Housing Inventories, Price Rises Slowing

Posted on January 7, 2014 by Popular Economics Weekly

The Mortgage Corner

The most important housing statistic in 2014 will be whether inventories continue to increase. Low inventories are hurting sales, and Goleta, California is helping local supplies with several new housing projects in the works.

This is because interest rates and housing prices are rising and the most affordable housing sold off quickly, which has slowed existing-home sales, in particular. New-home construction and sales are doing well, however, because of what is becoming a housing shortage as the economy and jobs continue to recover.

Existing-home inventories have declined in 2013 as most of the 2 million plus foreclosed and abandoned housing lost during the Great Recession have been gobbled up by investors and are being rented back. For sale inventories increase if housing prices continue to rise, of course, and the various housing price indexes show just that going into 2014.

Calculated Risk reports that Ben at Housing Tracker (Department of Numbers) has provided some weekly inventory data for the last several years. This graph shows the Housing Tracker reported weekly inventory for the 54 metro areas for 2010, 2011, 2012, 2013 and 2014.

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Graph: Calculated Risk

“In 2011 and 2012, inventory only increased slightly early in the year,” says Calculated Risk, “and then declined significantly through the end of each year. Inventory in 2014 is now 2.0 percent above the same week in 2013 (red dot is 2014, blue is 2013). Inventory is still very low – and barely up year-over-year – but this increase in inventory should slow house price increases.”

The S&P Case Shiller Home Price Index, a 3-month average of same-home prices, continued to climb. So in part due to limited supply, home price momentum was “solid and steady” going into year-end.  The Case-Shiller adjusted home price index for October showed a gain of 1.0 percent for the 20-city index.  This matched September’s gain and compares with gains of 0.9 and 0.6 percent in the two prior months. The year-on-year gain of 13.6 percent was up 3 tenths for the best rate of the recovery.

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Graph: Econoday

Gains were in all 20 cities for a 3rd month in a row, said the report, led in October by Miami at plus 1.9 percent and followed by Atlanta and Detroit, both at 1.8 percent. Year-on-year rates were strongest out West with several above 20 percent, including Las Vegas and San Francisco.

Lastly, new-home construction is booming, which should increase the housing supply somewhat. Private residential construction in particular posted a 1.9 percent rebound in November after a 0.4 percent dip the month before. Both the new single-family and new multifamily subcomponents rose notably.

New single-family home outlays increased 1.8 percent, following a decline of 0.4 percent in October. New multifamily spending advanced 0.9 percent after a 3.4 percent jump the month before. Residential outlays excluding new home outlays rebounded 2.2 percent, following a dip of 1.3 percent the month before.

We are seeing a surge in the Santa Barbara South Coast with several new housing developments in the City of Goleta. A total of 177 units are now under construction or completed, including Haskell’s Landing (102 units), The Bluffs (62 units), and Willow Springs (100 condo units).

Harlan Green © 2013

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Beware of the Taperians!

Posted on January 6, 2014 by Popular Economics Weekly

Popular Economics Weekly

Now that the Fed has begun to reduce its QE3 securities’ purchases $10B per month in January, what will that do for growth? My answer is it’s too soon to say. Firstly, beware of the ‘Taperians’, those who would end QE3 too soon. As outgoing Fed Chairman Bernanke explained in his most recent speech, without QE3 we might have regressed back into a recession.

“”Skeptics have pointed out that the pace of recovery has been disappointingly slow, with inflation-adjusted GDP growth averaging only slightly higher than a 2 percent annual rate over the past few years and inflation below the Committee’s 2 percent longer-term target,” Bernanke said at the American Economic Association annual meeting in Philadelphia. “However, as I will discuss, the recovery has faced powerful headwinds, suggesting that economic growth might well have been considerably weaker, or even negative, without substantial monetary policy support. For the most part, research supports the conclusion that the combination of forward guidance and large-scale asset purchases has helped promote the recovery.”

Then there are the political ‘headwinds’. Will the next 2 years’ budget agreement mean no more budget fights for a while, or will opponents to Obamacare continue to throw up roadblocks to its implementation in the 35 states that wouldn’t set up their own health care exchanges? This would make it more expensive and wasteful of government resources, needless to say.

Yet it seems at least one Fed Governors has been sounding the need to end QE3 before its time—Richmond Fed Governor Jeff Lacker. Lacker has been most vocal in wanting to rein in QE3 almost from its start last fall, and one who most consistently voted against continuing it at subsequent FOMC meetings. The reason? He’s an inflation hawk, or ‘inflationista’ (P Krugman’s term), as well as deficit hawk that fears all those bonds bought by the Fed will create runaway inflation (and deficits), once they are sold back into the economy.

In other words, he belongs to the ‘confidence fairy’ camp (another Krugman term) that believes business confidence is the key to growth, instead of consumer demand for their products, and businesses will lose confidence when interest rates and debt servicing costs rise, increasing budget deficits. But what about consumer confidence, when consumers are currently spending at a 4 percent annual rate, which is the largest component of overall demand?

“Businesses also appear to be quite reticent to hire and invest,” said Lacker in his most recent report. “A widely followed index of small business optimism fell sharply during the recession and has only partially recovered since then. Interestingly, when small business owners were asked about the single most important problem they face, the most frequent answer in the latest survey was “government regulations and red tape.” This observation accords with reports we’ve been hearing from many business contacts for several years now. They’ve seen a substantial increase in the pace of regulatory change and a substantial increase in uncertainty about the shape of new regulations. Both are said to discourage new hiring and investment commitments.”

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Graph: DShort

However that is not all survey results show in the December 10 NFIB report. “The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months was unchanged at a negative 8 percent. Fifteen percent still cite weak sales as their top business problem, but it is the lowest reading since June 2008. The net percent of owners expecting higher real sales volumes rose 1 point to 3 percent of all owners after falling 6 points in October (seasonally adjusted), a weak showing.”

In fact, the lack of consumer demand for their products is still the chief problem, not federal regulations or high taxes, as shown by their lack of need for more credit. “…only 2 percent of NFIB members cite credit and interest rates as their top business problem,” says the NFIB report,  “and a record 66 percent expressed no interest in a loan, obviously due to their dismal view of the future of the economy. It’s not a problem of credit supply; it’s a lack of credit demand due primarily to poor economic prospects.”

What does Lacker say about consumer demand, the largest driver of economic growth, as we said? That consumer sentiment is still depressed because of economic ‘uncertainty’. “Although consumption grew rapidly at the end of last year, we have seen similar surges since the last recession, only to see spending return to a more moderate trend. Consumer spending trends are likely to depend on whether the dramatic events of the last few years are only a temporary disturbance to household sentiment or if they instead represent a more persistent shift in attitudes about borrowing and saving. At this point, I am inclined toward the latter view (i.e., that household sentiment remains depressed).”

Once again he talks about sentiments, rather than real income and wealth, which are the main determinants of consumer spending. It is their actual wealth that determines consumers’ spending habits, much more than what they feel about future prospects, research has shown.

So it’s true consumers are still being cautious, but several factors are improving consumer confidence. For example, said Bernanke, “notwithstanding the effects of somewhat higher mortgage rates, house prices have rebounded, with one consequence being that the number of homeowners with “underwater” mortgages has dropped significantly, as have foreclosures and mortgage delinquencies. Household balance sheets have strengthened considerably, with wealth and income rising and the household debt-service burden at its lowest level in decades.

If in fact Fed Governor Lackey believes consumer and business uncertainty is still too high, he should not be supporting an early end to the QE3 taper. Consumers and businesses are still facing an uncertain future. Is this the time to be taking away the credit ‘punch bowl’, with the private sector holding back?

So beware of those Taperians which cite the shortcomings of governments, rather than their own policies that hamper future prosperity.

Harlan Green © 2013

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The Great Income Divergence—II

Posted on January 3, 2014 by Popular Economics Weekly

Financial FAQs

Ben Bernanke is now defending his record as Fed Chairman. He shouldn’t have to, as without the Fed’s easy money policies—such as QE3—the economy would surely have plunged back into recession, as the European Union has done with its ongoing austerity policies. This is but the outcome of the Great Divergence in wealth that has occurred over the past 30 years, and why the Fed had to maintain its massive injection of money into the economy over such a long period of time.

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Graph: Economix

“Skeptics have pointed out that the pace of recovery has been disappointingly slow, with inflation-adjusted GDP growth averaging only slightly higher than a 2 percent annual rate over the past few years and inflation below the Committee’s 2 percent longer-term target,” Bernanke said at the American Economic Association annual meeting in Philadelphia. “However, as I will discuss, the recovery has faced powerful headwinds, suggesting that economic growth might well have been considerably weaker, or even negative, without substantial monetary policy support. For the most part, research supports the conclusion that the combination of forward guidance and large-scale asset purchases has helped promote the recovery.”

History will surely ask what the Great Divergence has done for America and Americans, when its results are assessed. As of now, we seem to have achieved very little for the long term, if anything—at least since 1980. Its rationale was that by transferring more wealth to investors and corporations, the suppliers of goods and services rather than the buyers of those products, would increase employment and household wealth.

But, alas, that didn’t happen. Employment was actually much higher when tax rates were raised under President Clinton, and growth was higher when governments spent more to stimulate growth, hallmarks of Keynesian policies, rather than the austerity policies that were the hallmark of the so-called supply-siders.

Perhaps its end result was the Great Recession, just as the Great Depression ended the Roaring Twenties period of excesses. We know that this Great Divergence resulted in reduced household incomes for all but the top 1 percent, record corporate profits as a percentage of GDP, and a personal savings rate that dropped to 0 during the runup to the Great Recession.

Nothing was done for the future, in other words. Two wars were fought that drained necessary resources from domestic priorities, reduced retirement pensions, environmental safeguards, and drove some large cities into bankruptcy.

Another result of the Great Divergence in wealth are the austerity policies that have gripped America and Europe since 2009, resulting in sky-high unemployment rates in some European countries, and increasing, rather than decreasing budget deficits. These policies, including opposing U.S. debt ceiling increases and across the board sequester spending cuts, are the direct result of those calling for ever smaller government, lower taxes and less social welfare spending—at a time when just the opposite is needed.

What is to be done, with so much wealth concentrated in so few hands? Will governments continue to be too weak to regulate those beneficiaries of the Great Divergence that continue to deprive minority and poor voters of their right to vote, women of their right to contraception, and employees of their right to collective bargaining in the many right to work states?

This is but a short list of damages done by the Great Divergence in wealth that cries for a resurgence of New Deal legislation and regulation.

Harlan Green © 2013

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Mortgage Defaults Continue to Fall

Posted on January 2, 2014 by Popular Economics Weekly

The Mortgage Corner

Fannie Mae reported last week that the Single-Family Serious Delinquency rate declined in November to 2.44 percent from 2.48 percent in October. The serious delinquency rate is down from 3.30 percent in November 2012, and this is the lowest level since December 2008. This is when Fannie Mae serious delinquency rate peaked in February 2010 at 5.59 percent.

And Freddie Mac, the other GSE now administrated by the Federal Housing Finance Authority (FHFA), reported the Single-Family serious delinquency rate declined in November to 2.43 percent from 2.48 percent in October. Freddie’s rate is down from 3.25 percent in November 2012, and is at the lowest level since March 2009. Freddie’s serious delinquency rate peaked in February 2010 at 4.20 percent.

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Graph: Calculated Risk

This tells us several things. Firstly, housing price continue to increase, with the Case-Shiller Home Price index now up 13.6 percent in 2013, so that homeowners now have more equity. Las Vegas and San Francisco had the largest prices increases in the 20 city index. And jobs are becoming more plentiful so that home owners are now able to sell or refinance their homes, rather than default on their mortgages. But the Fed will begin in January to cut back $10B per month in so-called Quantitative Easing securities’ purchases that has kept long term rates low since last September.

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Graph: Calculated Risk

But the cutback in QE3 has S&P and banks worried about the future of housing in 2014. “Home prices increased again in October,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “Both Composites’ annual returns have been in double-digit territory since March 2013. However, monthly numbers show we are living on borrowed time and the boom is fading.

“The key economic question facing housing is the Fed’s future course to scale back quantitative easing and how this will affect mortgage rates. Other housing data paint a mixed picture suggesting that we may be close to the peak gains in prices. However, other economic data point to somewhat faster growth in the new year. Most forecasts for home prices point to single digit growth in 2014.”

So relatively low interest rates will be a key to housing’s health in 2014, as well as whether the unemployment rate continues to decline. The prognostications so far are favorable, with unemployment projected to drop to 6.5 percent. And I believe interest rates will remain in the 4 percent range in 2014, since household incomes and therefore inflation, which reflects how much buying power consumers can maintain, will remain low.

Harlan Green © 2013

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What Happens in 2014??

Posted on December 22, 2013 by Popular Economics Weekly

Popular Economics Weekly

Next year could start with a bang. U.S. third quarter Gross Domestic Product expanded at 4.1 percent, revised up from 3.6 percent, with consumer spending a main driver of growth. This has to mean consumers are feeling prosperous again, and if employment continues to rise as predicted by the Fed, and others, so will consumers’ incomes and spending.

Retail sales are also strong with the holidays looking good.  Overall retail sales in November jumped 0.7 percent, following a rise of 0.6 percent the month before (originally up 0.4 percent).  Autos were a big part of the November boost, gaining 1.8 percent after a 1.1 percent increase in October, so that annual sales are approaching 5 percent, and 6 percent is closer to a normal sales rate, and full employment.

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Graph: Econoday

The Kansas Federal Reserve Bank just released a study that says single family starts could increase by 150 percent from 2012 to their peak in 2021 (Chart 1). The annual level of starts at this peak is about the same as in 2002, one year into the single-family construction boom. Single-family construction is then projected to fall over the subsequent decade.

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Graph: Calculated Risk

Demand in particular was raised in the GDP report, and increasing demand for goods and services is what induces businesses and economies to grow. Final sales of domestic product were revised up to 2.5 percent, compared to the second estimate of 1.9 percent and 2.1 percent in the second quarter. Final sales to domestic purchasers (which exclude net exports) were bumped up to 2.3 percent versus the second estimate of 1.8 percent and 2.1 percent in the second quarter.

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Graph: Econoday

The best news of all was the bipartisan budget agreement that put off any talk of indiscriminate sequester cuts for the next 2 years. It will add back a total of $85 billion to government spending and will give an additional boost to growth in 2014. It has been the decline in government investments and employment in particular that have been the largest roadblock to increased growth.

Under the terms of the deal, spending for the Pentagon and other federal agencies would be set at $1.012 trillion for fiscal 2014, said the Washington Post, midway between the $1.058 trillion sought by Democrats and the $967 billion championed by Republicans. The Pentagon would get a $2 billion increase over last year, while domestic agencies would get a $22 billion bump, clearing space for administration priorities such as fresh investments in education and infrastructure.

Harlan Green © 2013

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Where is The Inflation??

Posted on December 19, 2013 by Popular Economics Weekly

Financial FAQs

The answer, in a nutshell, is it’s nowhere to be found. All current worldwide and domestic inflation indicators show depressed demand for goods and services, hence there is little incentive to raise prices. Therefore businesses are spending little on expanding capacity—with the exception of housing and autos. For instance, Ford just announced it will be hiring 5,000 additional workers and introducing 16 new models, while GM will spend $1.3 billion to expand 5 existing factories.

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Graph: Calculated Risk

In fact, the Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in November on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported. Over the last 12 months, the all items index increased just 1.2 percent before seasonal adjustment.

Why such a weakness in demand? It’s because consumer incomes are barely rising, and consumers account for some 70 percent of economic activity. The income side of the October report is especially soft, at minus 0.1 percent following two very strong months at plus 0.5 percent, said the Commerce Department. The decline is the first since January and may be related to the impact of the government shutdown on private wages. Wages & salaries are especially soft, up only 0.1 percent following gains of 0.4 and 0.6 percent in the two prior months, as the Econoday graphs shows.

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Graph: Econoday

So is it any wonder that consumers are spending less, with the Federal Reserve keeping interest rates at record lows? Spending has been increasing just 2 percent annually. Housing in particular has been boosted by those low rates, with conforming 30-year fixed mortgage rates still at 4.375 percent for zero origination points.

And housing starts are at 5-year high. Construction surged in November-and this time it was not just the multifamily component. Starts in November jumped 22.7 percent after rising 1.8 percent in October. The November starts annualized level of 1.091 million units topped expectations for 0.952 million units and was up 29.6 percent on a year-ago basis. September starts were 0.873 million and October was 0.889 million.

Low interest rates go with low inflation rates, which in turn are due to barely rising wages and salaries. Only a lower unemployment rate will boost consumers’ incomes, and that means a commitment by both political parties and the White House to policies that encourage greater growth.

Harlan Green © 2013

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Home Equity Increasing

Posted on December 17, 2013 by Popular Economics Weekly

The Mortgage Corner

CoreLogic, a real estate analytics firm, today released new analysis showing approximately 791,000 more residential properties returned to a state of positive equity during the third quarter of 2013, and the total number of mortgaged residential properties with equity currently stands at 42.6 million.

This is helping November home sales in the South Coast, with closed transactions holding strong and huge price increases year-over-year, reports Gary Woods for MLS.

“Year over year sales are up just slightly from 2012 with the median sales price up to about $940,000 for approximately a 19 percent rise. The average sales price is also up going from about $1.36 million in 2012 to approximately $1.43 million in 2013 for a 5 percent rise while the numbers of escrows are down with 1,203 in ’12 to 1,168 in ‘13 with the median list price on those escrows up about 15 percent to approximately $960,000.”

The CoreLogic analysis indicates that nearly 6.4 million homes, or 13 percent of all residential properties with a mortgage, were still in negative equity at the end of the third quarter of 2013. This figure is down from 7.2 million homes, or 14.7 percent of all residential properties with a mortgage, at the end of the second quarter of 2013.

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Graph: Calculated Risk

This is a result of the sharp rise in housing values this year. Of the 42.6 million residential properties with positive equity, 10 million have less than 20 percent equity. Borrowers with less than 20 percent equity, referred to as “under-equitied,” may have a more difficult time obtaining new financing for their homes due to underwriting constraints.

Under-equitied mortgages accounted for 20.4 percent of all residential properties with a mortgage nationwide in the third quarter of 2013, with more than 1.5 million residential properties at less than 5 percent equity, referred to as near-negative equity. Properties that are near negative equity are considered at risk should home prices fall.

“Rising home prices continued to help homeowners regain their lost equity in the third quarter of 2013,” said Mark Fleming, chief economist for CoreLogic. “Fewer than 7 million homeowners are underwater, with a total mortgage debt of $1.6 trillion. Negative equity will decline even further in the coming quarters as the housing market continues to improve.”

California has the twelfth worst negative equity with 13.2 percent of those homes holding mortgages. Nevada had the highest percentage of mortgaged properties in negative equity at 32.2 percent, followed by Florida (28.8 percent), Arizona (22.5 percent), Ohio (18.0 percent) and Georgia (17.8 percent). These top five states combined accounted for 36.4 percent of negative equity in the U.S.

Harlan Green © 2013

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The Great Divergence

Posted on December 16, 2013 by Popular Economics Weekly

Popular Economics Weekly

The so-called “minimalist” budget deal just reached by Congress is another illustration of the great divergence in wealth distribution of recent years that has eclipsed the middle class. The Great Divergence is not a term usually associated with inequality, but a term coined my historian Samuel Huntington to explain Europe’s explosive economic growth in the 19th century that left the rest of the world behind. But today, it best explains what has reduced domestic economic growth and job formation over the past 30 years.

Until 1970 wealth had been fairly evenly distributed so that the rising tide of economic growth lifted most boats, but then something happened. The middle class began to disappear, with wealth flowing upward, so what was left was either the poorest or richest among us.

The results of such a ‘divergence’ of wealth from what was its distribution since World War II has not been well documented, and ultimately resulted in the Great Recession (which some have called the Lesser Depression). Middle class consumers in particular saw their accumulated wealth disappear with the busted housing bubble, and income growth that did not keep up with inflation. Both household and government revenues declined to record lows as a percentage of overall economic activity.

What happened since then is conservative economic policies begun under Presidents Carter and Reagan, have gradually shifted most of U.S. wealth created to the wealthiest individuals and corporations, resulting in money flowing to those who either hoard it (such as record corporate cash assets of more than $2.2 trillion), or play the financial markets, causing speculative bubbles that have resulted in 5 recessions since 1980.

There has also been a gradual reduction in economic growth since then, with GDP growth averaging 2.5 percent, whereas it averaged 3.5 percent up to 1980, including the Great Depression. It is even worse today, averaging 2 percent since the end of the Great Recession, with the unemployment rate stuck at 7 percent.

This is not new news. It has been well documented by such as Professors Thomas Piketty and Emmanuel Saez’s research on income inequality, and Robert Reich in his book and movie, Inequality for All. But we are now just beginning to understand its effects.

According to the Congressional Budget Office, between 1979 and 2007 incomes of the top 1 percent of Americans grew by an average of 275 percent. During the same time period, the 60 percent of Americans in the middle of the income scale saw their income rise by 40 percent. From 1992-2007 the top 400 income earners in the U.S. saw their income increase 392 percent and their average tax rate reduced by 37 percent. In 2009, the average income of the top 1 percent was $960,000 with a minimum income of $343,927

And now, the brutal cuts to federal spending known as the sequester have wreaked havoc on important programs for mostly the poor, cutting off hundreds of thousands from Head Start and low-income housing assistance, setting back scientific research and environmental protection, and costing more than a million jobs. Getting rid of the sequester for domestic programs was a high priority for Congressional Democrats, yet very little was achieved in a budget deal reached last Tuesday to right this great divergence of wealth from the have-nots to the haves.

Lowering the maximum income tax rates for the wealthiest to 36 percent from as high as 48 percent during the Reagan era, lowering capital gains, inheritance tax rates, as well as giving energy companies and major corporations huge tax loopholes to drive through, has transferred most of the wealth created since then to the top 1 percent, while corporations have amassed record amounts of cash reserves, much it held overseas where most growth has occurred for the multinational corporations.

And corporations have used their increased economic power and profits to cement their economic dominance; by suppressing collective bargaining, minority voting rights, and a great number of environmental regulations in state legislatures via ALEC, the American Legislative Exchange Council that actually writes the legislation for conservative state legislatures.

The result is that most of the productivity gains enabled by both technology and globalization (i.e., relaxed trading regulations and oversight) have gone to corporations and their investors, abetted by the reduced tax base.

This is while middle class incomes and retirement accounts have been depleted, and governments have been starved of funds to even keep up with outmoded infrastructure maintenance, while reducing educational spending, environmental enforcement that pay forward benefits for future generations.

The Great Divergence is once again a fact, but a fact that highlights the decline of western economies due to the increasing concentration of wealth. It should raise alarms in Europe as well, where austerity programs are at work impoverishing their middle class.

Harlan Green © 2013

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Affordable Housing In Decline

Posted on December 11, 2013 by Popular Economics Weekly

The Mortgage Corner

The Harvard Joint Center for Housing Studies has just come out with their rental market report, and it shows very little low rent housing available, due mainly to both increased household formation and those who have lost their homes from the busted housing bubble. Almost all of the 2.7 million abandoned and/or foreclosed homes are gone; most becoming rentals that do not meet the expanding need for rental housing.

Millions of Americans are in precisely that situation, according to a study released today by Harvard’s Joint Center for Housing Studies. The availability of apartments, especially cheaper ones, hasn’t nearly kept up with demand, and the problem has worsened since the 2007-09 recession, the study says.

In 1960, about one in four renters paid more than 30 percent of income for housing. Today, one in two are cost burdened,” according to the study, America’s Rental Housing.

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Graph: Harvard Center for Housing Studies

Rick Judson, chairman of the National Association of Home Builders (NAHB), issued the following statement on the rental housing report:

“The report released today by the Harvard Joint Center for Housing Studies highlights serious affordability problems for many of America’s renter households, and NAHB supports many of the policy initiatives outlined in the study to meet this ongoing challenge.  Of primary importance, efforts to reform the housing finance system must include a federal backstop to maintain broad liquidity during all economic cycles and ensure that rental housing can continue to be built and preserved.”

Judson and the NAHB have supported maintaining some form of Fannie Mae and Freddie Mac to guaranteed conforming loans that currently cover more than 90 percent of mortgages originated. There have been no viable alternatives proposed to date.

“It is clear that the federal role in ensuring the availability of financing for multifamily rental housing for low- and moderate-income households is critical,” said Judson. “Other ways to reduce the costs of providing affordable housing must be pursued as well, such as strengthening the Low Income Housing Tax Credit program, removing regulatory barriers to construction, providing gap financing to help reduce construction costs, streamlining program rules and allowing agencies to align administrative procedures across programs.”

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Graph: Boston Globe

So the real problem is rising housing prices, coupled with very low housing inventories that are putting pressure on affordable housing. The good news is that a lot more rental housing is being constructed with strength in the multifamily component that spiked a monthly 15.3 percent after a 20.1 percent surge in September. The multifamily component is up 22.5 percent on a year-ago basis while the single-family component is up 8.8 percent.

Harlan Green © 2013

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Paying Sustainable Economic Growth Forward

Posted on December 8, 2013 by Popular Economics Weekly

Popular Economics Weekly

The Fed has said it wouldn’t begin to boost interest rates until sustainable economic growth was achieved. However, no one has actually defined what that means. Fed Chairman Bernanke defines it as when full employment is achieved, or the unemployment rate drops to around 6 percent. Others have said it is when Gross Domestic Product growth is back to the historical 3 percent plus rate from its 2 percent average of late.

But those metrics aren’t really definitions of sustainable growth, since they don’t take into account that portion of GDP invested in future growth. For no growth is sustainable unless investments are made in future, longer term growth, rather than held in corporate coffers or excess bank reserves. Senator Elizabeth Warren’s “paying forward” campaign speech is a good place to start in search of a truer definition of sustainable growth.

At a campaign stop in Massachusetts while running for Ted Kennedy’s Senate seat, she famously said, "You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did."

That is as good a definition of sustainable economic growth as we can find. For instance, future growth isn’t possible without adequate infrastructure. Yet how much of current economic activity is funneled to roads these days with the American Society of Civil Engineers saying there is some $2.2 trillion in deferred infrastructure maintenance? Or, how much is being spent on education?

A recent OECD study of education worldwide cited the U.S. as the biggest spender in elementary education, but with meager results. And for post-high school programs, the United States is far outspent in public dollars. U.S. taxpayers picked up 36 cents of every dollar spent on college and vocational training programs. Families and private sources picked up the balance. Whereas in other OECD nations, it was roughly reversed: The public picked up 68 cents of every dollar in advanced training and private sources picked up the other 32 cents.

"When people talk about other countries out-educating the United States, it needs to be remembered that those other nations are out-investing us in education as well," said Randi Weingarten, president of the American Federation of Teachers, a labor union.

But there is one measure of sustainability that almost no one talks about, and that is boosting sustainable consumer spending. We know consumer spending makes up some 70 percent of U.S. economic activity, yet current economic policies depress household incomes by putting most of the tax burden on wage and salary earners via payroll taxes. Whereas income taxes have been steadily reduced over the past 30 years, so that billionaires such as Mitt Romney and Warren Buffet pay effective tax percentages in the teens.

Rutgers economic historian James Livingston has put it best in various Op-eds and articles.

“Growth has happened precisely because net private investment has been declining since 1919 and because consumer expenditures have, meanwhile, been increasing. In theory, the Great Depression was a financial meltdown first caused, and then cured, by central bankers. In fact, the underlying cause of this disaster wasn’t a short-term credit contraction engineered by bankers. The underlying cause of the Great Depression was a fundamental shift of income shares away from wages and consumption to corporate profits, which produced a tidal wave of surplus capital that couldn’t be profitably invested in goods production — and wasn’t invested in goods production.”

“Now look,” said Senator Warren, “you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along."

There will always be a debate about how to share the wealth pie, but there should be no debate about investing in the future of America, which means our youth, but also a healthy environment and yes; a well-functioning health care system.

Harlan Green © 2013

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