What Happens in 2014??

Popular Economics Weekly

Next year could start with a bang. U.S. third quarter Gross Domestic Product expanded at 4.1 percent, revised up from 3.6 percent, with consumer spending a main driver of growth. This has to mean consumers are feeling prosperous again, and if employment continues to rise as predicted by the Fed, and others, so will consumers’ incomes and spending.

Retail sales are also strong with the holidays looking good.  Overall retail sales in November jumped 0.7 percent, following a rise of 0.6 percent the month before (originally up 0.4 percent).  Autos were a big part of the November boost, gaining 1.8 percent after a 1.1 percent increase in October, so that annual sales are approaching 5 percent, and 6 percent is closer to a normal sales rate, and full employment.

Graph: Econoday

The Kansas Federal Reserve Bank just released a study that says single family starts could increase by 150 percent from 2012 to their peak in 2021 (Chart 1). The annual level of starts at this peak is about the same as in 2002, one year into the single-family construction boom. Single-family construction is then projected to fall over the subsequent decade.

Graph: Calculated Risk

Demand in particular was raised in the GDP report, and increasing demand for goods and services is what induces businesses and economies to grow. Final sales of domestic product were revised up to 2.5 percent, compared to the second estimate of 1.9 percent and 2.1 percent in the second quarter. Final sales to domestic purchasers (which exclude net exports) were bumped up to 2.3 percent versus the second estimate of 1.8 percent and 2.1 percent in the second quarter.

Graph: Econoday

The best news of all was the bipartisan budget agreement that put off any talk of indiscriminate sequester cuts for the next 2 years. It will add back a total of $85 billion to government spending and will give an additional boost to growth in 2014. It has been the decline in government investments and employment in particular that have been the largest roadblock to increased growth.

Under the terms of the deal, spending for the Pentagon and other federal agencies would be set at $1.012 trillion for fiscal 2014, said the Washington Post, midway between the $1.058 trillion sought by Democrats and the $967 billion championed by Republicans. The Pentagon would get a $2 billion increase over last year, while domestic agencies would get a $22 billion bump, clearing space for administration priorities such as fresh investments in education and infrastructure.

Harlan Green © 2013

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

Where is The Inflation??

Financial FAQs

The answer, in a nutshell, is it’s nowhere to be found. All current worldwide and domestic inflation indicators show depressed demand for goods and services, hence there is little incentive to raise prices. Therefore businesses are spending little on expanding capacity—with the exception of housing and autos. For instance, Ford just announced it will be hiring 5,000 additional workers and introducing 16 new models, while GM will spend $1.3 billion to expand 5 existing factories.

Graph: Calculated Risk

In fact, the Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in November on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported. Over the last 12 months, the all items index increased just 1.2 percent before seasonal adjustment.

Why such a weakness in demand? It’s because consumer incomes are barely rising, and consumers account for some 70 percent of economic activity. The income side of the October report is especially soft, at minus 0.1 percent following two very strong months at plus 0.5 percent, said the Commerce Department. The decline is the first since January and may be related to the impact of the government shutdown on private wages. Wages & salaries are especially soft, up only 0.1 percent following gains of 0.4 and 0.6 percent in the two prior months, as the Econoday graphs shows.

Graph: Econoday

So is it any wonder that consumers are spending less, with the Federal Reserve keeping interest rates at record lows? Spending has been increasing just 2 percent annually. Housing in particular has been boosted by those low rates, with conforming 30-year fixed mortgage rates still at 4.375 percent for zero origination points.

And housing starts are at 5-year high. Construction surged in November-and this time it was not just the multifamily component. Starts in November jumped 22.7 percent after rising 1.8 percent in October. The November starts annualized level of 1.091 million units topped expectations for 0.952 million units and was up 29.6 percent on a year-ago basis. September starts were 0.873 million and October was 0.889 million.

Low interest rates go with low inflation rates, which in turn are due to barely rising wages and salaries. Only a lower unemployment rate will boost consumers’ incomes, and that means a commitment by both political parties and the White House to policies that encourage greater growth.

Harlan Green © 2013

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

Home Equity Increasing

The Mortgage Corner

CoreLogic, a real estate analytics firm, today released new analysis showing approximately 791,000 more residential properties returned to a state of positive equity during the third quarter of 2013, and the total number of mortgaged residential properties with equity currently stands at 42.6 million.

This is helping November home sales in the South Coast, with closed transactions holding strong and huge price increases year-over-year, reports Gary Woods for MLS.

“Year over year sales are up just slightly from 2012 with the median sales price up to about $940,000 for approximately a 19 percent rise. The average sales price is also up going from about $1.36 million in 2012 to approximately $1.43 million in 2013 for a 5 percent rise while the numbers of escrows are down with 1,203 in ’12 to 1,168 in ‘13 with the median list price on those escrows up about 15 percent to approximately $960,000.”

The CoreLogic analysis indicates that nearly 6.4 million homes, or 13 percent of all residential properties with a mortgage, were still in negative equity at the end of the third quarter of 2013. This figure is down from 7.2 million homes, or 14.7 percent of all residential properties with a mortgage, at the end of the second quarter of 2013.

Graph: Calculated Risk

This is a result of the sharp rise in housing values this year. Of the 42.6 million residential properties with positive equity, 10 million have less than 20 percent equity. Borrowers with less than 20 percent equity, referred to as “under-equitied,” may have a more difficult time obtaining new financing for their homes due to underwriting constraints.

Under-equitied mortgages accounted for 20.4 percent of all residential properties with a mortgage nationwide in the third quarter of 2013, with more than 1.5 million residential properties at less than 5 percent equity, referred to as near-negative equity. Properties that are near negative equity are considered at risk should home prices fall.

“Rising home prices continued to help homeowners regain their lost equity in the third quarter of 2013,” said Mark Fleming, chief economist for CoreLogic. “Fewer than 7 million homeowners are underwater, with a total mortgage debt of $1.6 trillion. Negative equity will decline even further in the coming quarters as the housing market continues to improve.”

California has the twelfth worst negative equity with 13.2 percent of those homes holding mortgages. Nevada had the highest percentage of mortgaged properties in negative equity at 32.2 percent, followed by Florida (28.8 percent), Arizona (22.5 percent), Ohio (18.0 percent) and Georgia (17.8 percent). These top five states combined accounted for 36.4 percent of negative equity in the U.S.

Harlan Green © 2013

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The Great Divergence

Popular Economics Weekly

The so-called “minimalist” budget deal just reached by Congress is another illustration of the great divergence in wealth distribution of recent years that has eclipsed the middle class. The Great Divergence is not a term usually associated with inequality, but a term coined my historian Samuel Huntington to explain Europe’s explosive economic growth in the 19^th century that left the rest of the world behind. But today, it best explains what has reduced domestic economic growth and job formation over the past 30 years.

Until 1970 wealth had been fairly evenly distributed so that the rising tide of economic growth lifted most boats, but then something happened. The middle class began to disappear, with wealth flowing upward, so what was left was either the poorest or richest among us.

The results of such a ‘divergence’ of wealth from what was its distribution since World War II has not been well documented, and ultimately resulted in the Great Recession (which some have called the Lesser Depression). Middle class consumers in particular saw their accumulated wealth disappear with the busted housing bubble, and income growth that did not keep up with inflation. Both household and government revenues declined to record lows as a percentage of overall economic activity.

What happened since then is conservative economic policies begun under Presidents Carter and Reagan, have gradually shifted most of U.S. wealth created to the wealthiest individuals and corporations, resulting in money flowing to those who either hoard it (such as record corporate cash assets of more than $2.2 trillion), or play the financial markets, causing speculative bubbles that have resulted in 5 recessions since 1980.

There has also been a gradual reduction in economic growth since then, with GDP growth averaging 2.5 percent, whereas it averaged 3.5 percent up to 1980, including the Great Depression. It is even worse today, averaging 2 percent since the end of the Great Recession, with the unemployment rate stuck at 7 percent.

This is not new news. It has been well documented by such as Professors Thomas Piketty and Emmanuel Saez’s research on income inequality, and Robert Reich in his book and movie, Inequality for All. But we are now just beginning to understand its effects.

According to the Congressional Budget Office, between 1979 and 2007 incomes of the top 1 percent of Americans grew by an average of 275 percent. During the same time period, the 60 percent of Americans in the middle of the income scale saw their income rise by 40 percent. From 1992-2007 the top 400 income earners in the U.S. saw their income increase 392 percent and their average tax rate reduced by 37 percent. In 2009, the average income of the top 1 percent was $960,000 with a minimum income of $343,927

And now, the brutal cuts to federal spending known as the sequester have wreaked havoc on important programs for mostly the poor, cutting off hundreds of thousands from Head Start and low-income housing assistance, setting back scientific research and environmental protection, and costing more than a million jobs. Getting rid of the sequester for domestic programs was a high priority for Congressional Democrats, yet very little was achieved in a budget deal reached last Tuesday to right this great divergence of wealth from the have-nots to the haves.

Lowering the maximum income tax rates for the wealthiest to 36 percent from as high as 48 percent during the Reagan era, lowering capital gains, inheritance tax rates, as well as giving energy companies and major corporations huge tax loopholes to drive through, has transferred most of the wealth created since then to the top 1 percent, while corporations have amassed record amounts of cash reserves, much it held overseas where most growth has occurred for the multinational corporations.

And corporations have used their increased economic power and profits to cement their economic dominance; by suppressing collective bargaining, minority voting rights, and a great number of environmental regulations in state legislatures via ALEC, the American Legislative Exchange Council that actually writes the legislation for conservative state legislatures.

The result is that most of the productivity gains enabled by both technology and globalization (i.e., relaxed trading regulations and oversight) have gone to corporations and their investors, abetted by the reduced tax base.

This is while middle class incomes and retirement accounts have been depleted, and governments have been starved of funds to even keep up with outmoded infrastructure maintenance, while reducing educational spending, environmental enforcement that pay forward benefits for future generations.

The Great Divergence is once again a fact, but a fact that highlights the decline of western economies due to the increasing concentration of wealth. It should raise alarms in Europe as well, where austerity programs are at work impoverishing their middle class.

Harlan Green © 2013

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Affordable Housing In Decline

The Mortgage Corner

The Harvard Joint Center for Housing Studies has just come out with their rental market report, and it shows very little low rent housing available, due mainly to both increased household formation and those who have lost their homes from the busted housing bubble. Almost all of the 2.7 million abandoned and/or foreclosed homes are gone; most becoming rentals that do not meet the expanding need for rental housing.

Millions of Americans are in precisely that situation, according to a study released today by Harvard’s Joint Center for Housing Studies. The availability of apartments, especially cheaper ones, hasn’t nearly kept up with demand, and the problem has worsened since the 2007-09 recession, the study says.

In 1960, about one in four renters paid more than 30 percent of income for housing. Today, one in two are cost burdened,” according to the study, America’s Rental Housing.

Graph: Harvard Center for Housing Studies

Rick Judson, chairman of the National Association of Home Builders (NAHB), issued the following statement on the rental housing report:

"The report released today by the Harvard Joint Center for Housing Studies highlights serious affordability problems for many of America's renter households, and NAHB supports many of the policy initiatives outlined in the study to meet this ongoing challenge.  Of primary importance, efforts to reform the housing finance system must include a federal backstop to maintain broad liquidity during all economic cycles and ensure that rental housing can continue to be built and preserved.”

Judson and the NAHB have supported maintaining some form of Fannie Mae and Freddie Mac to guaranteed conforming loans that currently cover more than 90 percent of mortgages originated. There have been no viable alternatives proposed to date.

"It is clear that the federal role in ensuring the availability of financing for multifamily rental housing for low- and moderate-income households is critical,” said Judson. “Other ways to reduce the costs of providing affordable housing must be pursued as well, such as strengthening the Low Income Housing Tax Credit program, removing regulatory barriers to construction, providing gap financing to help reduce construction costs, streamlining program rules and allowing agencies to align administrative procedures across programs.”

Graph: Boston Globe

So the real problem is rising housing prices, coupled with very low housing inventories that are putting pressure on affordable housing. The good news is that a lot more rental housing is being constructed with strength in the multifamily component that spiked a monthly 15.3 percent after a 20.1 percent surge in September. The multifamily component is up 22.5 percent on a year-ago basis while the single-family component is up 8.8 percent.

Harlan Green © 2013

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

Paying Sustainable Economic Growth Forward

Popular Economics Weekly

The Fed has said it wouldn’t begin to boost interest rates until sustainable economic growth was achieved. However, no one has actually defined what that means. Fed Chairman Bernanke defines it as when full employment is achieved, or the unemployment rate drops to around 6 percent. Others have said it is when Gross Domestic Product growth is back to the historical 3 percent plus rate from its 2 percent average of late.

But those metrics aren’t really definitions of sustainable growth, since they don’t take into account that portion of GDP invested in future growth. For no growth is sustainable unless investments are made in future, longer term growth, rather than held in corporate coffers or excess bank reserves. Senator Elizabeth Warren’s “paying forward” campaign speech is a good place to start in search of a truer definition of sustainable growth.

At a campaign stop in Massachusetts while running for Ted Kennedy’s Senate seat, she famously said, "You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did."

That is as good a definition of sustainable economic growth as we can find. For instance, future growth isn’t possible without adequate infrastructure. Yet how much of current economic activity is funneled to roads these days with the American Society of Civil Engineers saying there is some $2.2 trillion in deferred infrastructure maintenance? Or, how much is being spent on education?

A recent OECD study of education worldwide cited the U.S. as the biggest spender in elementary education, but with meager results. And for post-high school programs, the United States is far outspent in public dollars. U.S. taxpayers picked up 36 cents of every dollar spent on college and vocational training programs. Families and private sources picked up the balance. Whereas in other OECD nations, it was roughly reversed: The public picked up 68 cents of every dollar in advanced training and private sources picked up the other 32 cents.

"When people talk about other countries out-educating the United States, it needs to be remembered that those other nations are out-investing us in education as well," said Randi Weingarten, president of the American Federation of Teachers, a labor union.

But there is one measure of sustainability that almost no one talks about, and that is boosting sustainable consumer spending. We know consumer spending makes up some 70 percent of U.S. economic activity, yet current economic policies depress household incomes by putting most of the tax burden on wage and salary earners via payroll taxes. Whereas income taxes have been steadily reduced over the past 30 years, so that billionaires such as Mitt Romney and Warren Buffet pay effective tax percentages in the teens.

Rutgers economic historian James Livingston has put it best in various Op-eds and articles.

“Growth has happened precisely because net private investment has been declining since 1919 and because consumer expenditures have, meanwhile, been increasing. In theory, the Great Depression was a financial meltdown first caused, and then cured, by central bankers. In fact, the underlying cause of this disaster wasn’t a short-term credit contraction engineered by bankers. The underlying cause of the Great Depression was a fundamental shift of income shares away from wages and consumption to corporate profits, which produced a tidal wave of surplus capital that couldn’t be profitably invested in goods production -- and wasn’t invested in goods production.”

“Now look,” said Senator Warren, “you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along."

There will always be a debate about how to share the wealth pie, but there should be no debate about investing in the future of America, which means our youth, but also a healthy environment and yes; a well-functioning health care system.

Harlan Green © 2013

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

November’s 203,000 Payroll Jobs Not Enough

Popular Economics Weekly

The U.S. Bureau of Labor Statistics reported today unemployment declined from 7.3 percent to 7.0 percent in November, and total nonfarm payroll employment rose by 203,000. But that shouldn’t be enough good news for the Federal Reserve to begin to raise longer term interest rates, which is what will happen when they begin to ‘taper’ their monthly $85 billion in securities purchases. Too much money is still on the sidelines, rather than being invested in future growth.

In fact, if anything, the Fed will probably announce that tapering might begin in the spring, if such higher employment numbers persist. That’s because, coupled with the upward revision of Q3 GDP growth to 3.6 percent from 2.5 percent, the economy isn’t showing any inflation. Higher inflation is a sign of increased spending and investment, rather than all those excess reserves sitting idle in safe Treasury bonds, or other so-called MZM accounts (money at zero maturity), which totals $12 trillion, according to the St. Louis Fed.

Graph: Calculated Risk

Both the number of unemployed persons, at 10.9 million, and the unemployment rate, at 7.0 percent, declined in November. Among the unemployed, the number that reported as being on temporary layoff decreased by 377,000. But this largely reflects the return to work of federal employees who were furloughed in October due to the partial government shutdown.

And the civilian labor force rose by 455,000 in November, after declining by 720,000 in October. In fact, total employment as measured by the Household Survey increased by 818,000 over the month, following a decline of 735,000 in the prior month, so higher household employment just cancelled out the prior month’s drop.

Then why should the Fed wait longer to begin to taper? According to the BLS, there are 4.066 million workers who have been unemployed for more than 26 weeks and still want a job. This was up slightly from 4.063 million in October. Though generally trending down, it is still very high.  Long term unemployment remains one of the key labor problems in the US, in part because so much of the record corporate profits are not being put to work towards future growth, as I said.

One eye-opener is the continuing record corporate profits, in part because wage and salary growth has been depressed. Profits in the third quarter increased an annualized 11.5 percent, following a gain of 8.5 percent in the second quarter. Profits are after tax but without inventory valuation and capital consumption adjustments. Corporate profits on a year-on-year basis increased 5.8 percent versus 5.3 percent in the second quarter.

Graph: Econoday

MarketWatch columnist Rex Nutting believes that is the real growth problem. “Since June 2009, he says, “real average weekly earnings have increased 0.3 percent per year , even as productivity has increased 1.5 percent per year. Most of the income gains have gone to the highest paid workers, including the bosses. Real median weekly wages have actually declined 0.8 percent per year since 2009.”

And inflation is still a problem. That is, it’s too low, which means not enough money is being spent that would stimulate more growth, as I said. So though employment is up some 2.9 million jobs, the other two items the Fed is looking at before they decide to taper are inflation (core PCE is only up 1.1 percent year-over-year), and a budget agreement.   We are seeing some indication that an agreement can be reached, but it will do little to boost growth, though it should head off another government shutdown, which is something to cheer about.

Harlan Green © 2013

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

New-Home Sales Soaring

The Mortgage Corner

There aren’t enough new homes being built, apparently, as new U.S. homes sold at an annual rate of 444,000 in October, up 25.4 percent from 354,000 in September, the U.S. Census Bureau said Wednesday. And the inventory of new homes for sale plunged to a post-recession low of 4.9 months, which puts for-sale inventories back into 1960 levels.

Graph: Econoday

Lower interest rates are also holding, as more Federal Reserve Governors are saying that QE3 tapering of securities’ purchases shouldn’t begin until the unemployment rate actually drops below 6.5 percent, from its current 7.1 percent. And economists don’t see that happening for at least another year.

The collection of sales data for both months was delayed by the federal shutdown, prompting the government to release the information on the same day. Demand in October was strong across the country, with double-digit percent gains in all four major regions. Part of what drove sales was a decline in prices and more demand for lower-prices homes, a trend that typically emerges in the colder months.

The median price of new homes fell 5.3 percent to $245,800 in October. That's the lowest level since November 2012. The supply of new homes on the U.S. market, meanwhile, sank to 4.9 months in October at the current sales pace from 6.4 months in September. This is while new home sales are 21.6 percent higher compared to one year ago.

We mustn’t forget that the Federal Housing Finance Authority (FHFA) is also delaying any drop in conforming loan limits below $417,000 through 2014, which has to be heartening home buyers. As such a lower restriction on loan amounts would affect entry-level, lower-priced homes in particular.

Inventory levels are in fact back to levels last seen in 1997 to 2005 in this Calculated Risk graph that dates back to 1963. This is spurred the housing construction boom that boosted the housing bubble. But with all the restriction on mortgage lenders initiated by both the Federal Reserve and Dodd-Frank, Consumer Protection Finance Bureau, we don’t see the likelihood of another housing bubble. The homeownership rate has dropped to 64 percent from its high of 68 percent during the bubble. And with household incomes and debt loads that haven’t recovered from the Great Recession, there is little chance a bubble would re-occur anytime soon, if ever.

Graph: Calculated Risk

In spite of this news, existing-home prices were building steam through September based on S&P Case Shiller, indicating overall demand is still strong. The 20-city index rose an adjusted 1.0 percent in September vs monthly gains of 0.9 percent and 0.6 percent in the prior two months. Very respectable gains swept all 20 cities for the second month in a row, led this time by Atlanta at plus 1.9 percent followed by a string of cities out West where S&P says there's talk now of a housing bubble.

But we know S&P tends to be overly conservative in their projections. Most of the price gains were either in Las Vegas, or the California coastal cities of San Francisco, Los Angeles and San Diego, beneficiaries of the fast-growing Silicon Valley economy. So most of the growth in sale prices can be attributed to real economic growth, rather than the financial speculation that occurred on Wall Street leading to the Great Recession.

Harlan Green © 2013

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

What Should We Be Thankful For?

Financial FAQs

There is still much we can be thankful for this Thanksgiving, in spite of tax raises and government spending cuts that affect mostly the poorest—whether it’s less food stamps, early child care, environmental protection, and maybe even fewer funds to fully implement the Affordable Care Act.

We finally have almost-universal health care, 92.7 percent of our workforce is employed, and we are better off than the Europeans. Europe is still in recession after 4 years of austerity policies that have resulted in sky-high unemployment rates, rather than benefiting from the quantitative easing policies that our Federal Reserve has initiated since September 2012 that has kept even long term interest rates at record lows.

So we can be thankful that Ben Bernanke is the current Fed Chairman. And in January pro-labor economist Janet Yellen will be the new Federal Reserve Chairman. I believe we can therefore look forward to continued low interest rates leading to greater job creation for some years to come.

We mustn’t listen to those Austerians that keep crying stocks and even real estate might be re-inflating asset bubbles, as happened with the recent housing bubble. Household income isn’t growing enough, and consumer debt is still too high to re-ignite any bubbles, though it is returning to more sustainable levels.

 

Graph: Calculated Risk

Consumer debts have declined to the lowest level in 30 years, according to the Federal Reserve’s just released Q2 2013 Household Debt Service and Financial Obligations Ratios report. This will boost consumer spending, and housing values. The enclosed graph dating back to 1980 shows that the overall Household Debt Service ratio (red line) is actually lower than it was in 1980, while the Homeowner Mortgage (blue line) and Consumer (yellow line) ratios are back to 1980 levels.

We can also be thankful that the housing market is in recovery, with prices up some 13.3 percent just this year, according the Case-Shiller Index, reducing mortgage default and foreclosure rates. That is largely because of the Fed’s low interest rates that are helping consumers to pay down their debts.

A good report that few see is the Bureau of Labor Statistics’ JOLTS report of job openings, layoffs and transfers. Job openings are basically back to 2005 levels. But because many more millions have joined the labor force since then, it hasn’t yet brought us closer to full employment.

Graph: Econoday

There were 3.913 million job openings in September, up from 3.844 million in August. The number of job openings decreased in arts, entertainment, and recreation and was little changed in all remaining industries and in all four regions. But it reflects the 204,000 payroll jobs created in October, which shows job creation increasing faster than previously.

The number of hires in September was 4.585 million, essentially unchanged from 4.559 million in August. The number of hires was little changed for total private and government, as well as for all industries and all four regions. There were 4.426 million total separations in September, little changed from 4.405 million in August.

So there is more to be done to boost economic growth. But I see the cup as half full, and the economic odds are it will continue to fill.

Harlan Green © 2013

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

Equality Is Good For Everyone!

Popular Economics Weekly

It looks like some states are beginning to take the equality issue seriously again. Massachusetts just raised their minimum wage to $10 per hour, California is raising it to $8.25 over 2 years, with New Jersey and other states to follow.

And just last week, the Center for American Progress launched the Washington Center For Equitable Growth, which aims to deepen the economic critique of inequality. It is being set up by Berkeley economist Emmanuel Saez, among others, who is known with his partner Thomas Piketty, as the first economists to historically research the history of income distribution over the past 100 years.

Their results show that we have the worst income distribution in the developed world; as bad as in 1929 that resulted in the Great Depression. Such inequality was again the case in the run-up to the Great Recession.

It was declining household incomes that led the Bush administration and Federal Reserve to create the housing bubble. It used very easy credit conditions and lax loan qualification standards to boost economic growth. But those declining incomes caused consumers to use up all their available credit and savings to maintain their standard of living, thus causing the Great Recession.

As the mission statement of the Center says:

“New research suggests that growing inequality in the United States may have broad social and economic effects — by reducing stable demand for goods and services, dampening entrepreneurialism, undermining the inclusiveness and responsiveness of political and economic institutions, limiting access to education, and stunting individual development.  Yet our understanding of how these mechanisms interact with the broader economy is limited.”

In December 2011 I wrote a column entitled, Equality Is Good For Everyone, when there was hope that maybe the Great Recession was finally over, and households might regain their financial footing from the busted housing bubble.

Alas, that wasn’t to be because Congress become locked in the battle over a higher debt ceiling and government spending cuts, just as the Europeans were going through their own austerity budget cuts. And so similar budget cuts were agreed to by President Obama and Congress that has reduced economic growth by as much as 1 percent per year, according to leading economists.

President Obama had just given a speech on income inequality that December at Osawatomie, Kansas, the site of Teddy Roosevelt’s “New Nationalism” speech, which signaled the beginning of the progressive era that culminated in FDR’s New Deal.

Teddy Roosevelt had given his now famous speech in 1910 that called upon the three branches of the federal government to put the public welfare before the interests of money and property.

“The new Nationalism puts the National need before sectional or personal advantage,” said Roosevelt. “It is impatient of the utter confusion that results from local legislatures attempting to treat National issues as local issues. It is still more impatient of the impotence which springs from over-division of governmental powers, the impotence which makes it possible for local selfishness or for legal cunning, hired by wealthy special interests, to bring National activities to a deadlock. This new Nationalism regards the executive power as the steward of public welfare. It demands of the judiciary that it shall be interested primarily in human welfare rather than in property, just as it demands that of the representative.”

Sound familiar? Obama said the Republican ideology of laissez faire, small government, free markets that existed when Teddy Roosevelt made his Osawatomie speech had resulted in too much graft and unlimited corporate power.

“It’s a simple theory — one that speaks to our rugged individualism and healthy skepticism of too much government. It fits well on a bumper sticker. Here’s the problem: It doesn’t work. It’s never worked.”

Berkeley Professor and former Clinton Labor Secretary Robert Reich has been most vocal on the growing divide between Haves and Have-nots that has resulted from the decline in equality with his film and book, Inequality For All. He also highlights the resultant distortions—among them a declining quality of life for most Americans, and financial markets becoming more susceptible to boom and bust cycles.

Harlan Green © 2013

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

Is Builder Optimism, New Home Construction Faltering?

The Mortgage Corner

Will new-home construction falter, now that interest rates are rising and consumers remain unsettled over Washington’s political gridlock that prevents any legislation being passed that would aid economic growth?

Builder confidence in the market for newly built, single-family homes was unchanged in November from a downwardly revised level of 54, reported the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This means that for the sixth consecutive month, more builders have viewed market conditions as good than poor, since any index value above 50 percent, means a majority of builders report growing activity. But that hasn’t spurred more new-home construction, which is stuck at early spring levels.

Graph: Calculated Risk

“Given the current interest rate and pricing environment, consumers continue to show interest in purchasing new homes, but are holding back because Congress keeps pushing critical decisions on budget, tax and government spending issues down the road,” said NAHB Chairman Rick Judson. “Meanwhile, builders continue to face challenges related to rising construction costs and low appraisals.”

“Policy and economic uncertainty is undermining consumer confidence,” said NAHB Chief Economist David Crowe. “The fact that builder confidence remains above 50 is an encouraging sign, considering the unresolved debt and federal budget issues cause builders and consumers to remain on the sideline.”

New-home construction has basically stalled since April and the beginning of interest rates increases due to the Fed’s hints that QE3 could end. This will hurt economic growth and employment, since new-home construction makes up a large part of economic growth these days, with other growth components are being constrained by lower government and consumer spending.

Graph: Calculated Risk

There has been a significant increase in new home sales this year.  Sales of new single-family houses in August 2013 were at a seasonally adjusted annual rate of 421,000, according to estimates by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 7.9 percent above the revised July rate of 390,000 and is 12.6 percent above the August 2012 estimate of 374,000
Read more at

Though year-over-year increases have slowed - August only saw a year-over-year increase of 12.6 percent, but Calculated Risk’s Bill McBride still expects new home sales to be up 15 percent to 20 percent for the year.  That follows an annual increase of 21 percent in 2012.

The seasonally adjusted estimate of new houses for sale at the end of August was 175,000. This represents a supply of 5.0 months at the current sales rate. It means that new home construction has not taken up the slack in supply, and might slow new-home sales.

The initial third Quarter GDP growth was 2.8 percent, up from 2.5 percent in Q2. And residential real estate activity was a large part of that increase. So we will need more new-home construction to keep growth at that level.

Harlan Green © 2013

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Why Do We Have Two Countries?”

Popular Economics Weekly

 

Former CIA assistant director Mike Morell lamented on a recent CBS 60 Minutes that he didn’t understand why congressional Democrats and Republicans couldn’t work together to boost economic growth for “the good of the country” when our weak economy was the greatest problem facing US, above even terrorist threats.

“I don’t understand the inability of our government to make decisions that push our economy and society forward,” he said. “Our national security is more dependent on the strength of the economy and society than anything else.”

The real answer is that we are living in two countries at the moment, mainly divided into anti-government Republican Red states and pro-government Democratic Blue states. And the Red states are suffering, with the lowest per capita incomes, education levels, and everything else that modern economies need to thrive.

To be sure it’s about politics and Republican ideological intransigence. But in the Old South it’s also about fighting the last Civil War—which means preserving racism. They are getting their wish to secede from the union, but it’s economically rather than politically.

This is while those states depend on government most for their social safety needs, whether it is farm subsidies or food stamps and Medicare for their poorest populations. More government monies flow into their states than flow back to the federal government, in other words.

This is a little-known fact that puzzles economists. Why are the states most dependent on government aid most opposed to it, particularly to Obamacare and the expansion of Medicare?

“A South Carolina legislator put it bluntly earlier this year,” in a recent Huffington Post column. “State Rep. Kris Crawford told a business journal that he supports expansion, but said electoral math is the trump card. "It is good politics to oppose the black guy in the White House right now, especially for the Republican Party," he said.”

Most of the Red states also adamantly oppose the expansion of voters’ rights, union collective bargaining, better healthcare, immigrants’ rights, environmental regulation, abortion and women’s rights, as if they want to turn the clock back to the last century.

Government gridlock not only endangers our security, but the resultant inequality—greatest in the Red states—endangers our democratic system itself, needless to say. The CIA should know, as it has kept track of the economic well-being of nations in its World Factbook, with the U.S. now ranked below other developed countries in income equality, birth-death rates, longevity, and health outcomes.

The problem today is the huge amount of damage gridlock is doing to economic growth, from downgrades of government debt by Standard & Poor’s rating agency to reluctant consumer spending. Even Moody’s has put U.S. debt on credit watch. The Red and Blue states seem to still be fighting the Civil War all over again after 150 years, as I’ve said in past columns.

So the question is, government and the Congress should work for the good of whose country? Tea Partiers and southern politicians in particular want to take back “their” country. If that is their sentiment, we will have two countries living one century apart.

Harlan Green © 2013

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Thanks For Nothing, Washington!

Financial FAQs

Democrats have bought the Republican lie that Democrats were the big spenders, it seems, with the draconian federal budget cuts enacted over the past 2 years. But recent statistics show it’s been the Republicans since 1980 that created the most state and federal government jobs—4,289,000 under the Reagan and 2 Bush administrations, whereas Clinton created 1,934,000 jobs, while 752,000 government jobs have been lost to date during the Obama Administration.

The result of the huge cutbacks in government spending and hiring since the Great Recession has been an economy still stalled—especially in overall jobs and lost output.

WSJ Marketwatch’s economist Rex Nutting highlighted this recently. Though we are out of the Great Recession, and the just announced Q3 2013 GDP growth is 2.8 percent, above Q2’s 2.5 percent, our economy lost some $5 trillion in income and output since the end of the Great Recession. Our unemployment rate is stuck at 7.2 percent with millions of jobs lost, median household incomes have been falling steadily, and our infrastructure continues to crumble with some $2.2 trillion in deferred maintenance and upkeep, according to the American Society of Civil Engineers.

“And we’re falling behind the Chinese in investing in the future,” said Nutting. “Last week, the Treasury Department announced that federal spending fell 2.3 percent to $3.45 trillion in fiscal 2013 after dropping 1.8 percent in 2012,” he wrote. “It was the largest annual decline in federal spending since 1955, and the first time spending had fallen two years in a row since 1954-55, at the end of the Korean War.”

Graph: WSJMarketwatch

“We can’t blame Obama alone,” said Nutting. “Congressional Republicans must take the bulk of the responsibility because they insisted that supposed out-of-control federal spending was our paramount economic problem, despite stagnant wages, the glaring scarcity of jobs and the glaring lack of out-of-control spending. Obama and congressional Democrats fought back, but only half-heartedly.”

Gross Domestic Growth picked up in Q3. However there was underlying weaknesses. Personal consumption expenditures (PCE) that power most consumer spending increased at a 1.5 percent annualized rate - the slowest rate since Q2 2011.
It looks like state and local governments are spending more, but the Federal government isn’t.  Federal government actually subtracted 0.13 percentage points in Q3, whereas state and local governments added 0.17 percentage points.

Graph: Calculated Risk

That means the U.S. economy isn’t operating anywhere near its full potential, not to speak of an unemployment rate that was predicted to drop to 6.5 percent by the end of this year. Now it looks like we will be lucky to reach 7 percent.

Graph: Calculated Risk

Government has actually lost jobs during Obama’s tenure to date, as we said. Calculated Risk reports that 752,000 jobs have been lost, mostly due to the Great Recession, but also because Republicans have succeeded in their message that government spending is out of control.

“Even Herbert Hoover, the president who has gone down in history as the man who did nothing to stop the Great Depression, wasn’t this bad,” said Nutting. “Under Hoover, real federal spending rose at an 18 percent annual rate. And Hoover built stuff we still use. Our fiscal policy has been awful. We needed government to step up and fill some of the gap left by the private sector, and instead we got literally nothing. Thanks for nothing, Washington!”

Harlan Green © 2013

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Are Consumers Losing Confidence in Housing??

The Mortgage Corner

The unanswered question to date is how the debt ceiling impasse and government shutdown has affected economic activity.  Both the industrial and service sectors have shown stronger growth, according to the Institute of Supply Management (ISM).  But real estate is another story.  Pending home sales in the NAR’s Pending Home Sale Index doesn’t look good. The index that measures home sales under contract, but not closed, has been declining for 4 months, a sure sign that housing sales, at least, are faltering.

This is in part because consumer confidence is faltering, as consumers lose confidence in government’s ability to function.  The shutdown endangered much more than 800,000 furloughed defense workers.  Combined with huge cuts in food stamps, no farm aid bill, and a not yet functioning Affordable Care Act, the shutdown and debt ceiling impasse has spooked consumers big time.

Graph: Econoday

Year-on-year, the index is down 1.2 percent for the first negative reading in nearly 2-1/2 years. The National Association of Realtors (NAR), which compiles the report, cites as a major factor the government shutdown which it says pushed government workers and contractors to the sidelines of the housing market.

NAR chief economist Lawrence Yun wasn’t optimistic about the near future, either. “Declining housing affordability conditions are likely responsible for the bulk of reduced contract activity’” he said. (But) “In addition, government and contract workers were on the sidelines with growing insecurity over lawmakers’ inability to agree on a budget. A broader hit on consumer confidence from general uncertainty also curbs major expenditures such as home purchases.”

The government shutdown really weighed on confidence indexes.  The Conference Board’s confidence index fell to 71.2 from a revised 80.2. With an 11 point drop, the dip is the largest since 12 points in January, a month that was also hit by a fiscal standoff in Washington.

Graph: Econoday

But the drop was mainly in expectations, which could reverse if some agreement is reached on a new federal budget by the December 15 deadline.  The component for present situations continued to show much less volatility, at 70.7 versus 73.5 for what is a 4th straight reading over 70—“a trend that is consistent with steady and soft month-on-month growth for the economy,” said Econoday. 

A negative on the present situation side was a sharp 2.2 percentage point rise to 35.8 percent for those that said jobs fewer jobs were available. This suggests another month of weakness for monthly payroll growth.

Consumer confidence powers much more than home sales, of course.  Retail sales are also growing just 4 percent per annum with the holiday season approaching, when 6 to 8 percent is the normal sales’ rate if consumers feel more confident.  Retail sales don’t adjust for inflation, so ‘real’ retail sales after inflation are rising just over 2 percent. This has to mean government dysfunction is definitely affecting consumer spending overall that powers some 70 percent of economic activity.

Harlan Green © 2013

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Mortgage Delinquencies Continue to Decline

The Mortgage Corner

The good news is that foreclosure rates continue to fall, though delinquencies more than 90 days late are fluctuating with the season, according to Lender Processing Services (LPS) in their Mortgage Monitor report for September. According to LPS, 6.46 percent of mortgages were delinquent in September, up from 6.20 percent in August. But LPS reported that 2.63 percent of mortgages were in the foreclosure process, down from 3.86 percent in September 2012, in this graph that begins in June 1995.

This is great news, and due mainly to the increase in housing values that has allowed many homeowners to either refinance or sell their homes.

Graph: Calculated Risk

This gives a total of 9.03 percent delinquent or in foreclosure. It breaks down as, according to Calculated Risk:
• 1,935,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,331,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,328,000 loans in foreclosure process.

Meanwhile, CoreLogic reports that home prices nationwide, including distressed sales, increased 12 percent on a year-over-year basis in September 2013 year over year. This change represents the 19th consecutive monthly year-over-year increase in home prices nationally. On a month-over-month basis, including distressed sales, home prices increased by 0.2 percent in September 2013 compared to August 2013.

Graph: Calculated Risk

Excluding distressed sales, home prices increased on a year-over-year basis by 10.8 percent in September 2013 compared to September 2012. On a month-over-month basis, excluding distressed sales, home prices increased 0.3 percent in September 2013 compared to August 2013. Distressed sales include short sales and real estate owned (REO) transactions.

The bottom line is that housing values should continue to increase, in spite of the shutdown, because overall business activity continues to improve in both the manufacturing and non-manufacturing (service industries) sectors. The October Purchasing Managers’ Non-Manufacturing Business Activity Index increased to 59.7 percent, which is 4.6 percentage points higher than the 55.1 percent reported in September, reflecting growth for the 51st consecutive month. Though the New Orders Index decreased by 2.8 percentage points to 56.8 percent (maybe because of the government shutdown), the Employment Index increased 3.5 percentage points to 56.2 percent, indicating growth in employment for the 15th consecutive month.

Harlan Green © 2013

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Consumer Debt At Record Lows

Financial FAQs

The Federal Reserve just released the Q2 2013 Household Debt Service and Financial Obligations Ratios. The overall Debt Service Ratio decreased in Q2 2013, and is just above the record low set in Q4 2012 thanks to very low interest rates. The homeowner's financial obligation ratio for consumer debt increased slightly in Q2 (omitting mortgage debt), and is back to levels last seen in early 1995.

These ratios show the percent of disposable personal income (DPI) dedicated to debt service (DSR) and financial obligations (FOR) for households, says Calculated Risk.

The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.

Also, the financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio.

This is a very good sign for higher employment and economic growth in 2014, which shows the Fed’s QE3 quantitative easing program that is keeping interest rates at record lows is bearing results.

Graph: Calculated Risk

Also the homeowner's financial obligation ratio for mortgages (blue line in graph) is at a new record low.  This ratio increased rapidly during the housing bubble, and continued to increase until 2008. With falling interest rates, and less mortgage debt (mostly due to foreclosures), the mortgage ratio has declined to an all time low, said the Federal Reserve report.

This is while Fannie Mae also just reported that the Single-Family Serious Delinquency rate declined in September to 2.55 percent from 2.61 percent in August, while Freddie Mac’s serious delinquency rate declined in September to 2.58 percent from 2.64 percent in August.

Fannie Mae’s serious delinquency rate is down from 3.41 percent in September 2012, and this is the lowest level since December 2008. Its serious delinquency rate peaked in February 2010 at 5.59 percent, believe it or not.

Graph: Calculated Risk

So can we say that real estate is out of danger of falling back into recession? Probably, but Congress and Obama haven’t resolved the fate of Fannie and Freddie that guarantee some 90 percent of mortgages originated today. The U.S. Treasury is still holding them in conservatorship when they are making record profits, and putting those profits into general coffers, rather than paying off the $180 billion in debt incurred by them during the Great Recession and busted housing bubble.

That is not a good sign, what with the Consumer Finance Protection Bureau now policing mortgages with ever more stringent regulations, such as Qualified Mortgages, that is restricting mortgage lending. So indications are good for more growth in consumer spending this year, but prospects for housing in 2014 are still questionable.

Harlan Green © 2013

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Why Isn’t Washington Working “For the good of the Country?”

Popular Economics Weekly

If we really want to know what is depressing consumers, look at how Congress is tied up in knots over the debt ceiling and spending losses from sequestration cuts--$109 billion per year, according to labor economist Jared Bernstein.

Former CIA assistant director Mike Morell on CBS’s 60 Minutes said he didn’t understand why congressional Democrats and Republicans couldn’t work together to boost economic growth for “the good of the country” when our weak economy was the greatest problem facing US, above even terrorist threats.

“I don’t understand the inability of our government to make decisions that push our economy and society forward,” he said. “Our national security is more dependent on the strength of the economy and society than anything else.”

But for “the good of whose country” are we talking about? We seem to be living in two countries at the moment, mainly divided into anti-government Republican Red states and pro-government Democratic Blue states. Most of the Red states adamantly oppose the expansion of voters’ rights, union collective bargaining, better healthcare, immigrants’ rights, environmental regulation, abortion and women’s rights, for starters.

Government gridlock not only endangers our security, but the resultant inequality endangers our democratic system itself. The CIA should know, as it has kept track of the economic well-being of nations in its World Factbook. The U.S. now ranks below other developed countries in income equality, birth-death rates, longevity, and health outcomes.

The problem today is the huge amount of damage gridlock is doing to economic growth, from downgrades of government debt by Standard & Poor’s rating agency, to higher borrowing rates. Even Moody’s has put U.S. debt on credit watch. The Red and Blue states seem to be fighting the Civil War all over again, after 150 years, as I’ve said.

Graph: Reuters

The latest evidence of the damage being done is orders for a wide range of U.S.-made capital goods plummeted in September and consumer sentiment weakened sharply in October, signs that the budget battle in Washington has held back the economy, said Thomson-Reuters. The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment fell to 73.2in October from 77.5 in September and was the lowest final reading since December 2012.

Then we have the latest unemployment report that showed more workers dropping out of the labor force, while the Labor Department’s JOLTS report of labor layoffs and hires remained stagnant over the past year.

Graph: Econoday

There were 3.883 million job openings on the last business day of August, up from July at a revised 3.808 million. The job openings rate improved slightly to 2.8 percent from 2.7 percent in July. But it has leveled off after increasing steadily since the end of the Great Recession.

So the question is, government should work for the “good of whose country”? Tea Partiers want to take back “their” country, a country that no longer exists. If that is their sentiment, how do we push our country and society forward?

Harlan Green © 2013

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Conforming Mortgage Limit Reductions Postponed

The Mortgage Corner

Federal officials will delay any reduction in the maximum size of home-mortgage loans eligible for backing by Fannie Mae and Freddie Mac until next spring at the earliest, said FHFA Administrator Ed DeMarco in a Wall Street Journal article--DeMarco: No Mortgage Limit Declines Before Spring 2014. It is reputably from heavy resistance from the real-estate industry and many lawmakers in Congress.

This is in the face of the recent government shutdown and debt ceiling debate that has slowed economic growth this year, and even next year, if a budget agreement isn’t reached by January 2014.

Couple this with a recent slowdown in real estate sales, including for new homes.  There appears to be little doubt that rising mortgage rates, combined with higher home prices, resulted in a material slowdown in net new-home orders last quarter, says Calculated Risk. Mortgage rates, of course, have fallen considerably since early September, though they remain well above levels since during the first five months of the year.

Currently, Fannie and Freddie can guarantee mortgages that have balances as high as $417,000 in most of the country and up to $625,500 in expensive housing markets, including parts of California and New York. Loans within the limits are called “conforming” or “High-Balance conforming loans.

Potential loan-limit changes will be announced six months ahead of their implementation date, said Demarco, and such changes wouldn’t be announced until November at the earliest. “Anything we do would have a long lead time and would be gradual and measured,” said Mr. DeMarco.

When the agency does move ahead with loan limit declines, the declines will apply to both the national limit and the high-cost limits, which were enacted on an emergency and temporary basis by Congress in 2008.

It will be politically difficult to lower these limits, and the limits probably wouldn't be adjusted down very much.  The conforming loan limit was $252,700 in 2000. Using the FHFA Purchase Only index, the national conforming loan limit might be lowered to around $360,000.

Using the CoreLogic or Case-Shiller Comp 20 indexes, the conforming loan limit might be lowered to $380,000 to $395,000. Not a large downward adjustment for the national limit.

Harlan Green © 2013

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Why Is Government So Important?

Popular Economics Weekly

So it turned out to be true, contrary to those who believed less government is better. The government shutdown proved just how important government is to our daily lives. Not only its cost—upwards of $24 billion in lost output over the next 10 years, for starters. Standard & Poor’s said the shutdown “to date has taken $24 billion out of the economy,” equaling $1.5 billion dollars a day and “shaved at least 0.6 percent off annualized fourth-quarter 2013 GDP growth.” And probably the future loss of jobs, as well, because employers have cut back on future hires over the uncertainty of another shutdown.

“As a consequence (of the shutdown), you may expect fourth-quarter growth in gross domestic product to be shaved by a half-point or more – bringing the rate of growth down to 2 percent or less”’ said Marketwatch economist Irwin Kellner. “Some of this might also carry over into the first quarter – especially since this brouhaha could well see a return engagement come early 2014.”

Economists are already speculating on why just 148,000 payroll jobs were created last month, in a report delayed some 2 weeks because of the shutdown. The 7.2 percent unemployment rate was lower because more were dropping out of the workforce, not because more were employed in the household study.

Graph: Calculated Risk

According to the Bureau of Labor Stat’s household survey, the labor force rebounded 73,000 after dropping 312,000 in August. However, the pool of available workers fell another 183,000 after a plunge of 532,000 in August-resulting in the fourth decline in a row. Again, a low labor force participation rate is at least partly behind the lower unemployment rate.

Graph: WSJ Marketwatch

The bottom line is that government provides too many services, and employs too many people in the private and public sectors, to be shut down for any length of time. That is the overriding lesson learned from this shutdown.

And the public knows it. In the aftermath if this shutdown, 8 in 10 Americans say they disapprove of the shutdown, according to a new Washington Post-ABC News poll. Two of three Republicans, or independents who lean Republican, share a negative view of the stalemate. And even a majority of those who support the tea party movement disapprove.

Does that mean it can’t happen again, or will history continue to repeat itself?

Harlan Green © 2013

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Government Shutdown Dims Builder Optimism

Financial FAQs

New-home construction is already a casualty of the government shutdown, and even sequestration agreement that has cut government hiring and spending more than $1.6 trillion to date. But its effect would be mitigated if interest rates remain low, and lenders continue to ease qualification criteria, such as lowering their super-high credit score requirement.

The National Association of Home Builders/Wells Fargo housing-market index fell to 55 in October from 57 in September. A prior September estimate pegged the level at 58, which matched the highest reading since 2005. Results above 50 signal that builders, generally, are optimistic about sales trends.

 

“Interest rates remain near historic lows and we don’t expect the level of rates to have a major impact on sales and starts going forward,” said David Crowe, NAHB’s chief economist. “Once this government impasse is resolved, we expect builder and consumer optimism will bounce back.”

Despite the recent decline, pent-up demand is supporting builder sentiment, which has increased 34 percent over the past year, outpacing home-construction growth.

"A spike in mortgage interest rates along with the paralysis in Washington that led to the government shutdown and uncertainty regarding the nation's debt limit have caused builders and consumers to take pause," said NAHB Chief Economist David Crowe. "However, interest rates remain near historic lows and we don't expect the level of rates to have a major impact on sales and starts going forward. Once this government impasse is resolved, we expect builder and consumer optimism will bounce back."

Interest have declined slightly from their recent highs, so that the 30-year conforming fixed rate today is approximately 4.25 percent with 0 origination points in California.

There is some good news. The average credit score among borrowers who received a mortgage in September was 732, down from a peak of 750 a year prior, according to new data released today by Ellie Mae, which provides mortgage lenders with loan origination systems.  And this is a sign both that lenders loosening their heretofore strict qualification standards, and that more eligible homebuyers will be allowed in the market.

“The share of purchase loans continued to grow in September 2013, climbing 1 percent to 58 percent of all loans even in the face of higher interest rates and seasonality,” said Jonathan Corr, president and chief operating officer of Ellie Mae. “This was the eighth consecutive month that the purchase loan percentage has increased or stayed steady. In January 2013, purchases represented only 27 percent of closed loans.

“The credit standards also continued to ease in September with average FICO scores for closed loans dropping to 732 compared to 734 in August. September’s averages were 15 points below where they were at the beginning of the year (January 2013) and the lowest level since we began our tracking in August 2011,” noted Corr. “When you drill down farther, the change is even more apparent. For example, 31 percent of the closed loans in September 2013 had FICO scores under 700 compared to 17.4 percent of closed loans in September 2012.“

That’s also the lowest average credit score since the company started tracking this data in August 2011.

This is important because even a 680 FICO score is a sign of good credit record, though credit balances may be high. But the overall debt-to-income ratio is more important in determining borrowers’ ability-to-pay in this case.

Lenders pulled back on giving mortgages to borrowers with less-than-perfect credit in 2008 as the number of borrowers who foreclosed on their homes spiked. That’s left millions of would-be home buyers shut out of the housing market. The findings suggest that some borrowers who were unable to gain financing as recently as a year ago could get mortgage approval now.

To be sure, the bar to getting a mortgage remains high. Applicants who were denied a mortgage in September had an average FICO score of 696, according to Ellie Mae—a score that’s relatively stellar by most counts. FICO scores range from 300 to 850. Before the recession it was common for borrowers with credit scores in the 600 range and below to get mortgages.

Harlan Green © 2013

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