Wednesday, June 23, 2021

Can We Fix the Housing Shortage?

 The Mortgage Corner

Calculated Risk

Existing-home sales of single-family, condos and apartments were down slightly from their recent highs for a number of reasons. This is while demand for housing is skyrocketing with home prices up 20 percent year-over-year, but there just isn’t enough inventory, especially at the low, affordable end where young adults can buy a home or condominium, and builders are scrambling to catch up.

The Calculated Risk graph shows that last year during the pandemic existing-home sales reached the highest sales rate since 2006 and the pre-Great Recession housing bubble. So the worry is how to fulfill the exploding housing needs of Americans after the pandemic has caused a record number of homeless and at least 10 million homeowners behind on their mortgage payment.

The National Association of Realtors reported in May:

Total existing-home sales,1, completed transactions that include single-family homes, townhomes, condominiums and co-ops, dropped 0.9% from April to a seasonally-adjusted annual rate of 5.80 million in May. Sales in total climbed year-over-year, up 44.6% from a year ago (4.01 million in May 2020).

"Home sales fell moderately in May and are now approaching pre-pandemic activity," said Lawrence Yun, NAR's chief economist. "Lack of inventory continues to be the overwhelming factor holding back home sales, but falling affordability is simply squeezing some first-time buyers out of the market.”

So how will we provide enough homes to fill the rising demand for housing—not only to house those that can afford to buy, or rent, but for the homeless?

Housing economists predict that partly due to the pandemic, America is short some 5 million housing units, including rental housing.

Forbes Magazine summarizes a compendium of reports from WSJ and others that there would be 5.5 million more housing units today, if as many were built since 2000 as were built for baby boomers from 1968 to 2000.

“To make up the shortage, the NAR report says the U.S. would have to build 2.1 million homes each year for a decade—more than it built each year during the housing boom of the mid-2000s,” says Forbes.

That could be a problem with last month’s residential housing starts increasing 3.6 percent in May to a seasonally adjusted annual rate of (just) 1.57 million units off a downwardly revised April reading, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.


This is third highest, per the St. Louis Fed’s single-family starts since 1960, which shows the record for starts was 1.8 million in January 2006 at the beginning of the housing bubble, and the last time interest rates were lower than the inflation rate, as they are today with the Fed’s various quantitative easing purchases of treasury bonds and mortgage-backed securities.

The May reading of 1.57 million starts is the number of housing units builders would begin if development kept this pace for the next 12 months, says the National Association of Home Builders. Within this overall number, single-family starts increased 4.2 percent to a 1.10 million seasonally adjusted annual rate. The multifamily sector, which includes apartment buildings and condos, increased 2.4 percent to a 474,000 pace.

So how can we increase production? “[W]e’ll need to do something dramatic to close this gap,” said Yun in a press release. The association proposed increasing the housing supply by creating or expanding tax credits, loans or grants for builders who renovate or build new housing in low-income areas and who convert old malls and factories into homes. They also asked for incentives for cities to allow denser zoning, an approach that President Biden included in his infrastructure proposal, Reuters reported.

The White says the President’s infrastructure plan proposal invests $213 billion “to produce, preserve, and retrofit more than two million affordable and sustainable places to live. It pairs this investment with an innovative new approach to eliminate state and local exclusionary zoning laws, which drive up the cost of construction and keep families from moving to neighborhoods with more opportunities for them and their kids.”

So it's now up to the Senate to reach a final agreement on the bill, which will determine if we can even begin to cure the housing shortage.

Harlan Green © 2021

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Saturday, June 19, 2021

What Is Normal Inflation?

 Popular Economics Weekly


The financial markets were shocked, yes shocked, when the May Consumer Price Index for retail prices jumped 4.9 percent year-over-year. Just kidding. No one was really surprised because one year ago it wasn’t rising at all (well, just 0.22 percent), and it was predicted to rise substantially with the $4 trillion plus in government aid already being injected into companies and individuals.

It has averaged around two percent since the 1990s, per the above St. Louis Fed graph that dates back to 1950. Every business economist would know this, and expect such fluctuations that rather quickly return to the longer-term average with today’s just-in-time, global supply chains that have tamed prices.

In fact, CPI inflation was rising as high as 5.5 percent annually in July 2008 during the Great Recession, before another jaw-dropping plunge to -0.32 percent in 2009. You get the drift. So who is worrying about these temporary ‘blips’ in inflation?

The financial markets, of course. They love to use other peoples’ (borrowed) money to finance their stock, bond and commodity market transactions, if possible. And interest rates have been at rock bottom over the past year; close to zero for short-term rates, and the 10-year benchmark treasury yield below one percent for much of the time. It is still in a daily trading range of 1.5-1.6 percent, per the below FRED graph.


This is one reason market indexes have been at record highs, and why they gyrate so wildly on almost a daily basis, as traders try to guess what the Fed will do next in its almost daily pronouncements on when they might allow short-term interest rates to rise.

Consumers don’t have to worry so much, because it has been extremely difficult for the Federal Reserve, or anyone else, to keep CPI inflation above two percent, especially during this once in a 100-year coronavirus pandemic. Inflation below that range has invariably meant there is too little aggregate demand—consumers aren’t buying, investors aren’t investing, and banks aren’t lending.

CEPR’s Dean Baker just remarked on what has boosted inflation of late. It’s gasoline prices and insurance rates spiking because of the sudden surge in travel, as consumer bust out of their prolonged at home hibernation.

“Overall, the story this month is overwhelmingly that bounce back inflation was 100 percent predictable, coupled with soaring car prices (both new and used) due to temporary shortages. There’s not much here to get excited about,” he said.

“The overall CPI was up 0.6 percent (monthly), the core rose 0.7 percent. New and used cars were major factors, rising 1.6 percent and 7.3 percent, respectively. The jump in used and new car prices added 0.3 percentage points to the inflation rate for the month.”

And, he continues:

  • · Even though it’s hard to get good help, restaurant prices outpaced food prices by just 0.1 percentage points over the last three months, 1.0 percent to 0.9 percent.
  • · The medical care index fell 0.1 percent in May, up just 0.9 percent over last year. Drug prices were flat, down 1.9 percent over last year.
  • · Rent indexes: rent proper increase just 0.2 percent; owner equivalent rent rose 0.3 percent in May.
  • · Apparel prices jumped 1.2 percent in May, car insurance 0.7 percent, and air fares 7.0 percent. The indexes are respectively 2.2 percent, 0.2 percent, and 6.3 percent below the February 2020 level.

It is also why the housing market is booming. Interest rates are this low because bond traders see very little danger of longer-term inflation, and the Fed promising to hold short-term rates close to zero for at least one more year.

Harlan Green © 2021

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Thursday, June 17, 2021

When the Return to Normal?

 Financial FAQs

Calculated Risk

When will most American workers return to work, and the U.S. economy return to normal? The Calculated Risk-FRED graph since 1992 tells us that retail sales have historically never varied substantially from a 5 percent annual increase, except during the blue bar recession periods indicated in the graph, and consumers and businesses have spent most of their pandemic aid. It could take another year.

The U.S. Census Bureau reportedAdvance estimates of U.S. retail and food services sales for May 2021, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $620.2 billion, a decrease of 1.3% from the previous month, but 28.1% above May 2020.”

Altogether, the number of people reportedly still receiving jobless benefits from eight separate state and federal programs totaled 14.8 million as of May 29, reports MarketWatch’s Greg Robb. It is down about 560,000 from the prior week. Last year, 30 million Americans were receiving these extra benefits, while the historical range receiving claims is in the mid-200,000s, so one can see why it might take another year for economic activity to return to normal.

Retail sales began to rebound last April with the first aid checks, and really took off this January with the additional recovery dollars going to individuals. Clothing and accessory sales are up 200 percent from May 2020, while food service and drinking places surged 71 percent and electronic and appliance stores gained 91 percent.

This sudden prosperity is creating many bottlenecks, raising all prices and shrinking the housing supply, with builders struggling to meet the increased demand.

Privately‐owned housing starts in May were at a seasonally adjusted annual rate of 1,572,000. This is 50.3 percent above the May 2020 rate of 1,046,000, but is not enough construction to satisfy the soaring demand for more housing—new or used.

NAR chief economist Lawrence Yun commented on the May starts: “Despite the month-to-month trend, or even year-to-year changes, America is facing a massive housing shortage due to multiple years of underproduction in relation to population growth. We estimate around 5.5 to 6.8 million additional housing units need to be built. America is on track for only 1.6 million and 1.7 million new housing units this year and next, respectively. That would represent the best two-year performance in 15 years, yet it would still be inadequate. Therefore, expect both rents and home prices to outpace overall consumer price inflation in the upcoming years."

Calculated Risk

Where is this housing supply to come from? Estimates of population growth, demographic change, and demolitions suggest about 1.3 million households will form annually for the next few years, Goldman Sachs analysts said in a May note cited by Business Insider.

“Millennials are just reaching peak homebuying age and set to keep demand strong for the foreseeable future. Elevated lumber prices and lot shortages will continue to drag on construction even as starts accelerate. And while mortgage rates have risen from their pandemic-era floor, they still sit at historically low levels and should keep demand robust, the bank said.”

In 2021, the Mortgage Bankers Association (MBA) forecasts single-family housing starts to be around 1.134 million. And that could just be the beginning, as projections going forward are even rosier: 1.165 million single-family homes in 2022 and 1.210 million in 2023.

And we should see more entry-level homes under construction in 2021, says Joel Kan, associate vice president economic and industry forecasting at the MBA. That could help a potential pinch point, as too many entry-level buyers are helping to push up prices, making those homes unaffordable for that very group.

“We’ll see more affordable homes come onto the market as builders try to meet demand for these homes,” Kan says.

“Some 5.16 million people who have exhausted state compensation were also getting extra $300 a week in federal benefits as of May 29, down about 75,000 from the prior week,” says Robb. “The federal program ends in September and more than two dozen states are going to end the program early starting in the middle of this month.”

We know that will slow down the return to normal growth in those 25 states that are coercing their lower-paid workers to return to jobs they might not like. And that is on top of the need to find adequate housing.

Harlan Green © 2021

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Wednesday, June 9, 2021

There Are More Jobs Than Ever!

 Financial FAQs

Calculated Risk

The number of job openings reached a series high of 9.3 million on the last business day of April, the U.S. Bureau of Labor Statistics reported last Tuesday. Hires were little changed at 6.1 million. Total separations increased to 5.8 million. Within separations, the quits rate reached a series high of 2.7 percent while the layoffs and discharges rate decreased to a series low of 1.0 percent.

American workers are finally in a position to pick and choose from what is a record number of job openings. As proof, the number of quits jumped to a new all-time high of 4.0 million, versus 3.6 million last month.  These are voluntary exits from one job to a presumably better job.

This is panicking 25 red state governors into terminating the additional $300 per week in unemployment benefits early, believe it or not. They seem to be afraid that their workers might take the time to shop for a job with better pay and benefits, which anecdotal evidence already indicates.

The blue line in Calculated Risk’s graph tells us that hiring has actually returned to a more normal level, but sudden opening of the economy has orders pouring in for goods and services, which is more demand that can be satisfied at the moment, and this is boosting workers’ wages.

Reuters said “Higher worker mobility undoubtedly contributed to the surge in hourly earnings in the past two employment reports, as employers must not only pay higher wages to attract new workers but may feel more pressure to raise compensation to retain their existing employees.”

There are still too many unvaccinated employees that don’t feel safe returning to work, and most schools are still out or having only partial re-openings for many women to return to work.

Treasury Secretary Janet Yellen also claimed data does not support the argument that increased unemployment benefits are leading to a workforce shortage. She said when they looked at states and sectors where supplemental benefits were high, there weren't lower job finding rates as the argument would suggest, and in fact it was the "exact opposite."

The simple truth is that Republican governors en masse that suppress additional aid for their workers is in keeping with their small government principles. Why else give up $26 billion that will flow to them if they allow their workers to keep the additional benefits?

Sadly, research is showing that this hurts those states, report a number of researchers. A report cited by The Center For Equitable Growth concludes that workers salaries increased as much as five percent when their unemployment benefits were extended to 99 weeks in 2010-11 following the Great Recession.

And as of May’s jobs report released last Friday, the country is still down 7.6 million jobs from before the pandemic, reports The Hill. The May jobs report also indicated that there are 9.3 million people who are officially unemployed — meaning they are actively looking for work and unable to find it. In most industries, the number of jobseekers still exceeds the number of job openings.

We are in a different world with COVID-19 that is killing more than all the world wars, a time  much like the Great Depression and New Deal when a small government ideology makes no sense.

Harlan Green © 2021

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Friday, June 4, 2021

Who Lost Their Jobs?

 Popular Economics Weekly

This would be a good jobs report at any other time. Total nonfarm payroll employment rose by 559,000 in May, from a revised 278,000 jobs in May, and the unemployment rate declined by 0.3 percentage point to 5.8 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in leisure and hospitality, in public and private education, and in health care and social assistance.

Employers are crying labor shortage because they were surprised by the sudden 6.4 percent Q1 GDP growth pickup, so they were hoping for more new hires in the May report.

But maybe there is another reason for some workers not taking new jobs as quickly as employers would like—the businesses that employed them may be permanently closed, hence the large number still receiving unemployment benefits.

The WSJ reported that the pandemic resulted in the permanent closure of roughly 200,000 U.S. establishments above historical levels during the first year of the viral outbreak, according to a study released Thursday by economists at the Fed. In recent years, about 600,000 establishments have permanently closed per year, or about 8.5 percent, according to the study, so the total number could be upwards of 800,000 businesses permanently closed during the first pandemic year.

Then why would those losing permanent jobs, permanently, want to return to work quickly? Why shouldn’t they be given time to get over their loss? Have sociologists and psychologists even studied such traumas in detail?

We know something about the hurt from permanent job losses in the Rust Belt—soaring drug use and suicide rates in studies by Nobelist Angus Deaton and Anne Case.

The Federal Reserve gives a preliminary estimate of jobs permanently lost, and as of May it was 3.234 million from 3.529 million permanently lost in April. The calculated Risk graph shows the percentage losses over all recessions since WWII, and the time it took to return to normal levels; 5 years in 2001 (light blue line), 8 years in 2007 Great Recession (dark blue line) and is still below par just 15 months from the current pandemic (red line).

Calculated Risk

Individual companies account for about two-thirds—or roughly 130,000—of the extra business closures if historical patterns hold, according to the Fed economists who examined businesses with employees, cited by WSJ. Other closed establishments are units of major companies—say, a Gap or Pizza Hut—that closed some locations while remaining in businesses.

The service sector was hardest hit and is roaring back with 292,000 jobs in Leisure and hospital, followed by Education and health, and government. More women will return to the workforce, particularly mothers when schools are fully open in the fall. Other service-oriented businesses such as hotels, museums, parks and entertainment venues also added a flush of new jobs.

And many work sites are relaxing restrictions on masks or customer occupancy with coronavirus cases falling to the lowest levels since the first month of the crisis. 

MarketWatch’s Jeffry Bartash reports the global tally for the coronavirus-borne illness climbed above 172 million on Friday, while the death toll rose to 3.7 million, according to data aggregated by Johns Hopkins University. The U.S. remained in the lead globally in cases with 33.3 million and deaths with 596,434, JHUniv data show, but the seven-day average for cases has fallen 48 percent from two weeks ago, according to a New York Times tracker, for deaths has dropped 28 percent and for hospitalizations has declined 22 percent as vaccinations continue to increase.

This all points to labor participation rates continuing to rise in the fall, though it could depend in part on those workers that lost permanent jobs working through the debilitating effects of their losses.

Who is willing to help them, other than the Biden administration that is extending jobless benefits through September, and the 25 states that have not cut off their benefits too early?

Harlan Green © 2021

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Wednesday, June 2, 2021

President Biden’s New Deal Budget Helps All of US

 Financial FAQs

President Biden’s $6 trillion 2021-22 budget proposal would rebuild America’s infrastructure and social safety net, supporting those essential workers that need it the most.

“It also represents the most substantial expansion of the federal government’s spending powers since World War II and a direct rebuttal of the small-government principles of his Republican, and even many Democratic, predecessors,” reports VOX.

Then why are 24 states terminating the additional $300 per month payments early that Biden’s American Rescue Plan has extended until September, reports NY Times Binyamin Appelbaum?

The simple truth is that red states are suppressing any additional aid for their workers as much as possible in keeping with their small government principles. Why else give up $26 billion that will flow to them if they allow their workers to keep the additional benefits?

It is also a sign that Republicans will oppose President Biden’s new budget, which is really his ‘new’ New Deal that scares the daylights out of conservatives because it will show that government can work for all Americans, not just the wealthiest as it has over the past 40 years.

Biden’s budget proposal includes the $2 trillion American Jobs Plan — which would embrace an expansive definition of infrastructure, not only to modernize America’s road and bridges, but to invest in broadband and elder care — and a $1.8 trillion American Families Plan, which would establish free higher education and expand child care, health care, and tax benefits for needy families.

“As proposed, the budget would reinvest in infrastructure and education, raise taxes on the wealthy and corporations, and meet many — but not all — of Biden’s campaign promises,” says VOX.

This is happening while Federal Reserve and private banks are predicting and even bigger growth spurt ahead in coming quarters.

The Atlanta Fed has just updated their second quarter growth prediction, for starters:

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2021 is 10.3 percent on June 1, up from 9.3 percent on May 28. After this morning's Manufacturing ISM Report On Business from the Institute for Supply Management and the construction spending report from the U.S. Census Bureau, the nowcasts of second-quarter real personal consumption expenditures growth and second-quarter real gross private domestic investment growth increased from 8.6 percent and 20.7 percent, respectively, to 9.5 percent and 22.0 percent, respectively,” said the Atlanta Fed.

Goldman Sachs estimates 9.5 percent Q2 GDP growth while the New York Fed posts a much more conservative 4.5 percent spurt.

In fact, manufacturing activity is surging with the Institute for Supply Management reporting that The May Manufacturing PMI® registered 61.2 percent, an increase of 0.5 percentage point from the April reading of 60.7 percent. This figure indicates expansion in the overall economy for the 12th month in a row after contraction in April 2020.

President Biden’s budget, if enacted, would give a boost to GDP growth for the rest of this year because it targets working people that generate most economic activity, including essential workers that provide health care, police and fire protection, because they spend the largest percentage of their incomes.

And that is just a few of its elements, says VOX. “It also proposes universal pre-K, affordable childcare, and paid leave. It also puts the climate crisis front and center, with proposals dedicated to reducing US emissions, creating jobs in the clean energy sector, and funding climate research.”

Focusing on those folks that most need the support, this budget will give a huge boost to economic growth. The Federal Budget has supported the wrong segments of society for too long by cutting taxes and social services, when just the opposite is needed to end this coronavirus pandemic and be ready for whatever comes next that could damage economic growth—maybe our changing climate, or another pandemic?

Harlan Green © 2021

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