Saturday, March 28, 2015

New Home Sales Surging

The Mortgage Corner

New U.S. homes sold at an annual rate of 539,000 in February to mark the best month of sales in seven years, the government reported Tuesday. The pace of sales for January was also revised up sharply to 500,000. It's the first time annualized sales have hit 500,000 or more for two straight months since early 2008.

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Graph: Calculated Risk

“This is 7.8 percent above the revised January rate of 500,000 and is 24.8 percent above the February 2014 estimate of 432,000," said the Census Bureau. And it reduced the for sale inventory to a 4.7 month supply, which is low considering the pent up demand for housing sales sure to grow this year, with low inflation and rising employment.

Low inflation should be a factor in housing sales this year, if oil prices stabilize, since it boosts householders’ take home pay. Price rises moderated last year. The Federal Housing Finance Authority just reported that same-home prices of homes with conforming loans rose 5.1 percent in January, down slightly from 5.4 percent in December. But we are in mid-winter, so look for more price rises as the spring selling season kicks in.

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Graph: Econoday

Overall CPI inflation was unchanged in February, which is better than the negative -0.1 percent drop in January. Oil prices have stabilized around $50/barrel for Brent Crude at the moment, but who knows what this year will bring with so much unrest with major oil producers in the Middle East, and even Russia?

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Graph: Trading Economics

CNBC’s Diana Olick reports that lack of existing-home inventory is the real problem. “Lack of supply of existing homes is pushing prices again, up 7.5 percent year over year to a median sale price of $202,600 in February, according to the NAR, that reported slower February existing home sales,” she says. “And don’t blame it on the weather, according to NAR chief economist Lawrence Yun.

“He calls this reacceleration of price gains, "unhealthy," per Olick. “Affordability had been helping the housing recovery inch along, but now it is weakening and fast becoming a roadblock to homeownership. Still-rising rents are contributing to the problem, keeping first-time buyers from being able to save for a down payment.”

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 1.2 percent to a seasonally adjusted annual rate of 4.88 million in February from 4.82 million in January. Sales are 4.7 percent higher than a year ago and above year-over-year totals for the fifth consecutive month.

Lawrence Yun, NAR chief economist, says although February sales showed modest improvement, there’s been some stagnation in the market in recent months. “Insufficient supply appears to be hampering prospective buyers in several areas of the country and is hiking prices to near unsuitable levels,” he said. “Stronger price growth is a boon for homeowners looking to build additional equity, but it continues to be an obstacle for current buyers looking to close before rates rise.”

The median existing-home price for all housing types in February was $202,600, which is 7.5 percent above February 2014. This marks the 36th consecutive month of year-over-year price gains and the largest since last February (8.8 percent).

Hence those rising prices and low inventories should spur more new-home construction this year.  But housing construction is barely in recovery mode, and has a long way to go to approach the 800,000 to 1 million unit per year average of past decades.

Harlan Green © 2015

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Wednesday, March 25, 2015

A Ted Cruz Presidency?

Financial FAQs

Texas Senator Ted Cruz is about to announce his candidacy for the 2016 presidential campaign. What would his presidency look like, if he were elected? “Mr. Cruz has also begun championing a message of economic populism,” said the NYTimes on his announcement of candidacy, “denouncing income inequality and borrowing the “two Americas” metaphor used most famously by former Senator John Edwards in two unsuccessful campaigns for the Democratic presidential nomination.”

Let’s start with his silliest proposal to abolish the IRS. It tells us how he really views income inequality. There would then be no means to collect the taxes that pay his Senator salary. So he would have to work for nothing. Is that how he will tackle the scourge of income inequality afflicting those Americans that work for little or nothing?

We also know what his presidency might look like from another far right Tea Party favorite and potential candidate’s agenda; Wisconsin Governor Scott Walker. Walker’s first priority has been to downgrade union organizing and education funding in Wisconsin, in order to deprive Democrats of union support, as well as dumb down his own electorate. The result has been the lowest job creation and growth rates of all neighboring states.

Senator Cruz’s programs would have a similar result—would in fact increase income inequality—as he has opposed every economic program that would better ordinary Americans’ lives, including raising the minimum wage. “If you raise the minimum wage, the inevitable effect will be, number one, young people will lose their jobs or not be able to get their first jobs,” he said in 2013 in reaction to President Obama’s inauguration speech that included a call to raise the national minimum wage to $9 per hour.

But history has shown just the opposite effect. Where ever the minimum wage has been raised—such as in Seattle, Washington where it is $15/hr., or the state of Minnesota, where it will be $9.50/hour for large employers in 2016, employment is thriving. Seattle’s unemployment rate is now under 5 percent, and Minnesota’s unemployment rate has dropped to 3.6 percent, the lowest in 13 years.

He also opposes any climate change legislation that would reduce our dependence on carbon-creating fossil fuels, including his support of the Keystone XL Pipeline, and more offshore oil drilling. Yet even the Pentagon has documented the extreme economic costs, including future wars, of ignoring the effects of Global Warming.

And how about his call for greater liberty? He also opposes all forms of amnesty for Illegals, or ‘undocumented’ immigrants, though he’s the son of a Cuban-born immigrant. This would greatly restrict the freedom of those immigrants to become American citizens, of course.

Cruz has particularly stressed his opposition to President Obama’s executive actions on immigration, said the PBS Newshour. The Texas senator filed a bill blocking the president’s actions, which allow more undocumented residents to gain legal status, including the administration’s waivers for young people brought to the U.S. as children. Cruz argues that those actions encouraged increased illegal immigration.

And how about his call to dissolve the Affordable Care Act? Killing Obamacare would increase the poverty of the poorest and sickest among US that cannot afford, or would be ineligible for private health care insurance.

No, Senator Cruz’s presidency would neither create more liberty, nor better the lives of the poorest that suffer most from income inequality. Those liberties have been under steady assault by Tea Party members, in particular, with their no compromise positions on even the most basic poverty alleviating programs.

So his words don’t match his actions. Isn’t that called pandering, when a politician will say anything to win votes?

Harlan Green © 2015

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Sunday, March 22, 2015

Celebrating Our Great Society

Popular Economics Weekly

We are in the midst of celebrating the 50th anniversary of President Johnson’s Great Society, enacted for the most part from 1964-66, perhaps the greatest legislative achievement of any president since FDR and the New Deal.

We know how FDR’s New Deal improved the lives of millions, literally preventing tens of thousands from starving to death during the Great Depression, and giving millions more a useful and productive public service job when there were none to be had in the private sector.

But the results of the Great Society are perhaps more mixed. That’s only if we wonder what might have happened if the U.S. economy was an ideological utopia, which didn’t go through its cycles of boom and bust, or the Vietnam War, or an Arab Oil Embargo, or 5 recession since 1980—the housing bubble and Great Recession being the latest examples.

Many of the programs were stymied by those events that took money away from social programs; in particular the Office of Economic Opportunity that funded many public programs similar to the Depression’s WPA. Conservatives’ ire is particularly directed at the spending for anti-poverty programs that were supposed to eliminate poverty, but were in fact meant to give the poorest a ‘leg up’ in their race to escape poverty.

Spending to help the poor doubled from 1965-68, and within 10 years the percentage of Americans living below the poverty line declined to 12 percent from 20 percent. Those were also the years of highest economic growth of the middle class. The rate has fluctuated greatly in the past 50 years. According to the census, 15.9 percent of Americans lived in poverty in 2012, which is just a couple of points lower than where the Census estimates it stood in 1965.

We really don’t know, for instance, how many jobs were created by the Office of Economic Opportunity. Those were also boom years when President Johnson dropped the top marginal tax rate from 91 to 71 percent. More than 4 years of 6 and 7 percent Gross National Product growth followed, employing anyone that wanted a job. The U.S. Gross National Product (Since 1991 the U.S. has used Gross Domestic Product as a more accurate measure of US output.) rose 10 percent in the first year of the tax cut, and economic growth averaged a rate of 4.5 percent from 1961 to 1968, says Wikipedia.

Johnson's tax cut measure triggered what one historian described as "the greatest prosperity of the postwar years," according to the Washington Post. GNP increased by 7, 8 and 9 percent in 1964 to 1966, respectively. The unemployment rate fell below 5 percent. But the OEO did much more, as did most of the Great Society programs.

Do we really have to be reminded of the Clear Air and Water Acts that have kept our water and air cleaner than they would have been otherwise?  Or the Civil and Voting Rights Acts that banned discrimination and abolished the blatant ban on African Americans voting in the South?  Or the enactment of Medicare and Medicaid that has reduced the poverty rate of seniors from 1 in 7 living below the poverty line in 1965 to 1 out of 3 in 2013? 

We also now have consumer protection laws such as the Cigarette Labeling and Advertising Act requiring labeling of dangerous chemicals in cigarettes, and the National Highway Safety Administration setting safety standards for our highways.  Almost all of the Great Society programs have saved or improved the lives of millions of Americans.

That is something that can only be measured in non-economic ways. Head Start, for instance, has served more than 31 million children from birth to age 5 since 1965. In 2012-13, 1.13 million children and pregnant women were served by Head Start, according to the program. The vast majority – 82 percent – were children ages 3 and 4.

And how do we measure the value of its cultural contributions, such as PBS, the Public Broadcasting System that has 987 stations nationwide – most locally owned and operated – that broadcast NPR programming?

The Great Society also led to the fruition of the John F. Kennedy Center for the Performing Arts in Washington and created the National Endowment for the Humanities, which is one of the largest arts and culture funders in the United States.

These institutions and programs of the Great Society have in fact given a national voice to our hopes and dreams, because a nation that doesn’t care for its citizens’ hopes and dreams is a nation that has no future.

Harlan Green © 2015

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Thursday, March 19, 2015

Labor Force Participation Improving

Popular Economics Weekly

One lament by Fed Chairperson Janet Yellen and others has been the low labor participation rate of the prime-age workers—those 25 to 54 year-olds that have dropped out of the labor force, or are working part time.  But that may be changing, as we get closer to full employment.

The Atlanta Fed has just published an optimistic study that says they might be coming back to work. Atlanta Fed President Dennis Lockhart commented on it in a recent speech:

“Over the last few years, there has been a worrisome outflow of prime-age workers—especially men—from the labor force. I believe some of these people will be enticed back into formal work arrangements if the economy improves further.”

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Graph: Atlanta Fed

The decline in the "shadow labor force"—the share of the prime-age population who say they want a job but haven’t been looking (i.e., are not technically counted as unemployed)—demonstrates the cyclical nature of the labor market, says Lockhart. For the last year and half, the share of these individuals in the labor force had been generally declining (see the chart).

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But now the ability of the prime-age shadow labor force to find work is improving at the same time that the Labor Force Participation rate of the prime-age population is stabilizing. Taken together, this trend is consistent with improving job market opportunities and further absorption of the nation's slack labor resources, says the Atlanta Fed.

What might be enticing them back into the labor force? Rising wages and salaries, of course. About 70 percent of U.S. companies indicate that wages are starting to outpace inflation, according to a recent Duke University study of 500 CFOs. Wage growth should be at least 3 percent in tech, services and consulting, manufacturing and health care.

"The U.S. is finally entering a new phase in the economic recovery," said John Graham, a finance professor at Duke's Fuqua School of Business and director of the survey. "The first few years of recovery were 'jobless' and, even as job growth picked up over the past year, wages remained stagnant. Finally, we are starting to see wage growth for employees that outstrips inflation. Given that CFOs expect continued strong employment growth, it is surprising that wage pressures are not even greater."

But wage growth will remain subdued at about one-third of companies that indicated employee pay will not outpace inflation in the survey. In particular, employees in retail/wholesale, transportation/energy and communications/media should expect pay hikes of less than 2 percent. The primary reasons are weak company financial performance, intense product market competition that keeps a lid on wages (because of need to keep production costs lean?), and minimal labor market pressure in these industries.

And we said last week that analyzing about three decades of census data—from 1980 to 2012—the  Federal Reserve’s 2013 Survey of Consumer Finances found that on average, young workers are now 30 years old when they first earn a median-wage income of about $42,000, a marker of financial independence, up from 26 years old in 1980.

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Graph: fivethirtyeight.com

But with increasing employment and wage pressures, the financial well-being of younger workers should improve. It isn’t just the millennial generation of 18 to 36 year-olds that has suffered from the Great Recession, in other words.

Harlan Green © 2015

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

Monday, March 16, 2015

2014 Household Formation Rebounds

Financial FAQs

Breaking news. The latest Homeownership & Vacancy Survey, released by the Census Bureau, estimated household formation surged to 1.7 million in 2014 from 400,000 the previous year. That is really big news. Household formation, which is the bottom line demand factor for RE sales, mortgage financing, as well as the insurance and construction industries—in fact, anything related to the housing market--may finally begin to show growth from the horrible post-Great Recession years.

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Graph: Trading Economics

This graph tells the story. Projections were for a recovery to 800,000 new households in 2014, but it looks like Millennials are beginning to leave home, or even college, and form new households in greater numbers—especially the oldest ages from 30 to 36 years. And most demographers agree millennials were born between 1980 to 1996, which means the oldest are reaching the age when they want to start a family, and that usually means buying a home.

Many of those have been renting, and we actually saw a 2.1 million surge in rental units in 2014, which has to account for many of those new households, according to the Census Bureau survey.

In fact, over the past year all the growth in net household formations has been among renters, according to the U.S. Census. For those 35 years old and younger, their home ownership rate has fallen from 44 percent to 36 percent over the past decade, which is why construction of multi-family apartments is at the highest level in a quarter-century this year.

And we know why. They can’t afford to buy until they reach an older age—in fact 30 years of age is when they achieve the median income wage of $42,000, according to a new Georgetown University study.

Through analyzing about three decades of census data—from 1980 to 2012—the study found that on average, young workers are now 30 years old when they first earn a median-wage income of about $42,000, a marker of financial independence, up from 26 years old in 1980.

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Graph: fivethirtyeight.com

Economists now estimate millennials will spend some $1.6 trillion on home purchases and $600 billion on rent over the next five years, more per person than any other generation with more of them opting for more affordable rents versus paying the big price tags to buy homes, according to a new report from The Demand Institute, a non-profit think tank operated by The Conference Board and Nielsen. Millennials will form just over eight million new households, albeit most of them rental households, as we said.

But there is some good income news. The 2014 numbers aren’t in for a breakdown in median incomes, but the Q4 2014 Federal Reserve Flow of Funds report says the net worth of households and nonprofits rose to $82.9 trillion during the fourth quarter of 2014. The value of directly and indirectly held corporate equities increased $742 billion and the value of real estate rose $356 billion.

This can only boost the millennial generation’s financial well-being, as well, and so the housing market and its ancillary industries.

Harlan Green © 2015

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

Thursday, March 12, 2015

Will 2015 Interest Rates Remain This Low?

The Mortgage Corner

Record low interest rates are holding, in spite of the latest stock market selloffs, and may remain low throughout 2015. Why? Oil prices are still below $50/barrel, and overall prices are falling throughout the developed world. The Eurozone in particular has fallen into such deflationary times that some euro bonds have negative interest rates. That means holders of those bonds have to literally pay interest to hold them (i.e., government issued bonds), believe it or not.

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Graph: Trading Economics

This is while the U.S. inflation rate has fallen to 1.3 percent, below the Fed’s 2 percent target that would mean prices are rising enough to sustain economic growth—in part because of those plunging oil prices. And because low oil prices will probably be sustained for at least 2 years, according to energy analysts, Janet Yellen’s Fed shouldn’t be tempted to raise their rates until later this year, if at all.

Oil prices are likely to stay at $60 a barrel or lower for the next two years as US shale extraction continues to suppress prices, according to the International Energy Agency’s latest report. After plunging from $115 a barrel in June to little more than $45 in January, the price of Brent crude has rallied recently, but the IEA said price pressures could have further to go.

“Despite expectations of tightening balances by end-2015, downward market pressures may not have run their course just yet,” the IEA, which advises mainly developed economies on the oil market, said in a monthly report.

There’s another reason for the Fed not to raise rates anytime soon, even though the so-called “confidence fairies” (P Krugman’s term) demand it; which are mainly deficit hawks that see inflation right around the corner, even when there’s none.

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Graph: P Krugman

Because we are still not close to full employment, in spite of February’s 5.5 percent unemployment rate. Annual household median incomes after inflation have plunged 7.42 percent since the Great Recession, from $68,931 to $63,815. And history both here and in Europe has shown that tightening credit when household incomes haven’t recovered (either by raising interest rates, or otherwise restricting credit) can stop an economic recovery in its tracks.

That also means today’s long term mortgage rates, such as for the conforming 30-year fixed rate—should remain at or below 4 percent for the rest of 2015. Today, the 30-year conforming rate is 3.75 percent, still a very affordable mortgage.

Harlan Green © 2015

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

Friday, March 6, 2015

Good Jobs Report for Many

Financial FAQs

The stock market plunged on news total nonfarm payroll employment increased by 295,000 in February, and the unemployment rate edged down to 5.5 percent, the U.S. Bureau of Labor Statistics reported today.

Graph: Marketwatch

Why did stocks plunge on the BLS release when it was an extremely strong report with all sectors adding jobs? Because the financial markets mistakenly believe it will push up the Fed’s schedule for raising interest rates, and higher rates mean less excess liquidity to invest in the stock market.

But Janet Yellen’s Fed isn’t focused solely on the rate of job formation or jobless rate, as she has said countless times, if the U.S. isn’t closer to full employment. And there wasn’t good news on wage growth; though January’s report had showed a slight improvement. The BLS report said: "In February, average hourly earnings for all employees on private nonfarm payrolls rose by 3 cents to $24.78. Over the year, average hourly earnings have risen by 2.0 percent."

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Graph: Calculated Risk

This is the real reason the U.S. economy has taken so long to recover. There are still more workers out of work, or looking for work than available jobs that pay a living wage. And the unemployment rate shrank from 5.7 to 5.5 percent only because 178,000 left the workforce, because they stopped looking for work.

Why no wage growth after adjustment for inflation (now slightly under 2 percent)? A Federal Reserve study reported that the greatest demand for workers since the Great Recession has been in the poverty-level, minimum wage-paying service industries, and the lowest demand is for midlevel workers who once comprised the vast majority of the middle class.

A April 2014 report by the National Employment Law Project provided details supporting the Federal Reserve study. During the recession, low-wage jobs, those paying less than $27,700 per year, had both the lowest percentage of losses and the highest percentage of gains. Twenty-two percent of the total job losses were in the low-wage category, but 44 percent of new jobs were in that category.

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Graph: Truthout

Mid-wage jobs, those paying between $27,700 and $41,600 (i.e., middle class jobs), had the lowest percentage of new jobs created, 26 percent, but the second highest rate of job losses, 37 percent. High-wage jobs, those paying more than $41,600, had the highest rate of losses, 41 percent, but a higher rate of new jobs created, 30 percent, than the mid-wage category.

So Janet Yellen may not even be ready to raise interest rates in June, or sooner, as the financial markets fear. There can be no sustainable recovery, the Fed’s stated goal, until there is enough income growth to prevent another fallback into recession as happened to the Japanese and Eurozone economies because of premature credit tightening.

Harlan Green © 2015

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