Saturday, April 25, 2015

March New-Home Sales A Dud

"Sales of new single-family houses in March 2015 were at a seasonally adjusted annual rate of 481,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 11.4 percent below the revised February rate of 543,000, but is 19.4 percent above the March 2014 estimate of 403,000."


Graph: Calculated Risk

The March result was a disappointment, mainly in the south, where sales fell 15.8 percent. And because builders continue to build—housing starts are close to the million unit mark again—housing inventories are rising and prices are falling. The supply of new homes rose to 5.3 months, while the median price fell to 1.5 percent to $277,400. Year-on-year, the median price to down 1.7 percent while sales are up 19.4 percent, a discrepancy that points to price discounting by builders, says Calculated Risk.

What is behind the up and down gyration in sales? Winter is still with us, for one thing. And many of the southern and Midwest states are being pounded by tornadoes, as well as torrential rains. Lower oil prices could also be hurting an area heavily dependent on the oil and gas industries.

We will know next week if job creation will resume from February’s low numbers, and so consumer confidence remains high. Mortgage activity is high, highest level in years, what with interest rates still at record lows. (The 10-year Treasury yield is back down to 1.91 percent, and Eurozone bonds now have negative interest rates, meaning banks have to pay their clients to borrow money, because there is so little demand for loans.)

Mortgage applications increased 2.3 percent from one week earlier, according to data from the Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey for the week ending April 17, 2015.  The Market Composite Index, a measure of mortgage loan application volume, increased 2.3 percent on a seasonally adjusted basis from one week earlier.  The seasonally adjusted Purchase Index increased 5 percent from one week earlier to its highest level since June 2013.  The unadjusted Purchase Index increased 6 percent compared with the previous week and was 16 percent higher than the same week one year ago.

"Purchase applications increased for the fourth time in five weeks as we proceed further into the spring home buying season. Despite mortgage rates below four percent, refinance activity increased less than one percent from the previous week," said Mike Fratantoni, MBA's Chief Economist.  

The fact that purchase mortgage applications now comprise 44 percent of all applications, the highest in years, as we said, means the Fed’s policy of keeping interest rates as low as possible until household incomes begin to rise again is the right policy to kick start the housing market, and bring in those first time homebuyers who have been renting until know.

It also means some overbuilding of new homes is necessary to build up housing inventories for sale, and thus keep home prices in the affordable range.

Harlan Green © 2015

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Thursday, April 23, 2015

March Existing-Home Sales Spike

The Mortgage Corner

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 6.1 percent to a seasonally adjusted annual rate of 5.19 million in March from 4.89 million in February—the highest annual rate since September 2013 (also 5.19 million), said the National Association of Realtors report.


Graph: Calculated Risk

Sales have increased year-over-year for six consecutive months and are now 10.4 percent above a year ago, the highest annual increase since August 2013 (10.7 percent). This seems to corroborate yesterday’s Fannie Mae’s Economic & Strategic Research Group report that said economic activity was suppressed in the first quarter due largely to the West Coast port disruptions and difficult weather patterns across the Northeast, “but the economy is expected to gain momentum throughout the spring and reach previously anticipated levels by year-end.”

Total housing inventory at the end of March climbed 5.3 percent to 2.00 million existing homes available for sale, and is now 2.0 percent above a year ago (1.96 million). Unsold inventory is at a 4.6-month supply at the current sales pace, much too low for sustainable sales.

NAR Chief economist Lawrence Yun said, "The modest rise in housing supply at the end of the month despite the strong growth in sales is a welcoming sign. (But) For sales to build upon their current pace, homeowners will increasingly need to be confident in their ability to sell their home while having enough time and choices to upgrade or downsize. More listings and new home construction are still needed to tame price growth and provide more opportunity for first-time buyers to enter the market."

Prices are still rising, in other words, because of the lack of inventory. The FHFA just reported homes being purchased with conforming loans saw prices rise 5.4 percent in March. This is while new-home construction is still below par, with March starts up just 926,000, vs. the 1 to 1.2 million starts needed to increase inventories, and 2 million units annual rate at the height of the housing bubble.


Graph: Econoday

An even better indicator of future housing growth was the Mortgage Bankers Association weekly activity report. The Refinance Index increased 1 percent from the previous week, reports Calculated Risk. The seasonally adjusted Purchase Index increased 5 percent from one week earlier to its highest level since June 2013. The unadjusted Purchase Index increased 6 percent compared with the previous week and was 16 percent higher than the same week one year ago.

“Purchase applications increased for the fourth time in five weeks as we proceed further into the spring home buying season. Despite mortgage rates below four percent, refinance activity increased less than one percent from the previous week,” said Mike Fratantoni, MBA’s Chief Economist.

All of the above is significant evidence that the buying season should pick up after winter doldrums, as it has in past years. How much remains to be seen. Consumers also have to come out of their winter doldrums.

Harlan Green © 2015

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Tuesday, April 21, 2015

Fannie Says Better Growth For Rest of 2015

Popular Economics Weekly

“Economic activity was suppressed in the first quarter due largely to the West Coast port disruptions and difficult weather patterns across the Northeast, but the economy is expected to gain momentum throughout the spring and reach previously anticipated levels by year-end,” said a just released Fannie Mae’s Economic & Strategic Research Group report.

Is this a repeat of 2014, when growth surged for the rest of the year? It is what happened in 2014, due to last year’s deep freeze. In fact, it should be a repeat, as consumers aren’t spending much in Q1, the weather is as bad—whether blizzard, flood, or drought in the west—and Congress may be as gridlocked in ideological warfare as ever, and is therefore unable to do more harm to growth that it has in the past.


Graph: Trading Economics

We started out 2014 with a negative GDP growth rate of minus -2.1 percent. But it jumped to 4.6 and 5 percent in Q2 and Q3, such was the pent up demand from those very good jobs numbers. Just in the last 12 months 3.1 million jobs have been created, and consumers are in an almost ebullient mood. But consumers have to stop saving so much of their increased earnings, if that is to happen.

Fannie believes there’s also another ingredient to boost growth. An improved housing market as incomes improve and interest rates stay near record lows. “Our forecast calls for an increase in economic growth to 2.9 percent for 2015, which is a slight downward adjustment from our prior forecast but solid improvement nonetheless,” said Fannie Mae Chief Economist Doug Duncan


Graph: Econoday

Stronger retail sales gave an indication of the future. Sales of goods and services in March rebounded 0.9 percent after dropping 0.5 percent in February. The market consensus for March was for a 1.1 percent boost. Excluding autos, sales gained 0.4 percent, following no change in February. Expectations were for a 0.6 percent increase. Gasoline sales dipped 0.6 percent after a 2.3 percent increase in February. Excluding both autos and gasoline, sales rebounded 0.5 percent after declining 0.3 percent in February.


Graph: Econoday

However, the Conference Board’s Index of Leading Indicators is not so optimistic about future growth. Its 12 components predicted slower growth over the next 6 months. “In the negative column are building permits which, Thursday's disappointing housing starts report, fell sharply,” said Econoday.” This is a reminder that housing, despite some hopeful signs, has yet to boost economic growth. And declines in the factory workweek and for factory orders are reminders that the manufacturing sector, due in part to weak exports (and strong dollar), may now be pulling down economic growth.”

Let’s hope Fannie Mae is right. “Although we are beginning this year at a more modest pace compared to the above-trend numbers seen at mid-year 2014,” says the report, “the country’s aggregate income has benefitted from the improving labor market, which, combined with low gasoline prices, should help drive higher auto sales and overall consumer spending throughout 2015.”

So it may just be the gloom of winter’s cold that has been holding back economic growth in Q1, especially housing, and that more buyers will enter the housing market this selling season.

Harlan Green © 2015

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Friday, April 17, 2015

Germany’s Failed Austerity Policies

Financial FAQs

One would think by now the debate has been resolved on which economic model created the better recovery for this Great Recession or Lessor Depression, as P Krugman has called it. But no, Germany’s Finance Minister Wolfgang Schauble keeps pounding the drum for his, and the eurozone’s failed austerity policies.

And this is happening with a new Hitler looming on Europe’s border who is taking advantage of their weakness and threatening to repeat its history.

“The financial crisis broke out seven years ago and led many countries into an economic and debt crisis,” said Schauble recently. “A pervasive set of myths — that the European response to the crisis has been ineffective at best, or even counterproductive — is simply not accurate. There is strong evidence that Europe is indeed on the right track in addressing the impact, and, most importantly, the causes of the crisis.”

Really? One has only to compare Europe to U.S. economic growth since the Great Recession. The U.S. response by the Federal Reserve was to do everything possible to stimulate demand by keeping interest rates as low as possible, as long as possible, to pump more money into the system, rather than hoard it.

It is not even a matter of degree, but orders of magnitude. The U.S. has grown as much as 5 percent in a quarter, whereas Europe has grown no more than 0.3 percent since 2012. (Does Schauble even bother to look at economic data?)

One thinks that most economists should have learned from the 1930’s Great Depression, Roosevelt’s New Deal, etc., etc., that it takes a very active and proactive government to bring back the fallen ‘animal spirits’, as JM Keynes called the loss of confidence that kept consumers in the 1930s’ economy from completely recovering, until WWII government spending brought back fully employed economies.

But no, Schauble, has turned Keynes on his head in maintaining that it is the loss of investors’ confidence, not that of public consumers, which powers 70 percent of economic growth these days. He seems to have absolutely no concept of the meaning of aggregate demand, another Keynesian concept that spells out exactly what drives economic growth.

I.e. investors lose confidence in investing when the demand for their products and services declines, as it did drastically during the past two depressions. It is a basic misunderstanding of how economies work. Consumers ran out of money to spend, due in large part to the record income inequality that happened in 1929, and again in 2008.


Graph: Mother Jones

When almost all wealth flows to the top, the wealthiest enact policies to prevent it from being redistributed downward to those that spend it, where it would encourage and strengthen a recovery.

Then money is hoarded, rather than spent, as is still happening worldwide (particularly in Germany with the largest budget surplus in the developed world). That’s why economic growth has resumed in the U.S., but not in Europe, Which is currently teetering on the edge of its third recession since 2008.

But isn’t Putin’s Russia threatening war, even a nuclear war, if Europe doesn’t cave in to its demands? That is a wakeup call for Europeans to throw out their austerity policies, if they want to build the strength to oppose him. Europe is fractured because of their poorly functioning economies. Otherwise history is about to repeat itself. Only instead of a Hitler, we have a Putin.

Harlan Green © 2015

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Thursday, April 16, 2015

Expanding Social Security – Decreasing Inequality

Popular Economics Weekly

What, you say? We should expand, not shrink, social security benefits in the face of horrendous budget deficits of late? Elizabeth Warren put into the Senate Budget proposal for 2015 an amendment to protect social security, and even increase its benefits, when conservative pundits and pols have been chanting for years that it would drive the federal budget into bankruptcy. (Her amendment was defeated by the Republican majority, of course.)

And now potential Republican candidates such as Chris Christie are finding other ways to downsize social security, when social security isn’t the problem, and when record income inequality is getting worse during the recovery, not better.

No, what has driven the budget deficits have been concerted efforts by Republicans since R Reagan to cut maximum tax rates from 70 percent to the current 35 percent, while cutting government programs that would boost growth and productivity, such as public infrastructure spending, education, and even Research and Development.

All have proven records of increasing productivity—from our national freeway system, to DARPA’s funding of the Internet. Republicans have even gone so far as to cause a downgrade of sovereign treasury debt from its historic AAA rating by shutting down the government briefly in 2012.

Warren's recent effort was the product of a long progressive campaign that preceded her election. Pundits, such as the Huffington Post and the New York Times’ Paul Krugman have been pushing for the expansion of retirement benefits for years. In the past decade, left-of-center policy wonks became increasingly worried about retirement security for Americans. Corporate pension plans—many of which offered decent and secure retirement payments—were going the way of the dinosaurs. In 1980, about 40 percent of private-sector workers received such pension payouts; by 2006, that number had dropped to 15 percent.

In general, many retirement plans had shifted to private 401(k) accounts, and these often were woefully inadequate for supporting retirees in a climate of stagnating wages and scant savings. And the recent Wall Street collapse ravaged pensions and personal investments, illustrating that 401(k)s were a shaky foundation for retirement. Progressives and retirement policy wonks began looking for another option. The obvious answer was expanding Social Security.

In March 2012, the AFL-CIO called for "changing the terms of debate by focusing on the crisis of retirement security." Over the next year and a half, progressives policy shops and activists answered the call to arms. In April 2013, the New America Foundation, a progressive think tank, published a plan to expand benefits. "Our main purpose in doing that was to move the goal posts," says Michael Lind, a cofounder of the New America Foundation. Around the same time, two Democratic senators, Tom Harkin of Iowa and Mark Begich of Alaska, introduced bills to expand benefits.

Yet in November 2013, the Washington Post editorial board slammed the expansion push as "liberalism gone awry." It noted that "even the rich have finite resources; government can only go to that well so many times…Unchecked entitlement spending for the elderly crowds out spending" on young Americans and other priorities,” said the Post.

This is utter supidity. The Washington Post is now defending the rich? What “finite” resources we have created have all gone to the wealthiest since the end of the Great Recession. They garnered 90 percent of the income to be precise, while the 90 percent’s income bracket actually declined, mainly because wages and salaries have declined while the financial markets rallied for investors.


Graph: Seeking Alpha

The result has been anemic growth for the past 2 decades, far below historic growth rates. “In the last two decades, like in the case of many other developed nations, its growth rates have been decreasing,” said Trading Economics. “If in the 50’s and 60’s the average growth rate was above 4 percent, in the 70’s and 80’s dropped to around 3 percent. 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.”

That’s what happens when all income gains go to the top income brackets, and actual laws prevent wage and salary earners from even bargaining for more, such as Wisconsin’s banning of collective bargaining for its public employees that include teachers and health care workers.

There is good reason to expand social security benefits. There just has to be the political will to pay for it, and given the gains of those who can most afford to, we should be worrying more about growing the economy than a budget deficit that is the result of decades of anti-growth policies.

Harlan Green © 2015

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Tuesday, April 7, 2015

Mortgage Delinquencies Close to Pre-Recession Lows.

The Mortgage Corner

Calculated Risk reports Black Knight Financial Services (BKFS) released their Mortgage Monitor report for February on Monday. According to BKFS, 5.36 percent of mortgages were delinquent in February, down from 5.56 percent in January. BKFS reported that 1.58 percent of mortgages were in the foreclosure process, down from 2.22 percent in February 2014. This is approaching historical lows for delinquencies, and should mean a very good year for housing.


Graph: Calculated Risk

February’s delinquency rate, while still 17 percent above the pre-crisis norm of 4.6 percent, was down 49 percent from its January 2010 peak of 10.6 percent. And at 1.58 percent, the foreclosure rate remained 175 percent above precrisis norms, but was still down 63 percent from its October 2011 peak, reports Black Knight.

This breaks down as:

· 1,646,000 properties less than 90 days past due, but not in foreclosure.

· 1,067,000 properties that are 90 or more days delinquent, but not in foreclosure.

· 800,000 loans in foreclosure process.

It also means last week’s jump in Pending Home Sales was no fluke, as lower delinquency rates mean more homes with positive equity are increasing housing inventories. The National Association of Realtors Pending Sales Index is at its highest level since June 2013 (109.4), has increased year-over-year for six consecutive months and is above 100 – considered an average level of activity – for the 10th consecutive month.

So what will happen in 2015? Mortgage applications have also jumped, particularly purchase applications, as we said last week. "There was a broad based increase in mortgage applications last week (April 1) relative to the week prior. The increase in purchase volume was led by a nearly 6 percent increase in both conventional and government markets, perhaps signaling that households are finally ready to begin the home-buying season," said Lynn Fisher, MBA's Vice President of Research and Economics.

But that is largely because of still record low interest rates. The Fed wants to begin to raise interest rates sometime this year, but growth has slowed recently, due to the another severe winter, and a soaring dollar value that hurts exports. So the latest words from the Fed Governors are that low interest rates should be around for a while longer.

New York Fed Governor William Dudley said as much recently. “…as Chair Yellen remarked in her most recent press conference, removal of “patient” from the statement does not indicate that we will be “impatient” to begin to normalize monetary policy.  Rather, the timing of normalization will be data dependent and remains uncertain because the future evolution of the economy cannot be fully anticipated.”

The housing market will have a very good year, according to Core Logic’s 2015 housing forecast. “The U.S. economy is poised to grow by close to 3 percent in 2015, generating a 3- to 3.5-million-person gain in employment,” said Core Logic chief economist Frank Nothaft. “This job growth, coupled with very low mortgage interest rates and some easing in credit access, is expected to propel both owner-occupant and rental housing activity this year. This heightened level of housing demand should translate to the best home sales market in eight years.”

Let us hope the Fed remains patient for first-time homebuyers that require affordable loan rates, in particular, and are just now entering the housing market.

Harlan Green © 2015

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Friday, April 3, 2015

A Lousy Jobs Report?

Popular Economics Weekly

At first glance it looks like a lousy jobs report. It’s true the labor market has softened in several aspects. Payroll jobs increased just 126,000 in March after increases of 264,000 in February and 201,000 in January. January and February were revised down a net 69,000. Market expectations for March were for a 247,000 increase. And the unemployment rate held steady at 5.5 percent. The labor force participation rate edged down marginally to 62.7 percent from 62.8 percent in February.


Graph: WSJ Marketwatch

It is a 15-month low, say economists, that could be because of a number of factors. Winter is still freezing out the midwest and east, while the oil and mining industries have already lost 30,000 jobs in 2015 due to plunging oil prices. And governments have added back just 128,000 of the 630,000 jobs lost during the recession.  But overall wages are now rising faster than inflation—0.3 percent—and 3.1 million jobs were created in the past 12 months.

So it’s still a hopeful report, given the circumstances. This should mean Janet Yellen’s Federal Reserve will not be so hasty to raise interest rates in June. Not while inflation is still negative in Europe, close to zero in the U.S., and falling in other parts of the world.

There are still too many workers out of work, in other words, and most of the jobs being created are in the service sector, the lowest paying jobs in general. The professional and business services sector was the big jobs winner with 40,000 jobs added in March. This is not surprising, given that the largest businesses are in the computer and software industries—such as Facebook, Microsoft, Apple (now the largest corporation in stock valuation in the world), and so forth.

Actually the professional, scientific, and technical services sector is now our fastest growing business sector, comprising establishments that specialize in performing professional, scientific, and technical activities for others, such as attorneys, accounting, bookkeeping, and payroll services; architectural, engineering, and specialized design services; computer services; consulting services; research services; and other professional, scientific, and technical services, says the U.S. Bureau of Labor Services.

But low inflation is still a problem, particularly in Europe with its ongoing austerity policies that has kept the unemployment rate in the 11 percent range, and Greece still threatening to leave the Eurozone.


Graph: Trading Economics

The Eurozone is suffering from falling prices, and so the expectation of growth. This hurts the 25 percent of U.S. exports that flow to Europe. It is a situation Europeans have brought on themselves, as their policy makers refuse to infuse more economic stimulus spending, while their budget deficits soar. They are still in full-blown austerity mode, in other words, protecting themselves from non-existent inflation that cuts off government revenues and increases budget deficits.

And low wages are still a problem for U.S. workers, but that may be about to change, says Nobelist Paul Krugman in his latest NYTimes Oped: “On Wednesday, McDonald’s — which has been facing demonstrations denouncing its low wages — announced that it would give workers a raise. The pay increase won’t, in itself, be a very big deal... But it’s at least possible that this latest announcement, like Walmart’s much bigger pay-raise announcement a couple of months ago, is a harbinger of an important change in U.S. labor relations.”

“Suppose that we were to give workers some bargaining power by raising minimum wages, making it easier for them to organize, and, crucially, aiming for full employment rather than finding reasons to choke off recovery despite low inflation. Given what we now know about labor markets, the results might be surprisingly big — because a moderate push might be all it takes to persuade much of American business to turn away from the low-wage strategy that has dominated our society for so many years.”

For it is such low wage increases, and economic policies that have discouraged collective bargaining in the 29 right to work states (red states with the poorest economies), that have held down economic growth and spawned theories of a ‘new normal’, slower growth, economy.

That doesn’t have to be, if our austerians would only wake up and realize that giving employees the same rights as their employers will create more prosperity for all.

Harlan Green © 2015

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