More Jobs = Higher Consumer Optimism = More Housing

                

Twenty Five states had lower unemployment, reports the Bureau of Labor Statistics, as the economic recovery continues.  That is probably why consumers continue to be optimistic and housing prices continues to soar—as high as 11 percent in Portland, San Francisco, and Denver, reports the latest S&P Case Shiller Housing Price Index.

Graph: Calculated Risk

            Only 8 states, from New Mexico to Louisiana, now have more than 6 percent unemployment.  Even energy-dependent states like Oklahoma and Texas are at less than 5 percent unemployment.

            The S&P/Case-Shiller U.S. National Home Price Index, covering all nine U.S. census divisions, recorded a slightly higher year-over-year gain with a 5.3 percent annual increase in November 2015 versus a 5.1 percent increase in October 2015. The 10-City Composite increased 5.3 percent in the year to November compared to 5.0 percent previously. The 20-City Composite’s year-over-year gain was 5.8 percent, up from 5.5 percent reported in October.

Graph: Calculated Risk

This hardly puts housing prices in bubble territory.  They rose more than 10 percent in 2014, before dipping back to the current increases.  And it is putting pressure on the housing inventory, now down to a 3 months’ supply for new housing.  So look for a continued surge in housing construction this year, which gives another boost to overall growth.

            Builders broke ground on 1.11 million homes in 2015, more than at any point since 2007, according to a recent UBS study. That was an 11 percent gain compared to 2014. The consensus view of 1.25 million that UBS cites would represent a 13 percent gain in 2016. Their own forecast is for 1.31 million starts, an 18 percent jump.

            The result is more new home sales, as sales ran at an annual pace of 544,000, the highest since February, the Commerce Department said Wednesday. November’s previously-reported 490,000 pace was revised up to 491,000.  In all, some 501,000 new homes were sold during 2015, Commerce said, a 14.5% increase over 2014’s tally.

            Consumer spending may not be that strong but consumer confidence is solid, at 98.1 in January, says The Conference Board. “Consumer confidence improved slightly in January, following an increase in December,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions held steady, while their expectations for the next six months improved moderately. For now, consumers do not foresee the volatility in financial markets as having a negative impact on the economy.”

            Is this a good sign for future employment?  That depends if consumers continue to spend.  Retail sales have dipped below 4 percent annually in 2015, and the stock market is particularly volatile due to the uncertainty over energy prices.  But this has not affected the mood of consumers, yet. 

Harlan Green © 2016

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High Pending Home Sales—A 2013 Housing Shortage?

The Mortgage Corner

The huge jump is pending home sales could presage a sharp drop in inventory of homes for sale in 2013. Why? There are fewer foreclosures because of the declining shadow inventory of homes in default that have been bloating the for-sale inventories resulting from the housing bubble. And this is already causing home prices to rise while housing construction is still lagging, 50 percent below its recent high.

The Pending Home Sales Index just released by the National Association of Realtors, a forward-looking indicator based on contract signings but not closings, increased 5.2 percent to 104.8 in October from an upwardly revised 99.6 in September and is 13.2 percent above October 2011.

Lawrence Yun , NAR chief economist, said buyers are responding to favorable market conditions. "We've had very good housing affordability conditions for quite some time, but we're seeing more impact now from steady job creation, and rising consumer confidence about home buying now that home prices have clearly turned positive."

Outside of a few spikes during the tax credit period, pending home sales are at the highest level since March 2007 when the index also reached 104.8. On a year-over-year basis, pending home sales have risen for 18 consecutive months.

Graph: Calculated Risk

"The Northeast saw some impact from Hurricane Sandy, but limited inventory in the West is keeping a lid on the market. All regions are up from a year ago, with double-digit gains in every region but the West," Yun said. Housing inventories are down 23 percent in one year.

And we see that foreclosure inventories have been declining, as have foreclosure rates. We now see short sales replacing foreclosure sales, down to just 20 percent of all sales from its high of 35 percent just after the Great Recession.

Calculated Risk reports Lenders Processing Service released their First Look report for October today. LPS reported that the percent of loans delinquent decreased in October compared to September, and declined about 7 percent year-over-year. Also the percent of loans in the foreclosure process declined sharply in October and are the lowest level since August 2009.

Graph: Calculated Risk

LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) decreased to 7.03 percent from 7.40 percent in September. Note: the normal rate for delinquencies is around 4.5 percent.

Lastly, home prices are rising because of the declining for-sale inventories. Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio, since housing prices cannot rise faster than rents (i.e., household incomes) over the longer term. Therefore the ratio between rents and prices tells us if housing prices are rising abnormally, as happened during the housing bubble. As an example, if a house price was $200,000 in January 2000, the price would be close to $275,000 today adjusted for inflation.

Graph: Calculated Risk

This actually means that we should see a surge in housing construction, and therefore construction jobs in 2013. Stay tuned for the National Association of Home Builders sentiment survey that tracks builder’s confidence in new home construction to confirm that will happen.  Its index has already tripled since its post-recession lows.

Harlan Green © 2012

What to do with Record Corporate Profits?

Popular Economics Weekly

U.S. corporations continue with record-breaking profits in Q1 2011. So what is wrong with the downturn in stocks, employment, and depressed consumer sentiments? Nothing, really, except corporations refuse to spend their profits. Of course, economies never recover in straight lines, consumers and government still have too much debt to ‘goose’ growth substantially after the greatest recession since the Great Depression, but corporations don’t seem to want to contribute to that growth just yet. That is why Bernanke and the Federal Reserve have to continue to hold down interest rates.

Consumers are still cash-strapped, as we said. That has resulted in the slowdown of GDP growth from 3.1 percent in Q4 2010 to 1.9 percent in the first quarter.

A good measure of consumer demand is Final Sales of Domestic purchasers, and consumer make up approximately 70 percent of domestic Final Sales. Final Sales had been rising 2-3 percent during the housing bubble, largely because consumers were using their home’s equity as a checkbook, but is now down to 0.4 percent annualized. It has never returned 2 percent since Q4 2007, the beginning of recession.

But corporate profits continue their surge in the first quarter; up an annualized 35.2 percent following a 12.6 percent drop the quarter before, and were up 7.8 percent on a year-on-year basis. This has resulted in something like a $1 trillion cash hoard held by the S&P 500 largest corporation, according to the latest data. In other words, corporations are not expanding their businesses.

When will businesses begin to spend their cash hoard? Only when so-called effective demand picks up, and that won’t happen until those debts are paid down. All household debt including mortgages still totals more than 100 percent of household assets. That is why demand is down across the board, whether for durable goods (that last more than 3 years), or services. This means incomes have to substantially increase as well.

The good news is that increases in durable goods orders for the latest month were broad-based by industry.  Transportation led the way with a monthly 5.8 percent jump, following a 9.4 percent drop in April.  The swing in both months was largely nondefense aircraft (Boeing) which surged 36.5 percent in May after a 29.0 percent fall the month before.  Defense aircraft rebounded 5.5 percent after a 0.4 percent dip.  However, the auto industry appears to still be suffering from supply shortages.  Motor vehicles edged up only 0.6 percent, following a 5.3 percent fall in April.

Household net worth, the best measure of financial health, is also improving. It is at 370 percent, above the long term average of 350 percent, according to the Federal Reserve’s latest Flow of Funds report, while the personal savings rate is hovering around 5 percent, meaning that consumers are saving enough to continue to pay down their debts, as we said last week.

The Federal Reserve Bank of San Francisco also believes that corporations won’t open their pocketbooks until household debt levels decline further. “If the main problems facing businesses relate to depressed consumer demand due to a household sector weighed down by debt, investment tax subsidies and lower interest rates may have a limited effect on business investment and employment growth,” said a recent SFFRB report. “The evidence is more consistent with the view that problems related to household balance sheets and house prices are the primary culprits of the weak economic recovery.”

One would think higher corporate profits should mean corporations will eventually have to hire more workers, if they want to stimulate a greater demand for their products and services. Higher profits also mean a lower price-to-earnings ratio for stock values (earnings being the denominator in the P/E ratio), which has been hovering around 15:1 for the S&P 500 largest corporations of late. And a P/E ratio below 15:1 has historically boosted stock prices. So let us hope this new report gives a boost to stock prices for the rest of the year.

Harlan Green © 2011

Real Housing Prices Are Rising

The Mortgage Corner

Real housing prices—or prices with inflation discounted—have historically risen one to two percent above the inflation rate, and so been a reliable hedge against inflation. Is that still the case today with our depressed housing market? Several Blogs, including the Atlanta Federal Reserve Blog, maintain that housing prices have stabilized, and over the longer term they are still rising relative to inflation.

They base their conclusion on Robert Shiller’s historical graph of housing prices since 1890 that show prices returning to historical levels that have prevailed since at least the 1950s. It also shows the stratospheric rise of prices during the latest housing bubble that lasted from 1997 to 2006, before bursting. Atlanta Fed’s researcher Dave Altig has compared the Shiller price history to rents, as a measure of fundamental value. I.e., the price-to-rent ratio is a good measure of what homeowners can really afford, since rents track more closely to incomes.

Calculated Risk has posted the most recent update of Dr. Shiller’s data from Barry Ritzholtz’s Big Picture Blog. “A simple back-of-the envelope calculation for this ratio—essentially comparing the path of the S&P/Case-Shiller composite price index for 20 metropolitan regions to the time path of the rent of primary residences in the consumer price index—tells a somewhat different story than the New York Times chart used in the aforementioned Ritholtz blog post”, says Dave Altig of the Atlanta Fed. “According to this calculation, current prices have nearly returned to levels relative to rents that prevailed in the decade prior to the housing boom that began in the late 1990s.”

However, I believe a much more reliable price indicator is the Price to Median Household Income, and that is still 10 percent above the historical norm, at least since 1980 using the S&P Case-Shiller Home Price Index. It shows the ratio at 1.1:1, or 10 percent higher than the norm of 1:1. But household incomes have stabilized and are beginning to rise again with increased employment, which could stop a further decline in housing prices.

The bottom line is that housing prices still seem to be ahead of historical inflation. Home prices rose from 1998 to 2006, along with the consumer price index for consumer goods, then fell sharply during the Great Recession when consumer prices fell.

Keeping in mind the lag time between price fluctuations and consumer buying behavior, the Consumer Price Index has fallen from its 5 percent high in 2008 to 3 percent today and core inflation has declined from 3 to 1.3 percent, a more than 40 percent decline. Though also a ‘back of the envelope calculation’, it does show that housing prices have followed consumer prices down during recessions, and so should rise along with rising prices during this recovery.

There may be a lag of up to one year for that to happen, however. Consumer prices have been rising just since Nov of 2010, due mainly to higher food and gas prices, which may only be short term. So we may have to wait until the end of 2011 to see if inflation is sustained and so capable of boosting housing prices.

Harlan Green © 2011

What Will Bring Back Real Estate?

The Mortgage Corner

We are now beginning to see what is holding back the residential real estate market. The lack of jobs is one cause, of course. But two other factors—the reluctance of lenders and their loan servicers to modify loans, faulty—even fraudulent—foreclosure practices, and too restrictive mortgage credit may be even bigger factors.

Both new-home construction and existing-home sales have been languishing at the bottom of the market since January 2009 with a brief surge during the homebuyer tax incentives of 2010. The beginning of this year’s selling season is giving it some lift, with March housing starts and existing-home sales up.

The National Association of Realtors reports March was a "decent" month for existing home sales with a 3.7 percent gain to a slightly higher-than-expected annual rate of 5.1 million. Prices firmed slightly, up 2.2 percent for the median reading to $159,600. Yet year-on-year, contraction of 5.9 percent is a little deeper than 5.2 percent in the prior month. Slightly more homes were on the market, 3.549 million, but the solid rise in sales brought down the supply reading slightly to a still very heavy 8.4 months.

The report warns that credit standards are still too tight, reflected in a record all-cash sales rate of 35 percent in the month. Distressed sales made up 40 percent of all sales for the highest rate in nearly two years. The housing market may be lifting slightly but is still near the bottom, as we said.

A look at the distressed markets will tell us why in this Calculated Risk graph. A total of some 2 million housing units are delinquent. Although 30-day lates are slowly declining, the pending Foreclosed (FC), and REO (bank-owned) inventory of about 1 million units hasn’t declined since July 2009.

And the new measures promulgated by the Federal Reserve may take time to implement. For instance, one measure is requiring banks and mortgage servicers to have one point of contact for borrowers either in trouble or wanting to modify their mortgages. Another is not allowing banks to proceed with a foreclosure if it is simultaneously working on a loan modification.

Qualifying for mortgages has become harder, with credit scores below 680 for even Fannie Mae/Freddie Mac conforming loans no longer qualifying. That means those millions who might have lost their homes could be out of the home buying market for years. That is, they may have solved their financial problems, but it takes many years to get a credit score back above the 680 level.

The Case-Shiller Home Price Index is of no help, as home prices are still declining in most of its 20 metro markets. Its survey tells us that housing prices may have another 10 percent decline, based on historical price-to-rent ratios.

Here are the Federal Reserve “consent decrees” with the 10 largest commercial banks that include Bank of America, JP Morgan Chase and Citibank:

• strengthen coordination of communications with borrowers by providing borrowers the name of the person at the servicer who is their primary point of contact;
• ensure that foreclosures are not pursued once a mortgage has been approved for modification, unless repayments under the modified loan are not made;
• establish robust controls and oversight over the activities of third-party vendors that provide to the servicers various residential mortgage loan servicing, loss mitigation, or foreclosure-related support, including local counsel in foreclosure or bankruptcy proceedings;
• provide remediation to borrowers who suffered financial injury as a result of wrongful foreclosures or other deficiencies identified in a review of the foreclosure process; and
• strengthen programs to ensure compliance with state and federal laws regarding servicing, generally, and foreclosures, in particular.

The Fed concluded its announcement with a warning:  “The Federal Reserve will closely monitor progress at the firms in addressing these matters and will take additional enforcement actions as needed.”

Harlan Green © 2011

Home Sales to Recover in 2011

The Mortgage Corner

Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, increased 2.7 percent to a seasonally adjusted annual rate of 5.36 million in January, 5.3 percent above the 5.09 million level in January 2010. This is the first time in seven months that sales activity was higher than a year earlier, and is a sign that buyers are gaining confidence in the economic recovery.

It is while sales of newly built, single-family homes declined 12.6 percent to a seasonally adjusted, annual rate of 284,000 units in January, according to the U.S. Commerce Department. But that is because of record low housing construction. The inventory of new homes for sale continued to edge downward by 0.5 percent to 188,000 units in January due to the lack of inventory, which amounts to a 7.9-month supply at the current sales pace.

It is obvious that the oversupply of existing homes on the market has caused a precipitous drop in new home construction, whereas until 2006 they rose and fell in tandem. NAR chief economist Lawrence Yun said the improvement is good but could be better. “The uptrend in home sales is consistent with improvements in the economy and jobs, which are helping boost consumer confidence,” Yun said. “The extremely favorable housing affordability conditions are a big factor, but buyers have been constrained by unnecessarily tight credit. As a result, there are abnormally high levels of all-cash purchases, along with rising investor activity.”

We can see that affordability has improved drastically when looking at the ratio of housing prices to household median incomes. When the ratio rises, it is a sign of inflated housing prices. So such a ratio is a good measure of fundamental values, because household incomes cannot fluctuate wildly, whereas home prices depend much more on the availability of credit. Therefore the price to income ratio measures how much prices might be outside the most affordable range of household incomes. The ratio is currently hovering around 1.0:1.1 (prices to household income), vs. the 1:1 long term ratio.

A parallel NAR practitioner survey shows first-time buyers purchased 29 percent of homes in January, down from 33 percent in December and 40 percent in January 2010 when an extended tax credit was in place.  Investors accounted for 23 percent of purchases in January, up from 20 percent in December and 17 percent in January 2010. The balance of sales were to repeat buyers. All-cash sales rose to 32 percent in January from 29 percent in December and 26 percent in January 2010.

“Increases in all-cash transactions, the investor market share and distressed home sales all go hand-in-hand. With tight credit standards, it’s not surprising to see so much activity where cash is king and investors are taking advantage of conditions to purchase undervalued homes,” Yun said.

All-cash purchases are at the highest level since NAR started measuring these purchases monthly in October 2008, when they accounted for 15 percent of the market. The average of all-cash deals was 20 percent in 2009, rising to 28 percent last year. Regionally, existing-home sales in the Northeast fell 4.6 percent, in the Midwest rose 1.8 percent, in the South existing-home sales increased 3.6 percent, and in the West rose 7.9 percent.

Confirming increased home buyers’ optimism was that pending home sales—reflecting recent contract signings—continued recent gains. Sales advanced 2.0 percent in December, following a 3.1 percent gain in November, and 10.1 percent surge in October. December's gain is the fifth in six months and reflects what the National Association of Realtors calls good affordability and economic improvement.  It also reflects both increased consumer optimism and an improved jobs market.

Harlan Green © 2011