Tuesday, September 2, 2014

Pending Sales Up, Mortgage Delinquencies Down

The Mortgage Corner

U.S. home buyers signed more contracts to buy existing homes in July, rebounding from a drop in June. This is in line with declining delinquency and foreclosure rates that portend a healthy real estate market for the rest of this year, and maybe into next year, if interest rates hold at their current lows. Today’s 30-year fixed conforming rate has fallen to 3.75 percent for 1 origination point in California.

The National Association of Realtors' monthly Pending Home Sales index rose 3.3 percent in July over June but is still 2.1 percent below its level in July 2013. It’s rising again because both consumer confidence measures have been rising of late, buoyed by rising incomes and low inflation.


Graph: Econoday

"Interest rates are lower than they were a year ago, price growth continues to moderate and total housing inventory is at its highest level since August 2012," said Lawrence Yun, NAR's chief economist. "The increase in the number of new and existing homes for sale is creating less competition and is giving prospective buyers more time to review their options before submitting an offer."


Graph: Calculated Risk

And consumer sentiment is up in the final August reading, to 82.5 vs 79.2 at mid-month, along with the Conference Board’s Confidence index, the second reading of consumer optimism that is rising this week. The gain is centered in current conditions as it was in Tuesday's consumer confidence report, and underscores the improvement this month in unemployment claims, which once again fell below 300,000 for the second consecutive week. The current conditions component in this report is at 99.8 vs 99.6 at mid-month and 97.4 in final July. A rise in current conditions points to general month-to-month strength for consumer activity.


Graph: Calculated Risk

Lastly, home prices continue to rise and delinquencies to fall. A total of ​​3,785,000 loans were delinquent or in foreclosure in July. This is down from 4,599,000 in July 2013. Calculated Risk reports Black Knight Financial Services (BKFS) released their Mortgage Monitor report for July today. According to BKFS, 5.64 percent of mortgages were delinquent in July, down from 5.70 percent in June. More importantly BKFS reports that 1.85 percent of mortgages were in the foreclosure process, down from 2.82 percent in July 2013.

Both delinquencies and foreclosures are finally approaching historical levels, which means that housing sales—including new-home sales will do the same. The rate of monthly new problem loans has now fallen to 2005-06 levels, reports BKFS. Many foreclosure sales were held up by lengthy court proceedings in many of the eastern and Midwestern state that did judicial sales, rather than the western states with Trust Deed liens that could be auctioned off on courthouse steps.

Harlan Green © 2014

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Wednesday, August 27, 2014

Consumer Confidence Surging, Why Not Spending?

Popular Economics Weekly

Consumer confidence is up led by strength in the current assessment, which points to gains for consumer readings in August. But why aren’t consumers spending more, if so? Auto sales are up, but retail sales overall are flat at the moment. The answer may be consumers are waiting for better results in next Friday’s jobs report—maybe an unemployment rate below 6 percent, anyone?

Consumer confidence rose 2.1 points to a new recovery high of 92.4 reflecting a 6.7 point surge in the present situation component to 94.6. The gain in this component reflects improvement in August employment with substantially more consumers saying jobs are now plentiful, at 18.2 percent vs July's 15.6 percent, and a bit fewer saying jobs are currently hard to get, at 30.6 percent vs July's 30.9 percent.


Graph: Econoday

The problem with retail sales seems to be that households want to save more and spend less for the moment. Spending jumped in March that had been suppressed by the severe winter, so it may be an evening out of overall sales, still rising at 4 percent per annum. And ICSC-Goldman just reported sales up for the week of August 23, signaling strong back-to-school buying. Same-store sales rose 0.6 percent in the August 23 week for a very strong year-on-year rate of plus 4.2 percent. The report cites strength across most categories and general strength for back-to-school demand. So it may be seasonal factors causing the month-to-month fluctuations.


Graph: Calculated Risk

What do consumers really want, is the larger question? Next week’s jobs’ report may tell us more, as I said. If job creation continues to grow, we can see increased optimism. The Labor Department’s latest JOLTS report of job Quits and Hirings is telling us the number of job openings continues to grow. Jobs openings (yellow line in graph) increased in June to 4.671 million from 4.577 million in May and are up 18 percent year-over-year compared to June 2013.

The number of Hires (blue line) rose to 4.8 million from 4.7 million, the highest since 2006. It’s therefore only a matter of time before workers begin to fill those job openings, then look out for increased consumer spending, the main driver of economic growth and so job creation.

Harlan Green © 2014

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

Tuesday, August 26, 2014

Yellen + Jackson Hole = Higher Growth

Popular Economics Weekly

New Fed Chairman Janet Yellen plus a few other major central bankers at their annual Jackson Hole conference seem to have committed a heresy by advocating full employment as the goal of central bank policies, above and beyond fighting inflation. That may be an easier call today, of course, given inflation is low and unemployment still high after the Greatest Recession since the Great Depression.

But you can depend on the Wall Street Bankers and conservative economists who don’t like Central Banks controlling economic growth to call for restricting credit before the labor market—and economic growth—has become self-sustaining.

What is self-sustaining? It’s enough GDP growth to sustain not only full employment, but maintenance of a healthy social safety net. We know from past history that GDP has to exceed 3 percent growth, and has exceeded 3 percent on average since the Great Depression, for this to happen. That is what has made America and many Americans prosperous. But it is now averaging just 2 percent since the end of this Great Recession—in fact, over the past decade.

And this is mainly because not enough consumers have rising incomes, while housing prices are just beginning to recover—no surprise, as I’ve said. So the news from Jackson Hole was welcome, as it signaled that the Central Bankers of the EU, Japan, and the U.S. are serious about returning to full employment.

The New York Times Benyamin Applebaum just reported on the Jackson Hole conference of central bankers. “Twenty years later, heresy has become gospel. Leaders of the world’s major central banks made clear in speeches at this year’s conference, which ended Saturday, that they were focused on raising employment and wages. The pursuit of lower inflation has been replaced by a conviction that inflation is actually too low for the good of the economy.”

There is no question that economic activity is heating up. The Conference Board’s LEI just surged again and has been positive since February. Even housing seems to be growing again, though existing and new-home sales aren’t yet up to last year’s levels. But housing construction is growing again, with almost 1 million units being started to add to current low inventories.


Graph: Econoday

But the real cure to what ails the U.S. economy is the creation of more jobs. And that is something the Fed has only limited power to do. It can hold down interest rates for an extended period by buying securities, which enables consumers to afford more, and banks to lend more.

This has helped the U.S. outdistance both Japanese and European growth, but once again the upper limit seems to be in the 2 percent growth range without fuller employment and a recovered housing market—the basis of much of middle class wealth, let us not forget.

Thomas Piketty in his epochal Capital in the Twenty-First Century highlighted the dilemma of mature developed countries with declining and aging populations, a major determinate of economic growth. Developed countries’ populations have declined to a 1.5 percent growth rate, whereas the U.S. population growth after WWII soared as high as 5 percent, which gave us 5 percent growth for a while.

So population growth will continue to be a problem, which is why a larger workforce is so important. But the truth is that consumers power 70 percent of economic activity, and governments another 20 percent. And with consumers still hampered by record debt loads mainly incurred by the housing bust, and governments hampered by austerity policies that limits their spending and cuts revenues on badly underserviced public services, this cannot happen without another exploding another heresy, that higher taxes can be beneficial.

Many have said it, and research is beginning to prove that governments do add to economic growth. Tax expert David Cay Johnston is one such who has been saying higher taxes can stimulate growth, using California’s economic resurgence, one of the highest tax states, as an example.

“Dire predictions about jobs being destroyed spread across California in 2012 as voters debated whether to enact the sales and, for those near the top of the income ladder, stiff income tax increases in Proposition 30,” said Johnston. “Million-dollar-plus earners face a 3 percentage-point increase on each additional dollar.

“Last year California added 410,418 jobs, an increase of 2.8 percent over 2012, significantly better than the 1.8 percent national increase in jobs. California is home to 12 percent of Americans, but last year it accounted for 17.5 percent of new jobs, Bureau of Labor Statistics data shows.”

This not only benefits much needed public services, but actually boosts GDP growth, since much of government-financed work now employs private industry. George W Bush in his push to privatize government services put more than 800,000 private sector employees under government contracts just during his watch.

So the evidence is mounting, if not already there, that some higher taxation—including a streamlining of the various tax codes that eliminates perks—is needed to spur continued growth.

Harlan Green © 2014

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

Sunday, August 24, 2014

Leading Indicators, Housing, Show More Growth Ahead

Financial FAQs

It looks like the US economy is kicking into high gear from its winter slump, as the Conference Board’s just released July Index of Leading Indicators (LEI) jumped 0.9 percent, the highest it’s been this year. It is a compilation of 12 leading measures of economic activity, such as interest rate spreads, employee hours worked that is a good predictor of future economic growth.


Graph: Econoday

“The LEI improved sharply in July, suggesting that the economy is gaining traction and growth should continue at a strong pace for the remainder of the year,” said Ataman Ozyildirim, Economist at The Conference Board. “Although housing has been one of the weakest components this year, the sharp gain in building permits helped boost the LEI in July. Financial markets and labor market conditions have also supported recent gains, but business spending indicators remain soft and their contribution marginal.”

So real estate may finally be taking its place as a leading indicator of economic growth, as in past recoveries. Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 2.4 percent to a seasonally adjusted annual rate of 5.15 million in July from a slight downwardly-revised 5.03 million in June. Sales are at the highest pace of 2014 and have risen four consecutive months, but remain 4.3 percent below the 5.38 million-unit level from last July, which was the peak of 2013.

existing sales

Graph: Calculated Risk

Lawrence Yun, NAR chief economist, says sales momentum is slowly building behind stronger job growth and improving inventory conditions. “The number of houses for sale is higher than a year ago and tamer price increases are giving prospective buyers less hesitation about entering the market,” he said. “More people are buying homes compared to earlier in the year and this trend should continue with interest rates remaining low and apartment rents rising.”

new homes

Graph: Econoday

And housing starts for July jumped to an annualized pace of 1.093 million units-up from 0.945 million units the prior month. The latest number well topped expectations for 0.963 million units. July was up a sharp 15.7 percent (monthly), after dipping 4.0 percent in June.  July's pace was the highest level since November 2013.

Employment is also showing the largest improvement, with weekly initial unemployment claims below 300,000 again, reports the Labor Dept. This could mean August’s jobs report due in two weeks might show another drop in the unemployment rate, now at 6.2 percent.

Jobless claims have continued to trend lower, pointing to month-to-month strength for the August employment report coming up in 2 weeks. Initial claims fell 14,000 to a better-than-expected level of 298,000 in the August 16 week, a week that is also the sample week for the monthly employment report. A comparison with the July sample week shows a 5,000 improvement. The 4-week average, at 300,750, is up 4,750 from the prior week but is down 8,500 from the July sample week.

Continuing claims, lagging data for the August 9 week, are also down 49,000 from prior week to a new recovery low of 2.500 million. The 4-week average, at 2.528 million, is down 2,000 from the prior week and is down 16,000 from the July sample week. The unemployment rate for insured workers remains at a recovery low of 1.9 percent.

Real estate has historically led recoveries, but because of the severity of the housing bust, hasn’t until now. That is the main reason many economists say growth has been in the 2 percent range since the end of the Great Recession. But if housing continues its recovery, we could see GDP growth rising at least another 1 percent. And with builder optimism and new-home sales also surging, this could happen.

Harlan Green © 2014

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

Thursday, August 21, 2014

Where is the Inflation?

Financial FAQs

Stocks and bonds are rallying, as it looks like inflation is still falling, rather than rising. This is good news for investors, but prices aren’t rising enough to boost economic growth yet. Boosting inflation seems to be the central challenge for both US and Europe, in particular, as they attempt to recover from the Great Recession.


Graph: Reuters

Though prices are no longer falling, they are not yet rising overall, either. And the reason is clear. Household incomes aren’t yet rising above the current low inflation level of 1.9 percent, which means they are barely keeping up with rising food, housing and services prices. If the CPI consumer price index seems suspect, then we can look at the various other indexes, including the Personal Consumption Expenses deflator followed by the Fed.


Graph: Calculated Risk

This Calculated Risk graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the Cleveland Fed’s median CPI (yellow line) rose 2.2 percent, the trimmed-mean CPI rose 1.9 percent, and the CPI less food and energy rose 1.9 percent. Core PCE (green line) is for June and increased just 1.5 percent year-over-year.

One can see from the graph that inflation has struggled to even reach 2 percent, the Fed’s stated goal. Whereas during the 1990s, and the longest growth cycle in our history, it remained closer to 3 percent.

So we know that low inflation is a sign of slow growth, just as in Europe. Yet policy makers know how to boost inflation—raise household incomes by supporting policies that create more jobs, of course. Yet Republicans and conservative Demos resist any kind to government expenditures that would create jobs—such as public infrastructure maintenance and repairs.

This is when government expenditures are at an all-time low as a percentage of GDP, while some $10.8 trillion in cash and cash equivalents sit in financial institutions driving up stock and bond prices. Private businesses should benefit from this cash hoard, but aren’t investing sufficiently in new plants and equipment domestically. They are investing overseas, of course, where costs are lower.

That leaves governments and consumers to boost economic growth, and as during President Roosevelt’s New Deal, consumers can’t spend more if they can’t find jobs. It’s a pity, since the long term unemployment rate is still 12 percent, including part time workers. And there is still plenty of work to be done if we want to pay forward our economic growth to future generations.

Harlan Green © 2014

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

Tuesday, August 19, 2014

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.


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.

And 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 good 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.


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

Sunday, August 17, 2014

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.


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.


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”).


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

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