How Do We Provide More Homes?

 The Mortgage Corner

Calculated Risk

The housing market is cooling as is the fall weather. It’s not good news for those needing to live somewhere, given the low for-sale inventory. But interest rates still remain at record lows, with 30-year conforming and super-conforming fixed rates still below 3 percent and affordable for a majority of home buyers.

The construction of multi-family rental housing is also booming, which is good news for renters. It could bring down rental rates, which have been rising as well. Building more rental units may be the best way to cure the present housing shortage, given all the constraints in labor, building materials, and the supply of buildable lots.

Total existing-home sales,¹ https://www.nar.realtor/existing-home-sales, completed transactions that include single-family homes, townhomes, condominiums and co-ops, fell 2.0 percent from July to a seasonally adjusted annual rate of 5.88 million in August. Year-over-year, sales dropped 1.5 percent from a year ago (5.97 million in August 2020), reported the NAR.

"Sales slipped a bit in August as prices rose nationwide," said Lawrence Yun, NAR's chief economist. "Although there was a decline in home purchases, potential buyers are out and about searching, but much more measured about their financial limits, and simply waiting for more inventory."

So patience is a virture with the slowing price rises. The median sales price of a single-family home was $356,700, still up 14.9 percent from last August.

“Competition among home buyers has been behind the skyrocketing prices, driving the annual growth rate to a high of 23.6% in May. Since June, the rate has been steadily dropping, decelerating to 23.4% in June and 17.8% in July,” said Shaina Mishkin of MarketWatch.

“The housing sector is clearly settling down,” said chief economist Lawrence Yun, who described the surge of home buying in late 2020 and early 2021 as an anomaly.

Total housing inventory² at the end of August totaled 1.29 million units, down 1.5% from July's supply and down 13.4% from one year ago (1.49 million), said the Realtors. Unsold inventory sits at a 2.6-month supply at the current sales pace, unchanged from July but down from 3.0 months in August 2020.

Total housing starts increased 3.9 percent to a seasonally adjusted annual rate of 1.62 million units, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

The second Calculated Risk graph portrays years of supply and YoY inventory changes in red and blue lines, respectively. In January 2021 they reached a bottom of -30 percent below January 2020 and have been rising ever since.

Calculated Risk

So housing construction will have to play catch-up. The good news is single-family housing starts on a year-to-date basis are about 24 percent higher than the same period in 2020, reports the NAHB.

And help is on the way for renters, as I said. The National Association of Home Builders (NAHB) reports strong multifamily production helped push overall housing starts up in August as single-family starts edged lower due to ongoing supply chain issues and labor challenges.

The multifamily sector, which includes apartment buildings and condos, increased 20.6 percent to a 539,000 pace, whereas single-family starts decreased 2.8 percent to a 1.08 million seasonally adjusted annual rate, but are up 23.8 percent year-to-date.

“More inventory is coming for a market that continues to face a housing deficit,” said NAHB Chief Economist Robert Dietz. “The number of single-family homes under construction in August — 702,000 — is the highest since the Great Recession and is 32.7% higher than a year ago. While some building materials, like lumber, have seen easing prices, delivery delays and a lack of skilled labor and building lots continue to hold the market back.”

And though more homes are being built, just 29 percent of sales were for so-called first-timers, the entry-level buyers lowest in age and starting new families. This is the real void looming over an acceptable housing supply.

Unless builders and governments find ways to reduce housing costs, the housing shortage could continue for years and leave a whole generation without the benefits of home ownership.

Harlan Green © 2021

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

Why So Much Inequality?

Answering Kennedy’s Call

FREDcpi

President Biden hopes to pass the largest piece of social legislation since the New Deal with his upcoming $3.5 trillion social infrastructure bill. But he is finding lots of opposition to such public spending.

The NY Times’ Jim Tankersley summarized President Biden’s bill.  It:

“… combines major initiatives on the economy, education, social welfare, climate change and foreign policy, funded in large part by an extensive rewrite of the tax code, which aims to bring in trillions from corporations and the rich.”

Tankersley maintains the legislation, which Democrats are trying to pass along party lines and without Republican support, contains the bulk of Mr. Biden’s vision to overhaul the rules of the economy, “…in hopes of reducing inequality and building a more vibrant middle class.”

Then why are conservative economists against programs that would help to mitigate such record inequality? Harvard Prof Greg Mankiw recently said “Americans should be wary of their plans —“… not only because of the sizable budgetary cost, but also because of the broader risks to economic prosperity,” in a recent NY times Op-ed.

Doesn’t he want to reduce our record income inequality, the worst in the developed and many underdeveloped countries? It is a major reason for the political polarization of Americans that have made us so vulnerable to the COVID-19 pandemic.

I don’t believe so, because he said Biden’s social infrastructure bill “…also raises larger questions about American values and aspirations, and about what kind of nation we want to be?”

He is in fact repeating conservative’s mantra since the 1980s that higher taxes and more government regulation discourage work. He maintains:

“Economists disagree about why European nations are less prosperous than the United States. But a leading hypothesis, advanced by Edward Prescott, a Nobel laureate, in 2003, is that Europeans work less than Americans because they face higher taxes to finance a more generous social safety net.”

Prescott and Mankiw couldn’t be more mistaken, especially in asserting that prosperity (in the form of higher GDP growth) should be the gold standard for determining whether a populous is happy or willing to work.

The above FRED graph cited by Nobel prize-winning economist Paul Krugman in fact debunks that claim. Europeans, including Denmark and France (red and blue lines in graph), have a higher percentage of working aged adults 25-44 than the US (green line). They also have higher minimum wages, universal health care, and take longer vacations than Americans.

So the natural inference must be that a higher percentage of adult Europeans than Americans work (even though for fewer hours) and enjoy a much more generous social safety net because of their higher tax rates!

This is while most Americans do not have that luxury. Americans work longer hours for less, have a poor social safety net and less leisure time to enjoy.

Even modern economic history refutes the claim that greater prosperity depends on lower taxes and less government. Our modern prosperity has depended mostly on what Government has done: built our modern infrastructure, sent us to the moon, created the Internet, and protected us from environmental harm.

So we should ask ourselves why do conservatives still maintain prosperity for the few and inequality for the many is the American way?

The Kennedy economist John Kenneth Galbraith provides one answer, in speaking of France’s Ancien Régime that preceded their Revolution: “The privileged feel (also) that their privileges, however egregious, they may seem to others, are a solemn, basic, God-given right.”

Harlan Green © 2021

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

 

Strong Retail Sales Indicate Good Q3 Growth

Popular Economics Weekly

FRED/Calculated Risk

Retail and Food service sales, ex-gasoline, increased 0.7 percent in a month, and 15.1 percent above August 2020, per the US Census Bureau estimate, which is a sign that economic growth isn’t faltering from the Delta variant.

U.S. retail sales unexpectedly increased in August, likely boosted by back-to-school shopping and child tax credit payments from the government, which could temper expectations for a sharp slowdown in economic growth in the third quarter, said Reuters.

Most school districts started their 2021-2022 academic year in August, with in-person learning resuming after last year's shift to online classes because of the pandemic.

Economists and several Fed Governors had been predicting a slowdown in the third quarter and beyond because of the Delta variant-caused surge in infections, but consumers aren’t buying that, still flush with cash from the rescue packages.

Sales advanced in almost every major retail category in August, and they rose a much stronger 1.8 percent if autos are excluded, said MarketWatch. A widespread shortage of new cars and trucks has depressed sales at auto dealers due to the ongoing computer chip shortage.

This combined with the huge number of job openings, at a series high of 10.9 million on the last business day of July, means that businesses believe the 2021 economy is just beginning to roar.

BEA.gov 

Predictions of Q3 GDP are all over the map at present because of uncertainty over the Delta variant. The Atlanta Fed’s GDPNow estimate for Q3 growth is 3.6 percent, though a consensus of Blue Chip economists predicts 5 percent Q3 growth. I believe the Conference Board’s forecast is closest to reality. It predicts that US Real GDP growth will slow to 5.5 percent (annualized rate) in Q3 2021, vs. 6.6 percent growth in Q2 2021, and that 2021 annual growth will come in at 5.9 percent (year-over-year).

This is a huge increase, even though its forecast “…is a downgrade from our August outlook and incorporates the larger-than-expected impact that the COVID-19 Delta variant has had on the US economy. Looking further ahead, we forecast that the US economy will grow by 3.8 percent (year-over-year) in 2022 and 3.0 percent (year-over-year) in 2023,” said the Conference Board.

Reuters also reported the National Retail Federation said the rise in sales despite the headwinds reflected the continued strength of the American consumer and the resilience of the nation's retailers.

"We maintain our confidence in the historic strength of consumers and fully expect a record year for retail sales and a strong holiday season for retailers," NRF President Matthew Shay said.

Why? Americans are sitting on at least $2.5 trillion in excess savings accumulated during the pandemic. And wages are rising as companies scrambled to fill a record 10.9 million job openings in July.

Harlan Green © 2021

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

 

What Is Real Inflation?

 

Financial FAQs

FREDcpi

“The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in August on a seasonally adjusted basis after rising 0.5 percent in July, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 5.3 percent before seasonal adjustment.”

The above FRED cpi graph shows the most recent spike in retail inflation, but also its relative insignificance compared to past inflationary surges, especially in the 1970s and 1980s.

Then why so much worry about its recent spike? Because Wall Street investors like cheap money, and bond holders’ low inflation, and they worry that the Federal Reserve might react too soon to such an inflationary surge by tightening credit, when it’s primary goal should be to keep people employed and consumers happy.

Is inflation one of the major problems facing the US economy today? You would think so listening to major commentators and some economists. Zanny Minton Bedoes, Editor in Chief of The Economist, said it was the major problem for sustainable economic growth if prolonged on Fareed Zakaria’s Sunday TV cast recently.

Consumers and businesses also like cheap money to buy homes and things, but they aren’t so worried at present because lots of COVID-19 recovery money is available and in circulation.

Therefore, it’s a little early to be worrying about what I call real inflation—prices rising faster than wages for more than a few months. And the August CPI showed its first decline in 8 months from 5.5 to 5.3 percent August.

Economists have little to say about what causes long term inflation in the US. They only have the 1970s as an example. The FRED cpi graph shows when it really peaked. It was during the 1975 and 1980 recessions largely because the 1973 Arab oil embargo cut off Middle Eastern oil on our very oil dependent, auto-driven economy—before we began switching to renewable energy sources and more energy efficient regulations on homes and businesses.

Labor unions in the 1970s were able to push their wage demands to keep up with skyrocketing prices; oil was more than $100 per barrel, and there were long lines at gas stations—those stations that still had gas to sell. It was a hectic time, but is hardly the problem today, even with fewer workers and disrupted supply chains to meet the surging economic recovery.

The Fed’s Jerome Powell has said they will be vigilant if it remains high for too long, but that would mean labor costs, which are approximately two-thirds of product costs, continue to increase as they have since the end of this pandemic-induced recession in April, 2020.

FREDwagessalaries

Wages and salaries rose 10.1 percent annually in July 2021, per the latest available data on the above FRED graph, an uncomfortable level if prolonged. It reached its highest level in the 1970s, per the FRED graph on wages and salaries that dates from 1960. But as the Federal Reserve tightened inflation controls in 1980 by initially raising interest rates to double digits, and labor lost much of its bargaining clout as union membership declined, inflation began its long descent to the 2 percent average that has pretty much prevailed since the 1990s.

In fact, it has declined so much that the problem since the end of the Great Recession has been how to keep a healthy level of inflation. This was motivated by the fear of a repeat of Japan’s decades long era of deflation when its economy was shrinking.

So what inflation should we worry about? Inflation caused when businesses and government aren’t investing in productive enterprises, which has been the case in recent decades—with a strong safety net that makes consumers feel safe and not on the verge of bankruptcy with every unexpected downturn; such as the Biden administration has proposed; and investments in infrastructure and future technologies that will insure there are good jobs for all of US

Harlan Green © 2021

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

Where are the Job Openings?

Popular Economics Weekly

Calculated Risk

The number of job openings increased to a series high of 10.9 million on the last business day of July, the U.S. Bureau of Labor Statistics reported today. Job openings increased in several industries, with the largest increases in health care and social assistance (+294,000); finance and insurance (+116,000); and accommodation and food services (+115,000).

Health care job openings surged because the Covid-19 Delta variant is filling hospitals again, while surging consumer spending on leisure and travel is creating a higher demand for jobs in finance, accommodation and food services.

And now we have looming school openings, which could foster even more job openings, if teachers are reluctant to return to work because of conflicting mask mandates in red states, which I reported last week, and induces classroom shutdowns with quarantines affecting those not vaccinated or wearing masks.

As of September 2, over 5 million children have tested positive for COVID-19 since the onset of the pandemic, reports the American Academy of Pediatrics. Although a lower percentage of them are hospitalized, it is putting a burden on school openings.

The number of children and teens suffering from the coronavirus-borne illness COVID-19 exceeded 250,000 for the first time since the start of the pandemic in the week through Sept. 2, a worrying trend coming just as they return to school in person.

The current 7-day moving average of daily new cases (153,246) increased 4.9% compared with the previous 7-day moving average (146,087), said the CDC. The current 7-day moving average is 123.6% higher than the value observed approximately one year ago (68,533 new cases on July 20, 2020).

It really looks like there is too much uncertainty keeping many workers from returning to work. Total hiring slipped for the first time this year. Job hires fell by 160,000 to 6.7 million, with hiring in the retail sector down sharply. This is while separations rose 174,000 to 5.8 million. This includes those fired and those who left the job.

What will bring them back? More vaccinations and mask mandates will be most effective, according to experts, with CNN saying President Joe Biden will push for vaccine mandates and testing programs as part of a revamped approach to ending the pandemic.

As American students return to classrooms, battles over masks and vaccine requirements for older children have erupted in school districts around the country, as I’ve said. Health officials say they expect vaccines to be authorized for children under 12 in the next several months, but parents have become frustrated at the pace with which the process is unfolding.

So, although the huge number of job openings show economic activity speeding up, some of the country still needs convincing that the coronavirus pandemic must be vanquished.

Harlan Green © 2021

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

 

A Disappointing Jobs Report

 

Popular Economics Weekly

Calculated Risk

When will they come back to work? That is the question economists are asking with the August unemployment report out today. Although the Calculated Risk graph shows how quickly job creation has recovered in comparison with past recessions (red line) there are still some 5.3 million fewer jobs since February 2020.

Total nonfarm payroll employment rose by 235,000 in August, and the unemployment rate declined by 0.2 percentage point to 5.2 percent, the U.S. Bureau of Labor Statistics reported today. So far this year, monthly job growth has averaged 586,000. In August, notable job gains occurred in professional and business services, transportation and warehousing, private education, manufacturing, and other services. Employment in retail trade declined over the month.

“There was some good news - the decline in the unemployment rate, the decline in permanent job losers, and the decline in long term unemployed - however, there are still 5.3 million fewer jobs than prior to the recession,” said Calculated Risk’s Bill McBride, “and overall this was a disappointing report, probably due to the sharp increase in COVID cases.”

A major reason for the lackluster jobs report is the seasonal adjustment that BLS makes, which means there were just 235,000 more jobs created this time of year than is ‘normal’. In ‘normal’ years there is usually a hiring surge for schools in the fall, but many schools aren’t opening or are slow to open because of the tiff over mask mandates, particularly in the red states.

And the Delta variant of SARS-CoV2 is surging. Mask mandates are a crucial question, because students wearing masks are less likely to have to quarantine under the U.S. Centers for Disease Control and Prevention protocols.

“If a classroom of 25 students is masked and one of them comes down with COVID-19, no one but the sick student has to stay home. If children in the classroom are not masked, anyone in close contact with someone who tests positive must stay home for at least 7 days,” said the Baltimore Sun recently.

It cites several examples: Mississippi has 20,000 students quarantined and South Carolina and Arkansas also had hundreds out of school. Several districts have shut schools down as cases of the virus surged. And by Thursday, five Florida school districts were defying their governor’s order and instituting mask mandates after thousands of their students were quarantined. Hillsborough County alone had sent home about 10,000 students in the first week of school, the Tampa Bay Times reported.

In other words, the unemployment picture is chaotic because red states have chosen to make mask mandates a political issue that will hamper school openings perhaps for months, harming the health of K-12 students unnecessarily. Red-leaning states are doing this really for one reason only—they believe it will rally their troops for the 2022 election.

“The good news is that the change in total nonfarm payroll employment for June was revised up by 24,000, from +938,000 to +962,000, and the change for July was revised up by 110,000, from +943,000 to +1,053,000. With these revisions, employment in June and July combined is 134,000 higher than previously reported,” said McBride.

The BLS reported that in May 2017, 5.5 million teachers and instructors make up 65 percent of employment in elementary, middle, and secondary schools nationwide. There are over 2 million elementary and middle school teachers, representing 24 percent of total school employment. There are nearly 1.1 million secondary school teachers. And add to that 550,000 janitors and school administrators employed.

So it is not good news that the red states are having so much trouble with mask mandates. Do they really believe endangering the health of children is a winning political issue?

Harlan Green © 2021

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

California's NIMBY Problem

 

The Mortgage Corner

Calculated Risk

It’s no secret that California has a housing problem. Its bias for single-family, ‘not-in-my-backyard’ (NIMBY) zoning since the 1960s has finally caught up with reality—in the form of more than 150,000 residents homeless and some 700,000 new homes built last year in California, whereas 1,500,000 new jobs were created.

Where are these people expected to live? It’s no secret that the real problem is affordability. Commuters that work in Silicon Valley, for instance, must travel up to two hours per day to reach their jobs, because homes they can afford are on the farthest outreaches of metropolitan areas, with little mass transit yet planned to speed up the commute.

COVID-19 exacerbates the problem with existing-home inventories dropping to their lowest level in 2020, and annual prices then rising at double-digit rates when consumers came out of their stay-at-home shells looking for too few available to purchase.

The Calculated Risk graph dating from January 2002 shows that existing-home inventories in YoY change (blue line) and months of supply (red line) reached their low in January 2021 and have been rising fairly sharply since then.

Gov. Gavin Newsom, who came into office with bold pronouncements about a “Marshall Plan for Housing,” said he supported plans to increase density near transit, but never endorsed an individual bill that would implement that goal.

California legislators just took a huge step to address the state’s housing crisis by allowing homeowners to double up.  The state assembly passed a bill last week (Aug. 26) that allows for two-unit buildings to be built on lots previously zoned for single-family homes.

It’s a significant reversal of decades of policy built around restrictive single-family zoning. In California, as across the US, allowing for one housing unit to be built per parcel of land has been standard. It’s what gave rise the suburbs as we know them, but has also been used as a tool in racist housing policies that have excluded Black, brown, and Native Americans from homeownership. In recent years, restrictive zoning has been a primary driver of the state’s affordable housing shortage. The median home price in California has risen 27% in the past year alone, and currently sits at more than $800,000.

The bill would allow more building where it’s now illegal, with the intent of reducing California’s fast-rising home prices and increasing access to homeownership through a greater variety of options, according to state Senate leader Toni Atkins, D-San Diego, who introduced the bill and similar versions in the past.

To lessen concerns from more than 100 cities and neighborhood groups that oppose the bill, Atkins on Monday added a few amendments that give local jurisdictions some veto power over units that threaten public health and safety and curtail potential speculation. The bill — approved by the Senate in May and two Assembly policy committees in June — made it out of the Assembly Appropriations Committee Monday and was approved by the full Assembly Thursday on a 45-19 vote.

I reported last week that there is not enough housing to meet soaring demand. The national existing-home housing inventory at the end of July totaled 1.32 million units, up 7.3 percent from June's supply and down 12.0 percent from one year ago (1.50 million) according to the NAR. Unsold inventory sits at a 2.6-month supply at the present sales pace, up slightly from the 2.5-month figure recorded in June but down from 3.1 months in July 2020, a historic low.

The housing market is so hot that individual investors or second-home buyers, who account for many cash sales, purchased 15 percent of homes in July. All-cash sales accounted for 23 percent of transactions in July, and up from 16 percent in July 2020.

But first-time buyers purchased just 30 percent of existing sales, which means most young adults leaving school and/or their parents’ home may find rental housing to a more viable option for the foreseeable future.

Much more must be done, in other words. It will take years for this to happen with more multi-family housing amid denser zoning in the cards. And it will be closer to needed public transportation hubs, whether the NIMBYs like it or not.

Harlan Green © 2021

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