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.


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

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Existing-Home Sales On Rise Again

The Mortgage Corner

The NAR just reported total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, climbed 2.6 percent to a seasonally adjusted annual rate of 5.04 million in June from an upwardly-revised 4.91 million in May. Sales are at the highest pace since October 2013 (5.13 million), but remain 2.3 percent below the 5.16 million-unit level a year ago, due partly to inventory shortage, and affordability problems.


Graph: Calculated Risk

Total housing inventory at the end of June rose 2.2 percent to 2.30 million existing homes available for sale, which represents a 5.5-month supply at the current sales pace, unchanged from May. Unsold inventory is 6.5 percent higher than a year ago, when there were 2.16 million existing homes available for sale.

NAR chief economist Lawrence Yun says “Inventories are at their highest level in over a year and price gains have slowed to much more welcoming levels in many parts of the country. This bodes well for rising home sales in the upcoming months as consumers are provided with more choices,” he said. “On the contrary, new home construction needs to rise by at least 50 percent for a complete return to a balanced market because supply shortages – particularly in the West – are still putting upward pressure on prices.”

The most important statistic is the inventory of existing homes for sale, and other agencies show higher inventory levels. For instance, though the NAR reported that inventory was up 6.5 percent year-over-year in June, Housing Tracker shows inventory up 15 percent year-over-year in July, and Trulia chief economist Jed Kolko has seasonally adjusted the inventory, which is up some 10.9 percent, said Calculated Risk.

Yun also noted homebuyers are having affordability problems, in that stagnant wage growth is holding back what should be a stronger pace of sales. “Hiring has been a bright spot in the economy this year, adding an average of 230,000 jobs each month,” he said. “However, the lack of wage increases is leaving a large pool of potential homebuyers on the sidelines who otherwise would be taking advantage of low interest rates. Income growth below price appreciation will hurt affordability.”

Given the political realities at present, it looks like the only way to boost incomes—and housing sales—is to creep closer to full employment when employers will have to bid up wages. We know Fed Chairman Yellen is all for boosting employment, which is why she is resisting pressures to raise interest rates prematurely, when the real unemployment rate for the long term unemployed and part time workers is still 12.1 percent.

And that may not happen until mid-2015, at the earliest. So look for continued slow growth in housing sales (and lower interest rates) until next year, if Lawrence Yun and Janet Yellen are correct in their forecasts.

Harlan Green © 2014

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Don’t Forget the Consumer!

Popular Economics Weekly

“It’s the Consumers, Stupid,” is an oft-repeated mantra being echoed currently by Internet advocates who want to keep Internet access free. But there’s a more important reason to worry about consumer health. Consumers are still way too pessimistic in the fifth year of this recovery, and that is hurting economic growth.


Graph: Reuters

There are a lot of reasons for their malaise. Incomes that can’t rise faster than inflation are a major cause. So are consumers’ tremendous debt loads, a result of the housing bubble. But there is a deeper reason. Tax policies and political choices have emphasized employer and investor profits over employee salaries.

Rutgers economic historian James Livingston was one of the earliest to sound the alarm that consumers need help, if our economy is to continue to grow. He maintained that consumer and government spending now drive economic growth, not corporate profits, which tend to end up in inflated CEO salaries or speculative investments, or just hoarded as cash in very liquid assets. And there has been little to help consumers create more jobs or boost their incomes.

“…corporate profits are… just restless sums of surplus capital, ready to flood speculative markets at home and abroad. In the 1920s, they inflated the stock market bubble, and then caused the Great Crash,” said Livingston. “Since the Reagan revolution, these superfluous profits have fed corporate mergers and takeovers, driven the dot-com craze, financed the “shadow banking” system of hedge funds and securitized investment vehicles, fueled monetary meltdowns in every hemisphere and inflated the housing bubble.”

The Congressional Budget Office says as much in its latest budget report. Thanks to the lingering effects of the recession, the aging of the country, the shrinking of the labor force, and various tax and spending policies, the nation now only has the potential to grow about 2.5 percent per year over the next decade, on average, far below the long term 3 percent average that includes the Great Depression.

“In CBO’s projections, the growth of potential GDP over the next 10 years is much slower than the average since 1950,” says the report. “That difference stems primarily from demographic trends that have significantly reduced the growth of the labor force. In addition, changes in people’s economic incentives caused by federal tax and spending policies set in current law are expected to keep hours worked and potential output during the next 10 years lower than they would be otherwise.”


Graph: House of Debt

It’s been a terrible recovery, say House of Debt economists Atif Mian and Amir Sufi, the worst recovery since 1950. And with the revision of Q12014 GDP growth downward to -3.0 percent from -2.9 percent, it’s getting worse, not better. The reason is easy to see. It’s consumer incomes, and therefore spending that has fallen off and won’t return, unless more is done to encourage wage growth, for starters. The Reuters graph highlights how little consumers’ Personal Consumption Expenditures (PCE) are contributing to economic growth at present.

Yet if government was ever allowed to create jobs again, we could have above average job creation, and so higher GDP growth for decades to come. The New Deal proved that. But with Congress’s own CBO emphasizing debt, without highlighting policies that bring greater growth, there is little political will to increase job growth.

We know because net business investment declined 70 percent as a share of G.D.P. over that century, says Professor Livingston. In 1900 almost all investment came from the private sector — from companies, not from government — whereas in 2000, most investment was either from government spending (out of tax revenues) or “residential investment,” which means consumer spending on housing, rather than business expenditure on plants, equipment and labor.

When New Deal spending kicked in, it boosted growth by literally creating millions of WPA, CCC jobs that resulted in new highways, bridges, dams, even artworks that boosted spirits and glorified the work ethic. Conversely, when government spending was cut back prematurely in 1937 in an attempt to balance the budget, the Great Depression resumed. So we see history repeating itself, once again.

Harlan Green © 2014

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Why Such Low Interest Rates?

The Mortgage Corner

Fixed 30-year conforming interest rates have once again dropped slightly below 4 percent for a 1 pt. origination fee in California, after being as high as 4.50 percent earlier this year. Why the drop when most economic indicators show the economy recovering from the harsh winter? The unemployment rate has dropped to 6.1 percent. And both the service and manufacturing sector Institute for Supply Management indicators show strong growth.


Graph: Tim Duy

The easy answer is the lack of inflation, which is still below 2 percent overall. Interest rates follow inflation trends in general, since inflation cheapens the value of bonds. But less obvious is the fact that 2014 housing sales have slowed, putting less pressure on mortgage rates even though home prices continue to rise.


Graph: Calculated Risk

It’s easy to see from the graph that 2013 mortgage rates (blue line) rose after June, as housing sales rose, and began to decline in 2014 (red line) due in part to the winter deep freeze and geopolitical unrest. Paradoxically, even with the decline in the Fed’s QE3 bond purchases, rates have continued to decline this year.


That could also be because of the horrible -2.9 percent decline in Q1 GDP growth, probably a sign that 2014 growth overall will not be all that great. Hence investors tend to leave the stock market and flee to bonds as a safe haven.

Whatever the reason, it doesn’t look like interest rates will rise anytime soon. The US housing market would have to pick up, as NAR chief economist Lawrence Yun keeps repeating. But there is little likelihood that will happen, unless market conditions improve.

“Sales should exceed an annual pace of five million homes in some of the upcoming months behind favorable mortgage rates, more inventory and improved job creation,” said Yun. “However, second-half sales growth won’t be enough to compensate for the sluggish first quarter and will likely fall below last year’s total.”  

Also, since there is little or no inflation on the horizon, new Fed Chairperson Janet Yellen has vowed to keep interest rates as low as possible in her latest speeches and testimony before Congress. “For the moment, I don’t see any trade-off whatsoever in achieving our two objectives (growth with stable inflation). They both call for the same policy, namely, a highly accommodative monetary policy.”

Harlan Green © 2014

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Don’t Forget the Millennials!

Popular Economics Weekly

Fed Chair Janet Yellen’s current congressional testimony is saying the Fed could keep rates low for a long time to come. Why? Because unemployment is still too high, and economic growth too slow at present.

The CBO says thanks to the lingering effects of the recession, the aging of the country, the shrinking of the labor force, and various tax and spending policies, the nation now only has the potential to grow about 2.1 percent per year over the next decade, on average.

We believe that is far too pessimistic an outcome. For starters, GDP growth has averaged more than 3 percent over the long term, including the Great Depression. And no one is taking into account the next generation, the Gen Y’ers or Millennials, entering the workforce, which because of their size should kick start growth around 2020, and obviate the worries about soaring budget deficits as the baby boomers retire.


Graph: Trading Economics

In the last two decades our growth rate has been steadily decreasing. The 50’s and 60’s average growth rate was above 4 percent, It dropped to around 3 percent in the 70’s and 80’s. In the last ten years, the average rate has been below 2 percent and since the second quarter of 2000 has never reached the 5 percent level.

Yet if government was ever allowed to create jobs again, we could have above average job creation, and so higher GDP growth for decades to come. The New Deal proved that. When New Deal spending kicked in, it boosted growth by literally creating millions of WPA, CCC jobs that resulted in new highways, bridges, dams, and the care of natural resources. Conversely, when government spending was cut back prematurely in 1937 in an attempt to balance the budget, the Great Depression resumed.


Graph: Seeking Alpha

Especially spending on public infrastructure stimulates the U.S. economy in the short-run, given that there is some $2.2 trillion in deferred infrastructure maintenance, according to the US Society of Civil Engineers. Investing in infrastructure goes beyond mere improvements to the quality of roads, highways, sewers, and power plants. These investments also generate “significant economic returns for other portions of the U.S. economy and substantially increase ultimate tax revenue for the government,” according to a 2012 College of William & Mary academic study.

And what about demographics, the assertion that since baby boomers are retiring, the work force will shrink rather than grow, further cutting GDP growth? Ah, but we are speaking of the so-called Millennium generation born between 1981 to 1998, which numbers more than 70 million in the US alone. In fact, one commentator maintains, starting around 2020 (or a few years after 2020), the U.S. should see another robust growth period similar to the period enjoyed by the baby boomer generation.  This is because there will be just as many new workers in the work force from the Gen Y or Millennial generation as there were in the baby boomer generation. 

Barron’s Magazine has been looking at the Millennials’ potential. FOR ONE THING, THE MILLENNIALS — sometimes called Generation Y, and defined by many demographers as ranging from ages 18 to 37 — make up the largest population cohort the U.S. has ever seen. Eighty-six million strong, it is 7 percent larger than the baby-boom generation, which came of age in the 1970s and ’80s. And the Millennial population could keep growing to 88.5 million people by 2020, owing to immigration, says demographer Peter Francese, an analyst at the MetLife Mature Market Institute.

This echo-boom generation totals 27 percent of the U.S. population, less than the 35 percent the boomers represented at their peak in 1980. When the baby-boom generation drove the economy in the 1990s, growth in gross domestic product averaged 3.4 percent a year. As the Millennials hit their stride, they could help lift GDP growth to 3 percent or more, at least a percentage point higher than current levels.

So there’s no real reason to be so pessimistic about economic growth and a soaring federal deficit for decades to come. If GDP growth is dependent on workforce growth, and 1990’s growth repeats itself—which was the longest uninterrupted economic expansion in our history that also gave us 4 years of budget surpluses—then we may see the next generation already taking charge. And they could turn out to be much more industrious than we know!

Harlan Green © 2014

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Economic Recovery Is For Real

Popular Economics Weekly

We are already in July, and can now see that the US economic recovery is for real, in spite of the past winter. Even economic growth is picking up, so that second quarter Gross Domestic Product might surpass 4 percent, cancelling out the minus -2.9 percent decline in Q1. Many economists believe that Q1 was an aberration, or may even have been in error to be revised upward in coming months.


Graph: Marketwatch

Consumer confidence is also returning to normal, though its index was as high as 110 in the 1990’s the index has yet to return to 90, which prevailed before the housing crash. The final Reuters / University of Michigan consumer sentiment index for June increased to 82.5 from the May reading of 81.9, and was up from the preliminary June reading of 81.2.


Graph: Calculated Risk

Consumer incomes and spending have also to increase, since they are the largest component of economic growth. Right now, so-called Real Disposable Income (after taxes and inflation) is just at 2 percent, and it must rise at least to 3 percent to increase the GDP to 3 percent plus, and so fuller employment.


Graph: Econoday

How soon may that happen? Much will depend on GDP growth in the coming months, and that will depend on a continuing housing revival. Existing-home sales are back to 5 million units annually and prices in the West are rising most sharply, according to the latest New York Federal Reserve consumer survey, with cities such as San Francisco, Los Angeles and San Diego up double digits.

So there is no problem with upper income buyers. It is the entry-level, first time homebuyers that are having the most difficult time, says NAR chief economist Lawrence Yun.

“The flourishing stock market the last few years has propelled sales in the higher price brackets, while sales for homes under $250,000 are 10 percent behind last year’s pace. Meanwhile, apartment rents are expected to rise 8 percent cumulatively over the next two years because of tight availability,” said Yun. “Solid income growth and a slight easing in underwriting standards are needed to encourage first-time buyer participation, especially as renting becomes less affordable.”

Even better news was that perceptions on earnings and the job market seemed to improve. Median earnings growth expectations increased to 2.5 percent from 2 percent, driven mostly by respondents with no college education. The mean probability of finding a job in three months among the currently employed (if current job was lost) rose to 51.8 percent, a new 13-month high, the New York Fed said.

Harlan Green © 2014

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Where is Housing Affordable?

The Mortgage Corner

Why aren’t there more home buyers? It seems that housing can’t really recover until household incomes recover, and household incomes are barely keeping up with inflation at the moment. We also know that can’t happen until we are closer to full employment. Right now housing prices are rising faster than incomes, which means an ever shrinking number of homebuyers are eligible purchasers, unless current strict lending standards are eased.

At least, that’s what one report suggests. In Trulia’s Price Monitor for June, Trulia’s chief economist Jed Kolko compares the rise in asking prices with the rise (or lack thereof) of wages in the 100 largest metro areas.

“In fact, average wages per worker rose less than 1 percent in 2013 in all but one of the 10 metros with the largest price increases,” Kolko said. “Nationally, asking prices (year-over-year in June 2014) rose faster than wages per worker (year-over- year in 2013) in 95 of the 100 largest metros.”


Graph: Housing Wire

The report might be slightly biased, as those areas with the highest price increases; such as Detroit, Riverside-San Bernardino, and Florida; were severely overbuilt with mostly low cost housing. But even Silicon Valley suburbs such as San Francisco had 20 percent annual price increases, while average incomes even there can’t keep up.  They rose as much as 5 percent Y-o-Y in the high cost areas.

And Fannie Mae and Freddie Mac conforming loans have been getting more expensive. They can add as much as 3 pts. to loan costs if a buyer’s credit score drops below 680. And many lenders have dropped their Fannie Mae maximum debt-to-income ratio to 43 percent, though Freddie Mac’s can as high as 50 percent with compensating factors, such as a good savings history.

The good news is that the unemployment rate has dropped to 6.1 percent, but when part timers and those no longer looking for work are included, it is still stuck at 12.1 percent, according to the US Census Bureau’s June unemployment report.

The best answer to slow down price increases is to build more housing, of course. We know existing-home inventories continue to increase, with inventory now higher than in 2013, which is also helping affordability.


Graph: Investors Daily

Though we may have to wait for more jobs, the jobs picture is looking better. The latest indicator is the Labor Department’s May JOLTS report, which says that employers are firing fewer workers and hiring more.

Job openings rose to a recovery high in May, the Labor Department said Tuesday in its Job Openings and Labor Turnover Survey (JOLTS) report. The 4.64 million U.S. job openings topped economists’ expectations for 4.4 million and hinted at improvement in the economy and job market.

So economic growth and employment are picking up, which means the gap between incomes and housing prices will probably decrease, allowing more homebuyers into the housing market this year.

Harlan Green © 2014

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