Friday, May 31, 2013

A Greater Recession, if Fed QE Ends Too Soon

Financial FAQs

The stock and bond markets are sinking because of Fed Chairman Bernanke’s seemingly offhand remark that the Fed could slow down its QE purchases of securities as early as its June FOMC meeting. Now Organization for Economic Development and Cooperation (OECD) economists are saying that could hurt worldwide growth! Of course it will, since the U.S. is leading the worldwide recovery from the Great Recession, while our own economy is only beginning to recover. And we know from past history it takes many years to recover from such a severe downturn.

Why? The huge transfer of wealth upward has to be reversed, as it was after the Great Depression when income inequality was as bad as it is today. And that takes time. It took 10 years plus a World War in the case of the Great Depression, after Roosevelt tried to prematurely balance the federal budget in 1937, plunging the U.S. economy back into depression, hence making it the Great Depression.

There is a danger this could be repeated. Already the second Q1 2013 estimate of Growth Domestic Product growth revised growth downward to 2.4 percent from its 2.5 percent initial estimate. Even though consumer spending was revised up to 3.4 percent from 3.2 percent, it didn’t offset the reduction in government spending. The 2.4 percent rate is certainly ok, but it’s not enough to lower the unemployment rate that is currently 7.5 percent with 18 million workers still looking for full time work.

This is because consumers aren’t earning enough money to boost the demand for what is being produced. This is something that so-called Austerians, those who don’t like debt of any kind, can’t seem to understand. Because they believe that high debt is always the problem. Even during a time when borrowing isn’t the problem. That is to say, during a time when not enough is being purchased in the private sector to stimulate higher growth.

And we know why incomes have been stagnant or falling for most consumers. The collective bargaining of most employees has been severely weakened, or even banned in the case of public workers in states like Wisconsin. Pro-labor laws have been rolled back over the past 30 years that has resulted in record corporate profits and record income inequality not seen since the 1929 Black Market crash.

This is while tax rates for the wealthiest have been slashed, creating more income flowing away from most consumers. A recent National Bureau of Economic Research paper in fact shows that the more top tax rates are cut, the greater the share of national income is diverted to the wealthiest citizens.

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Graph: Krugman NYTimesBlog

Nobelist Paul Krugman said it best in disputing the Austerians. Inflation is almost nonexistent, having dropped to 1 percent in the GDP revision. Why is low inflation a problem, he asks? “One answer is that it discourages borrowing and spending and encourages sitting on cash. Since our biggest economic problem is an overall lack of demand, falling inflation makes that problem worse. Low inflation also makes it harder to pay down debt, worsening the private-sector debt troubles that are a main reason overall demand is too low.”

This is at the heart of the Austerians misconception. Money is hoarded rather than spent when demand is low and inflation falling. And households won’t spend more if they are intent on paying down debts.

The banks are holding some $1 trillion in excess reserves, while corporations are sitting on almost $5 trillion in cash, according to the Federal Reserve Bank of St. Louis. So why is inflation falling? Krugman says “The answer is the economy’s persistent weakness, which keeps workers from bargaining for higher wages and forces many businesses to cut prices. And if you think about it for a minute, you realize that this is a vicious circle, in which a weak economy leads to too-low inflation, which perpetuates the economy’s weakness.”

And that is our current problem that could lead us back into the Great Recession, or even make it the Lesser Depression. Government spending has been cut back due to the Sequester agreement, while taxes have been raised on must of US. There is really only one solution to weak demand.  Less money has to flow to the top income earners, whether through rising the maximum income tax brackets, or closing some corporate tax loopholes, or a combination of both.

Otherwise, we once again will be doomed to repeat a historic mistake—not putting our wealth where it will do the most good, whether that is repairing our obsolete infrastructure, in education, protecting the environment, or even saving social security .

Harlan Green © 2013

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Wednesday, May 29, 2013

Housing Prices at Seven-Year High

The Mortgage Corner

The S&P Case-Shiller Home Price Index just reported home prices were accelerating strongly going into  a very strong April start to the Spring housing season. The Case-Shiller 20-city data show a very strong 1.1 percent monthly adjusted increase in March home prices for a fourth straight gain over 1.0 percent which is the strongest run since the boom days of 2005. The year-on-year increase of 10.9 percent is the first double-digit gain since May 2006.

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Graph: Econoday

The prices in last week's new and existing home sales show recovery-best gains and even record gains, as we said last week, tied to lack of homes on the market. Price data for these reports are not based on repeat transactions, unlike Case-Shiller data that confirm strong gains going into April.

One reason for the strong showing in housing is consumer confidence is returning to pre-recession levels. It works both ways. Rising home prices and a rising stock market are two key factors that are boosting consumer confidence, which further boosts confidence. A third factor is rising strength in the jobs market.

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Graph: Econoday

The Conference Board reported its consumer confidence index jumped 7.2 points in May to a recovery best level of 76.2. Adding to the general showing of strength is a 9 tenths upward revision to April to 69.0. The assessment of the present situation is at a recovery best of 66.7, up nearly 6 points from April in a reading that hints at broad strength for May's run of economic data. This run includes jobs as more say jobs are plentiful, 10.8 percent vs April's 9.7 percent, and fewer say jobs are hard to get, at 36.1 percent for an 8 tenth improvement from April's 36.9 percent.

Says Lynn Franco, Director of Economic Indicators at The Conference Board: “Consumer Confidence posted another gain this month and is now at a five-year high (Feb. 2008, Index 76.4). Consumers’ assessment of current business and labor-market conditions was more positive and they were considerably more upbeat about future economic and job prospects. Back-to-back monthly gains suggest that consumer confidence is on the mend and may be regaining the traction it lost due to the fiscal cliff, payroll-tax hike, and sequester.”

Consumers’ outlook for the labor market was also more upbeat, said the Conference Board report. Those expecting more jobs in the months ahead improved to 16.8 percent from 14.3 percent, while those expecting fewer jobs decreased to 19.7 percent from 21.8 percent. The proportion of consumers expecting their incomes to increase dipped slightly to 16.6 percent from 16.8 percent, while those expecting a decrease edged down to 15.3 percent from 15.9 percent.

Meanwhile, we also reported last week that according to the First Look report for April by Lender Processing Services (LPS), the percent of loans delinquent decreased in April compared to March, and declined about 10 percent year-over-year, reports Calculated Risk. Also the percent of loans in the foreclosure process declined further in April and were down almost 25 percent over the last year.

All these factors point to a much stronger housing market this year. After all, housing prices are still some 28 percent below their housing bubble high in 2006, according to Case-Shiller.

Harlan Green © 2013

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Friday, May 24, 2013

Ben Bernanke and the Fragile Recovery

Financial FAQs

We know how fragile is the U.S. economic recovery just from the past 48 hours, because both U.S. and Japanese stock prices plummeted, and interest rates jumped on a seemingly offhand remark made by Fed Chairman Bernanke in congressional testimony that a reduction in the Fed’s QE bond purchases could begin as early as June.

Bernanke has said earlier in his testimony that “A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further.”

It’s just that such a seemingly offhand shouldn’t upset markets both here and in Japan, if there was confidence that stronger recoveries were in hand. Instead, it seems there is little confidence that the U.S. in particular will maintain its stimulus programs for a long enough period—at least until the unemployment rate drops to the Fed’s stated goal of 6.5 percent from its current 7.5 percent. That would bring the U.S. closer to full employment, though still a long way from the 5 percent rate that is considered to be full employment by most economists.

And prematurely ending government stimulus of any kind after what Paul Krugman calls the Lesser Depression (rather than Great Recession) is a lesson we have learned in the past, then seemingly unlearned when so-called ‘Austerians’, small government conservatives who believe cutting government spending is the way to cure a recession, grab the spotlight.

The ‘greatest’ lesson was learned in 1937, when Roosevelt listened to a newly elected Republican Congress that demanded a balanced budget and end to government spending. The result was the U.S. economy plunged back into what became the Great Depression that lasted until World War II defense spending ended it.

It has also been unlearned in Europe, where today small government Austerians are in control, having slashed government spending, causing unemployment to soar and plunging the euro zone back into recession.

So the danger is that history might repeat itself in the good old U.S. of A., if the minority of Federal Reserve Governors mentioned in the latest release of Federal Open Market Committee minutes get their way that favor an earlier demise of QE purchases.

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Graph: Trading Economics

Why is the U.S. recovery still so fragile? It’s not only because 18 million workers either have no job or work part time. It is because prices are not rising. And when companies can’t raise their prices, they don’t hire more employees. That is to say, our inflation rate is too low and continuing to fall.

The danger of falling prices is the other lesson ‘unlearned’ that has been experienced by Japan over the past 2 decades. Japan has been in a deflationary spiral where wages as well as prices have been falling, the result of prematurely ending its own stimulus programs. The result is the Japanese standard of living has fallen as its economy has been shrinking.

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Graph: Trading Economics

Only now under new Prime Minister Shinz┼Ź Abe is Japan practicing Quantitative Easing, or the purchasing of its own securities by its Central Bank. Paul Krugman says those in Europe and the U.S. who continually call for less government intervention during weak recoveries believe in what he calls the “confidence fairies”, magical beings who instill confidence in future economic growth only when government budgets are balanced and inflation is low.

But that means they have unlearned the lessons of our past. For such ideal conditions only happen after an economy has recovered and government has the means to pay down its debt, which means fully employing its citizens.

Harlan Green © 2013

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Wednesday, May 22, 2013

Existing-Home Sales, Inventories Climbing

The Mortgage Corner

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 0.6 percent to a seasonally adjusted annual rate of 4.97 million in April, reports the National Association of Realtors. This could be a trend, as housing inventories are also increasing, while foreclosure rates continue to fall, allowing more homes on the market. Sales activity is 9.7 percent above the 4.53 million-unit level in April 2012.

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Graph: Calculated Risk

Total housing inventory at the end of April rose 11.9 percent, a seasonal increase to 2.16 million existing homes available for sale, a 5.2-month supply at the current sales pace, compared with 4.7 months in March. Listed inventory is 13.6 percent below a year ago, when there was a 6.6-month supply, with current availability tighter in the lower price ranges. Inventories are improving, but more homes need to be available for sale to continue the upward trend.

Lawrence Yun, NAR chief economist, said the market is solidly recovering.  “The robust housing market recovery is occurring in spite of tight access to credit and limited inventory.  Without these frictions, existing-home sales easily would be well above the 5-million unit pace,” he said.  “Buyer traffic is 31 percent stronger than a year ago, but sales are running only about 10 percent higher.  It’s become quite clear that the only way to tame price growth to a manageable, healthy pace is higher levels of new home construction.”

Meanwhile, according to the First Look report for April by Lender Processing Services (LPS), the percent of loans delinquent decreased in April compared to March, and declined about 10 percent year-over-year, reports Calculated Risk. Also the percent of loans in the foreclosure process declined further in April and were down almost 25 percent over the last year.

LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) decreased to 6.21 percent from 6.59 percent in March. Note: the normal rate for delinquencies is around 4.5 to 5 percent. The percent of loans in the actual foreclosure process declined to 3.1 percent in April from 3.37 percent in March, but that is still higher than pre-recession levels.

One danger signal to a continued housing recovery are rising mortgage rates, however. They have been rising from as low as 3.25% for the conforming 30-year fixed rate to 3.625 percent today.  And this has caused mortgage applications to drop. The Refinance Index decreased 12 percent from the previous week. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier.

“Mortgage rates increased to their highest level since March last week, leading to the largest single week drop in refinance applications this year,” said Mike Fratantoni, MBA’s Vice President of Research and Economics. “The refinance index has fallen almost 19 percent over the past two weeks and is back to its lowest level since late March. Purchase activity declined over the week but is still running about 10 percent above last year’s pace at this time.”

Given consumers’ slow growing incomes, such low interest rates have been the main driver of housing sales. We can only hope the Federal Reserve continues its Quantitative Easing purchases of securities to keep interest rates low enough for housing to fully recover.

Harlan Green © 2013

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Monday, May 20, 2013

Consumer Sentiment, Leading Indicators Signal Higher Growth

Popular Economics Weekly

Both the University of Michigan’s Consumer Sentiment survey and Conference Board’s Index of Leading Indicators rose in May, signaling that employment and growth may be stronger than forecast by most economists.

How can that be with 7.5 percent of the workforce looking for work and some 18 million that have either part time, or no work at all? The real answer is the U.S. economy is almost too complex to accurately measure, and economists have their biases when predicting growth. In fact, few understand what is called macroeconomics, which helps to predict how government polices affect growth.

For instance, Haver Analytics surveys monthly a group of leading economists, and found that the latest Blue Chip survey foresaw U.S. economic growth of 1.6 percent in Q1’13 following an anemic 1.4 percent rise during Q4'12, when Q1 GDP growth was actually 2.5 percent.

“There is, however, divergence as to the degree of further improvement,” wrote Haver Analytics in a major understatement. “By the end of 2013, the consensus foresees GDP growing at 2.7 percent rate with the top 10 forecasts at 3.6 percent and the bottom 10 at 1.8 percent. The same divergence holds true for next year's expected growth. The consensus of a 3.0 percent advance in real GDP for Q4 2014 is derived from 3.8 percent at the top end and 2.2 percent at the bottom.”

The Blue Chip Indicators also forecast a 7.5 percent unemployment rate by the end of 2013, when it has already dropped to that level in May. The Congressional Budget Office also forecasts 2 percent growth this year, rising to 3.5 percent in 2014.

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Graph: Calculated Risk

Consumer spirits are improving dramatically this month in what very well may be a reflection of improvement in the jobs market. The consumer sentiment index jumped to 83.7 for the mid-month reading vs 76.4 for the final April reading and vs April's mid-month reading of 72.3. The Econoday consensus was looking for 78.0 with the high-end estimate at 82.5. The latest reading is near the recovery high set in November.

Boosted by strength in housing permits, the Conference Board’s index of leading economic indicators (LEI) surged 0.6 percent in April, double the rate of growth expected by the Econoday consensus and at the high-end of the Econoday consensus. The gain points to rising economic momentum six months out.

Also showing strength are financial measures, including credit activity, as well as jobless claims and the stock market. On the negative side are manufacturing measures, which reflect this sector's ongoing bumpy ride, as well as consumer expectations. This latter factor, however, is very likely to turn positive in May judging by this morning's big jump in the consumer sentiment report.

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Graph: Haver Analytics

The bottom line is that conditions may be improving enough that consumers are willing to spend again. The household debt-service ratio - an estimate of the share of debt payments to disposable personal income - fell to 10.38 percent in Q4’12, reported the Federal Reserve.

That was the lowest since the series started in 1980. In comparison, the ratio, which takes into account outstanding mortgage and consumer debt, was 10.56 percent in the third quarter. It peaked in the third quarter of 2007, shortly before the U.S. economy fell into recession. This may give consumers, who power 70 percent of economic activity, enough confidence to spend again.

Harlan Green © 2013

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Thursday, May 16, 2013

S. California RE Sales Return to 2006 Levels

The Mortgage Corner

DataQuick just reported Southern California homes sold at the fastest pace for an April in seven years amid the release of pent-up demand for move-up homes and high levels of investor purchases. This is while April new-home construction dipped slightly, though housing permits for new construction are increasing at 1 million units, annually.

The median sale price rose to a 58-month high, reflecting both home price appreciation as well as the simultaneous plunge in foreclosure resales and surge in mid- to up-market buying. On average, sales between March and April have risen 1.0 percent since 1988, when DataQuick’s statistics begin.

The median price paid for all new and resale houses and condos sold in the six-county Southland was $357,000 last month, up 3.3 percent from $345,500 in March and up 23.1 percent from $290,000 in April 2012. Last month's median was the highest since June 2008, when the median was $360,000.

Last month’s sales were the highest for the month of April since 27,114 Southland homes sold in April 2006, but they were 11.8 percent below the April average of 24,291 sales. The low for April sales was 15,303 in 1995, while the high was 37,905 in April 2004.

“This is a market that is still re-balancing. Sales of deeply discounted properties in affordable neighborhoods are way down. Activity in middle and high-end communities is on its way up. Now it's catch-up time, with a healthier economy spurring more demand and rising prices tempting more people to put their homes up for sale,” said John Walsh, DataQuick president.

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Graph: Econoday

Privately-owned housing starts in April were at a seasonally adjusted annual rate of 853,000. This is 16.5 percent below the revised March estimate of 1,021,000, but is 13.1 percent above the April 2012 rate of 754,000. Single-family housing starts in April were at a rate of 610,000; this is 2.1 percent below the revised March figure of 623,000. The April rate for units in buildings with five units or more was 234,000.

But Privately-owned housing units authorized by building permits in April were at a seasonally adjusted annual rate of 1,017,000. This is 14.3 percent above the revised March rate of 890,000 and is 35.8 percent above the April 2012 estimate of 749,000. So we can see that future construction looks promising and continues the building surge in 2013.

So it is no surprise that builder confidence in the market for newly built, single-family homes improved three points to a 44 reading on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for May. This gain, from a downwardly revised 41 in April, reflected improvement in all three index components – current sales conditions, sales expectations and traffic of prospective buyers.

Harlan Green © 2013

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Wednesday, May 15, 2013

Consumer Debt Falls to Pre-Recession Level

Financial FAQs

The total amount of debt held by Americans fell again in the first three months of 2013 and stood at the lowest level since the middle of 2006, the New York Federal Reserve said Tuesday. The level of household debt fell by $110 billion, or 1 percent, to $11.23 trillion, mainly because consumers reduced their mortgage obligations and used credit cards less. Household debt is now 11.4 Percent lower vs. a peak of $12.68 trillion in 2008.

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Graph: New York Federal Reserve

This is one reason retail sales are holding up. Mortgage debt slid to $7.93 trillion from $8.03 trillion in the fourth quarter to mark the lowest amount since late 2006. Mortgage debt fell in the first quarter even though more home loans were issued than in the prior quarter.

Delinquency rates improved across the board: mortgages (5.4 percent from 5.6 percent), HELOC (3.2 percent from 3.5 percent), auto loans (3.9 percent from 4.0 percent), credit cards (10.2 percent from 10.6 percent) and student loans (11.2 percent from 11.7 percent).  The overall 90+ day delinquency rate dropped from 6.3 percent to 6.0 percent this quarter, below the 8.7 percent peak from three years ago.

“After a temporary deceleration in the previous quarter, the data suggest that household deleveraging has resumed its previous trajectory,” said Wilbert van der Klaauw, senior vice president and economist at the New York Fed. “We’ll look to see if this pace of debt reduction and delinquency improvements will persist in upcoming quarters.”

Retail sales beat expectation in April, up 0.1 percent, 3.75 percent in a year, following a drop of 0.5 percent in March (originally down 0.4 percent). Analysts forecast a 0.3 percent decline. Motor vehicles were unexpectedly up 1.0 percent after a 0.6 percent dip in March. Unit new motor vehicle sales slipped in April but from high levels, according to manufacturers' data. Core strength was in building materials & garden equipment; clothing; nonstore retailers; general merchandise; and food services & drinking places. There may be some seasonality issues but discretionary spending appears to be picking up.

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Graph: Econoday

Other positive developments in the Q1 New York Fed report included a rise in the share of 30-60 day delinquent mortgage balances that transitioned to current and a decline in the rate at which current mortgages transition into delinquency.  Nearly 35 percent of 30-60 day delinquent balances became current compared to 28 percent in the previous quarter. Moreover, 1.6 percent of current balances became delinquent compared to 1.8 percent in the previous quarter.   
Highlights from the report include:

  • Outstanding student loan debt increased $20 billion to $986 billion.
  • Total mortgage debt decreased to $7.93 trillion from $8.03 trillion.   
  • Auto loans increased $11 billion to $794 billion.
  • Credit card balances decreased $19 billion to $660 billion.
  • HELOC balances fell $11 billion to $552 billion. 
  • Mortgage originations rose for the sixth consecutive quarter, to $577 billion.

Inflation and energy prices in particular are declining, giving consumers more room to spend, which will boost Q2 economic growth as well.

Harlan Green © 2013

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Monday, May 13, 2013

Saving Fannie and Freddie—Part II

Financial FAQs

The Federal Housing Finance Authority that supervises the so-called Government Supervised Enterprises (GSE), now including Fannie Mae and Freddie Mac, just announced restrictions that not only weaken Fannie and Freddie’s mandate, but the mortgage and housing markets in general. The FHFA just announced that it will no longer allow Fannie and Freddie to purchase or guarantee so-called “non-qualified” mortgages with more than 30 years amortization or that have interest only payments, among other restrictions.

Fannie and Freddie’s mission is to “Ensure that the housing GSEs operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment”. So why has it just made a ruling that will restrict their ability to be the most “reliable source of liquidity and funding”, and so real estate in general?

FHFA’s answer is the “Adoption of these new limitations by Fannie Mae and Freddie Mac is in keeping with FHFA’s goal of gradually contracting their market footprint and protecting borrowers and taxpayers,” said the announcement.

Yet Fannie Mae and Freddie Mac are the gold standard for mortgage underwriting, with the toughest qualification criteria, which is why these GSEs have the lowest default rates—some 3.13 percent vs. 6.7 percent for all private label mortgages, as I said in a past column (Saving Fannie and Freddie). That means first time home buyers and those with lower incomes will have to depend on portfolio lenders for those programs. These lenders therefore tend to use weaker qualification criteria and so either have to keep those mortgages on their books, or who package them as less credit worthy securities.

So Fannie and Freddie are the most “reliable source of liquidity and funding for housing”. There are really no other viable mortgage programs to sustain the housing market, in particular. They now guarantee some 90 percent of mortgage originations precisely because private label lenders have not come back into the market, even as housing prices have risen.

FHFA’s actual announcement said, “Beginning January 10, 2014, Fannie Mae and Freddie Mac will no longer purchase a loan that is subject to the “ability to repay” rule if the loan:

· is not fully amortizing,

· has a term of longer than 30 years, or

·includes points and fees in excess of three percent of the total loan amount, or such

other limits for low balance loans as set forth in the rule.

“Effectively, this means Fannie Mae and Freddie Mac will not purchase interest-only loans, loans with 40-year terms, or those with points and fees exceeding the thresholds established by the rule, said its announcement.”

Yet both interest only and 40-year amortized mortgage lower the payments for first time homebuyers, in particular. It also means shutting out lower-income buyers, even though Fannie and Freddie qualify them at the fully amortized rate.

There is no other way to interpret this ruling, other than another attempt to lower the overall quality of mortgage lending at a time when housing and real estate in general is at the beginning of its recovery.

Fannie Mae just reported pre-tax income of $8.1 billion for the first quarter of 2013, compared with pre-tax income of $2.7 billion in the first quarter of 2012 and pre-tax income of $7.6 billion in the fourth quarter of 2012. Fannie Mae’s pre-tax income for the first quarter of 2013 was the largest quarterly pre-tax income in the company’s history.

Need we say more? A financially sound Fannie Mae and Freddie Mac will continue to be the mainstay of housing finance, unless those who do not want or support a healthy mortgage market for all home buyers succeed in limiting their mission to “serve as a reliable source of liquidity and funding for housing finance and community investment.”

Harlan Green © 2013

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Tuesday, May 7, 2013

Bank Lending Still Stingy

The Mortgage Corner

The Federal Reserve just published its quarterly Senior Loan Officer survey on lending standards by the largest banks. They basically adhere to the strictest Fannie Mae and Freddie Mac guidelines for residential loans, such as minimum 620 credit score and debt-to-income ratios around 45 percent. Banks were a bit more liberal with commercial and industrial loans—apartment lending in particular, which is red hot due to dropping vacancy rates.

The banks“…on balance, reported having eased their lending standards and having experienced stronger demand in several loan categories over the past three months,” said the report.

But not in housing, perhaps the largest segment and one that gives consumers the greatest feeling of financial well-being. Even with record low interest rates banks are being stingy, which is why there is a record some $1.76 trillion in excess reserves sitting at the Fed. Banks’ overall lending has increased just 3 percent per annum of late, versus the historical 6 percent during good times, as in this Federal Reserve graph that dates from 1987 Q1 to 2013 Q1.

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Graph: Federal Reserve

This could change, however, as loan delinquency rates continue to decline and banks become less risk averse. Calculated Risk just reported Processing Services (LPS) released their Mortgage Monitor report for March. According to LPS, 6.59 percent of mortgages were delinquent in March, down from 6.80 percent in February. LPS reports that 3.37 percent of mortgages were in the foreclosure process, down from 4.19 percent in March 2012.

This gives a total of 9.96 percent delinquent or in foreclosure. It breaks down as:
• 1,842,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,466,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,689,000 loans in foreclosure process.
It is a total of ​​4,997,000 loans delinquent or in foreclosure in March, down from 5,589,000 in March 2012.

The March Mortgage Monitor report also found that new problem loan rates (seriously delinquent mortgages that were current six months ago) have fallen below 1 percent for the first time since 2007. At 0.84 percent, the March new problem loan rate is approaching pre-crisis levels, and nearing the conditions of 2000-2004 when the rate averaged 0.55 percent. However, as LPS Applied Analytics Senior Vice President Herb Blecher explained, a borrower’s equity position is still a key indicator of his or her propensity to default.

“There has always been a clear correlation between higher levels of negative equity and new problem loan rates,” Blecher said. “Looking at the March data, we see that borrowers with equity are actually outperforming the national average -- at 0.6 percent, this group is quite close to pre-crisis norms. The further underwater a borrower gets, the higher those problem rates rise. Borrowers with loan-to-value (LTV) ratios of just 100-110 percent are actually defaulting at more than twice the national average. For those 50 percent or more underwater, we see new problem rates of 4 percent.

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Graph: LPS

“Still, the overall equity trend has been a very positive one,” Blecher continued. “LPS’ latest data shows that the share of loans with LTVs greater than 100 percent has fallen 41 percent from a year ago. In total, there were approximately 9 million such loans, or about 18 percent of active mortgages. Some states, including the so-called ‘sand states’ (Arizona, Florida, Nevada and California), are still well above the national level, at an average 28 percent, but they, too, have seen improvement over the last year, with negative equity dropping over 40 percent across those four states since January 2012.”

So we know that rising housing values will continue to benefit homeowners and lenders. As foreclosure rates continue to fall, there is less downward pressure on housing values, since foreclosed homes sell on average some 33 percent below market prices.

Corelogic just reported that home prices nationwide, including distressed sales, increased 10.5 percent on a year-over-year basis in March 2013 compared to March 2012. This change represents the biggest year-over-year increase since March 2006 and the 13th consecutive monthly increase in home prices nationally. On a month-over-month basis, including distressed sales, home prices increased by 1.9 percent in March 2013 compared to February 2013.

Banks are not doing much for the housing market, in particular, leaving Fannie Mae and Freddie Mac to guarantee 90 percent of current home loans originated by lending institutions. Meanwhile, the Federal Housing Finance Authority has just announced it will no longer allow Fannie and Freddie to guarantee so-called ‘non-qualified’ loans after 2013, which are basically those loans that don’t amortize principal to be paid off in 30 years or less, such as interest only mortgages.

The hugely excess reserves held by banks once again highlight their conservative nature. And with Fannie and Freddie withdrawing from all but the most basic mortgages, we can only hope that other lending institutions—such as Mortgage Banks and Credit Unions—will recognize the lending opportunities that rising housing prices afford, if the housing recovery is to continue.

Harlan Green © 2013

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

Sunday, May 5, 2013

Payrolls Rising with Lower Labor Productivity

Popular Economics Weekly

Suddenly it looks like the U.S. economy isn’t stalling. Total nonfarm payroll employment rose by 165,000 in April, and the unemployment rate fell slightly to 7.5 percent from 7.6 percent in March, reported the U.S. Bureau of Labor Statistics last Friday. I suspected as much in my April 29 column (Will U.S. Growth Slow in 2012?) due to the large seasonal adjustments deducted from last month’s actual 729,000 increase in payroll jobs.

On top of that, the change in total nonfarm payroll employment for February was revised from +268,000 to +332,000, and the change for March was revised from +88,000 to +138,000. With these revisions, employment gains in February and March combined were 114,000 higher than previously reported.

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Graph: Calculated Risk

So maybe the sequester cuts in government spending may not be harming growth as much as predicted—at least for the present. The Congressional Budget Office predicted a loss of up to 750,000 jobs and 1.5 percent in GDP growth in 2013 due to the sequestration cuts.

Why the large revisions to such an important economic indicator? Circumstances may be mirroring that of an earlier era. President Clinton saw some 22 million jobs created during his term, while government spending was reduced due to an earlier cutback in defense spending. The slack was made up by booming exports due to a reduced dollar exchange rate, a more accommodative Fed under Chairman Greenspan, the dot-com bubble that saw a boom in high tech investments, as well as the beginning of the last housing boom that ultimately resulted in the housing bubble.

It may be harder to identify the current growth drivers coming out of this Great Recession. But Fed Chairman Bernanke is pursuing the same business-friendly practices as predecessor Greenspan with record low interest rates and the QE securities’ buying programs that has also boosted exports.

Could it be the high tech, digital replace-workers-with-machines revolution has slowed, along with productivity growth, which means the current workforce has reached the limits of its output, so that hiring has to increase? Nonfarm business productivity rebounded an annualized 0.7 percent, following a decline of 1.7 percent in the fourth quarter. Unit labor costs rose 0.5 percent, following a 4.4 percent jump in the fourth quarter. That is usually a sign of the need for increased hiring, and Q1 seems to have confirmed it. We know the importance of keeping labor costs down, since such costs make up two-thirds of product costs.

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Graph: Econoday

So increased hiring is probably why unit labor costs plunged in Q1 2013, which are the costs associated with producing ‘one unit’ of product. Year-ago unit labor costs were up 0.6 percent, compared to 2.0 percent in the fourth quarter. Hourly compensation was up 1.6 percent, following 2.7 percent in the fourth quarter.

More good news was the National Federation of Independent Business (NFIB) report that hiring had increased in the small business sector in particular. "April was another positive, albeit lackluster month for job creation—but small-business owners are expressing a bit more enthusiasm in hiring plans in the months to come”, said NFIB Chief Economist William Dunkelberg. “According to NFIB’s latest data, small employers reported increasing employment an average of 0.14 workers per firm in April. This is a bit lower than March’s reading, but still the fifth positive sequential monthly gain.”

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Graph: NFIB

The higher payroll and small business hirings could mean productivity gains for robots and other high tech productivity aids are reaching their limits. It looks like robots can only do so much of the work.

Harlan Green © 2013

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

Friday, May 3, 2013

Austerinomics, the Anti-Growth Orthodoxy

Financial FAQs

The Federal Reserve Open Market Committee has just said it in the press release from its latest committee meeting in an otherwise ‘moderately’ upbeat announcement: “Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth.”

Austerinomics, or the policy of starving the beast of government by cutting both its revenues and spending doesn’t work at a time when 7.6 percent of those looking for work cannot find jobs, and some 4.7 million have been unemployed for more than 6 months. In fact, austerinomics is really starving most Americans of their wealth, as well as necessary public services and safeguards.

We know the restraints are across the board sequestration spending cuts on top of the $1.6 trillion in spending cuts enacted in 2011. The results, says the Congressional Budget Office are the loss of up to 750,000 jobs and up to 1.5 percent in GDP growth in 2013.

The real beef of Keynesian economists such as Paul Krugman, Joseph Stiglitz and a host of other Nobelists is that the advocates of austerity in both U.S. and Europe won’t acknowledge the evidence. Austerinomics hurts economic growth. The evidence is really overwhelming, both in Europe that is back in recession and the weak U.S. recovery. Cutting government spending and other stimulus measures during recessions, and consequent recoveries makes no economic sense, because it reduces the demand for more goods and services.

Austerinomics isn’t based on any economic theory (nor is Laffernomics, the theories of Arthur Laffer who predicted that lower tax rates would increase growth). It hasn’t happened, as GDP growth has been slowing since the 1970s rather than speeding up as tax rates have been slashed.

For what drives growth is both public and private spending, not just spending of the wealthiest few. Consumers spend less and investors invest less when unemployment is high and incomes are low, period. Even GW Bush understood this, which is why he refused to cut government spending after his first recession and 9/11 attacks.

Unfortunately, most of that spending was to finance 2 wars and tax cuts for the wealthiest individuals. But it did bring back full employment, until the housing bubble burst.

So what is the real goal of the advocates of austerinomics? It is the continued transfer of wealth to the wealthiest. Representative Paul Ryan’s budget proposals provide the blueprint, and Bush’s Brain Senior Advisor Karl Rove provided the rationale for re-creating the cartels and monopolies of President William McKinley’s time—1897-1901. Rove believed Republican principles and power would reign supreme for generations, if Republicans and their supporters accumulated enough wealth.

But that has never stuck with Americans. Vice President Teddy Roosevelt initiated the progressive era upon McKinley’s assassination, battling the monopolies and cartels of that era. The result was what he called the “New Nationalism”, a government that functioned for all the people, in his famous 1910 Osawatomie, Kansas speech.

“The new Nationalism puts the National need before sectional or personal advantage. 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 the representative body shall represent all the people rather than any one class or section of the people.”

We cannot turn the clock back to the beginning of the 19th century, in other words, even if some people want to.

Harlan Green © 2013

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

Wednesday, May 1, 2013

Housing Is Definitely Recovering

The Mortgage Corner

In spite of warnings from such as Robert Shiller of Irrational Exuberance fame that housing values could remain stagnant over the next ten years, housing prices are making a comeback, which is boosting economic growth. Some of the worst hit bubble cities have the largest price increases, and diminished inventories. Even better news is that housing prices have returned to historical levels as measured by the price-to-rent ratio, which measures the relationship between rents (which are closely tied to incomes) and housing values, signaling that housing values are no longer in bubble territory.

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Graph: Calculated Risk

Data through February 2013, released today by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices ... showed average home prices increased 8.6 percent and 9.3 percent, respectively, for the 10- and 20-City Composites in the 12 months ending in February 2013, said the press release.

“Home prices continue to show solid increases across all 20 cities,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “The 10- and 20-City Composites recorded their highest annual growth rates since May 2006; seasonally adjusted monthly data show all 20 cities saw higher prices for two months in a row – the last time that happened was in early 2005. Home sales aren’t doing badly either.”

For instance, we can say that housing prices in California cities, San Francisco, Los Angeles, and San Diego have recovered more than half their values lost since 2000. And the Price-to-Rent ratio is back to 1 to 1, meaning that the historical ratio held since January 1983 is probably the best indicator that prices have now stabilized for the longer term.

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Graph: Calculated Risk

Some economists, including Dr. Shiller, seem to be puzzled by the price surge, in particular. But what about the return to more than 1 million plus new households being formed in 2012—a tripling of the recession lows, when children fled back to their parents homes because of the hard times?

And we mustn’t forget that employment has improved substantially, with some 6 million jobs now added to payrolls since the Great Recession. Dr. Shiller’s latest conclusions are based on surveys and his theories that much of consumer behavior comes from hearsay and not much research into investments, hence the housing bubble.

Dr. Shiller, an Economics Professor at Yale University, also says the biggest home price increases now are seen in multifamily rather than single-family homes which reflects a shift from home ownership to renting. The buyers are investors who rent their properties, in other words.

“Most of the increase in households in this country has been met by an increase in renting,” says Shiller. “My own survey data with Chip Case confirms that people feel more positive about renting.” He suggests that those investing in real estate are buying homes most suitable to convert to rentals, which means price increases will be more closely tied to rent increases, which means closely tied to inflation. Hence he is intimating the price-to-rent ratio should remain stable around its historical 1 to 1 ratio for years to come, which means housing prices won’t rise faster than rents.

But whether rental or primary residences, housing is contributing to overall economic growth. The First Quarter contribution by the U.S. Bureau of Economic Analysis shows that housing contributes more than 2 percent of GDP growth, and is on the upswing, particularly in single-family construction. Home improvements and broker commissions provide slightly less, while office and shopping mall investment provides contribute little at present, due to the high vacancy rates still prevailing, an overhang from the Great Recession.

Needless to say, construction spending means greater construction employment, and spending has been surging. Construction outlays rebounded 1.2 percent in February after dropping 2.1 percent in January. Private residential construction jumped 2.2 percent. For the latest month, the new one-family component was particularly strong, gaining 4.3 percent, following a 3.6 percent boost in January. The new multifamily component fell back 2.2 percent but followed a robust 6.1 percent jump the prior month. Public construction gained 0.9 percent, following a 0.2 percent rise in January. On a year-ago basis, overall construction was up 7.9 percent in February compared to 6.1 percent in January.

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Graph: Econoday

Single-family investments is about to surpass home improvement outlays, says the BEA, with multifamily outlays still a minor component. So will Americans give up their home-ownership dream, and become a nation of renters? In fact, the current 64 percent home ownership rate is the long term ownership rate, which is one more factor that should tell us the housing bubble mentality Dr. Shiller so warns against has been deflated.

Harlan Green © 2013

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