of overall economic growth.

So another element in weaker aggregate demand is the massive cuts in government spending on such items as education, infrastructure and Research & Development by the conservative House majorities. Less spending on public improvements means less investments in future productivity. Delayed investments in decaying bridges, highways, energy and electrical grid networks; even the environment, means lost time and wages for the employed.

Can we blame the baby boomers for electing GW Bush, (or maybe it was the Supreme Court decision nullifying a Florida recount)? We’re talking here about the huge budget deficits generated since 2000, roots of the Great Recession, which has driven federal debt to the highest level since WWII, resulting in the loss of more than 8 million jobs and countless wealth.

But really, Bush’s first Treasury Secretary Paul O’Neill revealed in “The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O’Neill,” a book written with former Wall Street Journal reporter Ron Suskind, in great detail the reason for the huge budget deficits. The Bush administration chose to cut taxes for investors and corporations, rather than use the 4 years of Clinton budget surpluses to strengthen social security and Medicare.

Further damage was done with the invasion of Afghanistan and Iraq, which has added another $1 trillion to the deficit, after the Bush administration ignored warnings from the intelligence community that Al Qaeda was planning terrorist attacks on American soil, and that resulted in 9/11.

And then we have the consequence of VP Cheney’s policy statement that “deficits don’t matter”, echoing Ronald Reagan’s excuse for his record deficits to outspend the Soviet Union’s military machine. Government spending wasn’t cut, although the tax revenues to pay for that spending were cut during the Bush-Cheney era, which continues to add to the deficit to this day.

This massive deficit spending ultimately resulted in the Great Recession. How? Then Fed Chairman Greenspan’s policies of ultra-low interest rates and failure to regulate Wall Street excesses were designed to help pay for the Wars on Terror, while inflation rates were soaring close to 4 percent.

The result was basically free money, as inflation was increasing faster than interest rates, therefore making it more profitable to borrow than save. Hence the housing bubble, as interest rates below inflation poured gasoline on housing prices. Economists have estimated that those early years of double-digit housing price growth (as much as 20 percent) was fueled in large part by that ‘free’ money.

In the end Main Street and our middle class in particular didn’t benefit from the Bush tax cuts and reduced government revenues. We know where the money went—to the top 1 percent on Wall Street—so much so that the highest earning 25 hedge fund managers reported some $23.4 billion in annual income in 2013, for the privilege of pushing money around, instead of investing it productively.

So there is plenty of blame to go around for so much lost wealth, but the result has been that Wall Street and major corporations were the beneficiaries of the Great Recession, not Main Street.

Harlan Green © 2015

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

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Case-Shiller Home Prices Up, Ownership Rate Lower

Posted on July 29, 2015 by Popular Economics Weekly

The Mortgage Corner

Home prices have stabilized for a while, after the 2013 double-digit price surge brought on by the Fed’s various QE bond purchases and ultra-low interest rates. And homeownership rates are still dropping due mainly to affordability and lack of supply, but homeownership might improve as more new homes are being built and inventories increasing after several years of skimpy supplies.

The S&P/Case-Shiller U.S. National Home Price Index, covering all nine U.S. census divisions, recorded a 4.4 percent annual increase in May 2015 versus a 4.3 percent increase in April 2015.The 10-City Composite and National indices showed slightly higher year-over-year gains while the 20-City Composite had marginally lower year-over-year gains when compared to last month. The 10-City Composite gained 4.7 percent year-over-year, while the 20-City Composite gained 4.9 percent year-over-year.

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Graph: Calculated Risk

And home ownership rates continue to decline, perhaps because the newer generation of entry-level householders either prefer to rent or cannot yet afford to buy a home. The US Census Bureau reported the second quarter 2015 homeownership rate dropped to 63.4 percent from 64.7 percent in Q2 2014.

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Graph: Census Bureau

We know more people are renting because housing vacancy rates are falling for both rental and homeowner housing; down 0.7 percent to 6.8 percent nationally for rentals, and to 1.8 percent for owned housing. Homeownership rates were highest in the Midwest (68.4 percent) and lowest in the West (58.5 percent). The homeownership rates in the Northeast, Midwest, South and West were lower than the rates in the second quarter 2014.

There is some optimism that homeownership rates will rise, though, as household formation returns to its historical 1 million plus per year rate. The Harvard Joint Center for Housing Studies predicts some 1.2 million households per year will be formed over the next ten years, up from the current low levels spawned mostly by the Great Recession.

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Graph: Calculated Risk

One obstacle to greater homeownership will be affordability, however, until inventories are replenished. This Calculated Risk Price-to-Rent ratio graph shows how prices are rising again in relation to rents. And when price rises outdistance rent increases over an extended period, a housing bubble ensues, as can be seen from the peak formed just before the Great Recession (large gray bar on graph).

But the Price-to-Rent ration seems to be leveling off, in part because rents are rising as well. And as rents continue to rise, it will motivate more renters to buy. And the recent increase in building permits and housing construction should help keep more homes affordable for those first-time homebuyers that want to buy.

Harlan Green © 2015

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Will Fannie and Freddie’s Investors Finally Succeed?

Posted on July 23, 2015 by Popular Economics Weekly

Financial FAQs

It is welcome news for Fannie Mae and Freddie Mac investors that Judge Margaret Sweeney in the Federal Claims Court in Washington Tuesday granted a motion that will force the U.S. Treasury to release all discovery document materials in its possession that pertain to the decision to take Fannie Mae and Freddie Mac into conservatorship.

Why? Because the White House, US Treasury, and Federal Housing Finance Authority have been stonewalling discovery requests by investors who want to know exactly why the GSEs were put into conservatorship in the first place.

This is important for several reasons—not least is the reputed $36 billion in preferred Fannie stock alone that was ‘taken’ by the government when it claimed Fannie and Freddie were in danger of collapse, and so had to be recapitalized with government support to the tune of $186 billion.

But that has been paid back in spades, and the GSEs are not being allowed to recapitalize. This is when commercial banks that were granted some $350 billion in TARP funds by the same Republican Treasury Secretary under GW Bush (Henry Paulson, former Chairman of Goldman Sachs) were allowed to be recapitalized. So Wall Street benefited, but not Main Street homeowners that for the most part still depend on Fannie and Freddie to guarantee most home loans.

Instead, due to a last minute (2012) ‘tweak’ to the original conservatorship order, all profits go into the Treasury’s General Fund, which has raised suspicions that Treasury is behind the move to capture all profits for its own uses, rather than returning value to preferred stockholders, at least. How is that fair when the GSEs weren’t responsible for the bubble, or subprime loans, or the Great Recession, at all?

We know this because some $14 billion in settlements have already been recovered from those commercial banks and Wall Street entities that submitted fraudulently underwritten mortgages misrepresenting their loan quality to Fannie and Freddie.

The request, made by Fairholme Funds, is a big win for them in the battle to review federally sealed documents in its case against the United States government. Fairholme is one of several former investors in the government-sponsored enterprises who say their ownership stake was illegally taken from them by the federal government during conservatorship. They are fighting in court to get that stake returned.

The more than ten thousand discovery documents will be available to the United States District Court of Appeals in Washington D.C. and the United States District Court.

There is plenty of evidence that Fannie and Freddie were still solvent at the time. Even Treasury Secretary Henry Paulson reassured Congress of their solvency, while Bear Stearns was going under in 2007.

“Fannie Mae and Freddie Mac play an important role in our housing markets today and need to continue to play an important role in the future,” Secretary Treasury Henry Paulson told the House Financial Services Committee at a hearing on financial regulation. “Their regulator has made clear that they are adequately capitalized.”

And mortgage delinquency rates are almost back to historical levels. For instance, June’s existing-home sales report showed just 8 percent of sales were comprised of forecloses homes, lowest since 2007 and the housing bust.

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Graph: Seeking Alpha

The profits have been enormous for US Treasury. “Taxpayers have been paid back and the companies are now left with little capital due to the net worth sweep,” says Seeking Alpha in its latest article on the issue. “Based on Judge Lamberth’s ruling (of last year dismissing Fairholmes suit), the government could be sued for a taking if the companies are liquidated. Reform must include adequate compensation to shareholders, as well as a method to bring capital back onto the balance sheet. After 2010, solvency was never a problem.”

And now we have Judge Sweeney ruling in favor of discovery that will enable investors to untangle the ‘rest of the story’.

Harlan Green © 2015

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Existing-Home Sales at 8-Year High

Posted on July 22, 2015 by Popular Economics Weekly

The Mortgage Corner

It had to happen.  Why did June existing-home sales jump to an 8-year high? Fewer foreclosures is the short answer, hence more available for sale at market prices. But soaring consumer optimism due to an even better jobs market has to be the driving force causing families to build their nests.

Also, prices are rising to multi-year highs due to supply scarcities. And then there are the demographics, as the new generation is pushing older generations to move up or down, with even baby boomers wanting more retirement living.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 3.2 percent to a seasonally adjusted annual rate of 5.49 million in June from a downwardly revised 5.32 million in May. Sales are now at their highest pace since February 2007 (5.79 million), have increased year-over-year for nine consecutive months and are 9.6 percent above a year ago (5.01 million).

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Graph: Calculated Risk

Lawrence Yun, NAR chief economist, says backed by June’s solid gain in closings, this year’s spring buying season has been the strongest since the downturn. “Buyers have come back in force, leading to the strongest past two months in sales since early 2007,” he said. “This wave of demand is being fueled by a year-plus of steady job growth and an improving economy that’s giving more households the financial wherewithal and incentive to buy.”

Inventories have dropped to 5 months, which is driving up prices. The median price, up 3.3 percent in the month to $236,400, is already a record. Part of the rise in prices is tied to a lack of distressed sales, at only 8 percent of June’s total which is a record low, according to Econoday.

Adds Yun, “June sales were also likely propelled by the spring’s initial phase of rising mortgage rates, which usually prods some prospective buyers to buy now rather than wait until later when borrowing costs could be higher.”

And that may be an additional factor. Interest rates, though still low, have risen approximately ¼ percent since their most recent lows, with 30-year fixed conforming rates now 3.75 percent for a 1 point origination fee in California.

Total housing inventory3 at the end of June inched 0.9 percent to 2.30 million existing homes available for sale, and is 0.4 percent higher than a year ago (2.29 million). Unsold inventory is at a 5.0-month supply at the current sales pace, down from 5.1 months in May.

“Limited inventory amidst strong demand continues to push home prices higher, leading to declining affordability for prospective buyers,” said Yun. “Local officials in recent years have rightly authorized permits for new apartment construction, but more needs to be done for condominiums and single-family homes.”

The percent share of first-time buyers fell to 30 percent in June from 32 percent in May, but remained at or above 30 percent for the fourth consecutive month. A year ago, first-time buyers represented 28 percent of all buyers.

This is why housing starts surged nearly 10 percent last month to an annual rate of 1.17 million, just a touch below a post- recession high. Builders were especially active in the Northeast and South that suffered so much from last winter. We need more housing, in other words, as jobs and families continue to grow.

Harlan Green © 2015

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Housing Starts, Builder Optimism at Recovery Highs

Posted on July 18, 2015 by Popular Economics Weekly

The Mortgage Corner

Privately-owned housing starts in June were at a seasonally adjusted annual rate of 1,174,000. This is 9.8 percent above the revised May estimate of 1,069,000 and is 26.6 percent above the June 2014 rate of 927,000. This tells us the real estate recovery is beginning to contribute to economic growth as it has in past recoveries.

So-called housing starts surged nearly 10 percent last month to an annual rate of 1.17 million, just a touch below a post- recession high. Builders were especially active in the Northeast and South that suffered so much from last winter.

And single-family housing starts in June were at a rate of 685,000; this is 0.9 percent below the revised May figure of 691,000. The June rate for units in buildings with five units or more was 476,000.

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Graph: Calculated Risk

“While builders are reporting overall confidence in the housing market, they continue to note difficulties accessing land and labor,” said NAHB Chief Economist David Crowe. “These headwinds appear to be affecting production gains in the single-family sector.”

Builder confidence was also the highest since 2005, according to the National Association of Home Builders. Builder confidence in the market for newly built, single-family homes in July hit a level of 60 on the just released National Association of Home Builders/Wells Fargo Housing Market Index (HMI) while the June reading was revised upward one point to 60 as well. The last time the HMI reached this level was in November 2005.

“This month’s reading is in line with recent data showing stronger sales in both the new and existing home markets as well as continued job growth,” said NAHB Chief Economist David Crowe. “However, builders still face a number of challenges, including shortages of lots and labor.”

Construction on multi-dwelling projects with five units or more soared to the highest level since 1987. Builders have devoted more effort to these kinds of projects instead of their traditional focus on single-family homes because of a growing trend toward renting, especially among younger millennials, children of the baby boomers. Greater difficulty in obtaining mortgages has also compelled some people to rent.

Yet rising demand for rental units has also forced up the cost of housing, especially amid a shortage of new units available. A separate government report on Friday showed another sizable increase in the cost of shelter in June, with housing expenses up 3 percent in the past year.

It all points to rising demand for shelter for the millennial generation that is seeing better jobs and has to begin to pay off their huge educational loans. It’s a negative sum game for both student-borrowers and the economy. According to the Consumer Financial Protection Bureau, student loan debt has reached a new milestone, crossing the $1.2 trillion mark — $1 trillion of that in federal student loan debt, says Forbes Magazine.

According to The Institute for College Access and Success (TICAS) Project on Student Debt, the average borrower will graduate $26,600 in the red.  While there are lots of stories of graduates with crippling debt of $100,000 or more, this is the case for only about 1 percent of graduates.  Yet 10 percent of college graduates accumulate more than $40,000.

That is the reason so many millennials can only afford to rent at the moment, and why rental housing construction will be the priority for builders, at least until 2020 when most of the so-called echo boomers (now aged 16 to 35) have matured into adults and begin to form their own families.

Harlan Green © 2015

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Iran Agreement Means Low Inflation, Higher Growth

Posted on July 16, 2015 by Popular Economics Weekly

Financial FAQs

Although economists haven’t yet begun to crunch the numbers, Iran’s agreement not to produce atomic weapons or weapon-grade plutonium for at least 10 years will result in much lower oil prices, thus keeping inflation in check and interest rates at their current lows for some time to come, if not years.

This is if Congress approves the deal, of course. But lifting the economic sanctions will enable Iran to begin to sell its oil internationally sometime next year, into a world already flooded with oil products, though there is some uncertainty when this will happen.

Barron’s, for instance, believes it will happen slowly, which might not affect oil prices in the short term, at least. When and if sanctions are lifted, Iran’s oil production has to be ramped up, facilities upgraded, so that its products will only gradually reach international markets.

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Graph: TradingEconomics

This is when retail inflation via the Consumer Price Index is already zero—i.e., retail prices aren’t rising at all. So it will give Janet Yellen’s Federal Reserve room to keep interest rates lower longer, thus boosting consumer spending and housing, which is beginning to show more robust growth with builder confidence at its highest level since 2005.

It will also boost consumer incomes, which are already profiting from the low interest rate environment that has reduced borrowing costs for consumers. Real (after inflation) consumer incomes are now rising at 4 percent.

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Graph: Econoday

Wages & salaries rose 0.5 percent in the month. Both proprietors’ income and rental income show especially strong gains. Spending was higher for durables, especially to autos, and also strong gains for non-durables, partly because of higher gas prices.

This in turn is boosting consumer spirits, with both the Conference Board and U. of Michigan surveys now at pre-recession levels.

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Graph: Econoday

Optimism in the closely watched consumer sentiment report from the University of Michigan is as strong as it can get, according to Econoday. The overall index is up sharply this month and well beyond Econoday’s high-end forecast. The report’s expectations component, reflecting strong optimism for the jobs market, is an absolute standout at 97.8 for a 12-year high and a 13.6 point surge from May. The 13.6 point spread is the largest monthly gain since March 1991 (that’s right, 1991).

There is a downside to the agreement, of course. Russia and China will benefit from doing more business with Iran, and Iran could backslide on the agreement. But there is general agreement that Iran’s nuclear weapons ban will boost growth throughout developed countries with consumer-driven economies that require low inflation and cheap energy to maintain sustainable economic growth.

Harlan Green © 2015

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

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Three % Plus YoY Economic Growth Is Here

Posted on July 15, 2015 by Popular Economics Weekly

Popular Economics Weekly

We are finally back to 3 percent plus GDP growth on an annual basis. And it is largely fueled by consumer spending that has been increasing as more jobs are created.

Retail and Food service sales ex-gasoline increased by 3.5 percent on a YoY basis—though overall retail sales were up just 1.4 percent. This wasn’t a particularly strong report, but it will improve over time with increased consumer confidence and continued employment growth.

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Graph: Calculated Risk

Personal Consumption Expenditures are the better measure of growth, and they are increasing at more than 3 percent annually. The consumer came to life in May, boosted by a 0.5 percent rise in personal income, helping to support a 0.9 percent surge in personal outlays that reflects heavy spending on autos and retail goods. And gains are not inflationary, at least yet, based on the very closely watched core PCE price index which edged only 0.1 tenth higher in May and is at a very low 1.2 percent year-on-year rate which is actually down a tenth from an upward revised April.

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Graph: Econoday

The reason for my optimism is that incomes are finally increasing faster than inflation. Both proprietors’ income and rental income show especially strong gains, said Econoday. Spending components show special strength for durables, again tied especially to autos, and also strong gains for non-durables, here tied to higher pump prices. Spending on services once again shows an incremental gain.

However the PCE Index was for May, and with weaker June retail sales, PC Expenditures could drop in the June report. But not consumer incomes, which is the main reason for the high readings in consumer confidence.

Even Fed Chair Janet Yellen is upbeat in her latest congressional testimony, and says the Fed on track to raise interest rates sometime this year. When? I believe it will be a single token raise to show the Fed means business though both wholesale and retail inflation are still too low, and the job market is still “slack”, so let’s get it over with in September.

“Other measures of job market health are also trending in the right direction, with noticeable declines over the past year in the number of people suffering long-term unemployment and in the numbers working part time who would prefer full-time employment. However, these measures–as well as the unemployment rate–continue to indicate that there is still some slack in labor markets.”

And that slack with continued low inflation should keep interest rates low as well through next year, which is in keeping with the Fed’s mandate of “maximum employment with 2 percent inflation.”

Harlan Green © 2015

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

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