Saturday, May 28, 2016

Future Home Sales Also Soaring

The Mortgage Corner

It looks like housing sales this year could return to pre-recession levels (though not into bubble territory), as all 3 major housing stats—existing, new, and now Pending-home sales are off to a good start in 2016.

Pending home sales increased for the third consecutive month in April, in spite of all the market uncertainties, surging to the highest level in over a decade, according to the National Association of Realtors.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, hiked up 5.1 percent in March and is now 4.6 percent above April 2015. Lawrence Yun, NAR chief economist, says huge gains in the South and West propelled pending sales in April to their highest level since February 2006 (117.4).
“The ability to sign a contract on a home is slightly exceeding expectations this spring even with the affordability stresses and inventory squeezes affecting buyers in a number of markets,” he said. “The building momentum from the over 14 million jobs created since 2010 and the prospect of facing higher rents and mortgage rates down the road appear to be bringing more interested buyers into the market.”
Pending home sales in the South jumped 6.8 percent in April and is 5.1 percent higher than last April, while the index in the West climbed 11.4 percent in April, now 2.8 percent above a year ago. In the Midwest, which posted the only drop, the index declined slightly, but is still 2.0 percent above April 2015.

Although the future of mortgage rates is in question, Yun said, “Even if rates rise soon, sales have legs for further expansion this summer if housing supply increases enough to give buyers an adequate number of affordable choices during their search.”

What is driving the burst in home sales in general? It’s the increase in household formation, as millennials finally leave home or school to move into their own housing. A recent SF Fed paper predicts higher household formation in the next several years, much higher even than predictions by the Harvard Joint Center for Housing Studies of 1 to 1.2m households per year over the next decade.
“To the extent that headship rates among various age groups stabilize, household formation can be expected to more closely follow the growth in adult population…In that baseline projection, older age groups tend to have the highest growth rates. Since the older group also has traditionally higher shares of heads of households, this should mean a higher headship rate overall.”
Given current 12-month annual headship rates by age group, the Census Bureau projections imply household formations averaging on the order of 1.4 to 1.5 million per year through 2020, said the SF Fed. It compares favorably to an average of a little less than 900,000 annually over the past five years.

This is huge, folks. If household formation is increasing this much then the real estate industry will help boost overall economic growth. Q1 2016 GDP growth was revised up slightly to 0.8 percent, and spending on residential construction increased at a 17.1 percent rate in the first quarter, the fastest pace since the fourth quarter of 2012. Residential construction added 0.56 percentage point to first-quarter GDP growth, up from the 0.49 percentage point reported last month.

Income at the disposal of households after accounting for taxes and inflation was revised up to show it jumping at a 4.0 percent rate in the first quarter instead of the previously reported 2.9 percent. Savings were revised up to $782.6 billion from $712.3 billion.

This means there should be much higher second quarter GDP growth, needless to say, as retail sales are again booming, and retail sales are again booming. Consumers came back to life in April, driving retail sales 1.3 percent higher. Autos are the key component, up a sharp 3.2 percent to reverse the prior month's decline. Excluding autos, retail sales rose 0.8 percent, still a strong number.

Harlan Green © 2016

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Thursday, May 26, 2016

What Happened to Link Between Profits and Productivity?

Popular Economics Weekly

What’s the link between profits and productivity, on which economic growth is based? It has broken down of late, so that profits are no longer used to enhance productivity. And without higher productivity, we see the standard of living for most of US no longer rising.

Labor productivity has to do with the amount of output per worker, which in turn depends on the amount of capital expenditures (capex spending) on plants and equipment. The current tepid economic recovery that has averaged slightly above 2 percent GDP growth has been attributed in large part to lower labor productivity.

So why, with corporations making record profits over the past 2 years as a percentage of GDP (accompanied by today’s comparatively low tax rates and large tax loopholes) aren’t corporations investing more in productivity that would enhance their profits as well?

In fact, such record profits seem to have created a different investment environment, one that is conducive to what Nobelist Robert Stiglitz calls monopolistic behavior last seen during the Gilded Age of the early 1900s.
Monopolistic behavior means that businesses and even whole industries prefer to keep themselves in power by amassing more wealth for their shareholders and executives, rather than invest those profits to also benefit their employees and the public domain.

The result is lower investments in productivity, made mostly via investments in capital, or capex spending. And studies show increased capex spending does boost productivity, as historically higher profits have in the past boosted capex spending.

A 1964 NBER working paper by economist Robert Eisner highlighted that fact. “The historical correlations are indeed indisputable; periods of high capital expenditures have been periods of high profits and periods of low capital expenditures have been periods of low profits.”
(Therefore)“…I would suggest that capital expenditures are undertaken in the pursuit of profits, or perhaps in order to reduce the risk associated with expectations of profits…I would view the rate of investment demand as related to the expected profitability of investment, something which is quite different from past or current profits.”

So during this period of the highest corporate profits as a percentage of GDP and GDI in history, corporations have been hoarding their profits. This has to change; firstly, because so many working-age adults are still out of work some 7 years after the end of the Great Recession.

And secondly, a return to another Gilded Age, also warned by economist Thomas Piketty in his epochal Capital In the Twenty-First Century, means another era of high income inequality, and so a period with greater economic instability. This happened during the Great Recession, due in large part to a record income inequality last seen in the run up to the Great Depression.

Both private industry and governments have to invest more in R&D research, for starters. An early reading of the April service-sector PMI Flash Index showed growth in new orders, hit by weakness in investment spending, continues to slow and is among the weakest readings in the 7-year history of this series. Respondents in the sample say clients are unwilling to commit to new projects. 

And though the April Durable Goods orders just out were strong (i.e., goods that generally last more than 3 years), a negative in the report is a sizable 0.8 percent decline in core capital goods orders which ominously is the third straight decline for this reading and the fifth out of the last seven reports. Year-on-year, orders are noticeably in the negative column at minus 5.0 percent. These readings point squarely to stubborn weakness in business investment and uncertainty in the general business outlook, said Econoday.

How does this explain today’s actions of those corporations with huge profits that aren’t investing in their future growth? Actually, it can. For, if businesses find more ways to line their pockets, such as using financial engineering by speculating in markets—i.e., either by hedging commodities or stock buybacks—then they will neglect to make money the old fashioned way by creating new products and services.

A recent Reuters Special Report entitled, The Cannabilized Company, said that in the most recent reporting year, share purchases reached a record $520 billion. Throw in the most recent year’s $365 billion in dividends, and the total amount returned to shareholders reaches $885 billion, more than the companies’ combined net income of $847 billion.
And it confirms the cost; reduced innovation spending in new products that would boost future productivity. “…among the approximately 1,000 firms that buy back shares and report R&D spending,” said Reuters, “the proportion of net income spent on innovation has averaged less than 50 percent since 2009, increasing to 56 percent only in the most recent year as net income fell. It had been over 60 percent during the 1990s.”
Thus, maximizing shareholder value with stock buybacks has “concentrated income at the top and has led to the disappearance of middle-class jobs. The U.S. economy is now twice as rich in real terms as it was 40 years ago, but most people feel poorer,” said Reuters

A good example of this practice is tech icon IBM. CEO Sam Palmisano left in 2011, having received more than $87 million in compensation in his last three years at the company. Meanwhile, revenue declined for the past three years, and earnings have fallen for the past two. The stock is down a third from its 2013 peak, while the S&P 500 has risen 34 percent. To rein in costs, IBM has cut jobs. It now employs 55,000 fewer workers than it did in 2012.

Thus it turns out maximizing stock prices is neither maximizing shareholder value nor longer term profits—since it only benefits the few. Should this be the sad fate of American business? No one likes to give up power—not our major corporations, certainly—power that was built up over the past 40 years of consolidation and reduced regulation.
But such record income and opportunity inequality cannot continue indefinitely. This is what revolutions are made of.
Harlan Green © 2016

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Tuesday, May 24, 2016

New-Home Sales Also Soaring

Financial FAQs
"Sales of new single-family houses in April 2016 were at a seasonally adjusted annual rate of 619,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 16.6 percent above the revised March rate of 531,000 and is 23.8 percent above the April 2015 estimate of 500,000."
We are beginning to see a real recovery in housing inventories with more new home being built, the one element that has been holding back more robust sales, as well as first-timers from entering the housing market.

“Rising home sales combined with tight inventory will translate into increased housing production as we move onward in 2016, especially as job creation continues and mortgage rates remain low,” said NAHB Chief Economist Robert Dietz.
We are also seeing record low mortgage default rates, another sign that more homeowners are free to either move or refinance their homes.  Strong job creation and a seven-year U.S. economic recovery have helped home owners get in the best shape in years. The number of new foreclosures in the first quarter edged near the lowest level in 17 years, the New York Federal Reserve said Tuesday.

The same was true for other consumer debt. Repayments increased and just 5 percent of all outstanding household debt — student loans, credit cards, auto loans, mortgages, home equity lines of credit - was delinquent in early 2016. That’s the smallest share of delinquencies since 2007, shortly before the onset of the Great Recession.

Graph: Calculated Risk

The bottom line is that more new homes have to be built—almost doubled to 1 million per year in order to catch up with historical demand. Historically, the number of new and existing-home sales was a constant ratio of 6 to 1 existing-homes to new-home sales. That means at the current existing-home sales rate of 5.4 million homes, some 900,000 new homes need to be sold. And they have to be in the more affordable price ranges, which means closer to the current median new-home price of $321,100, or below.

Harlan Green © 2016

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Monday, May 23, 2016

Home Sales Recovering

The Mortgage Corner

There is more news the housing market is recovering—from the Great Recession, that is. But it’s still below pre-recession levels.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 1.7 percent to a seasonally adjusted annual rate of 5.45 million in April from an upwardly revised 5.36 million in March. After last month's gain, sales are now up 6.0 percent from April 2015, said the NAR.

Lawrence Yun, NAR chief economist, says April's sales increase signals slowly building momentum for the housing market this spring. "Primarily driven by a convincing jump in the Midwest, where home prices are most affordable, sales activity overall was at a healthy pace last month as very low mortgage rates and modest seasonal inventory gains encouraged more households to search for and close on a home," he said. Except for in the West — where supply shortages and stark price growth are hampering buyers the most — sales are meaningfully higher than a year ago in much of the country."

Also good news was the 32 percent that were first time homebuyers, up from 30 percent, but nowhere near the 40 percent during more normal economic times. Alas, pricing and low inventories are the problem. Too many builders are yet building the entry-level affordable housing that has to be below the new $232,000 median price.

And there’s just a 4.7-month supply of available inventory. That’s why the Wells Fargo Market Index is hovering just above 60 percent—i.e., 60 percent of buyers can now afford a median-price home, which shows steady improvement.
"This is the second consecutive quarter that we've seen a nationwide improvement in affordability due to favorable home prices and mortgage rates," said NAHB Chief Economist Robert Dietz. "These factors, along with rising employment, a growing economy and pent-up demand will provide a boost for home sales in the second half of 2016."
So new home construction has to fill the void in available housing inventories. Nationwide housing starts rose 6.6 percent to a seasonally adjusted annual rate of 1.17 million in April, according to newly released data from the U.S. Department of Housing and Urban Development and the Commerce Department. Overall permit issuance was also up 3.6 percent to a seasonally adjusted annual rate of 1.12 million.
“Though housing construction data is relatively flat for the beginning of 2016, we anticipate a ramping up of housing production during the rest of the year, given a strengthening job market, low mortgage interest rates and favorable demographics,” said NAHB Chief Economist Robert Dietz.

That is sorely needed, as new-home sales in particular have been weak. This graph tracks the relative performance of existing home sales (dark line) and new home sales (light line). Existing home sales have moved from a mid 6 million rate over the span of the graph to a mid 5 million rate, but note the special weakness in new home sales, moving from over a 1 million rate in 2006 to half that now, says Econoday. Weakness in new homes means weakness for the construction sector and less strength for GDP. Watch for the April new home sales report on Tuesday's calendar, May 24.

Harlan Green © 2016

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Thursday, May 19, 2016

Middle Class Finally Gets A Raise

Popular Economics Weekly

A new rule announced by the Obama administration will, effective December 1, double the overtime-pay salary threshold and set it to automatically increase every three years. It’s about time. The salary of employees has been diminishing since the 1970s, as a share of the economic pie, believe it or not. While the profits of businesses are at record highs, as a percentage of GDP.

The high point of employee earnings was 50.1 percent of Gross Domestic Income in 1970, a proxy for Gross Domestic Product, and the current low point is 42.5 percent.  Why the discrepancy? It’s complicated, but has resulted in the decline of middle class wealth—and so of the middle class itself. The Obama administration, thanks to Labor Secretary Thomas Perez, is set to correct the deficiency.

The Labor Department says about 4.2 million workers will gain overtime benefits as a result of the rule, though the labor think tank Economic Policy Institute, which has argued strongly in favor of the rule, says this is a major undercount. Up to 13.5 million employees could be affected.

Americans’ paychecks have not kept pace with their productivity in part because millions of lower-middle-class and even middle-class workers are working overtime but not getting paid for it. President Obama directed the Labor Department to modernize the rules that require employers to pay workers time-and-a-half if they work overtime. The department issued a proposed rule to raise the overtime threshold from $455 per week, or $23,660 per year, to a “standard salary level equal to the 40th percentile of earnings for full-time salaried workers,” which is $921 per week in 2013 dollars, or $933 per week adjusted to 2014 dollars.

Salaried workers whose earnings are $933 per week or more can be exempted from the right to receive overtime if they fall into one of three categories: professionals, administrators, and executives. Each of these exempt categories is defined by a set of duties showing that the exempt employee is skilled and exercises independent judgment, or is a boss with a department and employees to supervise.

Unfortunately this rule was ignored by the Bush administration when the overtime pay rule was last adjusted.

The threshold was kept at $23,660 per year, and even those workers were required to work overtime, even though they had little or no management duties.

The result has been record corporate profits, and very low productivity improvements with little incentive for businesses to raise workers’ wages or make investments that would create more jobs.Why does private business have so little incentive to put some of their record profits to productive use? Nobelist Joe Stiglitz and other economists have labeled it “Monopoly’s New Era”.
“Capitalists are rewarded for saving rather than consuming – for their abstinence, in the words of Nassau Senior, one of my predecessors in the Drummond Professorship of Political Economy at Oxford (in order to pass their wealth on to succeeding generations)…The second school of thought takes as its starting point “power,” including the ability to exercise monopoly control or, in labor markets, to assert authority over workers.”
 In other words, Big Business in particular has since the 1970s focused on maximizing profits, not to create even more wealth for their employees or communities, but to pass it on to future generations. Economist Thomas Piketty has labeled it a return to Europe’s Gilded Age when most of the wealth was inherited.

US President Barack Obama’s Council of Economic Advisers, led by Jason Furman, has attempted to tally the extent of the increase in market concentration and some of its implications, says Stiglitz. In most industries, according to the CEA, standard metrics show large – and in some cases, dramatic – increases in market concentration. The top ten banks’ share of the deposit market, for example, increased from about 20 percent to 50 percent in just 30 years, from 1980 to 2010. Hence the need for Dodd Frank to avoid any more ‘too big to fail’ scenarios.

And the result is our middle class is shrinking, the economic class that is the most productive in our society. After more than four decades of serving as the nation’s economic majority, the American middle class is now matched in number by those in the economic tiers above and below it, reports a recent PEW Research study.

In early 2015, 120.8 million adults were in middle-income households, compared with 121.3 million in lower- and upper-income households combined, a demographic shift that could signal a tipping point, according to a new Pew Research Center analysis of government data.

Over the same period, however, the nation’s aggregate household income has substantially shifted from middle-income to upper-income households, driven by the growing size of the upper-income tier and more rapid gains in income at the top. Fully 49 percent of U.S. aggregate income went to upper-income households in 2014, up from 29 percent in 1970. The share accruing to middle-income households was 43 percent in 2014, down substantially from 62 percent in 1970.

So it’s no surprise that economic growth has slowed. There are fewer households that tend to spend their earnings into the economy, which would generate the jobs and future economic growth. This is something the wealthiest do not do—they tend to save most of their wealth for other uses.

Harlan Green © 2016

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Tuesday, May 17, 2016

Why Too Little Inflation?

Financial FAQs

Where’s the inflation? It is barely rising, as consumers still wait for bargains, before they decide to buy. The overall Consumer Price Index in April rose just 1.1 percent, and is up 2.1 percent less food and energy prices, which have been falling this year.

Graph: Econoday

This is the major reason we saw just 0.5 percent GDP growth in Q1. It is the surest sign we are still in deflationary times, and the reason Janet Yellen’s Fed doesn’t want to raise short term rates further. We aren’t growing fast enough to put everyone to work—which includes some 8 million that are either working part time, or have stopped looking for work—which is why so many have listened to Bernie or Donald during the primaries.

Consumers sit on their pocket books when they believe prices might go lower, and job prospects aren’t so good. It is also how Japanese consumers continue to behave, as do Europeans during deflationary times, which keeps their economies from growing faster.

The U.S. isn’t as badly affected thanks to a very proactive Federal Reserve and the Obama administration $1.1T budget agreement that is pumping some infrastructure spending into public spending, as is the $305B Surface Transportation Bill that renewed the gasoline tax so that our roads and bridges can be repaired.

The new law, dubbed the Fixing America’s Surface Transportation Act, or the FAST Act, formally reauthorizes the collection of the 18.4 cents per gallon gas tax that is typically used to pay for transportation projects, and also includes $70 billion in “pay-fors” to close a $16 billion deficit in annual transportation funding that has developed as U.S. cars have become more fuel-efficient.

 Retail sales also jumped, along with consumer sentiment in April. So we should see better growth this Q2. What is causing the spike in consumer sentiment? The U. of Michigan’s consumer sentiment survey is absolutely soaring so far this month, up nearly 7 points to 95.8 for the mid-month flash, as we said last week. This is the best reading since June last year.

Retail sales surged in April a much higher-than-expected 1.3 percent for the best showing since March last year. The strength is broad based and includes auto sales which finally show some life for the first time this year, with a 3.2 percent monthly jump.

Nobelist Joseph Stiglitz has been pounding the table on what is needed for better economic growth. He says there is a deficiency in aggregate demand, a Keynesian formula that measures the overall demand in goods and service from government as well as consumer spending, and exports.
“Today’s markets are characterized by the persistence of high monopoly profits,” says Stiglitz. “The implications of this are profound. Many of the assumptions about market economies are based on acceptance of the competitive model, with marginal returns commensurate with social contributions. This view has led to hesitancy about official intervention: If markets are fundamentally efficient and fair, there is little that even the best of governments could do to improve matters.
“But if markets are based on exploitation (i.e., monopoly power), the rationale for laissez-faire disappears. Indeed, in that case, the battle against entrenched power is not only a battle for democracy; it is also a battle for efficiency and shared prosperity.”
So when the private sector won’t spend—thanks in large part to the monopoly power of Big Business that has kept most of their record profits in the board rooms or on Wall Street, rather than investing in plants and equipment—government has to tax more of those profits in order that they be put to productive use.

So welcome to the popularity of Sanders and Trump!

Harlan Green © 2016

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Friday, May 13, 2016

Housing Affordability, Consumer Sentiment, Improving

The Mortgage Corner

Spurred by a modest reduction in mortgage interest rates and favorable home prices, nationwide housing affordability in the first quarter of 2016 posted a slight increase, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI) released today.
"This is the second consecutive quarter that we've seen a nationwide improvement in affordability due to favorable home prices and mortgage rates," said NAHB Chief Economist Robert Dietz. "These factors, along with rising employment, a growing economy and pent-up demand will provide a boost for home sales in the second half of 2016."
Is this causing the spike in consumer sentiment? Consumer sentiment is absolutely soaring so far this month, in the opinion of Econoday, up nearly 7 points to 95.8 for the mid-month flash. This is the best reading since June last year.

Expectations, which have been pulling down the headline index most of this year, jumped nearly 10 points to 87.5. The month-to-month turnaround for this reading is the best of the cycle, since 2006. Current conditions are also moving higher, to 108.6 from 106.7.

In all, 65 percent of new and existing homes sold between the beginning of January and end of March were affordable to families earning the U.S. median income of $65,700. This is up from the 63.3 percent of homes sold that were affordable to median-income earners in the fourth quarter.

The national median home price fell from $226,000 in the fourth quarter to $223,000 in the first quarter. Meanwhile, conforming 30-yr fixed mortgage rates are still as low as 3.25 percent in California, and 3.375 percent for a Hi Balance conforming fixed rate with a 1 pt. origination fee.

Harlan Green © 2016

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