Wednesday, October 26, 2016

Housing Sales, Prices Continue Skyward

The Mortgage Corner

The S&P Case Shiller Home Price Index continues to soar, with Seattle and Portland existing-home prices up double digits in a year, while Dallas and Denver are up some 8 percent annually.

Case-Shiller’s national index is within a hair of its 2006 peak — just 0.1 percent below. The smaller 20-City index is 7.2 percent lower. Tight inventory has constrained the housing market for years, driving prices higher. Many analysts have expected to see price gains decelerate in response, especially in overheated metros like San Francisco, but that hasn’t happened yet. San Francisco prices were flat in July but picked up again in August, and are up 6.7 percent in a year.

September existing-home sales are also soaring again, after a slight drop in August. September sales surged 3.2 percent to a 5.470 million annualized rate that exceeds Econoday's high estimate. The key single-family component leads the report, up 4.1 percent to a 4.860 million rate while condos, where choices are limited and permits for new building are on the rise, fell 3.2 percent to a 610,000 rate.

It is possible because mortgage rates are still at record lows, with the 30-year conforming fixed rate still as low as 3.0 percent for those that want to buy down the rate and have excellent credit. Fannie and Freddie offer their best rates to those with 740 plus credit scores.

This has enabled more first-time homebuyers to own homes, with their percentage up to 34 percent of sales. Regionally, September sales were strongest in the West, up 5.0 percent for a year-on-year gain of 1.6 percent, and in the Midwest, up 3.9 percent on the month for a year-on-year plus 2.3 percent. Total year-on-year resales are up but only fractionally, at plus 0.6 percent.

But the existing-home inventory of homes for sale is still at a 4.5 month supply at the current sales rate, hardly enough to supply the rising demand from first-time homebuyers. And so new-home sales have to eventually fill the void.

New-home sales are still struggling in September, up 3.1 percent to a 593,000 annualized rate, though sharp downward revisions to both August (575,000 from 609,000) and also July (629,000 from 659,000) do lower expectations for more solid strength in the new home market. But year-on-year, sales are up 30 percent in what is a sharp contrast to the fractional 0.6 percent gain on the existing-home side.

The potential for more inventory is mixed with new-home construction permits higher in what is a deceptively solid housing starts & permits report. Starts plunged what looks like a shocking 9.0 percent in September, to a 1.047 million annualized rate. But the drop is tied entirely to the volatile multi-family component where starts fell a massive 38 percent in the month to a 264,000 rate. The more important single-family component is up sharply in its own right, 8.1 percent higher to a 783,000 rate.

We can therefore see from the graph that starts are still on an upward trend, which is needed if we want housing prices to mitigate their sharp rises of late, and so make housing more affordable to those youngest household-forming adults.

The demand is there as evidenced by the sharp rise in new-home prices nationally, up 6.7 percent in the month to a median $313,500. And further price gains can be expected as the year-on-year gain, in contrast to the surge in sales, is only 1.9 percent, says Econoday.  While the existing-home median price is already up 15 percent this year, per the NAR’s affordability index.

Harlan Green © 2016

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Monday, October 24, 2016

Hillary Clinton, A New FDR?

Popular Economics Weekly

Even President Obama, among others, has said Hillary Clinton is one of the most qualified presidential candidates ever. And she has been advocating a new New Deal for America, including tuition-free public universities and colleges, paid maternity leave, child care, expanded social security and Medicare benefits, as well as more public investment at a time when the private sector has severely cut back on productive investment of any kind.

She would also be our first female president. So how should we compare her to FDR, our father figure during the Great Depression and WWII, at a time of economic suffering from the second worst depression we have just lived through?

What is little know is that the major New Deal programs created during the Great Depression, including Social Security, unemployment insurance, and the 40-yr work week, were designed and created by a female Labor Secretary, Francis Perkins, whom he had brought with him from his New York state governorship.

During her term as Secretary of Labor from 1933 to 1946, Secretary Perkins created the Civilian Conservation Corps, the Public Works Administration (WPA), and the labor portion of the National Recovery Industrial Act. With the Social Security Act, she established unemployment benefits and pensions for the many uncovered elderly Americans, and welfare for the poorest Americans. She pushed to reduce workplace accidents and helped craft laws against child labor. Through the Fair Labor Standards Act, she established the first minimum age and overtime laws for American workers, and defined the standard forty-hour work week.

Yes, Francis Perkins, a woman, was the real designer and implementer of most of the New Deal programs, without which we would not have weathered the Great Depression with enough economic strength to win WWII.

So might Hillary Clinton provide a similar vision for America during these divided times when so much of the rest of the world wants what we have? Her drive to provide tuition-free public colleges is a first step.

The now $1 trillion in student debt is holding back economic growth, for starters. It prevents students from investing in their future growth, such as a profession they prefer, rather than continuing to pay for the past investment in themselves. It has held back the number of college graduate that both earn higher salaries and are more fully employed than non-college graduates.

A recent NBER Working Paper by economist Enrico Moretti, showed a percentage point increase in the supply of college graduates raises high school drop-outs' wages by 1.9 percent, high school graduates' wages by 1.6 percent, and college graduates wages by 0.4 percent. The effect is larger for less educated groups, as predicted by a conventional demand and supply model. But even for college graduates, an increase in the supply of college graduates increases wages, as predicted by a model that includes conventional demand and supply factors as well as spillovers, said Dr. Moretti.

It is particularly important that the United States increases its investment in postsecondary education in the face of rising competition from its international peers, and having government take on the burden of public university debt is a first step. As recently as 1996, the United States had the second highest share of adults who had earned postsecondary education credentials and the highest share of adults with university degrees, in part because there was little or no tuition until the 1970s, when governments began to cut back on their share of state university funding, which was then taken up by rising tuition fees.

More recently, however, America’s level of achievement has fallen behind other nations. In 2012, the most recent year measured, the United States ranked fifth in the percentage of adults who had earned postsecondary education credentials, according to the Center for American Progress. Even more worrisome, the share of young Americans—those between the ages of 25 and 34—with postsecondary credentials has dropped to 12th relative to other nations, while those possessing university degrees fell to 14th.

Why is Hillary so qualified? President Roosevelt had a history of public service, first as Assistant Secretary of the Navy, then New York Governor, before serving as our President from 1932-45. Hillary has had 30 years of service, including as a State Senator, Secretary of State, and First Lady. And such a broad record of service is what it will take to even begin to heal our fractured society.

Harlan Green © 2016

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Wednesday, October 19, 2016

Housing Construction--Slow But Steady Increase

The Mortgage Corner

Single-family housing construction rose in September. Though overall starts plunged what looks like a shocking 9.0 percent in September, to a 1.047 million annualized rate, said Econoday. The drop is tied entirely to the volatile multi-family component where starts fell a massive 38 percent in the month to a 264,000 rate. But the more important single-family component is up sharply in its own right, 8.1 percent higher to a 783,000 rate.

However, no problem, as multi-family construction starts were up sharply in August. But the graph really shows how far we need to catch up to prior years. There just aren’t enough affordable homes to satisfy demands for more affording dwellings, and the Fed is now hinting at a December rate hike.

What will happen to those millennials that want to buy their first home? However builder confidence is still high, according to the Wells Fargo Home Builders Index, and purchase mortgage applications are up 13 percent in a year, which may be the reason builders are still optimistic about future construction and inventories.

Builder confidence in the market for newly constructed single-family homes was down just two points to a level of 63 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

  “The October reading represents a mild pullback from a jump in September, and indicates that the housing market continues to make slow and steady gains,” said NAHB Chief Economist Robert Dietz. “Moreover, mortgage rates remain low and the HMI index measuring future sales expectations has been over 70 for the past two months. These factors will sustain continued growth in the single-family market in the months ahead.”
So there may be a lull in sales, as the NAR’s Pending Home Sales Index of future sales is also lower. According to NAR chief economist LawrenceYun, evidence is piling up that without more new home construction the current housing recovery could stall. Housing inventory has declined year-over-year for 15 straight months; properties in August typically sold 11 days quicker than in August 20151 and after increasing 5.1 percent last month, existing-home prices have risen year-over-year for 54 consecutive months.
"There will be an expected seasonal decline in new listings in coming months, which could accelerate price appreciation and make finding an affordable home even more of a struggle for would-be buyers," added Yun.
Mortgage rates have bumped up slightly, with 30-year fixed conforming rates now 3.125 percent for a 1.0 pt. origination fee, and 3.375 percent for no points in California, which is helping to boost the mortgage volume. The question then will be, who can afford to buy without more homes in the construction pipeline?

Harlan Green © 2016

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Tuesday, October 18, 2016

Is Retail Sales Pickup For Real?

Financial FAQs

September retail sales rose: total up 0.6 percent, ex-auto up 0.5 percent, ex-auto ex-gas up 0.3 percent, which indicates a good holiday season for retail. But this is bucking the downward trend that has sales sinking to the 3 percent range since 2014—not what is needed for a continuing recovery. This is even though the jobs market is looking good, with job openings still at almost record levels and the unemployment rate at 5 percent.

Auto sales are the highlight of the September retail report, up 1.1 percent to reverse the prior month's 0.3 percent decline. Auto sales, a discretionary category, have been solid this year though down from last year's peak. Restaurants, another discretionary category, are also strong, up 0.8 percent to add to August's 0.7 percent gain.

Job openings fell to 7.3 percent in August to 5.443 million at the same time that hiring, instead of rising, slowed by 0.9 percent to 5.210 million. And though the openings number is the lowest since last December, the hiring number is more respectable, ranking as the fourth highest so far this year.

Graph: Econoday

We still have a problem with male blue collar workers, however. Some 7 million, or 11.4 percent of men between 25 and 54 years of age, have stopped looking for work, according to Princeton Economist Alan Krueger. The causes are many, including physical disabilities, but also because of lack of skills required in this fast changing economy. Most have no college or post-high school technical education, according to Dr. Krueger. And 40 percent take some kind of opioids, most painkillers.

This is the hard core of the unemployed that need government assistance the most—such as universal healthcare (that includes being able to negotiate for drug costs), and government-funded infrastructure jobs that would encourage them to return to the jobs market.

And those most affected are in the poorest red states that have rejected Obamacare, in particular, which tends to hurt the unemployed most , thus stoking their anger. It is times like these that require a fully-funded and functional social safety net, in other words.

So it really is the huge loss in both residential and public investment construction that has most hurt this recovery, and resulted in the huge backlog of deferred bridge, highway, and energy infrastructure improvements. Residential construction of new homes is roughly two-thirds of what it was in 2005, for instance.

Whereas the private sector has gained some 11 million jobs, governments haven’t yet hired back all those that lost their jobs due to the Great Recession Which in many ways was greater than the Great Depression. I.e.,, more wealth was lost with less GDP growth since 2008 than in the Nineteen-Thirties because we did not have a new New Deal that could employ millions in the public sector when the private sector economy collapsed.

This happens when tax revenues plunge, and state governments in particular have to balance their budgets. There has to be a massive reinvestment in our future growth, in other words, for this economy to really recover and put those 7 million still disenfranchised back to work.

Harlan Green © 2016

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Thursday, October 13, 2016

Will Low Interest Rates Continue?

The Mortgage Corner

This question is behind much of the stock and bond market gyrations. We are near full employment with a 5.0 percent unemployment rate, some 11 million jobs created since the end of the Great Recession, yet we still have record low interest rates. And inflation has barely budged, with GDP growth still struggling in the 2 percent range, and predicted to continue in that range by the Atlanta Federal Reserve Bank.

But beware of the Federal Reserve’s next FOMC meeting in the first week of November. Several Fed Governors now say that it’s time to begin to raise short term rates to dampen any incipient inflation tendencies.


So will such low rates continue? The simplest economic answer is there’s not much demand for money at the moment, in relation to the amount of money either in circulation or being saved by companies and individuals.

This is evidenced by the record amount of cash or other readily sellable assets—some $4.5 trillion in such assets are being held by corporations both home and abroad—and the 5.7 percent personal savings rate, which is up from its historical low of 1.9 percent in 2005, per the graph below.

In other words, even though lots of money is being hoarded in both public and private sectors, many Fed Governors are saying it’s time to raise interest rates. The private sector is investing in new plants and equipment overseas, so it’s not boosting domestic GDP growth, whereas government spending has been shut down by a very conservative Congress.

Austerity policies have ruled, in other words, just as in Europe. The only difference and reason for US growth being faster than Europe’s, is the Fed’s QE purchase of bonds vs. the EU’s almost total refusal to consider it until lately. This has put enough U.S. money into circulation to create 2 percent GDP growth, whereas the EU has suffered 2 recessions since 2008, though EU growth has picked up of late.

It has kept our interest rates at these record lows, and been good for the real estate recovery, of course. But many Fed governors are beginning to make noises that interest rates could rise after their November FOMC meeting, which occurs at the same time as the Presidential election. We can only hope that it will be a onetime rate increase followed by enough time to examine the results.

The reason is housing affordability. First-time homebuyers comprise just 30-32 percent of buyers, down from 40 percent during more normal times. And the NAR’s housing affordability index has dropped 10 percent in just one year, which measures the amount of house someone with a median income can buy. This is mainly due to the fact that the NAR’s median single-family home price has risen 15 percent just this year.

So we need those low interest rates for the housing industry to continue to recover, though we know interest rates will probably rise into next year. But with conforming fixed rates still 3.25 percent for a 1 point origination fee, it is still dirt cheap.

Harlan Green © 2016

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Monday, October 10, 2016

Jobs Report—Not Yet Full Employment

Popular Economics Weekly

The unemployment rate rose slightly to 5 percent for the first time since April, the government said Friday, though that was mainly because 444,000 people entered the labor force. There are still too many unemployed, in other words. A broader measure of unemployment that includes people who gave up looking for work or can only find part-time jobs was unchanged at 9.7 percent. And it was at 8 percent before the Great Recession.

Some 3 million people have jointed the labor force in the past year, a clear sign that record job openings and steady hiring are enticing more Americans to seek work. An increasing number of companies even say they have trouble finding enough skilled workers. But there are still more than 7 million that have either stopped looking or can’t find full time jobs.

This is while total employment gains for August and July were 7,000 lower than previously reported in revisions. The government said 167,000 new jobs were created in August instead of 151,000. July’s gain was trimmed to 252,000 from 275,000.

The U.S. has added an average of 178,000 jobs a month this year, down from 228,000 in 2015 and 251,000 in 2014. Hiring was expected to taper off as it usually does when an economic expansion reaches maturity and the pool of jobless workers shrinks.

But the inflation hawks will now cry louder that it’s time to raise the Fed’s short term rates from 0.5 percent—because wages are now rising at 2.6 percent per year, though that isn’t enough to raise the inflation rate. In fact, it hasn’t been enough to raise economic growth, either, which is projected to remain in the 2 percent range this year as it has been for the last 2 years.

So any boost in the Fed’s interest rates will hurt growth by causing the US dollar’s value to rise against other currencies, which in turn hurts exports and so manufacturing, which barely expanding, according to the latest ISM manufacturing survey.

The September ISM Manufacturing Index did bounce more than 2 points higher to a much better-than-expected 51.5, largely because the US Dollar has been weaker of late—due to the fact that the Fed hasn’t raise interest rate. So said higher growth isn’t assured.

New orders, the most important of all readings rose 6 points to a very solid 55.1. Export orders are respectable and steady at 52.0 while the draw in total backlog orders slowed, with this index up 4 points and nearly hitting breakeven 50 at 49.5. Production also improved in the month, up 1.4 points to 52.8, as did employment which, at 49.7, is also nearly at 50. This is a positive report, pointing to rising though no more than moderate strength for the nation's factory sector.

But beware of those inflation hawks if we want higher growth, and fuller employment for all who want to work. There are two reasons for the Fed to keep interest rates low. Firstly, the energy sector is just beginning to recover from its mini-recession, as crude oil prices inch up to $50 per barrel. And European bond prices are negative with the EU in trouble with Brexit, signaling the European Central Bank is still in an easing mode. So let’s give this economy a chance to really grow before beginning to raise the all-important Fed funds and overnight rates.

Harlan Green © 2016

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Saturday, October 8, 2016

Trump the Terrible Demogogue

Popular Economics Weekly

Many Republicans as well as Democrats are horrified at the possibility of a Trump Presidency. It’s not only because of his blatant racism, which he makes no attempt to hide. Or his complete ignorance of foreign policy. He has advocated the arming of Japan and Korea with nuclear weapons—which coupled with his unstable personality that a biographer has labeled psychopathic, makes him a dangerous psychopath.

No, it is because with his slogan Take Back America, he wants to disunite the United States of America. This is when America is already divided—by race and economic opportunity, for starters. Trump seems to want to take America to a time when we were a divided country—to the Civil War.

He is taking advantage of the fact the U.S. Civil War is still being fought in many, particularly southern states, where African-American and other minorities are disproportionally prevented from exercising their voting rights—be it with voter ID requirements, or the even more pernicious felon disenfranchisement laws in many states.

For instance, Iowa, Kentucky, and Florida permanently ban any convicted felon from exercising their right to vote. Only Maine and Vermont give everyone the right to vote, even still imprisoned felons. The rest of the states allow for reinstatement in some form, once their time has been served.

The Sentencing Project in a just released study found:
  • As of 2016, an estimated 6.1 million people are disenfranchised due to a felony conviction, a figure that has escalated dramatically in recent decades as the population under criminal justice supervision has increased. There were an estimated 1.17 million people disenfranchised in 1976, 3.34 million in 1996, and 5.85 million in 2010.
  • Approximately 2.5 percent of the total U.S. voting age population – 1 of every 40 adults – is disenfranchised due to a current or previous felony conviction.
  • Individuals who have completed their sentences in the twelve states that disenfranchise people post-sentence make up over 50 percent of the entire disenfranchised population, totaling almost 3.1 million people.
  • Rates of disenfranchisement vary dramatically by state due to broad variations in voting prohibitions. In six states – Alabama, Florida, Kentucky, Mississippi, Tennessee, and Virginia – more than 7 percent of the adult population is disenfranchised.
  • The state of Florida alone accounts for more than a quarter (27 percent) of the disenfranchised population nationally, and its nearly 1.5 million individuals disenfranchised post-sentence account for nearly half (48 percent) of the national total.
  • One in 13 African Americans of voting age is disenfranchised, a rate more than four times greater than that of non-African Americans. Over 7.4 percent of the adult African American population is disenfranchised compared to 1.8 percent of the non-African American population.
It is therefore easy to see why majorities in four states are in the Take Back America column. Florida (21 percent), Kentucky (26 percent), Tennessee (21 percent), and Virginia (22 percent) have the largest percentage of disenfranchised voters—more than one in five African-Americans.

But what if another such demagogue with the thirst for absolute power—both Trump and Veep Pence have said Vladimir Putin and even N. Korea’s Kim Jong Un are stronger leaders than President Obama—is able to disguise the racism and divisive politics that demagogues must utilize to achieve and keep power?

It’s terrifying just how close Trump seemed to come to the White House before his latest blunders. But what would be even more terrifying is the possibility another, much more polished demagogue, might stir up the Take Back America crowd in future election cycles.

African-Americans now comprise 50 percent of our 2.3 million prison population when they are 12 percent of our population. There are many states that restrict many other rights (mainly red states), including abortion rights, immigration, even the collective bargaining rights of workers that are no longer able to negotiate for their own living wages.

Preventing another Donald Trump is why our political leaders must to find a way to re-unite the Divided States of America.

Harlan Green © 2016

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