Housing Picks Up, Builder Confidence Highest in 7 Years

The Mortgage Corner

Builders are most optimistic about single family homes, and the youngest adults are finally beginning to leave their parents’ nest, apparently. The National Association of Home Builders/Wells Fargo gauge rose four points to 58 in November, near the highest level in nine years. Readings above 50 signal that builders, generally, are optimistic about sales trends.

“Low interest rates, affordable home prices and solid job creation are contributing to a steady housing recovery,” said NAHB Chief Economist David Crowe. “After a slow start to the year, the HMI has remained above the 50-point benchmark for five consecutive months, and we expect the momentum to continue into 2015.”

Privately-owned housing starts in October were at a seasonally adjusted annual rate of 1,009,000. This is 2.8 percent below the revised September estimate of 1,038,000, but is 7.8 percent above the October 2013 rate of 936,000.  Single-family housing construction in October rose to 696,000 units; 4.2 percent above the revised September figure of 668,000. The October rate for units in buildings with five units or more was 300,000.

Why the optimism? More young buyers, a key segment of the housing market, are beginning to find jobs. This makes them more likely to buy an entry-level home, with rents rising as fast as 10 percent annually in some markets. Last Friday’s unemployment report showed signs that this group is getting closer to be able to buy a home, which would, in turn, help other families find a new home.

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Graph: Trulia.com

Among 25- to 34-year olds, the share who were employed hit 76.2 percent in October, according to Trulia.com—the greatest proportion since the end of 2008—and up from 74.8 percent a year earlier, according to the Bureau of Labor Statistics.

And those younger buyers are already making a difference, as total existing-home sales rose 1.5 percent to a seasonally adjusted annual rate of 5.26 million in October. Sales are at their highest annual pace since September 2013 (also 5.26 million) and is the First Year-Over-Year Increase since October 2013, according to the National Association of Realtors.

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Graph: Calculated Risk

NAR chief economist Lawrence Yun says the housing market this year has been a tale of two halves. “Sales activity in October reached its highest annual pace of the year as buyers continue to be encouraged by interest rates at lows not seen since last summer, improving levels of inventory and stabilizing price growth,” he said. “Furthermore, the job market has shown continued strength in the past six months. This bodes well for solid demand to close out the year and the likelihood of additional months of year-over-year sales increases.”

And though housing inventory at the end of October fell 2.6 percent to 2.22 million existing homes available for sale, a 5.1-month supply at the current sales pace, unsold inventory is now 5.2 percent higher than a year ago, when there were 2.11 million existing homes available for sale.

Economists will mine this data for signs that more Millennials are buying homes, but as job growth continues to pick up (weekly initial jobless claims have stayed below 300,000 now for 10 consecutive weeks), this is surely a portent for continued increase in new and existing-home sales in 2015.

Harlan Green © 2014

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Mortgage Delinquency and Foreclosure Rates Lowest Since 2007

The Mortgage Corner

The delinquency rate for mortgage loans on one-to-four-unit residential properties decreased to a seasonally adjusted rate of 5.85 percent of all loans outstanding at the end of the third quarter of 2014. This is approaching the historical average of 4.25 percent with those eastern and Midwestern states that conduct judicial foreclosures lagging the mostly western states that conduct Trust Deed auctions in clearing their books of delinquent loans.

The delinquency rate decreased for the sixth consecutive quarter and reached the lowest level since the fourth quarter of 2007. Whereas the delinquency rates for Fannie Mae and Freddie Mac are even lower—2.05 percent for “seriously delinquent” mortgages more than 90 days late in payments.

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Graph: Calculated Risk

So it is another sign of the housing recovery. All areas of distress are lower, and housing prices continue to rise, though more slowly than last year. Housing price for homes with Fannie Mae guaranteed loans are up 5.9 percent YoY, and 6.1 percent for Freddie Mac guaranteed loans.

“Delinquency rates and the percentage of loans in foreclosure fell to their lowest levels since 2007,” said Mike Fratantoni, MBA’s chief economist. “We are now back to pre-crisis levels for most measures. Foreclosure starts were unchanged on a seasonally adjusted basis, but increased slightly in the raw data. Given that this measure reached the lowest level in eight years last quarter, and given the continued decline in delinquency and foreclosure inventory rates, we expect that the increase in the unadjusted starts rate is just regular seasonal fluctuation.”

The problem is mainly in the eastern states that have judicial foreclosures which must be processed through the courts, which is a very time-consuming process. For instance, Nevada is the only non-judicial state in the top 10, and this is partially due to state laws that slow foreclosures (D.C added some new foreclosure mediation requirements).

The top states are New Jersey (7.96 percent in foreclosure, down from 8.10 percent in Q2), Florida (6.12 percent), New York (5.72 percent) and Maine (4.29 percent).  Former bubble states California (1.05 percent) and Arizona (0.85 percent) are now far below the national average by every measure.

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Graph: Calculated Risk

This graph that dates from 2006 shows the difference. The blue line charts Judicial foreclosures (blue line) down to 4.20 percent of inventories, while Non-judicial foreclosures (dotted blue line) have fallen to 1.27 percent on inventories.

And interest rates are back to historical lows with ultra-low inflation. Thirty-year conforming fixed rates are now 3.75 percent in California, for instance. And such low inflation could be around for years to come, as there is oversupply in most commodities, including oil, that is feeding the deflationary environment.

This is good news for the housing market and real estate in general, as it makes housing more affordable for even entry-level buyers who have been priced out of the housing market during this recovery.

Harlan Green © 2014

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Retail Sales, Consumer Sentiment Boosting Holiday Cheer

Popular Economics Weekly

Retail Sales are growing again, and U. of Michigan survey of consumer sentiment is also spiking at the right time of year for holiday sales. That’s because job openings and hires in the September JOLTS report are bringing US closer to full employment. This is especially in some high growth areas of the country, such as California’s Silicon Valley, where unemployment rates have dropped to the low 4 percent range in September.

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Graph: Calculated Risk

Retail sales ex-gasoline surged by 5.1 percent on a Year-over-Year basis–4.1 percent for all retail sales—which is somewhat misleading because sales aren’t adjusted for inflation, which has been falling. Retail outlets now routinely offer 20 percent discounts for goods of all kinds, except for luxury goods, due to depressed household incomes. So sales volumes’ have probably been rising faster than the indicators.

Fallen incomes have been the overall problem, and the reason for the slow recovery, since lower incomes depress prices which leads to decreased demand for those goods and services. But the latest JOLTS report is heartening. There were 4.7 million job openings on the last business day of September, barely changed from 4.9 million in August, but the Quits and Hiring levels are surging.

Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs, and is a major employment  indicator liked by Fed Chairman Janet Yellen. The number of quits increased from 2.5 million in August to 2.8 million in September. This was the highest level of quits since April 2008. And companies hired 5.03 million people in September, which is the highest number since December 2007, just as the Great Recession started.

The following graph from Calculated Risk shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

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Lastly, the preliminary Reuters / University of Michigan consumer sentiment index for November was at 89.4, up from 86.9 in October. This was above the consensus forecast of 87.5 and is at the highest level since 2007 in this graph that dates back to 1980.  So we can see that it has yet to climb above 90 to reach sentiment that prevailed during full employment periods that prevailed especially during the 1990s.

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Graph: Calculated Risk

So once again, we are seeing the Goldilocks economy at work. It’s not running too hot (high inflation), or too low (there is good job creation). It is household incomes that need to rise, which should happen as we creep towards full employment. Full employment won’t be reached until the unemployment rate is in the 4 percent range these days, given the 11.1 million in underemployed and unemployed workers looking for work or wanting full time jobs.

That’s why most economists aren’t predicting that full employment will be achieved until sometime in 2016.  Guess what else is happening in 2016!

Harlan Green © 2014

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California’s Budget Surplus Leads to Credit Upgrade

Popular Economics Weekly

A day after voters passed Proposition 2, which creates a “rainy day fund” to cushion the state budget from future economic downturns, major credit-rating house Standard & Poor’s on Wednesday upgraded California’s general obligation bond rating. S&P raised the state’s credit rating from A to A-plus, citing the stability offered by Proposition 2.

But it’s more than that. California’s unemployment rate dropped to 6.8 percent in September, according to the State Unemployment Office and the U.S. Bureau of Labor Statistics. The San Francisco Bay area led the way with San Francisco and the surrounding counties’ jobless rates in the low 4 percent, which in essence means full employment.

Proposition 2, championed by Gov. Jerry Brown and passed by the Legislature on a bipartisan vote, requires the state to set aside funds, especially when revenue from taxes on capital gains is high, to both pay down debt and create a reserve that can be tapped only when the state is in fiscal distress.

What happened to the California economy that several years ago was pronounced dead or dying by its critics, conservatives determined to downsize government with budget and tax cuts to punish everyone, except the wealthiest? Governor Jerry Brown did just the opposite—raised more revenues to stimulate job growth, at a time of record low interest rates, as the S&P upgrade noted.

Californians won the battle of economic ideologies that has blocked so much growth in the rest of the country; such as with Kansas, the poster child for cutting government programs that has set its economy in reverse.

“The upgrades follow voter approval on Nov. 4, 2014, of a strengthened budget stabilization account under Proposition 2,” S&P analyst David Hitchcock said in a statement. “In our view, the new state constitutional provision will partially mitigate California’s volatile revenue structure by setting aside windfall revenue for use during periods when state tax revenue could fall materially short of forecast.”

And California now has a very large budget surplus, because of it. State Controller John Chiang in a press release just released his monthly cash report for the month of June, and announced that the state’s General Fund — the primary account from which California funds its day-to-day operations and programs — ended the fiscal year with a positive cash balance for the first time since June 30, 2007.

A positive cash balance means that the state had funds available to meet all of its payment obligations without needing to borrow from Wall Street or the $23.8 billion available in its more than 700 internal special funds and accounts.

And what about California’s drought could badly hurt future growth? Voters also overwhelming approved Proposition 1 was to address water conservation and climate change problems that could create even more severe water shortages in the future.

"At its core, Proposition 1 advances an all-of-the-above strategy that includes everything from local resources to water storage to safe drinking water," said Timothy Quinn, executive director of the statewide Association of California Water Agencies. "Other states facing similar challenges may learn from that approach."

And that is the point. California, once thought the economic basket case, has instead become the model that both red and blue states should follow.

Harlan Green © 2014

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Jobless Rate Falls to 5.8 Percent—Why be unhappy?

Financial FAQs Weekly

Nonfarm payroll jobs advanced 214,000 in October after gaining 256,000 September and 203,000 in August. Net revisions for August and September were up 31,000. The unemployment rate dipped to 5.8 percent in October from 5.9 percent in September. So why were voters Tuesday so pessimistic about the economy and jobs?

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Graph: Marketwatch

Job creation in October marked the ninth straight month the economy has added 200,000 jobs or more, a feat last accomplished in 1994. The U.S. has created some 2.3 million jobs this year and is on track for the biggest gain in almost a decade. What’s more, job openings recently hit a 13-year high while layoffs have fallen to the lowest level since the turn of the century, says Marketwatch.

The unemployment rate, meanwhile, fell again as more than half a million people found work, according to a survey of households. And another 400,000-plus joined the labor force, a good sign because it means people think more jobs are available.

But wages are still rising 2 percent per year, which is just keeping up with inflation. And the U-6 measure of so-called underemployed is still 11 percent, which includes not just those who are unemployed, but those who are “marginally attached” to the workforce as well as those who want a full-time job but can only work a part-time job.

These are some of the reasons that voters were unhappy at last Tuesday’s election. Exit polls after Tuesday’s midterm elections showed that just one-third of Americans think the economy is getting better, and an even larger number believe the U.S. is headed in the wrong direction.

Goods-producing jobs increased 28,000 in October after a 36,000 gain the month before. Manufacturing employment increased 15,000 in October, following a rise of 9,000 in September. Motor vehicles and parts rebounded 3,000, after slipping 1,000 the month before. Construction advanced 12,000 after a gain of 19,000 in September. Mining edged up 1,000 in October, following an 8,000 rise in September.private service-providing jobs gained 181,000 after a 208,000 boost in September. Strength again was seen in professional & business services and retail trade.

The question is why when several times since the 2009 end of the Great Recession, Republican anti-government policies almost drove us back into recession. In 2011, Republicans took the government to the brink of default on its debt (and S&P downgrade of U.S.) , which led to an agreement with Obama, Harry Reid and Nancy Pelosi to cut spending, by automatically sequestering funds if necessary.

A year ago, the Republicans again forced the issue with a 16-day partial shutdown of the federal government, which led to another agreement with the Democrats on spending cuts.

So now that they control both the House and Senate, and new Senate Majority Lead Mitch McConnell says they will no longer be shutting down government, they will have to find a way to work with the Democrats to lose their ‘no compromise’ past.

The problem is Republicans have been wrong on every economic issue that would improve lives—from budget deficits to health care, from tax cuts to public infrastructure spending, environmental safeguards, Dodd-Frank financial regulation; not to speak of their war on contraception, voters’ rights, and collective bargaining that would raise workers’ income—you name it.

They have literally been wrong on every issue that keeps this economy afloat. It is an abysmal record of economic ignorance. How will they change their ways?

Harlan Green © 2014

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Bullies, Not Government Is the Problem

Financial FAQs Weekly

Even though the U.S. economy grew by a 3.5 percent annual rate in the third quarter, boosted by a surge in exports and the biggest jump in federal spending in five years, Democrats don’t seem to be taking credit for it.

Why? The bullies are in control, whether they are Republican Tea Partiers that refuse to compromise on any legislation that won’t downsize government programs, the Koch Brothers who fund any candidate or cause that cuts environment regulations, or the NRA, lobbying arm of the gun industry that capitalizes on gun violence to boost weapons sales; they control Washington’s agenda these days.

And it has almost wrecked our economy several times since the 2009 end of the Great Recession. Republicans dare not take credit for it, either. “Anyone who trusts the Republicans hasn’t been paying attention to what their economic policies have been. Instead of focusing on full employment and higher wages, the Republicans have doubled down on the trickle-down policies that have failed so miserably over the past 30-plus years,” says Marketwatch economist Rex Nutting.

In fact, several times since the 2009 end of the Great Recession, Republican anti-government policies almost drove us back into recession. In 2011, Republicans took the government to the brink of default on its debt (and S&P downgrade of U.S.) , which led to an agreement with Obama, Harry Reid and Nancy Pelosi to cut spending, by automatically sequestering funds if necessary.

A year ago, the Republicans again forced the issue with a 16-day partial shutdown of the federal government, which led to another agreement with the Democrats on spending cuts.

Why do we call them bullies? Because they have been able to get away with it. And because it looks like Republicans might gain control of the Senate, it’s Democrats who have been willing to compromise, when their economic agenda has brought the unemployment rate down to 5.9 percent, and economic growth above 3 percent over the last 2 quarters.

The problem with dealing with such bullies that say it’s ‘my way or the highway’, is that they take any sign of compromise as a sign of weakness. So when Vice President Biden says, ““[L]ook, we’re — we’re ready to compromise,” bullies see it as a sign of weakness, that they have already won the battle of this midterm election, so there is no need to compromise.

“Going into 2016, the Republicans have to make a decision whether they’re in control or not in control,” the vice president told CNN’s Gloria Borger. “Are they going to begin to allow things to happen? Or are they going to continue to be obstructionists? And I think they’re going to choose to get things done.”

Unfortunately, that is not how to deal with the bully mentality that has pervaded much of today’s politics, as well as our schools. It only happens when there is a leadership vacuum, when strong leaders refuse to step forward that know how to oppose bullies. Yet we know how–history has told US. That’s how we defeated the biggest bullies of all; Hitler and Emperor Hirohito, and even Stalin. Just stand up to them, and only compromise when the bullies are willing to compromise.

Harlan Green © 2014

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Government Spending Boosts Q3 GDP

Popular Economics Weekly

WASHINGTON (MarketWatch) — The U.S. economy grew by a 3.5 percent annual rate in the third quarter, fueled by a surge in exports and the biggest jump in federal spending in five years, screamed one headline this morning.

That is all we need to know to understand why US economic growth is finally returning to the long term average that has prevailed since the Great Depression. This is in spite of the Great Recession and a busted housing bubble that is taking years to recover, record wealth inequality that has kept consumers from spending, and ultra-conservative House Republicans that have refused to allow even the most basic public works spending; such as to repair and replace the roads and bridges that have so fallen into disrepair, not to speak of keeping up with the educational needs of a growing population.

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Graph: Calculated Risk

This first graph from Calculated Risk shows the increasing contribution to GDP for residential investment (RI) and state and local governments since 2005. It’s the beginning of recovery from the huge slump in RI during the housing bust (blue), followed by the unprecedented period of state and local austerity (red) not seen since the Depression.

It doesn’t tell the whole story, of course, as continuing austerity policies that cut government spending and some taxes in Japan and Europe have kept them in recession, whereas the pro-growth actions of the Fed (and boosting of some taxes) have reduced the budget deficit and kept the US government solvent.

It is a phenomenal recovery, even a miracle that this could even happen with a Congress locked in a battle over ideologies, and race. So it is thanks mainly to Ben Bernanke and Janet Yellen’s Federal Reserve QE actions, in particular, part of their pro-growth policies that pushed interest rates (especially long term rates) to record lows, just because the Fed could act outside of politics as usual.

“What’s more, the U.S. is adding jobs at the fastest rate since the recession ended in 2009 and consumers are feeling the most confidence in seven years, buoyed by a rising stock market and falling gasoline prices. As a result, most analysts believe the U.S. is likely to expand at a 3 percent pace or so in the fourth quarter to string together the best stretch of economic growth since before the Great Recession,” said the MarketWatch announcement.

So government spending was the largest contributor, up 10 percent mostly for defense, and exports up 7.8 percent annually. State and local governments’ spending rose 1.3 percent, and consumer spending slowed to a 1.8 percent annual pace from 2.5 percent in the prior quarter.

Business investment on equipment decelerated from the second quarter’s 11.2 percent gain to 7.2 percent, but is still strong. Residential housing investment grew at a low 1.8 percent rate after an 8.8 percent increase in the spring.

What does all this data mean? That there are ways around Congressional gridlock, if the executive branch and Federal Reserve concentrate on pro-growth policies that keep interest rates low, raise taxes sufficiently to lower the budget deficit, lower health care costs, support collective bargaining of employees, as well as lobby for higher household incomes to boost consumer spending (and the housing market).

And best of all, this happened with very low inflation, in spite of warnings that more government spending and the Fed’s QE policies would cause soaring inflation. Instead inflation as measured by the PCE index rose just 1.2 percent annually, down from 2.3 percent in Q2, as cheaper energy prices has kept inflation ultra-low. Even the core PCE that excludes food and energy rose just 1.4 percent.

We can now say officially that we have that goldilocks economy that prevailed through the 1990s; not too hot or too cold that will boost economic growth for years to come, if Congress can be ignored.

Harlan Green © 2014

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