Lower Household Debt, Housing, Now Boosting Growth

The Mortgage Corner

In another sign that this could be a better growth year, builder confidence in the market for newly built, single-family homes rose two points to 55 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for August, and housing starts surged. This third consecutive monthly gain brings builder optimism to its highest level since January, and housing starts to the highest level in 8 months.

And housing has been the missing component of GDP growth since the end of the Great Recession, which is another sign that 3 percent plus GDP growth is in the cards for the rest of this year and maybe next year as household formation (mainly the millennial generation of 18 to 36 year-olds finally leaving home) returns to normal levels.

icap

Graph: Wrightson ICAP

All three HMI components posted gains in August. The indices gauging current sales conditions and expectations for future sales each rose two points to 58 and 65, respectively. The index gauging traffic of prospective buyers increased three points to 42.

“Each of the three components of the HMI registered consecutive gains for the past three months, which is a positive sign that builder confidence appears to be firming following an uneven spring,” said NAHB Chief Economist David Crowe. “Factors contributing to this rise include sustained job growth, historically low mortgage rates and affordable home prices, which are helping to unleash pent-up demand.”

Based in part on the strength in the NAHB index last month, Wrightson ICAP, a leading financial market data provider, expects a third straight solid increase in single-family building permits in today’s July report. Today’s NAHB data suggest that the uptrend in permits will continue into August.

Sure enough, U.S. housing starts jumped 15.7 percent in July, hitting the highest level in eight months. The 1.09 million annual rate of new housing starts topped economist expectations of 975,000. And permits for new construction, a sign of future demand, rose 8.1 percent to an annual rate of 1.05 million from 973,000 in June.

Some lenders are getting around the tight lending conditions and higher risk fees imposed by the Fed on conventional mortgages guaranteed by Fannie Mae and Freddie Mac, in particular. For instance, they are beginning to offer interest only mortgages again, though borrowers have to be qualified at the fully amortized interest rate, rather than the lower interest only payment.

And, the July 2014 Senior Loan Officer Opinion Survey on Bank Lending Practices showed a continued easing of lending standards and terms for many types of loan categories amid a broad-based pickup in loan demand. “Although many banks reported having eased standards for prime residential real estate (RRE) loans,” said the report, “respondents generally indicated little change in standards and terms for other types of loans to households.”

However, a few large banks had eased standards, increased credit limits, and reduced the minimum required credit score for credit card loans. Banks also reported having experienced stronger demand over the past three months, on net, for many more loan categories than on the April survey.

The best news, though, was that many of the new Quality Mortgage standards imposed by the CPFB (i.e., 43 percent maximum debt-to-income ratios, no interest only provisions) don’t apply to GSE guaranteed mortgages, if they meet the stricter conforming underwriting criteria.

What all this means is that banks are willing to lend again, which should put some of that cash savings’ hoard back to work that is held by banks and wealthy individuals. Market Watch’s Rex Nutting has reported on this extensively.

deposits

Graph: Marketwatch

“The majority of Americans are doing their patriotic bit, spending nearly everything they earn,” writes Nutting. “ A recent report from the Fed showed that little more than a third of families are able to save any money at all after they pay their bills each month. More than 60 percent say they couldn’t come up with $400 in an emergency without borrowing or pawning something.”

The bottom line is that most people are saving next to nothing, while just a few are saving a large amount of their personal disposable income (i.e., after taxes). A recent bankrate.com survey found that the top 1 percent save some 36 percent of their income, whereas the overall personal savings rate for all Americans is still not much more the 5 percent at present.

It speaks to the unequal income distribution since the end of the Great Recession, with lower and middle class income earners actually losing income—in part due to the housing bust—and those able to profit from the rise in financial markets garnering almost 100 percent of the income gain since then. Those who do save are saving a ton — more than $1.2 trillion a year of the $10.8 trillion held in financial assets, rather than investing in productive capacity.

Harlan Green © 2014

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

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Consumers Healthier with Lower Household Debt

Popular Economics Weekly

Household debt continues to decline, which will free more disposable income for consumers, which should be a sign that consumer spending, the main driver of economic growth, will continue to grow. That has to be why Q2 GDP growth jumped to 4 percent from Q1’s -2.1 percent shrinkage, with its weather problems. But consumers have become more choosey, so it may not yet be reflected in such as retail sales, which have been flat the past 2 months.

gdp

Graph: Econoday

That is why Janet Yellen’s Fed is keeping interest rates low. The Fed still has some doubt that more growth and fuller employment is certain this year. Final GDP sales of domestic product rebounded 2.3 percent after dipping 1.0 percent in the first quarter. Final sales to domestic purchasers (excluding export sales) gained 2.8 percent in the second quarter, compared to 0.7 percent in the first quarter.

Turning to components, inventory investment jumped $93.4 billion after rising $35.2 billion in the first quarter. Importantly, personal spending (PCE) posted a robust 6.2 percent gain, following a 1.0 percent rise in the prior quarter. This is the result of higher disposable incomes. Consumer durables’ PCEs were particularly strong with nondurables healthy.

Aggregate household debt showed a minor decrease of $18 billion in the 2nd quarter of 2014, said the New York Fed in its Q2 Household Debt and Credit Report. As of June 30, 2014, total consumer indebtedness was $11.63 trillion, down by 0.2 percent from its level in the first quarter of 2014. Most of it was in mortgages, with both first and second equity line mortgages declining. Overall consumer debt still remains 8.2 percent below its 2008Q3 peak of $12.68 trillion.

housedebt

Graph: Calculated Risk

This Calculated Risk graph from 2003 shows mortgages, the largest component of household debt (gold columns), decreased by 0.8 percent. Mortgage balances shown on consumer credit reports stand at $8.10 trillion, down by $69 billion from their level in the first quarter.

And delinquency rates improved across the board in 2014Q2. As of June 30, 6.2 percent of outstanding debt was in some stage of delinquency, compared with 6.6 percent in 2014Q1. About $724 billion of debt is delinquent, with $521 billion seriously delinquent (at least 90 days late or “severely derogatory”).

resinvest

Graph: Calculated Risk

So the decline in household debt will most likely improve both new and existing home sales. In fact, the Q2 GDP report shows a higher percentage of growth in both residential and non-residential (i.e., commercial) construction, though they are still at recession-lows.  Investment in single family structures (blue line in graph) was $188 billion (SAAR) (almost 1.1 percent of GDP). Investment in home improvement (red line) was at a $179 billion Seasonally Adjusted Annual Rate (SAAR) in Q2 (just over 1.0 percent of GDP).

Consumer debt is still too high, however, which accounts for the fluctuations in consumer spending—up one month and down the next. We have to hope employment continues to improve this year for economic growth to continue. It will boost wages and salaries, as well, which are finally showing signs of life.

For instance, the Fed’s latest Beige Book found that wage pressures were modest in most districts, though they were rising in sectors such as construction and energy, where employers were struggling to find qualified workers. It said increases in the minimum wage in some parts of the country were also pressuring wages.

While average hourly earnings gains are up just 2 percent over the last year, aggregate wages for production and non-supervisory workers, which include overtime, are up 4.6 percent, a good sign.

Some Wall Street and other conservative economists are calling for higher interest rates at the first sign that household incomes are rising. As the New York Fed’s Q1 Household Debt and Credit Report shows, that mustn’t happen until consumers are healthier—which means their incomes rise sufficiently to continue to pay down the huge amount of debt accumulated during the housing bubble.

And Janet Yellen, the macro economist who understands the bigger picture, is resisting those calls for a premature rise in rates. “While rising compensation or wage growth is one sign that the labor market is healing, we are not even at the point where wages are rising at a pace that they could give rise to inflation,” she said recently. 

Harlan Green © 2014

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Don’t Forget the Millennials—Part II

Financial FAQs

We have talked before about the upcoming Millennial, or Gen Y generation that will number more than 80 million eventually, 7 percent higher than their baby boomer parents that gave us such high economic growth in the 1980s and 90s. And chances are they will fuel similar economic growth as they mature in the 18 to 37-year age brackets, including a large boost to housing.

Why? Because favorable demographics is the main driver of economic growth and jobs, say Demographers, and millennials are  the right ages for having families and expanding the work force of eligible workers.

A record number are currently still living with their parents and staying in school. Who can blame them with the housing bust and current slow recovery? But that’s going to change. For instance, Forbes Magazine likes their work prospects. “No generation before has had as much access, technological power or the infrastructure to share their ideas as quickly as the millennials. They are used to speed, multi-tasking, and working on their own schedule. These can be great assets in a knowledge economy which values end results over the process.”

births

Graph: Calculated Risk

In fact, it is already happening. The US birthrate is up for the first time in 5 years, reports the National Center for Health Statistics. Though these millennial mothers may have fewer babies, there are more of them, hence the overall increase. And they are waiting longer to have babies, with teenage pregnancies down 10 percent from 2012 to 2013.

Whereas, the 2013 preliminary birth rate for women aged 30–34 was up 1 percent from the rate in 2012. The rate for women aged 35–39 was up 3 percent from 2012, reaching the highest rate for this age group since 1963. This is good news for future economic growth, which is currently in the 2 percent range. That’s because they will replace the retiring baby boomers in the workforce that have been the cause of so much doom and gloom about future budget deficits and care of the elderly.

They are considered optimistic, with 41 percent satisfied with the way things are going in the country, compared with 26 percent of those over 30, according to a US Chamber of Commerce Foundation study. “Optimism abounds despite the many tragic events that have shaped this generation, such as 9/11, terrorist attacks, school shootings like Columbine, the 2004 Southeast Asian tsunami, and hurricane Katrina. Political, economic, and organizational influences include the 2000 election, the impeachment of a president, the recession and the fall of Enron to name a few. As kids, they were tightly scheduled and many would say overindulged by helicopter parents. They were products of NCLB, reality TV, and an “iWorld,” where Starbucks is usually just a short walk away.”

There is a reason that millennials will boost the housing market, as they enter the jobs market. Rents are rising faster than interest rates and housing prices in many areas, making purchasing a home more affordable.

Job Growth Boosts Rents in Largest U.S. Rental Markets, says Trulia. Rents rose more than 10 percent year-over-year in five large rental markets – San Francisco, Sacramento, Oakland, Denver, and Miami. These five markets all had job growth ranging from solid to stellar, says Trulia economist Jed Kolko.  Overall, rents rose 6.1 percent nationally, with rents increasing more in markets with faster job growth.

The Harvard Joint Center For Housing Studies also reports more favorable household formation, and so housing trends over the next 10 years in their State of the Nation’s Housing 2014 report.

“Given the current size of the adult population as well as current headship rates by age or race/ethnicity, the Joint Center for Housing Studies estimates that demographic trends alone will push household growth in 2015–25 somewhere between 11.6 million and 13.2 million, depending on foreign immigration. This pace of growth is in line with annual averages in the 1980s, 1990s, and 2000s, and should therefore support similar levels of housing construction as in those decades.”

So, why worry so much about future growth and budget deficits when we have a generation that might equal the purchasing power and job growth of the baby boomers? We really need to give millennials, born during much more trying times, the chance to prove their mettle, and it looks like that is already happening.

Harlan Green © 2014

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More Jobs–What About Incomes?

Popular Economics Weekly

The U.S. in July added 209,000 jobs last month outside the farm sector, the Labor Department said Friday. Although hiring tapered off after a 298,000 gain in June, the U.S. has generated at least 200,000 jobs in six straight months for the first time since 1997. Every major sector of the economy added jobs and hiring was particularly strong in the professional ranks, construction and manufacturing — all sectors that pay above the average national wage.

jobs

Graph: Marketwatch

The unemployment rate, meanwhile, rose slightly to 6.2 percent from 6.1 percent despite another strong month of hiring, according to government data . More people entered the labor force in search of work to push the rate higher, but that’s usually a good thing. It typically a sign that people think more jobs are available.

But yesterday, a second quarter report on rising employee wages and salaries (April to June 2014) called the Employment Cost Index (ECI) caused a big stock market selloff, even though costs rose just 2 percent, as they had since 2012, really. Why? Because traders and investors conjectured that rising wage costs might raise inflation fears, and therefore the Fed could raise short term interest rates earlier than next year.

But most forecasters see absolutely no hint of looming inflation, including Marketwatch’s Jeffry Bartash. In fact, stagnant wages are acting as a brake on the economy and preventing it from growing much faster, he says, which is keeping inflation low. The U.S. has averaged 2 percent wage growth since 2011, well below its historic 3.2 percent average. Without fatter increases in wages, the economy is unlikely expand more rapidly.

wages

Graph: MarketWatch

“In July, average hourly wages showed almost no change,” said Bartash. “They rose a penny to $24.45, a disappointing result after strong gains in June and May. In 23 of the past 24 months, the yearly increase in hourly pay has ranged from 1.9 percent to 2.2 percent – one-third less than usual during an economic recovery.”

Then we have Wednesday’s release of the last FOMC meeting minutes that show the Fed is on the right track in maintaining low interest rates. Though growth is increasing and there are hints of higher inflationary tendencies, there is still “significant underutilization of labor resources,” said the Governors. “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

The question is how long will the Fed allow some inflation before putting on the credit brakes by raising interest rates? In fact, the bottom line is that there is no inflation, if wages can only rise as fast as inflation, since that effectively nullifies the wage increases. The Fed says they might wait until summer 2015 before initiating any raises. If done prematurely, it will shorten this recovery, as has happened in past recoveries.

Harlan Green © 2014

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

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Consumer Confidence In A ‘Goldilocks’ Economy

Popular Economics Weekly

Once upon a time, the U.S. was considered to have a “Goldilocks” economy that was neither too hot nor too cold; where inflation was moderate, yet there was full employment. This last happened in the late 1990s when the unemployment rate shrank as low as 4 percent in 2000 and inflation remained in the 3-4 percent range. In fact, some 22 million jobs were created from 1992 to 2000 during the Clinton administration which also resulted in 4 years of federal budget surpluses

We might be coming into a similar period today, with consumer confidence beginning to soar because of better income, job prospects, and core inflation still below 2 percent. This is while the first estimate of Q2 GDP growth just in reports growth soaring. But it may be the U.S. economy playing catchup from the horrid first quarter’s severe winter when much of the country was in deep freeze.

gdp

Graph: Trading Economics

The Gross Domestic Product (GDP) in the United States expanded by a seasonally adjusted annual rate of 4 percent in the second quarter of 2014 over the previous quarter. GDP Growth Rate in the United States averaged 3.27 Percent from 1947 until 2014, reaching an all-time high of 16.90 Percent in the first quarter of 1950 and a record low of -10 Percent in the first quarter of 1958, says Trading Economics. So 4 percent looks like a normal growth rate for this stage of the recovery.

But such a Goldilocks recovery may depend on Janet Yellen’s Fed Governors’ attitude towards inflation expectations. In fact, full employment has never been achieved unless inflation rates were in the 3-5 percent range, which means bucking Wall Street, which doesn’t like inflation. Creditors never do, since it devalues their debt, but fuller employment means tolerating some inflation, which also means higher profits and so more jobs.

consumer

Graph: Inside Debt

Consumer confidence is by far at its best level of the recovery, at a much higher-than-expected 90.9 in July vs an already very strong and upwardly revised 86.4 in June. July’s level is the highest since December 2007 while the June reading is the second highest since January 2008.

July’s gain is led by the expectations component which is up a very sharp 6.3 points to 92.7 for the highest reading since February 2011, with future job prospects and income expectations higher. The present situation component is up 2.0 points to 88.3 for the highest reading since March 2008.

Friday’s unemployment report will probably also confirm that we are entering the best of job environments, with the unemployment rate possibly below 6 percent for the first time since 2006.

Today’s release of the last FOMC meeting minutes shows the Fed is on the right track in maintaining low interest rates. Though growth is increasing and there are hints of higher inflationary tendencies, there is still “significant underutilization of labor resources,” said the Governors. “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

The question is how long will the Fed allow some inflation before putting on the credit brakes by raising interest rates? They have said they might wait until summer 2015 before initiating any raises. If done prematurely, it will shorten this recovery, as has happened in past recoveries.

Harlan Green © 2014

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

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Pending Home Sales Remain Strong

The Mortgage Corner

The Pending Home Sales Index, a forward-looking indicator based on contract signings, declined 1.1 percent to 102.7 in June from 103.8 in May, and is 7.3 percent below June 2013 (110.8), reports the National Association of Realtors. Despite June’s decrease, the index is above 100 – considered an average level of contract activity – for the second consecutive month after failing to reach the mark since November 2013 (100.7).

Lawrence Yun, NAR chief economist, says the housing market is stabilizing, but ongoing challenges are impeding full sales potential. “Activity is notably higher than earlier this year as prices have moderated and inventory levels have improved,” he said. “However, supply shortages still exist in parts of the country, wages are flat, and tight credit conditions are deterring a higher number of potential buyers from fully taking advantage of lower interest rates.”

We also have to look at the newest generation for those potential buyers, the Millennials, or echo boomer children of the baby boomers born after 1980. From ages 18 to 36, they could number as much as 80 million, according to Barron’s Magazine. And this could ultimately generate a huge pent up demand for housing, according to Goldman Sachs analyst Hui Shan.

The fact is more than 35 percent of so-called young adults still live with their parents. It’s in part because of the recession, but also because record numbers have remained in school. Whereas the normal percentage of young adults remaining with parents is about 25 percent, so that extra 10 percent should eventually find their own housing.

"As long as economic recovery and labor market improvements continue, household formation should eventually normalize," Shan writes. "Given the severe damage caused by housing busts to the economy, the process of normalization may take a number of years."

Past history also tells us that new-household formation will pick up, says Shan. "The average household size increased during the first few years of each housing bust, presumably driven by young individuals living with their parents and roommates doubling up to save rent. Over time, the effect reversed itself and average household size retraced the earlier increases, translating into increases in household formation.”

What is normal household formation? It has averaged more than 1 million per year over past decades, but today is somewhere between 350 to 600,000/year, depending on whom you ask. The Harvard Joint Center For Housing Studies predicts it will rise to some 1.2 million annually over the next decade precisely because of Millennials coming of age.

Given the sheer volume of young adults coming of age, the number of households in their 30s should increase by 2.7 million over the coming decade, which should boost demand for new housing. “Ultimately, the large millennial generation will make their presence felt in the owner-occupied market,” says Daniel McCue, research manager of the Joint Center, “just as they already have in the rental market, where demand is strong, rents are rising, construction is robust, and property values increased by double digits for the fourth consecutive year in 2013.”

So despite these headwinds, the NAR’s Yun ultimately expects a slight uptick in pending, and existing-home sales during the second half of the year. Price appreciation has decreased to its slowest pace since March 2012 behind larger increases in inventory, and rents are rising 4 percent annually. So those potential buyers are less likely to experience sticker shock, which makes it more likely that many will choose to buy in order to participate in potential price appreciation, rather than tolerate greater rent increases.

Harlan Green © 2014

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Restricted Credit Will Impede Housing Recovery

Financial FAQs

As if we need more evidence that the Consumer Protection Finance Bureau and government regulators have listened to the wrong people when drafting their Qualified Mortgage requirements (that lowers the maximum debt-to-income ratio to 43 percent for non-agency mortgages, disallows interest only options and 40-yr amortization for starters), while Fannie Mae and Freddie Mac add huge fees and stricter underwriting criteria to anyone below a 700 credit score (which is almost perfect in today’s trying markets), the latest new-home sales should convince us.

sales

Graph: Calculated Risk

The Census Bureau reports New Home Sales in June were at a seasonally adjusted annual rate (SAAR) of 406 thousand, while May sales were revised down from 504 thousand to 442 thousand, and April sales were revised down from 425 thousand to 408 thousand. Inventories rose to a 5.8-month level from 5.2 months in May.

The National Association of Home Builders tried to put a good face on the numbers. “With continued job creation and economic growth, we are cautiously optimistic about the home building industry in the second half of 2014,” said NAHB Chief Economist David Crowe. “The increase in existing home sales also bodes well for builders, as it is a signal that trade-up buyers can move up to new construction.” Regionally, new-home sales were down across the board. Sales fell 20 percent in the Northeast, 9.5 percent in the South, 8.2 percent in the Midwest and 1.9 percent in the West.

But this is not good news for housing advocates so late in the recovery. For one thing, government regulators and the Obama administration are way behind the housing curve in choosing to tighten credit standards long after the problem of too easy credit was solved. The Federal Reserve and regulators have outright banned low teaser rate, negatively amortized,‘liar’ loans, and loans that don’t require income and asset verification. Mortgages delinquencies are down, existing-home sales are back to a 5 million annual sales rate, and record low interest rates should make it easier to qualify.

So why are regulators still chasing phantoms, and continue to punish lenders five years after the housing bubble burst? Instead, it’s time to encourage them to lend some of their record $1 trillion in excess reserves held by the Federal Reserves in MZM accounts (i.e, at zero interest). Without a housing recovery, there will be no substantial economic recovery, say many major economists.

For instance, former Fed Chair Bernanke has said too-tight credit conditions have squeezed both prospective homebuyers and builders. “Why has the recovery in housing been so slow? One important factor is restraints on mortgage credit,” Bernanke said in 2012, adding that total outstanding mortgage credit has shrunk by about 13 percent since its peak in 2007.

Just how weak are home sales? Five years after the end of the recession, sales of new single-family homes still remain far below an annual average of more than 770,000 over the 20 years leading up to a 2005 peak, government data show.

Fannie Mae is growing more optimistic this month about U.S. sales of new single-family homes, and now sees 2014 hitting the highest level in seven years. Fannie’s  FNMA July housing-market forecast estimates that sales of new single-family homes will reach 486,000 this year — the most since 2007 — a bit higher than June’s estimate of 478,000, which would have been the greatest since 2008.

However, despite the uptick in the July forecast, over the past year Fannie has slashed its outlook for new-home sales, showing just how disappointing the market’s been in 2014. Back in July 2013, federally controlled Fannie had expected 2014 sales of new single-family homes to hit 588,000.

Rising mortgage rates, a low supply of new homes and unusually poor winter weather each took a bite out of residential sales this year. It’s also been tough for many borrowers to meet lenders’ strict credit standards, as we said. But it is home sales, and new-home sales in particular that has to improve to boost inventory and keep housing prices in the affordable range.

Harlan Green © 2014

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

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