Housing Market Recovering

 The Mortgage Corner

Census.gov

Real estate is the industry most affected by rising interest rates, so it’s encouraging to see that housing sales are showing signs of a revival. Both new-home and pending home sales jumped in January, even with still expensive mortgage rates.

One reason: builders are buying down those mortgage rates.

Sales of newly built, single-family homes in January increased 7.2 percent to a 670,000 seasonally adjusted annual rate from an upwardly revised reading in December, according to newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

And it’s not that expensive for a builder to offer an affordable mortgage rate—just 4 points (%) to buy down a conforming 30-year fixed rate mortgage to 4.875%; not that much to tack onto a sales price.

“The latest HMI survey shows 57% of builders are using incentives to bolster sales, including providing mortgage rate buy-downs, paying points for buyers and offering price reductions,” said Alicia Huey, chairman of the National Association of Home Builders (NAHB). “Buyer incentives, along with stabilizing mortgage rates during the month of January, increased the pace of new home sales for the month. However, in a sign of current market weakness, sales are down 19.4% compared to a year ago.”

Pending home sales also improved in January for the second consecutive month, according to the National Association of Realtors^Ò.

The Pending Home Sales Index (PHSI)^* — a forward-looking indicator of home sales based on contract signings — improved 8.1 percent to 82.5 in January. (But) Year-over-year, pending transactions dropped by 24.1 percent.

“Buyers responded to better affordability from falling mortgage rates in December and January,” said NAR Chief Economist Lawrence Yun.

What is causing more optimism among homebuyers? Builders are seeing more traffic from new-home wannabes, for starters.

The National Association of Builders reports two consecutive solid monthly gains for builder confidence, spurred in part by easing mortgage rates, signal that the housing market may be turning a corner even as builders continue to contend with high construction costs and building material supply chain logjams.

A more immediate reason for the improvements is an acute housing shortage. Builders essentially stopped building new homes for a decade after the Great Recession and busted housing bubble.

“With the largest monthly increase for builder sentiment since June 2013, excluding the period immediately after the onset of the pandemic, the HMI indicates that incremental gains for housing affordability have the ability to price-in buyers to the market,” said NAHB Chairman Alicia Huey. “The nation continues to face a sizeable housing shortage that can only be closed by building more affordable, attainable housing.”

The NAR anticipates the economy will continue to add jobs throughout 2023 and 2024, with the 30-year fixed mortgage rate steadily dropping to an average of 6.1% in 2023 and 5.4% in 2024.

Most prospective homebuyers are still on the sidelines, however. The Conference Board reported a further decline in consumer confidence reflecting large drops in confidence for households aged 35 to 54 and for households earning $35,000 or more,” said Ataman Ozyildirim, Senior Director, Economics at The Conference Board.

“While consumers’ view of current business conditions worsened in February, the Present Situation Index still ticked up slightly based on a more favorable view of the availability of jobs. In fact, the proportion of consumers saying jobs are ‘plentiful’ climbed to 52.0 percent—back to levels seen in the spring of last year.”

So what are homebuyers to do? Should they look for homebuilders willing to buy down that mortgage to 4.875%, or wait while housing prices continue to climb?

Harlan Green © 2023

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

Chapter Eleven - Building a Livable Community

 

Old Town’s Revival

As we began to redesign Goleta’s Old Town District, we realized our efforts might apply to a livable city as well.

As recently as 2005, the Institute of American Architects defined a such a community as. . . “broadly speaking, a livable community recognizes its own unique identity and places a high value on the planning processes that help manage growth and change to maintain and enhance its community character.”

Thoughts of forming a new city of Goleta were also revived, as the actual planning of Old Town’s future began. There had been several unsuccessful efforts to form a city since the 1970s. The Goleta Old Town Revitalization Committee, a mix of local officials and residents that wanted Old Town’s infrastructure and services upgraded, was now created, and I was appointed its chairman. Hearings were held in Old Town’s Community building so county planners could learn what Goleta’s residents wanted for a future town center. We were following the precepts of community organizing in bringing citizens together to solve some of the problems afflicting such a diverse community.

Goleta in many ways was a microcosm of small-town America and all that had happened to those communities since the sixties: rapid population growth with little concern for the environment. It had an early history combining both rural and urban life with industrial and research centers while being adjacent to the Santa Barbara Airport. I wanted to participate in this organization (that included some future Goleta city mayors), because it could aid in giving the Goleta Valley its “own unique identity” that planners and architects deemed requisite for a livable community.

I had read and was influenced by M. Scott Peck’s book The Different Drum, describing the elements that bring a community together to achieve whatever they want. His approach epitomized for me the essence of community development. Dr. Peck, a medical doctor, psychologist, and author of a better-known prequel, The Road Less Traveled, broke down the steps that a community goes through to come together in a meaningful way in The Different Drum.

He warned that the process could take time. Any community usually goes through four stages to reach agreement and to be able to function effectively, whatever its goals. He characterized these stages as Pseudo community, Chaos, Emptiness, and (true) Community.

Pseudo community is the first gathering of any group with the initial pleasantries and avoidance of conflict in the desire to be nice to each other. But it is a false community, because until the second stage of Chaos is reached, individual differences aren’t revealed, and a discussion of the real problems doesn’t surface.

Chaos described the early stages of our hearings when open discussions brought out the conflict between those residents who loved Old Town’s funkiness and cheap rents, and those landlords and landowners who wanted to improve their properties. The goal of the Old Town Advisory Committee was to bring the sides together. There was also a Goleta Beautiful organization that wanted to preserve and restore some of the more historic Old Town structures.

Dr. Peck’s third stage is Emptiness: a time of resignation, when the group or organization gives up their individual prejudices, ideologies, control needs, and begins to see what can be accomplished as a group. In Old Town, it wasn’t until the second year of the hearings that this happened. More Old Town residents were put on the committee, and we began to see a vision of what a revitalized Old Town could be for the Goleta community.

After many hearings and dialogues with planners, architects, developers, and residents that included a weekend Design Charrette that I will discuss in a later chapter, the committee members began to have a sense that we were all in this together and would be able to create something beneficial for the community.

Dr. Peck wrote:

". . . initially I thought this book’s title should be “Peacemaking and Community”. But that would put the cart before the horse. For I fail to see how we Americans could effectively communicate with the Russians, (or any peoples of other cultures) when we don’t even know how to communicate with the neighbors next door, much less the neighbors on the other side of the tracks."

In our culture of rugged individualism— in which we generally feel that we dare not be honest about ourselves, even with the person in the pew next to us—we bandy around the word, “community”. . . [but] if we are to use the word meaningfully, we must restrict it to a group of individuals who have learned how to communicate honestly with each other.¹

The Old Town Revitalization Committee needed two years and 100 hearings to finally form the Old Town Revitalization Plan.

Once the Plan’s CEQA (California’s Environmental Quality Act) study was approved—a study required to name and mitigate the environmental hazards we might encounter—the County applied to the state of California for the formation of a Goleta Old Town Redevelopment Plan, which would allow a percentage of the tax monies to be withheld for use in Old Town to upgrade its housing, improve San Jose Creek that flowed under its main thoroughfare, and infrastructure.

The final report approved by the County on June 16, 1998, stated: “The purpose and objectives of this Redevelopment Plan are to eliminate the conditions of blight existing in the proposed Project Area and to prevent the recurrence of blighting conditions in said Area.”

¹ Peck, M. Scott. The Different Drum. Simon & Schuster, 1987. P. 56

Consumer Incomes/Sentiment Still Rising

 Financial FAQs

BEA.gov

January consumer spending rose 1.8 percent (orange bar in graph) in a month, while personal incomes rose 0.6 percent in the BEA’s latest personal income (PCE) report out Friday.

This is one more headache for the Fed that wants lower incomes and spending to bring down inflation. But that ain’t happening in January, at least.

From the same month one year ago, the PCE price index for January increased 5.4 percent. Prices for goods increased 4.7 percent and prices for services increased 5.7 percent. Food prices increased 11.1 percent and energy prices increased 9.6 percent. Excluding food and energy, the PCE price index increased 4.7 percent from one year ago.

Inflation is declining, but it still caused financial markets to panic for no real reason. Such a spike in spending (orange bar in the above graph) after two negative months and the concomitant inflation rate is temporary because of the huge 8 percent SocSec inflation adjustment in January.

No wonder consumer sentiments are on the rise. The University of Michigan final monthly survey for February confirmed the preliminary February reading, rising 3 percent above January. They don’t see much of a drop in employment, either, per their graph.

UMich

“After lifting for the third consecutive month, sentiment is now 17 index points above the all-time low from June 2022 but remains almost 20 points below its historical average,” said Survey Director Joanne Hsu.

Long-run inflation expectations remained firmly anchored at 2.9 percent for the third straight month and stayed within the narrow 2.9-3.1 percent range for 18 of the last 19 months, per the U. Michigan study.

So much for Fed fears that higher inflation expectations may become imbedded and cause consumers to sustain the high inflation by shopping until they exhaust their savings.

More studies by Federal Reserve economists are showing the Fed’s unrealistic expectations to achieve a 2 percent inflation target, no matter the loss of jobs, economic growth, etc.

Progressive economist Robert Kuttner has just highlighted a Cleveland Fed study by its own staff economists that highlights the consequences of holding to a 2 percent inflation target.

The study, by Randal Verbrugge and Saeed Zaman of the Cleveland Fed, says Kuttner, found that, using the Fed’s own projections, inflation would still be at 2.75 percent by the end of 2025—moderate by historic standards—and reducing it all the way to 2.0 percent would require an unemployment rate of 7.4 percent, more than double the current rate.

Who doesn’t believe that would be disastrous at a time of geopolitical unrest, economic sanctions, and the Ukraine war?

Harlan Green © 2023

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

Q4 2022 Growth Continues

 

BEAgdp

Last year is ending in better shape than it began. Instead of shrinking in the first two quarters of 2022, US GDP growth has turned positive in Q3 and Q4, as portrayed in the above graph of real, or inflation adjusted, Gross Domestic Product growth.

Fourth quarter GDP was reduced slightly from 2.9 to 2.7 percent in the second of three revisions, yet the overall year is shaping up to grow 2.1 percent, much like in pre-pandemic 2019.

The BEA release said, “The increase in real GDP in the fourth quarter reflected increases in private inventory investment, consumer spending, nonresidential fixed investment, federal government spending, and state and local government spending that were partly offset by decreases in residential fixed investment and exports. Imports decreased,” said its press release.

Its main strengths were strong consumer spending and investments in plants and equipment, no surprise with the Inflation Reduction and Infrastructure Act $trillions that are being invested over the next 10 years.

The White House said whereas the Bipartisan Infrastructure Law invests $1.2 trillion on overhauling the nation’s roads and bridges, electric and water systems, and high-speed internet; the Inflation Reduction Act would fund energy production and manufacturing, reduce carbon emissions, lower prescription prices and extend affordable healthcare coverage.

The GDP measure of inflation was better, dropping to 3.7 percent from 4.4 percent. Inflation rose at an annual 3.7 percent pace in the fourth quarter, compared with a 4.3 percent increase in the prior three-month period. For the full year, inflation surged 6.8 percent, the biggest increase since 1982, which won’t make the Fed Governors happy.

However, US inflation has fallen faster than in other developed countries, as was highlighted by the New York Times David Leonhardt in an interview with Brian Deese, who stepped down as Biden’s chief economic advisor, due to our quicker recovery.

NYTimes

Europeans have bigger problems in taming inflation, like greater supply chain disruptions caused by Covid and the energy price increases caused by Russia’s invasion of Ukraine that have slowed down eurozone growth.

The US is shaping up to continue strong growth in the New year with full employment and initial jobless claims at seasonal lows. Initial jobless claims fell by 3,000 to 192,000 in the week ending Feb. 18, the Labor Department said Thursday. That’s the sixth straight week below 200,000 is a signal of a strong labor market, and the lowest level in three weeks.

And the Atlanta Fed continues its upbeat GDPNow estimate of first quarter 2023 growth.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2023 is 2.5 percent on February 16, up from February 15. After this morning’s housing starts report from the US Census Bureau, the nowcast of first-quarter real residential investment growth increased from -10.4 percent to -8.1 percent.

Does it mean real estate could lead us out of the current slowdown? Stay tuned, as the University of Michigan consumer sentiment survey rose in early February to a 13-month high of 67, suggesting somewhat greater optimism about the economy among U.S. households.

Harlan Green © 2023

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

Building Community Answering Kennedy's Call Book Review

 

Amazon.com

Building Community, Answering Kennedy’s Call by Harlan Russell Green A Peace Corps Writers Book, 2022.

This memoir will take members of ERFSA back to the “good old days” when you might have been protesting the war in Vietnam or marching for Civil Rights before, during or after finishing graduate school. Building Community, Answering Kennedy’s Call certainly did that for me. The author, Harlan Green, joined the first wave of Peace Corps Volunteers in 1962 on the verge of graduating from UC Berkeley, with much uncertainty as to what his next step should be.

This was his lucky moment because the experience of trying to mobilize villagers in a remote Turkish village stayed a course for his life. In this brief, but well written and engaging memoir, Harlan takes to Ishmet Pasha with neither electricity or running water in 1962. Fortunately, Harlan had learned basic carpentry skills with his father while growing up and through a sincere effort to learn the Muslim villagers’ language so he could understand what they wanted, in addition to what he thought they needed, the tough experience yield results as well as path and philosophy he carried forward after completing the two year mission.

The story becomes increasingly interesting and its significance is peeled back Harlan Green returns to the States to become involved in other social movements of the 1960s and 70s. He studied film making in San Francisco and then was hired by the Environmental Protection Agency where he honed his camera chops on such issues as airplane safety and urban air quality in Los Angeles. Recounts of later work as a film maker for with Ceasar Chavez and the United Farm Workers during in 1974 are especially compelling .

This is a quick yet serious read. It could never be called a “blast from the past” because of the depth of the author’s commitment to bringing positive change into our world. It would be inspirational for undergraduates. I wished momentarily for a syllabus that I could include Building Community , Answering Kennedy’s Call as required reading.

Harlan Green © 2023

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

Will It Be a Soft Landing?

 The Mortgage Corner

There is a growing optimism Jerome Powell’s Fed can engineer a so-called soft landing with its restrictive monetary policies, which means avoid an outright recession.

Why? First quarter 2023 GDP growth is predicted to be positive following strong Q3 and Q4 growth in 2022, and we are still fully employed. This is in part because the US economy has recovered faster from the pandemic than other countries.

But the Federal Reserve’s last attempt to engineer a soft landing with a 2 percent inflation target resulted in the Great Recession, the worst worldwide downturn since the Great Depression.

Alan Greenspan, the Fed Chairman and his Fed Governors at the time thought that if they raised the overnight Fed funds rate slowly enough, they could tame inflation while avoiding a recession.

The funds rate was raised in increments of 0.25 percent 16 consecutive times in a vain attempt to mitigate what actually occurred. It was an example of the Fed wanting to have its cake and eat it too.

It was a different time, however. Inflation soared then because the GW Bush administration in 2001 took their hands off regulations, allowing the falsification of credit ratings, while cutting taxes to create the first $trillion budget deficit in our history.

And many traders are under what may be a similar illusion; that a so-called ‘soft landing’ is achievable with the Fed holding to its 2 percent inflation target.

However, because inflation measures have never had more than plus or minus 2 percent accuracy, pressing for a 2 percent target could bring actual inflation to zero, which is tantamount to a recession.

This fact was explicated by David Wheelock, a St. Louis Fed group vice president and deputy director of research, in a 2017 podcast.

“The price indexes that are used to estimate inflation don’t necessarily include all goods and services in an economy. Furthermore, these indexes have a slight upward bias. So, when the observed rate of inflation is, say, 1 or 2 percent … the true measure is actually probably lower than that, closer to zero.”

FREDpce

Another well-known fact is that prices plunge substantially during recessions when consumers slow spending, which is portrayed in the above FRED of personal consumption expenditures, our best measure of consumer spending.

Consumption only dipped below zero once since 1950, during the 2007-09 Great Recession that was worldwide, as I said. All other recessions (gray bars in graph) showed a consumption drop that was quickly mitigated by the Fed reversing course and dropping their interest rates.

So what is different this time? The last recession lasted just two months—from Mar-April 2020—caused by the first worldwide pandemic in 100 years that shut down economic activity completely, rather than an over-heated economy.

The inflation rate quickly dropped to zero, but took off as quickly because of the $trillions in pandemic aid, igniting the latest inflation surge. Other countries are taking longer to recover, and so the supply-chains are playing catchup to the surging demand for more goods and services.

When will a new equilibrium between supply and demand be established? It’s hard to say with a fully employed economy and consumers so willing to spend.

Larry Summers is the preeminent inflation hawk, though he has softened his rhetoric of late as inflation has subsided. I repeat a recent quote of his from Bloomberg news that has been scaring financial markets.

“We need five years of unemployment above 5% to contain inflation -- in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,” said Summers said in a recent speech in London. “There are numbers that are remarkably discouraging relative to the Fed Reserve view.”

His remarks are based on an outmoded thesis of classical economic theory left over from the inflationary spiral of the 1970s; suppress demand by suppressing hiring and the labor market with very high interest rates rather than wait for healthier supply-chains.

And supply-chains are recovering. The US Chamber of Commerce just reported for all of 2022 that exports of goods and services increased $453.1 billion to $3,009.7 billion, passing the $3 trillion mark for the first time. Imports of goods and services hit $3,957.8 billion, up $556.1 billion from 2021 and the highest on record.

Increasing supplies should continue to bring down inflation, in other words. But holding to a 2 percent inflation target, though Powell had said the Fed would be flexible, almost guarantees a recession.

Harlan Green © 2023

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

Higher Retail Sales Herald Better New Year

 Popular Economics Weekly

FREDretailsales

Now we have retail sales also surging in January, on the heels of a terrific unemployment report and Atlanta Fed’s GDPNow estimate of higher first quarter economic growth.

Retail sales that make up half of consumer spending rose more than 3 percent in January, almost double early estimates. Consumers are going out more than ever with most of the US freezing, ignoring predictions of an oncoming recession, or calls by the Federal Reserve for businesses to cut back on hiring.

It’s as if the public is listening to a different song, a more optimistic tune that trumpets the U.S. economy and their finances are just fine.

Sales rose in every major category, led by department stores. Receipts leapt almost 18 percent, the biggest jump since the reopening of the U.S. economy in May 2020 after the early onslaught of the coronavirus.

One closely watched category is bars and restaurants, the only service sector in the retail report. Restaurant sales soared 7.2 percent last month after falling slightly in the last two months of 2022.

Sales of new vehicles and parts, a volatile category, jumped 5.9 percent last month. That’s the biggest increase in 22 months, and signals Americans want to travel more than ever.

Since retail sales aren’t adjusted for inflation, it also means consumers have enough cash and savings to keep up with inflation, while it is declining.

Retail CPI inflation is 6.3 percent higher YoY in January, down from its 9 percent high in June 2022. And it has risen just 2 percent since last June. The cost of gasoline rose 2.4 percent in January and gave a boost to the headline CPI reading.

Prices have subsided in February, however, as more refineries that were shut down for maintenance are coming back on line.

Grocery prices have risen 11.3 percent in the past year, but have come off their peak. They rose 0.4 percent in the first month of the new year. That was the smallest increase in 17 months, however, and a good sign for the prospects of slowing, even while inflation is falling.

And that is the real conundrum puzzling economists. What is the real cause of inflation? How can it be falling while consumers buy more than ever? The increased demand isn’t pushing up prices, in other words.

Instead, it looks like supplies are catching up in a big way. Asian economies like China are pumping out more products than ever, revitalizing the supply chains that were cut short by the pandemic.

So instead of focusing on suppressing the demand for goods and services by attacking employers and workers’ rising wages with higher interest rates, why not listen to the music in consumers’ ears heralding a rising abundance and better New Year?

Harlan Green © 2023

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

New Year GDP Growth Looking Better

Financial FAQs

AtlantaFedGDPNow

Because of January’s gangbuster unemployment report of 517,000 new payroll jobs and the unemployment rate decline to an all-time low of 3.4 percent, consensus is growing that the US may avoid a recession.

One indicator of a more optimistic outcome is the Atlanta Federal Reserve GDPNow estimate of economic growth that I have been reporting. It has been close to correct over the past two quarters. For instance, it predicted 3.2 percent growth for Q4 2022 and the official final estimate of Q4 from the US Bureau of Economic Analysis (BEA) came in at 2.9 percent.

It is predicting 2.2 percent growth for the first quarter 2023, when last year’s first and second quarter growth was negative (though there was no recession). The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2023 is 2.2 percent on February 8, up from 2.1 percent on February 7, said its press release.

Why is the Atlanta Fed’s GDPNow estimate of Q1 2023 so optimistic?

Its estimate highlighted increased foreign trade because supply chains have been able to circumvent the Ukraine war and a host of other supply constraints so that US consumers continue to buy cheaper foreign goods, which is also holding down inflation.

The New York Fed has a new Global Supply Chain Pressure Index that tells us supply prices have eased substantially because Asian countries are recovering quickly. For instance, Chinese imports have recovered as they work out of their COVID-induced slowdown.

Bank of America and Goldman Sachs fund managers are finding their clients also see less chance of a recession, as reported on MarketWatch.

The B of A’s latest global fund manager survey found forecasts of a recession have massively dropped since its November 2022 peak, where 77 percent of fund managers said a recession was likely, to 24 percent in February.

“Most fund managers are optimistic on inflation; 83% anticipate lower global CPI in the next year and 47% expect to see lower short-term rates in the next 12 months, the most since March 2020,” said the B of A survey.

Similarly, Goldman Sachs research analysts led by David Kostin, said in a client note on Tuesday that companies in the Russell 3000 index are talking less about an oncoming recession. Their analysis of corporate earnings calls found just 12 percent mentioning the R word.

The well-regarded New York Fed’s consumer expectations report shows inflation expectations in particular ‘well anchored’, i.e., consumers are expecting no surprises.

“Median inflation expectations remained unchanged at the one-year-ahead horizon,” said the NYFed, “decreased by 0.2 percentage point at the three-year-ahead horizon, and increased by 0.1 percentage point at the five-year-ahead horizon, to 5.0%, 2.7% and 2.5%, respectively.”

So we still have an inflation problem. U.S. Treasury Secretary Janet Yellen last week said she saw a path for avoiding a U.S. recession, with inflation coming down significantly and the economy remaining strong, given the strength of the U.S. labor market.

"You don't have a recession when you have 500,000 jobs and the lowest unemployment rate in more than 50 years," Yellen told ABC's Good Morning America program.

Who is right in this crazy year? The developed world has proved resilient in easing supply chains, which will bring down inflation even faster.

Harlan Green © 2023

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

What Interest Rates Are Declining?

 The Mortgage Corner

FRED30yr

The average 30-year fixed rate conforming mortgage has declined almost one percent since November 2022 to the current 6.12 percent as of February 2023, per the St. Louis Fed.

The housing sector has been a leading edge of economic recoveries historically, and declining interest rates have led housing recoveries, so we can make an educated guess that a recovering housing and the real estate sector in general is indicating an economic recovery this year.

A leading indicator of home sales is the NAR’s Pending Home Sales survey that measures contracts signed with closings occurring usually in 30 to 60 days.

Pending home sales increased in December for the first time since May 2022 — following six consecutive months of declines — according to the National Association of Realtors press release.

The Pending Home Sales Index (PHSI)* — a forward-looking indicator of home sales based on contract signings — improved 2.5% to 76.9 in December. Year-over-year, pending transactions dropped by 33.8%. An index of 100 is equal to the level of contract activity in 2001.

“This recent low point in home sales activity is likely over,” said NAR Chief Economist Lawrence Yun. “Mortgage rates are the dominant factor driving home sales, and recent declines in rates are clearly helping to stabilize the market.”

Why is this a contra-indicator to rising interest rates engineered by the Fed? Because mortgage loans are longer-term products controlled by bond traders looking at longer-term inflation, which has been declining precipitously.

Retail CPI inflation, for instance, declined from 9 percent to 6.4 percent just since last June. Housing sales will take a bit longer to recover from the December lows, since housing prices are also part of the recovery formula.

And said price increases are returning to a more historical level of +5 percent per annum as well.

Calculated Risk

Per Calculated Risk, Freddie Mac recently reported that its “National” Home Price Index (FMHPI) declined for the seventh consecutive month on a seasonally adjusted basis in December, putting the National FNHPI down 2.5% from its May 2022 peak, and down 5.0% Not Seasonally Adjusted (NSA) from the peak.

Mortgage applications have therefore increased as well. Mortgage applications increased 7.4 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending February 3, 2023.

“Applications rose last week as the 30-year fixed mortgage rate inched lower to 6.18 percent, its fifth consecutive weekly decline. The 30-year fixed rate is almost a percentage point below its recent high of 7.16 percent in October 2022,” said Joel Kan, MBA’s Vice President, and Deputy Chief Economist. “

Both purchase and refinance applications increased last week and have shown gains in three of the past four weeks because of lower rates.

So, it looks like head winds created by the Fed’s rate hikes that brought home sales to their lows in December are slowly turning into tail winds pushing housing sales higher as inflation and longer-term, fixed interest rates continue to decline.

Harlan Green © 2023

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

To A Better State of the Union

 Financial FAQs

Reuters

Reuters just reported that U.S. Treasury Secretary Janet Yellen on Monday said she saw a path for avoiding a U.S. recession, with inflation coming down significantly and the economy remaining strong, given the strength of the U.S. labor market.

"You don't have a recession when you have 500,000 jobs and the lowest unemployment rate in more than 50 years," Yellen told ABC's Good Morning America program.

Why is she being optimistic about a so-called soft landing for our economy? It would raise the importance of our annual State of the Union report that President Biden will present to Congress and Americans on Tuesday.

It’s not only the incredibly strong unemployment report, but service sector businesses that employ most Americans as measured by the Institute for Supply Management (ISM) Non-manufacturing Index soared in January from its December lows; another huge surprise.

It’s as if Americans have changed their minds en masse about the possibility of a recession in January. And that could mean a much better performing ‘state of the union’ this year.

“Ten industries reported growth in January,” said Anthony Nieves, Chair of the Institute for Supply Management®, “according to the Services PMI^®, which was in expansion territory after a single month of contraction and the prior 30-month period of growth. The composite index has indicated expansion for all but three of the previous 155 months.”

And former Treasury Secretary Larry Summers is also tapering his hawkishness and seeing the possibility of a better future for the U.S. economy.

Summers said on Fareed Zakaria’s GPS Sunday that it “looks more possible that we’ll have a soft landing than it did a few months ago,” but he has continued fears about inflation indicators that have come back to earth, but are still too high for his liking.

“They’re still unimaginably high from the perspective of two or three years ago, and that getting the rest of the way back to target inflation may still prove to be quite difficult,” Summers said.

The manufacturing sector hasn’t done so well per the ISM Manufacturing Index. Economic activity in the manufacturing sector contracted in January for the third consecutive month following a 28-month period of growth, say the nation's supply executives in the latest Manufacturing ISM^® Report On Business^®.

The report was issued today by Timothy R. Fiore, Chair of the Institute for Supply Management^® (ISM^®) Manufacturing Business Survey Committee:

“The January Manufacturing PMI^® registered 47.4 percent, 1 percentage point lower than the seasonally adjusted 48.4 percent recorded in December. Regarding the overall economy, this figure indicates a second month of contraction after a 30-month period of expansion.”

Why has manufacturing activity contracted? It seems to have been most affected by higher prices for raw materials, or, “due to buyer and supplier disagreements regarding price levels,” in Fiore’s words.

So more economists are lining up behind the inflation doves, who see inflation as a temporary phenomenon, with consumers’ longer term inflation expectations continuing to be “well-anchored” around 3 percent.

Maybe that’s why the Fed raised the overnight interest rate it charges banks just a quarter-percent to 4.5 percent, and why it bespeaks a better state of our union.

Harlan Green © 2023

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

No More Recession, Period?

 Popular Economics Weekly

MarketWatch

I said last week, the U.S. economy has done it again with stronger than predicted fourth quarter GDP growth. This time it’s another record employment gain that will shock most economists and professional prognosticators to their roots.

Total nonfarm payroll employment rose by 517,000 in January, and the unemployment rate dropped to 3.4 percent, the U.S. Bureau of Labor Statistics reported today. It was double the estimates of job growth for January; whereas just 223,000 nonfarm payroll jobs were created in December.

President Biden gave a short announcement this morning that a total 12 million jobs were created in his first two years in office, also a record. It’s now looking like we should anticipate a record year of recovery rather than worry about an incipient recession, with economic growth continuing as the $trillions in government spending over the past two years gets put into a more productive economy.

“Job growth was widespread, led by gains in leisure and hospitality, professional and business services, and health care. Employment also increased in government, partially reflecting the return of workers from a strike,” said the BLS.

In fact, all sectors had job growth except for the information services. Is Silicon Valley cutting jobs because its revenues are shrinking? Apple, Google, Microsoft have all announced layoffs.

The drop from 3.5 percent to 3.4 percent unemployment was the lowest level since 1969 and the number of hours people work jumped 0.3 hours to 34.7 hours, matching the highest level in a year.

Why wouldn’t this be with a five-year allocation of $550 billion in federal investments in America’s infrastructure to upgrade highways and major roads, bridges, airports, ports, and water systems?

Additional investments cover expansions and improvements to the nation’s broadband access, public transportation systems, and energy grid infrastructure, as I said last week, all boosters to economic growth.

The fall in wage inflation will upset the Fed most, since the report showed that average annual hourly wage growth had dropped to 4.4 percent. I.e., it is falling with a stronger job market.

So, inflation isn’t endangering job growth; the opposite is happening. The most important figure in the Q4 GDP report was the inflation rate rose at an annual 3.2 percent pace in Q4, falling from a 4.3 percent advance in the prior three-month period.

The so-called inflation deflator used in the Bureau of Economic Analysis that measures the aggregate prices for all goods and services transacted domestically signals inflation will continue to decline. So why shouldn’t we be hopeful that 2023 might be a better year for Americans?

The fastest job growth was in sectors that most benefit the public—Education & Health, Leisure/Hospitality, Professional/Business, and Government.

In the face of what looks like a rising prosperity for all, Does the Fed dare to raise interest rates much further?

Harlan Green © 2023

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

More Jobs Available Than Ever

 The Mortgage Corner

BLS.gov

A preview of December’s official unemployment report was given today. Employers continued to fight the Fed by offering more jobs in the December Bureau of Labor Statistics JOLTS report, its Job Openings and Labor Turnover Survey.

The number of job openings increased to 11 million from 10.4 million in November, signaling employers still see a huge demand for their products and services—mainly in retail and leisure activities.

“On the last business day of December, the number and rate of job openings increased to 11.0 million and 6.7 percent, respectively,” said the BLS. “In December, the largest increases in job openings were in accommodation and food services (+409,000), retail trade (+134,000), and construction (+82,000). The number of job openings decreased in information (-107,000).”

The Fed Governors probably won’t like the JOLTS report, as they believe it means inflation won’t continue to decline—or will decline too slowly. They seem to believe almost religiously that full employment is synonymous with high inflation.

So does former Treasury Secretary Larry Summers, apparently, on Bloomberg News, who has been leading the inflation hawks.

“We need five years of unemployment above 5% to contain inflation -- in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,” said Summers said in a speech in London Monday. “There are numbers that are remarkably discouraging relative to the Fed Reserve view.”

His remarks are based on s a horrific thesis of so-called classical economic theory that no longer applies, and which even some Fed Governors are saying they no longer believe.

In fact, the swift decline in inflation since last June occurred in the face of continuing full employment and a record-low unemployment rate.

Then why is inflation now declining so fast? Lets’ return to an even more basic economic theorem: the Law of Supply and Demand. Supplies are now catching up to said demand for goods and services, which is reflected in falling commodity (like oil and food grain) prices.

Inflation came from the aftereffects of accelerating growth after the COVID shutdowns in early 2020 getting ahead of supply-chains, hence the sudden shortages were due to the pandemic shutdowns, the Ukraine war, and China’s ongoing COVID problems.

And because world trade has become global, we are finding alternatives to these shortages.

EPI.org

So rising wages of employees are no longer the major inflation threat. The Economic Policy Institute, a labor think tank, provides a simple graphic to explain why—the widening gap between what employees produce and what they earn from their labor since 1980.

Until 1979, labor’s compensation rose in tandem with labor productivity. But then the gap widened so that labor productivity has increased 64.7 percent from 1979 to 2021, whereas a typical worker’s compensation increased just 17.3 percent, not even keeping up with inflation.

Where did the rest of the wealth end up that has been generated since 1979? It’s the reason corporate profits as a percentage of GDP were the highest ever in the summer of 2022.

The good news is that Fed Chairman Powell’s remarks after this Wednesday’s announcement of its one-quarter percent rate hike is indicating that the Fed Governors are not listening to Larry Summers.

But are they listening to wage-earners who will suffer most from a recession?

Harlan Green © 2023

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