The debate has only begun on whether the various stimulus packages are enough to kick-start the economy. Of great help will be Animal Spirits, a new book by two well-known behavioral economists who study the psychological and sociological aspects of financial markets—Nobelist George Akerlof and author Robert Shiller. Professor Shiller is best-known for coining the term “irrational exuberance” in his book of the same name, which predicted the dot-com bubble bursting.
Get Reaganomics off our backs!—translated into layman’s terms, that’s how Akerlof and Shiller begin Animal Spirits (Princeton U. Press, 2009. It is an inquiry into the role of human psychology in economic behavior. The small-government, laissez-faire outlook that Reagan helped popularize has severely damaged the financial system. “Now, three decades after the elections of Margaret Thatcher and Ronald Reagan, we see the troubles it can spawn. No limits were set to the excesses of Wall Street. It got wildly drunk. And now the world must face the consequences.”
What in fact the Obama Administration is trying to do is not only stimulate job formation and retention that will in itself grow demand for more goods and services, but raise the confidence level of consumers and business as well. This is also at the core of British Lord Keynes economic theory. Keynes believed that the Great Depression was caused by a pervading loss of confidence in both business and government to correct the economic malaise of that time.
Animal Spirits cites the crash of 1929, for instance, when speculative exuberance and the narrative of a “new era” of continually appreciating stocks suddenly evaporated, while technical factors such as central bank protection of the gold standard worsened unemployment by causing a deflationary price spiral.
As Keynes pointed out, the fundamental problem was that bankers were too scared to loan, because they thought they would lose their money—sound familiar? And since none of the deficit spending was on a scale needed to stimulate demand, self-perpetuating hopelessness set in. Only with the emergency mobilization of World War II did the shattered national mood, and narrative, begin to change.
Might some parts of President Obama’s stimulus measure not work? Of course. Some economists, including Nobelist Paul Krugman, fear that not enough is being done to give it an immediate boost this time, either. Just put more money in people’s pockets, whether via rebates or tax cuts, say some. But history shows that doesn’t provide much bang for the buck. It doesn’t necessarily get consumers spending again, for instance.
Much of the stimulus spending focuses on increasing productivity and nurturing research and innovation in future technologies. Another part focuses on improving our educational and health care systems. The Congressional Budget Office predicts that the economy may need a boost through 2011, so the stimulus package is aimed at promoting a sustainable recovery, not a quick fix.
After touring through this grim history, our contemporary problems, as severe as they may be, don’t look quite so bad. Profs Akerlof and Shiller end on a reassuring note: “Yet we are currently not really in a crisis for capitalism. We must merely recognize that capitalism must live within certain rules.” And we must take into account that irrational behavior has a real effect on demand, necessitating government intervention.
Harlan Green © 2009
Saturday, February 28, 2009
IS THERE LIGHT AT END OF THE TUNNEL?
The economic news is not all dire, though financial markets don’t yet seem to get it. Remember, headlines only capture most economic events after the fact. Though the recession began in December 2007, for instance, it wasn’t until June of 2008 that bad news began to appear in the headlines. And the recession wasn’t made ‘official’ until November 2008, when the NBER’s Business Cycle Dating Committee was sure economic activity had in fact topped out the prior December.
For the same reason, very few media are focusing on the often subtle turning points that signal when economic activity has bottomed out. This recession began only after the Federal Reserve had boosted interest rates 17 consecutive times in an attempt to combat inflation. But instead of driving down its cause—high energy and commodity prices—the Fed’s actions drove up mortgage rates on short-term Option and subprime ARMs, which made those loans no longer affordable to the marginal borrower.
The result is people are saving more and buying less. But existing real estate sales surged 6.5 percent in December, as housing prices have come back down to affordable levels. This is due to a combination of lower interest rates and the largest median price decline in 70 years, according to the National Association of Realtors. In fact, the NAR’s Affordability Index has increased more than 50 percent since 2006, meaning buyers can afford a house worth 50 percent more than the existing-home median price of $174,000.
Both the manufacturing and service sectors are also showing signs of improvement. January new orders surged 10 percent in manufacturing and 3 percent in service sector industries, according to the Institute for Supply Management. Retail sales also jumped 1 percent in January, the largest increase in 1 year.
And labor productivity is surging, because employers cut back working hours faster than they cut back on production. The resulting output per hour worked increased a large 3.2 percent in Q4, and for the year rose at the fastest pace since 2003.
Why is this good for future growth? Because high productivity growth means the economy can grow rapidly without inflation, raising living standards and theoretically allowing workers to get big raises without hurting company profits. It means companies will invest more in so-called capital expenditures that help to maintain that productivity. But it also means fewer workers will be needed as companies become more efficient in producing those goods and services.
We can also debunk one more piece of conventional wisdom. It doesn’t look like inflation will be a problem for years to come, in spite of the $2.5 billion in stimulus aid that is being injected into the economy. The Congressional Budget Office has predicted that the shortfall in output over the next 2 plus years will probably be around $6 billion, and an economy working at less than capacity does not induce inflation.
Harlan Green © 2009
For the same reason, very few media are focusing on the often subtle turning points that signal when economic activity has bottomed out. This recession began only after the Federal Reserve had boosted interest rates 17 consecutive times in an attempt to combat inflation. But instead of driving down its cause—high energy and commodity prices—the Fed’s actions drove up mortgage rates on short-term Option and subprime ARMs, which made those loans no longer affordable to the marginal borrower.
The result is people are saving more and buying less. But existing real estate sales surged 6.5 percent in December, as housing prices have come back down to affordable levels. This is due to a combination of lower interest rates and the largest median price decline in 70 years, according to the National Association of Realtors. In fact, the NAR’s Affordability Index has increased more than 50 percent since 2006, meaning buyers can afford a house worth 50 percent more than the existing-home median price of $174,000.
Both the manufacturing and service sectors are also showing signs of improvement. January new orders surged 10 percent in manufacturing and 3 percent in service sector industries, according to the Institute for Supply Management. Retail sales also jumped 1 percent in January, the largest increase in 1 year.
And labor productivity is surging, because employers cut back working hours faster than they cut back on production. The resulting output per hour worked increased a large 3.2 percent in Q4, and for the year rose at the fastest pace since 2003.
Why is this good for future growth? Because high productivity growth means the economy can grow rapidly without inflation, raising living standards and theoretically allowing workers to get big raises without hurting company profits. It means companies will invest more in so-called capital expenditures that help to maintain that productivity. But it also means fewer workers will be needed as companies become more efficient in producing those goods and services.
We can also debunk one more piece of conventional wisdom. It doesn’t look like inflation will be a problem for years to come, in spite of the $2.5 billion in stimulus aid that is being injected into the economy. The Congressional Budget Office has predicted that the shortfall in output over the next 2 plus years will probably be around $6 billion, and an economy working at less than capacity does not induce inflation.
Harlan Green © 2009
WHAT IS DEFLATION RISK?
Why the urgency of putting so much money into the various stimulus plans? Treasury Secretary Geithner’s addition to TARP, a mix of public and private investments, could cost as much as $1.5 trillion. The congressional stimulus bill, called the American Recovery and Reinvestment Plan or ARRP, will cost approximately $790 billion, while the Federal Reserve could be lending and/or guaranteeing more than $1 trillion in debt, and so on.
The recent plan unveiled by Treasury Secretary Geithner highlighted the difficulty of getting banks to lend again. Its centerpiece was a public/private proposal to relieve banks of their toxic—or nonperforming—assets. But if there is no market for these assets, then banks have no idea what they are worth. This is the main reason they are hoarding their monies—bailout funds included.
And so some kind of government guarantee is needed to bolster their value(s). Otherwise, as Citibank Chairman Vikram Pandit said, they would be irresponsible to unload these assets at today’s fire sale prices. Actually, should banks do so, they might very well reveal themselves to be insolvent.
The result is a stalemate, which is causing wages and prices to begin to spiral downward. Hence the urgency of the various plans. Such a deflationary spiral is the most debilitating form of a recession. In fact, that is when a recession becomes an actual depression, as it did in Japan during the 1990s and our Great Depression.
Most Americans have no experience of one, therefore cannot conceive of its damage—when wages as well as prices are in a prolonged slump. This leads to the opposite of the wage-price stagflationary spiral experienced in the 1970s that drove the inflation rate to 14 percent—and unemployment rate above 8 percent.
Nobelist Paul Krugman is one of those sounding the alarm. He maintains that we could see a real 3 percent drop in prices if the so-called ‘output gap’, or difference between normal Gross Domestic Product growth and the negative growth during a recession/depression, is as high as the Congressional Budget Office predicts.
That is why so much money is being thrown at the deflation problem. The ARRP stimulus is targeted at creating jobs, whether by directly subsidizing industry, or indirectly with tax cuts. The Treasury plan is designed to heal the banks’ balance sheets so they will lend again. Both plans have to work before our economy will be able to recover.
Harlan Green © 2009
The recent plan unveiled by Treasury Secretary Geithner highlighted the difficulty of getting banks to lend again. Its centerpiece was a public/private proposal to relieve banks of their toxic—or nonperforming—assets. But if there is no market for these assets, then banks have no idea what they are worth. This is the main reason they are hoarding their monies—bailout funds included.
And so some kind of government guarantee is needed to bolster their value(s). Otherwise, as Citibank Chairman Vikram Pandit said, they would be irresponsible to unload these assets at today’s fire sale prices. Actually, should banks do so, they might very well reveal themselves to be insolvent.
The result is a stalemate, which is causing wages and prices to begin to spiral downward. Hence the urgency of the various plans. Such a deflationary spiral is the most debilitating form of a recession. In fact, that is when a recession becomes an actual depression, as it did in Japan during the 1990s and our Great Depression.
Most Americans have no experience of one, therefore cannot conceive of its damage—when wages as well as prices are in a prolonged slump. This leads to the opposite of the wage-price stagflationary spiral experienced in the 1970s that drove the inflation rate to 14 percent—and unemployment rate above 8 percent.
Nobelist Paul Krugman is one of those sounding the alarm. He maintains that we could see a real 3 percent drop in prices if the so-called ‘output gap’, or difference between normal Gross Domestic Product growth and the negative growth during a recession/depression, is as high as the Congressional Budget Office predicts.
That is why so much money is being thrown at the deflation problem. The ARRP stimulus is targeted at creating jobs, whether by directly subsidizing industry, or indirectly with tax cuts. The Treasury plan is designed to heal the banks’ balance sheets so they will lend again. Both plans have to work before our economy will be able to recover.
Harlan Green © 2009
WILL HOMEOWNER ASSISTANCE PLAN WORK?
President Obama’s newly announced $275B mortgage stimulus program has many parts, which means it is attacking the foreclosure problem from many sides. This will certainly help to put a bottom on home values, which are at the root of the foreclosure problem.
Below is a list of key elements of the plan outlined this week by President Obama that aims to aid as many as 9 million households in fending off foreclosures:
- Allows 4 million–5 million homeowners to refinance via government-sponsored mortgage giants Fannie Mae and Freddie Mac.
- Establishes $75 billion fund to reduce homeowners' monthly payments.
- Develops uniform rules for loan modifications across the mortgage industry.
- Bolsters Fannie and Freddie by buying $200B more of their shares.
- Allows Fannie and Freddie to hold $900 billion in mortgage-backed securities — a $50 billion increase.
A separate program would potentially help 3 million to 4 million additional homeowners with jumbo mortgages by allowing them to modify their mortgages to lower monthly interest rates through any participating lender. Under this plan, the lender would voluntarily lower the interest rate, so that payments are just 38 percent of gross monthly income, and the government would provide subsidies to the lender to lower it further to a 31 percent debt to income ratio.
FDIC Chairperson Sheila Bair has also come out with her long-awaited mortgage modification program that she believes will have an effect in months. This proposal is designed to promote wider adoption of such a systematic loan modification program:
- by paying servicers $1,000 to cover expenses for each loan modified according to the required standards; and
- sharing up to 50 percent of losses incurred if a modified loan should subsequently re-default
“We envision that the program can be applied to the estimated 1.4 million non-GSE mortgage loans that were 60 days or more past due as of June 2008, plus an additional 3 million non-GSE loans that are projected to become delinquent by year-end 2009,” says the FDIC website. “Of this total of approximately 4.4 million problem loans, we expect that about half can be modified, resulting in some 2.2 million loan modifications under the plan.”
Almost one in 10 home mortgages is either delinquent or in foreclosure, and analysts estimate that at as many as six million families could lose their homes over the next three years in the absence of government action. These programs will certainly help a certain percentage of them. The foreclosure rate for single-family homes is now above 6 percent of the 100 million + mortgages outstanding, 2 percent above the historical rate of 4.25 percent, so it is not the end of the world.
The plan will take effect March 4, when the administration publishes detailed rules explaining it. Except for the provision that empowers bankruptcy judges, almost all the other elements can be enacted by Mr. Obama without further action by Congress.
Harlan Green © 2009
WHY THE FIXED RATE PREFERENCE?
Fixed rate mortgages continue to be the financing of choice, in spite of former Fed Chairman Greenspan’s attempt to sway borrowers towards adjustable rate mortgages, or ARMs. Studies from the Federal Housing Finance Board, which regulates savings and loan institutions, show that more than 80 percent of mortgages tend to be fixed-rate products versus 18 percent that are adjustable.
This puts the current adjustable rate subprime crises in proportion, since subprime loans comprise just 6 percent of outstanding mortgages, though their default rate is approaching 20 percent. The default rate for all conventional mortgages is now 6 percent.
"The fixed-rate mortgage is a cornerstone of the U.S. housing finance system and has been instrumental to the accrual of wealth on the part of many households. The low interest rates of the past two years have increasingly lured consumers seeking a predictable payment in an uncertain economy," said Stuart Gabriel, director of the University of Southern California Lusk Center for Real Estate.
The 30-year, fixed-rate mortgage is about 70 years old. The loan instrument was first offered during the 1930s after the creation of the Federal Housing Administration as part of financial reforms to combat the Depression.
Before that, most residential loans were balloons, requiring a payoff within 10 years. In addition, mortgages were made for only up to 50 percent of a property's value.
Long-term loans took off in the housing boom post World War II, when FHA and VA mortgages fueled construction in U.S. suburbs. At the same time, homeownership rates jumped once the 30-year loan became available, from 44 percent in 1940 to 65 percent in 1966; the rate is near 68 percent today.
Adjustable-rate loans have their advantages when fixed interest rates are high or rising quickly. But the subprime debacle showed us that using them when interest rates were at record lows 2003-2005, lulled borrowers into a false sense of security. The Federal Reserve under Fed Chairmen Greenspan and Ben Bernanke raised short term interest rates 17 consecutive times over 2 plus years, which burst the real estate bubble and caused the credit crunch we have today.
ARMs first became widely available in 1981, their share of the mortgage market has varied from a high of 39 percent in 1994 to a low of 12 percent in 2001, Gabriel found.
"Clearly, borrowers benefit from the availability of a wider variety of products. ARMs appeal to more mobile households, homebuyers who expect their incomes to be positively correlated with interest rate fluctuations and buyers who are down payment-constrained," Gabriel wrote. But if affordability of the monthly payments isn't a problem, "then many borrowers prefer the ongoing payment certainty of the fixed-rate loan."
There are some regional differences in the use of fixed-rate vs. adjustable-rate mortgages. Consumers in Alaska are most enamored of the fixed-rate mortgage: In 2003, 98 percent of conventional home mortgages in Alaska were fixed-rate mortgages.
Following Alaska in favoring the fixed-rate mortgage are Delaware (93 percent), Oklahoma (92 percent), Texas (92 percent), New Mexico (91 percent), Pennsylvania (91 percent) and Tennessee (90 percent.)
Homebuyers in Massachusetts are most likely to take an ARM; 32 percent did so, in part due to the higher price of homes. Other states where adjustable loans command a high percentage of the market: Colorado and Michigan, with 30 percent; California, 29 percent; and Illinois, 27 percent.
© Harlan Green
This puts the current adjustable rate subprime crises in proportion, since subprime loans comprise just 6 percent of outstanding mortgages, though their default rate is approaching 20 percent. The default rate for all conventional mortgages is now 6 percent.
"The fixed-rate mortgage is a cornerstone of the U.S. housing finance system and has been instrumental to the accrual of wealth on the part of many households. The low interest rates of the past two years have increasingly lured consumers seeking a predictable payment in an uncertain economy," said Stuart Gabriel, director of the University of Southern California Lusk Center for Real Estate.
The 30-year, fixed-rate mortgage is about 70 years old. The loan instrument was first offered during the 1930s after the creation of the Federal Housing Administration as part of financial reforms to combat the Depression.
Before that, most residential loans were balloons, requiring a payoff within 10 years. In addition, mortgages were made for only up to 50 percent of a property's value.
Long-term loans took off in the housing boom post World War II, when FHA and VA mortgages fueled construction in U.S. suburbs. At the same time, homeownership rates jumped once the 30-year loan became available, from 44 percent in 1940 to 65 percent in 1966; the rate is near 68 percent today.
Adjustable-rate loans have their advantages when fixed interest rates are high or rising quickly. But the subprime debacle showed us that using them when interest rates were at record lows 2003-2005, lulled borrowers into a false sense of security. The Federal Reserve under Fed Chairmen Greenspan and Ben Bernanke raised short term interest rates 17 consecutive times over 2 plus years, which burst the real estate bubble and caused the credit crunch we have today.
ARMs first became widely available in 1981, their share of the mortgage market has varied from a high of 39 percent in 1994 to a low of 12 percent in 2001, Gabriel found.
"Clearly, borrowers benefit from the availability of a wider variety of products. ARMs appeal to more mobile households, homebuyers who expect their incomes to be positively correlated with interest rate fluctuations and buyers who are down payment-constrained," Gabriel wrote. But if affordability of the monthly payments isn't a problem, "then many borrowers prefer the ongoing payment certainty of the fixed-rate loan."
There are some regional differences in the use of fixed-rate vs. adjustable-rate mortgages. Consumers in Alaska are most enamored of the fixed-rate mortgage: In 2003, 98 percent of conventional home mortgages in Alaska were fixed-rate mortgages.
Following Alaska in favoring the fixed-rate mortgage are Delaware (93 percent), Oklahoma (92 percent), Texas (92 percent), New Mexico (91 percent), Pennsylvania (91 percent) and Tennessee (90 percent.)
Homebuyers in Massachusetts are most likely to take an ARM; 32 percent did so, in part due to the higher price of homes. Other states where adjustable loans command a high percentage of the market: Colorado and Michigan, with 30 percent; California, 29 percent; and Illinois, 27 percent.
© Harlan Green
Wednesday, February 4, 2009
WHAT IS ‘THE SOLUTION' TO BANKING CRISIS?
The critics of the new $814 Billion stimulus have got it wrong. Lowering taxes helps the few, but spending monies on infrastructure, education, health care and state governments aids the many. The problem is that businesses are hurting because there is a lack of demand for their products. And demand comes mainly from consumers who are tapped out at present. So any programs that directly create more jobs—especially in the private sector—give the most bang for the stimulus buck.
The demand slack is now worldwide, so that even our exports are down, which has hurt many domestic industries. This is puzzling many of the 2500 economists, business and political leaders attending the annual Davos, Switzerland economic summit, according to New York Times columnist Thomas Friedman. They seem to be at a loss to find a solution to the current worldwide economic malaise.
Part of the puzzlement is due to the nature of the malaise. Such a complete breakdown in consumer spending hasn’t happened since World War II. And that is due to both the housing and credit crunches, which caused the soaring jobless rate. So any solution must also envision how to get banks lending again. But banks won’t lend, until they see a pickup in demand for products and services.
This recession is also puzzling because the old solutions aren’t working. The first half of the TARP funds went to shore up financial institutions, on the theory that they would begin to lend again. For the past 28 years the answer to any economic problem was what is called supply-side economics, which meant giving more breaks to businesses such as banks or cutting taxes of the investor class.
But that program didn’t work over the past 8 years. Only 5 million jobs were created, in spite of record corporate profits and incomes of the top 1 percent of income earners; whereas 20 million jobs were created in the prior 8 years. The result is that wages and salaries of most consumers haven’t risen at all when inflation is taken into account. And so consumers could only spend what they could borrow, and borrowing collapsed when housing values plunged.
Therefore, any solution has to boost the incomes of ordinary Americans. This was understood by British economist John Maynard Keynes during Roosevelt’s New Deal, and his theories helped the U.S. and Europe recover from the Great Depression. So what was forgotten is being resurrected, given the severity of the current recession.
There is a new twist to the solution that is missed by many economists, even, because Lord John Maynard Keynes’ economic theories continue to be misunderstood. He advocated more government spending only during the bad times. His real contribution was in the new field of behavioral economics. He was the first to take psychological factors into account to explain the behavior of individuals and the financial markets.
Keynes maintained that the Great Depression was caused primarily by a psychological depression in “animal spirits” that caused Americans to retreat into themselves, and so cease most economic activity. His most famous conclusion was that since governments already knew how to stimulate economies during wartime, they should also be able to do so during peacetime.
Many of his followers have been behavioral economists whose research has led to a greater understanding of what financial stimulus works and what doesn’t. For instance, the irrational exuberance that caused the housing bubble (and dot-com bubble before that) was predictable, since research has shown that investors and consumers are easily fooled by past history. Once home prices started climbing, for instance, there was a tendency to believe they would continue to climb.
And so part of the solution is create measures that prevent such bubbles from re-occurring. Hence the emphasis should be on better regulatory oversight of the financial markets. Such oversight not only fights fraud, but helps to establish programs that educate investors and consumers in the pitfalls of irrational exuberance.
Harlan Green © 2009
The demand slack is now worldwide, so that even our exports are down, which has hurt many domestic industries. This is puzzling many of the 2500 economists, business and political leaders attending the annual Davos, Switzerland economic summit, according to New York Times columnist Thomas Friedman. They seem to be at a loss to find a solution to the current worldwide economic malaise.
Part of the puzzlement is due to the nature of the malaise. Such a complete breakdown in consumer spending hasn’t happened since World War II. And that is due to both the housing and credit crunches, which caused the soaring jobless rate. So any solution must also envision how to get banks lending again. But banks won’t lend, until they see a pickup in demand for products and services.
This recession is also puzzling because the old solutions aren’t working. The first half of the TARP funds went to shore up financial institutions, on the theory that they would begin to lend again. For the past 28 years the answer to any economic problem was what is called supply-side economics, which meant giving more breaks to businesses such as banks or cutting taxes of the investor class.
But that program didn’t work over the past 8 years. Only 5 million jobs were created, in spite of record corporate profits and incomes of the top 1 percent of income earners; whereas 20 million jobs were created in the prior 8 years. The result is that wages and salaries of most consumers haven’t risen at all when inflation is taken into account. And so consumers could only spend what they could borrow, and borrowing collapsed when housing values plunged.
Therefore, any solution has to boost the incomes of ordinary Americans. This was understood by British economist John Maynard Keynes during Roosevelt’s New Deal, and his theories helped the U.S. and Europe recover from the Great Depression. So what was forgotten is being resurrected, given the severity of the current recession.
There is a new twist to the solution that is missed by many economists, even, because Lord John Maynard Keynes’ economic theories continue to be misunderstood. He advocated more government spending only during the bad times. His real contribution was in the new field of behavioral economics. He was the first to take psychological factors into account to explain the behavior of individuals and the financial markets.
Keynes maintained that the Great Depression was caused primarily by a psychological depression in “animal spirits” that caused Americans to retreat into themselves, and so cease most economic activity. His most famous conclusion was that since governments already knew how to stimulate economies during wartime, they should also be able to do so during peacetime.
Many of his followers have been behavioral economists whose research has led to a greater understanding of what financial stimulus works and what doesn’t. For instance, the irrational exuberance that caused the housing bubble (and dot-com bubble before that) was predictable, since research has shown that investors and consumers are easily fooled by past history. Once home prices started climbing, for instance, there was a tendency to believe they would continue to climb.
And so part of the solution is create measures that prevent such bubbles from re-occurring. Hence the emphasis should be on better regulatory oversight of the financial markets. Such oversight not only fights fraud, but helps to establish programs that educate investors and consumers in the pitfalls of irrational exuberance.
Harlan Green © 2009
Mortgage Market Beginning Revival
When will we see an improvement in mortgage volume, and so real estate sales? This is probably the most asked question these days. Both the Fed and Congress are doing all they can to make mortgages reasonable and affordable to more borrowers. But in fact it is just Fannie and Freddie—now owned by the government—who are originating most of those mortgages.
So-called jumbo loans—those above $603,750 for a single unit in Santa Barbara County—are still not saleable on the secondary market, meaning that investors will only buy them for a tremendous premium. This has jacked up their rates into the 6-8 percent range for both jumbo ARMs and fixed rates.
But mortgage volumes are rising. The Mortgage Bankers Association (MBA) Weekly Mortgage Applications Survey for the week ending January 9, 2009 showed an increase of 15.8 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 95.7 percent compared with the previous week and was up 52.4 percent compared with the same week one year earlier.
It is mostly refinances, whose volume is back up to June 2003 levels, and now comprise 85 percent of transactions. So the purchase market is still hurting, as perhaps homebuyers are reluctant to buy until they see a bottoming out in prices. That is common during deflationary times.
It is incumbent upon Realtors in particular to chart the direction of home prices in their territories. For instance, Santa Barbara and South Coast prices seem to have bottomed out in the $700 to $900,000 median price range. And that is in the range of the new high-balance conforming loan amount.
Why have mortgage volumes fallen so drastically last year? It is not only because of the credit squeeze. Housing expenses—including rent or mortgage payments as well as the cost of utilities, property taxes, insurance, and maintenance—have grown much faster than incomes from 1996 to 2006, according the Harvard’s Joint Center for Housing Study. But household incomes grew just 36 percent during that time.
In fact, Americans' incomes since 2000 have grown more slowly than at any time since the 1960s. So most consumers had to borrow to even maintain their standard of living. Therefore there has to be a push to boost the jobs that will boost the wages and salaries of working Americans to bring this economy back into equilibrium.
This is a 180 degree turn for many economists who believed that smaller government and lower taxes were the prescription that fit all economic ailments. But we now know that such a philosophy led to the excesses that government is working to fix.
Harlan Green © 2009
So-called jumbo loans—those above $603,750 for a single unit in Santa Barbara County—are still not saleable on the secondary market, meaning that investors will only buy them for a tremendous premium. This has jacked up their rates into the 6-8 percent range for both jumbo ARMs and fixed rates.
But mortgage volumes are rising. The Mortgage Bankers Association (MBA) Weekly Mortgage Applications Survey for the week ending January 9, 2009 showed an increase of 15.8 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 95.7 percent compared with the previous week and was up 52.4 percent compared with the same week one year earlier.
It is mostly refinances, whose volume is back up to June 2003 levels, and now comprise 85 percent of transactions. So the purchase market is still hurting, as perhaps homebuyers are reluctant to buy until they see a bottoming out in prices. That is common during deflationary times.
It is incumbent upon Realtors in particular to chart the direction of home prices in their territories. For instance, Santa Barbara and South Coast prices seem to have bottomed out in the $700 to $900,000 median price range. And that is in the range of the new high-balance conforming loan amount.
Why have mortgage volumes fallen so drastically last year? It is not only because of the credit squeeze. Housing expenses—including rent or mortgage payments as well as the cost of utilities, property taxes, insurance, and maintenance—have grown much faster than incomes from 1996 to 2006, according the Harvard’s Joint Center for Housing Study. But household incomes grew just 36 percent during that time.
In fact, Americans' incomes since 2000 have grown more slowly than at any time since the 1960s. So most consumers had to borrow to even maintain their standard of living. Therefore there has to be a push to boost the jobs that will boost the wages and salaries of working Americans to bring this economy back into equilibrium.
This is a 180 degree turn for many economists who believed that smaller government and lower taxes were the prescription that fit all economic ailments. But we now know that such a philosophy led to the excesses that government is working to fix.
Harlan Green © 2009
When Will Real Estate Markets Improve?
December existing-home sales jumped 6.5 percent, according to the National Association of Realtors (NAR) with unsold inventory falling to 9.3-month supply. The Conference Board’s Index of Leading Economic Indicators (LEI) also rose for the first time in months, which may be a sign that economic activity is beginning to stabilize.
But concerns about the faltering economy and reluctant home buyers pushed builder confidence in the market for newly built single-family homes down further in January, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI). The HMI edged down a single point to a new record low of 8 in January.
Lawrence Yun, NAR chief economist, said home prices continue to fall significantly. “It appears some buyers are taking advantage of much lower home prices,” he said. “The higher monthly sales gain and falling inventory are steps in the right direction, but the market is still far from normal balanced conditions. Buyers will continue to have an edge over sellers for the foreseeable future.”
Meanwhile, builders are advocating more federal housing aid to jumpstart new home sales. Specifically, the NAHB is advocating for an enhanced home buyer tax credit and a government buy-down of mortgage rates for home purchases in 2009, moves that would rejuvenate demand for homes and trigger significant consumer spending across the board.
"Clearly, conditions in the nation's housing market aren't getting any better, and they aren't going to get any better until the federal government takes substantial action to encourage qualified buyers to get back in the market," said NAHB Chairman Sandy Dunn. Dunn noted that "The Obama Administration and the new Congress have a tremendous opportunity and responsibility to enact legislation that can spur home buyer demand and jump-start the national economy."
"Builder views continue to track with historically low consumer confidence measures," said NAHB Chief Economist David Crowe. "The fact that there has been microscopic movement in the historically low HMI and its component indexes over the last three months provides further evidence of the need for government action to rejuvenate housing demand. Qualified buyers are clearly in the wings, but they're looking for a significant signal from the federal government that now is the time to return to the market."
The Conference Board’s LEI predicts future economic activity, and “Taken together, the recent behavior of the composite economic indexes suggests that the recession that began in December 2007 will continue in the near term.”
Harlan Green © 2009
But concerns about the faltering economy and reluctant home buyers pushed builder confidence in the market for newly built single-family homes down further in January, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI). The HMI edged down a single point to a new record low of 8 in January.
Lawrence Yun, NAR chief economist, said home prices continue to fall significantly. “It appears some buyers are taking advantage of much lower home prices,” he said. “The higher monthly sales gain and falling inventory are steps in the right direction, but the market is still far from normal balanced conditions. Buyers will continue to have an edge over sellers for the foreseeable future.”
Meanwhile, builders are advocating more federal housing aid to jumpstart new home sales. Specifically, the NAHB is advocating for an enhanced home buyer tax credit and a government buy-down of mortgage rates for home purchases in 2009, moves that would rejuvenate demand for homes and trigger significant consumer spending across the board.
"Clearly, conditions in the nation's housing market aren't getting any better, and they aren't going to get any better until the federal government takes substantial action to encourage qualified buyers to get back in the market," said NAHB Chairman Sandy Dunn. Dunn noted that "The Obama Administration and the new Congress have a tremendous opportunity and responsibility to enact legislation that can spur home buyer demand and jump-start the national economy."
"Builder views continue to track with historically low consumer confidence measures," said NAHB Chief Economist David Crowe. "The fact that there has been microscopic movement in the historically low HMI and its component indexes over the last three months provides further evidence of the need for government action to rejuvenate housing demand. Qualified buyers are clearly in the wings, but they're looking for a significant signal from the federal government that now is the time to return to the market."
The Conference Board’s LEI predicts future economic activity, and “Taken together, the recent behavior of the composite economic indexes suggests that the recession that began in December 2007 will continue in the near term.”
Harlan Green © 2009
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