Fed Stays in Accommodative Mode

Popular Economics Weekly

It looks like Janet Yellen’s Fed will continue to keep interest rates low this year, based on the latest FOMC press release. This is great news for the housing market, in particular, but not necessarily for consumers that continue to save more than they are spending, for fear of another economic slowdown.

“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate,” said the press release; “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

And sure enough, the NAR’s gauge of future closings, the Pending Home Sales Index, a forward-looking indicator based on contract signings, climbed 1.4 percent to 110.5 in March from an downwardly revised 109.0 in February and is now 1.4 percent above March 2015 (109.0). After last month’s slight gain, the index has increased year-over-year for 19 consecutive months and is at its highest reading since May 2015 (111.0).

Lawrence Yun, NAR chief economist, says last month’s pending sales increase signals a solid beginning to the spring buying season. “Despite supply deficiencies in plenty of areas, contract activity was fairly strong in a majority of markets in March,” he said. “This spring’s surprisingly low mortgage rates are easing some of the affordability pressures potential buyers are experiencing and are taking away some of the sting from home prices that are still rising too fast and above wage growth.”

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Graph: Econoday

Why are consumers cutting back on spending, per latest retail sales figures that show lower auto sales, in particular? Consumer confidence has declined, is one reason. The Conference Board’s index slipped more than 2 points to 94.2 when it is 100 plus during normal growth periods (but is roughly in line the 6-month trend). Weakness in the report is centered in the expectations component which fell 4.3 points to 79.3, said Econoday. Here, in contrast to the assessment of the current jobs market, there’s outright pessimism with 17.2 percent seeing fewer jobs ahead vs only 12.2 percent seeing more ahead.

Pundits aren’t sure why confidence in future jobs and growth has declined, when more than 200,000 new jobs per month have been created over the past 2 years, and 11 million jobs during Obama’s presidency. But incomes are still not rising fast enough for the majority of consumers, though the Fed maintains household incomes will eventually rise faster, as the unemployment rates falls further.

What is usually overlooked, however, are the almost deflationary times we consumers currently live in. Believe it or not cheaper gas and energy prices are just one of the factors causing this uncertainty about future prospects.

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Graph: Econoday

History shows that consumers spend less when prices are falling, because they expect prices to fall further. Whereas consumer spending picks up when prices are rising, in an attempt to save money by getting ahead of the next price increase. This is Japan’s history during its 2 decades of deflation.

What will cause retail inflation to return to its historical 2 percent plus level? Economists say it is greater aggregate demand, or the demand for goods and services by both consumers, businesses, and governments. The sectors are related, of course, with rising household incomes the main driver of growth, since ithis stimulates more investments in plants and equipment—so-called capex spending, that in turn stimulates more job growth.

But in fact, governments have been the least spendthrift due to falling tax revenues, hence the huge backlog in deferred infrastructure maintenance and construction (more than $2 trillion per the American Society of Civil Engineers), as well as public investment in schools, new research, protecting the environment, social security and Medicare, and so forth.

Harlan Green © 2016

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Why Not More Homes For Sale?

Financial FAQs

Many Realtors and economists have been asking this question. Why such a low housing inventory? Total existing-home sales jumped 5.1 percent to a seasonally adjusted annual rate of 5.33 million in March from a downwardly revised 5.07 million in February, as we reported last week.

But though total housing inventory at the end of March increased 5.9 percent to 1.98 million existing homes available for sale, it is still 1.5 percent lower than a year ago (2.01 million). And unsold inventory is at just a 4.5-month supply at the current sales pace, up from 4.4 months in February, but much below the 6 month’s supply during normal times.

We are running out of homes for sale with the 2016 selling season about to start, in other words. And new, replacement home sales are still at historic lows, when only more new homes can keep up with population growth, especially of millennials, the most populous generation of all that outnumber even their baby boomer parents.

For instance, home prices in the Dallas metro area, historically one of the nation’s most stable and affordable markets, have climbed at one of the fastest rates in the U.S. since 2014, reports Calculated Risk. And inventories of houses on the market are under two months’ supply, the lowest in 25 years.

The major answer to the housing shortfall has to be that many homes are off the market because they are rented—to the millennial generation, above all, who can’t afford to buy a home, in part because their incomes have declined due to the Great Recession and many are heavily indebted from soaring education costs.

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Graph: Calculated Risk

Sales of new single-family houses in March 2016 were at a seasonally adjusted annual rate of 511,000, said the U.S. Census Bureau and the Department of Housing and Urban Development, far too low to replenish housing inventories.

This is still below the 600 to 800,000 new-homes sold annually that prevailed during the 1970s and 1980s. New-home sales then took off in the 1990s to reach 1.4 million annualized units at the height of the housing bubble in 2005, per the above graph. In comparison, current sales are 1.5 percent below the revised February rate of 519,000, but 5.4 percent above the March 2015 estimate of 485,000.

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Graph: Calculated Risk

What will it take to bring new-home sales back to historical levels? There is a “Distressing” Gap between new and existing-home sales, says Calculated Risk, whereas they matched during more normal times and only began to diverge in 2006 at the top of the housing bubble.

So more new homes must be built, of course. But builders have to offer homes in the moderate price range for that to happen, with home prices rising 5 to 7 percent at present. New-home construction is beginning to pick up. Currently, privately-owned housing starts in March were at a seasonally adjusted annual rate of 1,089,000. This is 8.8 percent below the revised February estimate for new construction of 1,194,000, but is 14.2 percent above the March 2015 rate of 954,000, according to the Census Bureau.

Starts are improving, but still far from historical levels. For instance, total starts of both single family and multi-unit rental housing averaged between 1.5m to 2m units from the 1970s to 1990s, before soaring to 2.5 million during the housing bubble.

This means that housing construction has to double just to bring it back to historical levels, and we are adding some 80 million millennials from the ages of 18 to 35 years to those needing housing.

Stay tuned, as the Fed has to cooperate by keeping interest rates as low as possible for as long as possible to make those new and existing-homes affordable, what with today’s much more restrictive qualification requirements, and the future of Fannie Mae and Freddie Mac, guarantor for the majority of home loans, still uncertain.

Harlan Green © 2016

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Who Opposes Overtime Pay Increase?

Financial FAQs

That’s a no-brainer—Republicans in Congress, of course. Who else would oppose updating the safeguards against working more than 40 hours without overtime pay, part of the New Deal that President Roosevelt called the most important part of the New Deal legislation since the Social Security Act of 1935?

Lawmakers in the House and Senate this week introduced the Protecting Workplace Advancement and Opportunity Act, legislation that will ensure the Department of Labor pursues a balanced and responsible approach to updating federal overtime rules, according to their press release. The sponsors of the legislation—members of the House Committee on Education and the Workforce and the Senate Committee on Health, Education, Labor, and Pensions—released the following statements upon introduction:

““In the 21st century workplace, we need to encourage policies that increase flexibility, reduce regulatory burdens, and create more opportunities for workers to pursue their dreams. Our nation’s outdated overtime rules are in need of modernization, but it must be done in a responsible way that doesn’t stifle opportunities for working families to get ahead. Unfortunately, the administration’s overtime proposal fails this test and should be sent back to the drawing board,” said House Subcommittee on Workforce Protections Chairman Tim Walberg (R-MI).

Sure, this when corporate profits have doubled from 6 percent of gross domestic product to 12 percent and more over the last 30 years, while wages have fallen by almost exactly the same amount, said former Labor Secretary Robert Reich in a recent NYTimes Oped.

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Graph: EPI

It is Repub’s reaction to the Labor Department’s proposal for new overtime rules that are expected to be introduced this summer—rules that require no congressional approval. 

According to the Economic Policy Institute, says Professor Reich, it would give 13.5 million more workers a new or stronger right to overtime pay — substantially increasing both middle-class incomes and employment. “It’s not as high as the $69,000 threshold it would take to return to 1975 levels, after adjusting for inflation, but it’s a courageous step in the right direction. It’s like a minimum wage hike for the middle class,” said Reich.

And opposing any boost to the minimum wage is of course the real target of Republicans. But minimum wages are rising, anyway. California, New York, and several cities have already enacted a $15 per hour minimum wage to be phased in over several years.

This tells us just how out of the mainstream are Republican lawmakers that have little, if any, interest in bettering living conditions of 80 percent of the workforce that are wage and salary earners.

Harlan Green © 2016

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Motor Vehicles, Housing Will Power 2016 Economy

Popular Economics Weekly

Even though Q1 2016 GDP growth looks weak for a number of reasons (such as lower exports and slumping oil prices that depress energy sector earnings), there are reasons it can go higher in 2016. Oil prices have stabilized, for starters, and exports are rising again as the dollar has weakened against other currencies when the Fed signaled it wouldn’t raise interest rates further until later, if at all this year, due to the worldwide slowdown in growth.

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Graph: Trading Economics

Firstly, auto sales, a major component of retail sales, should surpass last year’s 17.5 million total, according to industry pundits. Moderate wage growth, declining gasoline prices and continued low interest rates on auto loans will drive new car and light truck sales higher in 2016, said Steven Szakaly, chief economist of the National Automobile Dealers Association, at the Los Angeles Auto Show.

“New light-vehicle sales will rise to 17.71 million units in 2016, a 2.3 percent increase from our forecast of 17.3 million sales in 2015,” Szakaly said. “This would mark the seventh straight year of increasing U.S. new-vehicle sales.”

There is a temporary weakness in motor vehicle production because of a slowdown in current vehicle sales, according to the Fed’s March Industrial Production figures. But production has climbed steadily higher in the last five years and been the strongest component in the Fed’s Manufacturing Index, as the red line in the graph indicates.

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Graph: Econoday

And housing sales are picking up, beginning with the just released existing-home sales, up 5.1 percent to a 5.33 million annual rate in March. Existing sales rose in all four major regions last month and are up modestly (1.5 percent) from March 2015. Total housing inventory at the end of March increased 5.9 percent to 1.98 million existing homes available for sale, but is still 1.5 percent lower than a year ago (2.01 million).

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Graph: Calculated Risk

The above graph shows that existing sales have been rising steadily since 2008 the end of the Great Recession. Unsold inventory is at a 4.5-month supply at the current sales pace, up from 4.4 months in February, but still far too low to stimulate more buying in the lower price ranges, where inventory is most lacking. In fact, inventory has fallen back to 2000 levels, even before the housing bubble that doubled the housing inventory.

Another window into the housing market is the volume of mortgage applications that depend on interest rates, and rates are back to historic lows with the 30-year conforming fixed rate down to 3.25 percent for a 1 point origination fee in California.

Applications increased 1.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending April 15, 2016. The Refinance Index increased 3 percent from the previous week. The unadjusted Purchase Index increased 1 percent compared with the previous week and is 17 percent higher than the same week one year ago.

Another sign of future growth is the Conference Board Leading Economic Index® (LEI) for the U.S., which increased for the first time in 3 months, up 0.2 percent in March to 123.4 (2010 = 100), following a 0.1 percent decline in February, and a 0.2 percent decline in January.

“With the March gain, the U.S. LEI’s six-month growth rate improved slightly but still points to slow, although not slowing, growth in the coming quarters,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “Rebounding stock prices were offset by a decline in housing permits, but nonetheless there were widespread gains among the leading indicators. Financial conditions, as well as expected improvements in manufacturing, should support a modest growth environment in 2016.”

Manufacturer’s new orders, higher stock prices (now above 2015 indexes), and the fact that weekly jobless claims fell to the lowest level since 1973 were the strongest signs of future growth in the Conference Board’s LEI.

Still, it consumer spending that powers most economic activity these days, and consumers will only spend when there’s more market stability, hence certainty in such things as energy prices, which have been fluctuating wildly of late, and an adequate supply of new housing that keeps housing prices within reach of prospective home buyers.

Harlan Green © 2016

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Builder Confidence Holds, But Household Formation Still Weak

The Mortgage Corner

Builder confidence in the market for newly-built single-family homes remained unchanged in April at a level of 58 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

“Builders remain cautiously optimistic about construction growth in 2016,” said NAHB Chief Economist Robert Dietz. “Solid job creation and low mortgage interest rates will sustain continued gains in the single-family housing market in the months ahead.”

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Graph: NAHB.org

And privately-owned housing starts in March were at a seasonally adjusted annual rate of 1,089,000. This is 8.8 percent below the revised February estimate for new construction of 1,194,000, but is 14.2 percent above the March 2015 rate of 954,000, according to the Census Bureau. This is the main reason builders’ confidence remains solid.

But for it to go higher, (and housing starts return to historical levels)—the formation of new households would also have to increase to historical levels, and that will take some time, given all those millennials aged between 18-36 years that either cannot afford to live alone, or choose to rent rather than purchase a home, according to the Census Bureau.

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Graph: Bloomberg

This manifests itself in in the number of 25- to 34-year-olds of working age living at home. The rate began rising in 2003, fell briefly after the recession (perhaps because of first-time buyer-assistance programs), says Bloomberg’s Barry Ritzholtz, and then started rising again. As of last year, those still of working age still at home was at a record high.

It isn’t merely living in their parents’ basements;” says Ritzholtz, “more young adults are doubling up in apartments. Census data has identified this as a fast-growing living arrangement. The central theme is that expensive housing, along with a dearth of economic opportunities, forces young adults into less-than-desirable living arrangements.”

Unfortunately, there is still a shortage of homes on the market, especially entry-level housing that most millennials can afford. Single-family housing starts in March, for instance, were at a rate of 764,000; this is 9.2 percent below the revised February figure of 841,000. The March rate for units in buildings with five units or more was 312,000.

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Graph: Calculated Risk

And privately-owned housing units authorized by building permits in March were at a seasonally adjusted annual rate of 1,086,000. This is 7.7 percent below the revised February rate of 1,177,000, but is 4.6 percent above the March 2015 estimate of 1,038,000.

What is the current level of new household formation? Speaking on the country’s economic outlook and monetary policy at the Economic Leadership Forum in Somerset, New Jersey, Federal Reserve Bank of New York President Bill Dudley said the U.S. economy has its strengths and weaknesses—but he expects household formation to receive a boost in 2016.

“Housing starts are still well below the rate consistent with the nation’s population growth rate, and the fundamentals of housing demand remain positive,” Dudley said. “Rising employment is likely to boost the household formation rate and low mortgage interest rates should keep housing relatively affordable, despite the ongoing recovery in home prices.”

Harlan Green © 2016

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Record Mortgage Originations in 2015, In Spite of FHFA

The Mortgage Corner

In addition to very large Consumer credit borrowing that rose $17.2 billion in February (but excludes mortgage lending), the number of new first mortgages increased to a post-recession high in 2015, according to new data from credit rating company Equifax. In fact, it is approaching pre-recession levels thanks to the Fed’s low interest rate policy, which should also help the housing shortage by stimulating more new-home construction.

This is in spite of the Obama Administration’s efforts to downsize Fannie Mae and Freddie Mac, the conforming mortgage GSEs that continue to guarantee the bulk of affordable mortgage loans.

According to the company’s latest National Consumer Credit Trends Report, the total number of new first mortgages originated in 2015 rose to 7.71 million, an increase of 31.6 percent from 2014. Meanwhile, the total balance of new first mortgages was $1.82 trillion, a year-over-year spike of 42.9 percent.

Equifax also found that first mortgage lending to subprime borrowers grew in 2015, with 366,900 loans made – an increase of 25.2 percent over 2014 – and a total subprime balance of $59.7 billion, a 41.3 percent increase.

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Graph: Econoday

Why is it taking this long for the housing market to recover? The so-called qualification criteria of conforming loans have become ever stricter since the housing bubble. It is even more difficult to qualify for a subprime mortgage, or the origination totals would be even higher. There has to be some measure of the ability to repay as part of the mortgage application process these days. For subprime mortgages it can be the 12-month total of deposits from non-business bank accounts—no more No Income, No Asset mortgages, in other words. And it has to be a 5 or 7-year fixed rate ARM that converts to an adjustable rate for the rest of the 30 years, rather than the plain vanilla 30-year fixed rate.

“We saw a nice jump in mortgage lending in 2015 that was driven by both rising home-purchase activity and solid refinancing volumes,” said Amy Crews Cutts, Equifax senior vice president and chief economist. “While low interest rates are helping, continued gains in employment and consumer confidence are key. What we are not seeing is any meaningful loosening of underwriting, at least with respect to credit scores. The median credit score on new first mortgages in the fourth quarter of 2015 was 750 and 90 percent of first mortgage borrowers had a score in excess of 646; these values are essentially unchanged for the past three years.”

There is a reason for the higher credit scores. Both Fannie and Freddie add large ‘penalties’ for credit scores lower than 720. This discourages many borrowers, as the US Treasury and the Federal Housing Finance Authority, their nominal conservators, don’t seem to want the GSEs to expand their credit guarantees.

Why? It’s a long story, but the Treasury (the real puppeteer pulling their strings) has said several times they want to dissolve the GSEs, and have Congress replace them with something more streamlined, but without an implicit government guarantee. The catch is it will raise interest rates, since the latest Treasury proposals require originating lenders to put some skin into the game (such as retaining liability even when sold to investors), which defeats the purpose of making home ownership more available.

This overturns the reasons Fannie Mae, created as part of Roosevelt’s New Deal, and Freddie Mac, created post-WWII, were formed. They were never the major cause of the housing bubble, nor contributed to its failure. That was due to the likes of such non-banks as Lehman Brothers and Bear Stearns lending money they themselves had borrowed without sufficient collateral. Why on earth does the Obama Administration oppose the GSEs, as long as there are eligible home buyers wanting affordable housing?

Harlan Green © 2016

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Record Low Rates Spur Consumer Debt, But Not Spending

The Mortgage Corner

Consumer credit rose a very large $17.2 billion in February with January revised higher to $14.9 billion, says the Federal Reserve. Nonrevolving credit, which are gains for vehicle financing and student loans, rose $14.2 billion and revolving credit, where credit-cards are tracked, rising the smallest amount as usual with a gain of $2.9 billion. Total consumer borrowing, which does not include mortgage debt, is now $3.57 trillion.

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Graph: Econoday

This seems to contradict recent weak retail and consumer spending data that shows consumers saving more and spending less. So what are consumers up to? The lack of gains for revolving credit is good in the sense that it points to consumer wherewithal but negative relative to short-term consumer spending, says Econoday.

The Commerce Department reported consumer spending has been tepid the past 2 months. Income rose a soft 0.2 percent in February with wages & salaries slipping 0.1 percent for the first decline since September and, as it turned out, underscoring the lack of earnings punch in the employment report. But the worst news comes from the spending part of the report, up only 0.1 percent and with January revised sharply lower, now also at 0.1 percent vs an initial jump of 0.5 percent.

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Graph: Econoday

And consumers continue to put money in the bank as the savings rate, in perhaps a sign of consumer defensiveness, is up 1 tenth to 5.4 percent for a 3-year high. This is while year-over-year income growth is near a two-year low and spending well under the growth during 2014. This softness isn’t helping vehicle sales which in an ominous sign for the March retail sales report (released next week) fell 5.1 percent in data released on Friday. The annualized unit rate of 16.6 million is the lowest since February last year.

So what is the problem, with jobless claims at record lows, pointing to a lack of layoffs and ongoing strength for the nation’s labor market? Initial claims fell 9,000 in the April 2 week to a slightly lower-than-expected 267,000. Consumers continue to pile up debt, but are spending less on day-to-day needs paid with credit cards.

Could it be due to plunging stocks and geopolitical uncertainty, synonymous with the recent terrorist attacks and weak growth in other major economies, like the EU and China?

We have no real answer, but continue to hope real estate will somehow fill the growth gap, with record low interest rates, and the Fed showing no signs of raising interest rates further. Purchase applications for home mortgages declined by 2.0 percent in the April 1 week, but refinancing, boosted by lower rates, increased by 7 percent. The average rate for 30-year conforming loans ($417,000 or less) dropped by 8 basis points from the prior week to 3.86 percent. (But conforming fixed mortgage rates are now as low as 3.25 percent in California for 1 origination point.)

Year-on-year, the purchase index was up 11 percent, still strong but a far cry from early March levels when it was more than 30 percent higher than year ago levels. But last week’s construction spending report for February showed spending for new single-family homes rose 1.2 percent month-to-month and multi-family homes 0.9 percent. And, the 11 percent year-to-year rise in the purchase index is in line with February’s year-to-year 10.7 percent increase in residential construction spending, and these are still quite impressive.

So when and how will we know what consumers are really up to, more savings or more spending? Probably not until the spring housing season kicks in sometime in May. We should also have a better picture of 2016 GDP growth by then.

Harlan Green © 2016

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