Poverty Level Down, As Incomes Surge

Popular Economics Weekly

Fewer Americans lived in poverty in 2015 and median incomes charted their first increase since the Great Recession, according to data released Tuesday by the Census Department. The official poverty rate fell 1.2 percentage points between 2014 and 2015 to 13.5 percent, and the number of people in poverty fell by 3.5 million, Census said. The threshold for a family of two adults and two children to be considered living in poverty was $24,036.

Graph: Census Bureau

And new data showing middle-class household incomes growing at the fastest rate since the recession seemed to confirm that a recovery that’s remained slow and uneven is finally touching the lives of ordinary, especially middle-class Americans.

Graph: Marketwatch

In fact, this could be the income growth needed to bring US back to 3 percent GDP growth; something that hasn’t happened since 2007 before the Great Recession. Millions of Americans escaped poverty last year and incomes rose at their biggest gainever, as the 6-year long economic recovery finally hit home for households. Median middle-class wages surged 5.2 percent between 2014 and 2015, the Census Department said Tuesday, the first annual increase since 2007, just before the economy plunged into recession.

This is in large part due to almost non-existent inflation, which has not returned to even the Fed’s 2 percent target, hence the reluctance of Janet Yellen’s Federal Reserve to raise interest rates at all this year. But that may change, as rising wages also have an effect on inflation, since wages make up some two-thirds of product costs.

An even better way to increase growth is to invest more in what would grow our economy; like infrastructure, education, R&D, the environment, etc. That’s why productivity has ground to a halt, which is the main driver of future growth.

At least 43 companies plan to cut, or leave unchanged, their capital spending levels in 2016, while about 20 are increasing, according to a Reuters review of Standard & Poor's 500 companies that have given explicit early guidance.

However, Citibank seems to disagree. It’s mainly the energy sector that has cut back on new investments due to the slump in energy prices. This, however, is boosting growth in capex spending in other sectors, says Tobias Levkovich, Citigroup chief equity strategist. There's no reason to think stock buybacks, the current straw man for the lack of productive investment, are replacing capital expenditures. Rather, he said, they are complementing them.

"While misperceptions abound when it comes to companies allegedly not investing in their businesses and preferring to buy back stock instead, there is little corroborating evidence," Levkovich argued. "S&P 500 companies have had capital investment dollars ahead of the amount used for buybacks for more than four and a half years and capex has hit a record every year since 2011."

And a major reason for this is the low cost of capital is today’s low inflationary environment. So there is good reason to keep interest rate as low as possible, until we see signs of more normal GDP growth.

Harlan Green © 2016

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Who Are the Homeowners?

The Mortgage Corner

The Atlanta Federal Reserve Bank just published a housing study entitled, “It’s Not Just Millennials Who Aren't Buying Homes,” that breaks down homeownership by age and household status. And the results show that age and whether one is head of a household makes a difference.

 

Graph: Atlanta Fed

“In recent years, much attention has been focused on the growing tendency of millennials to rent,” says the Atlanta Fed study. “Theories for the decrease in homeownership among young adults abound. They include rising student debt levels that crowd out additional borrowing, a tendency to live in more urban areas where the cost to buy is relatively high, a generally tougher credit environment, and even shifts in the perception of homeownership in the wake of the housing bust.”

But in fact the homeownership rate has declined in all age brackets, except 65 + year-olds. Why is not clear. We know household incomes since 1980 have declined for all age brackets except seniors whose incomes are boosted by social security, Medicare, and other retirement benefits.
The study also shows that homeownership rates have actually returned to pre-housing bubble levels of 64 percent, the homeownership rate since the 1970s.

“The fact that the average U.S. homeownership rate is close to rates seen in the mid-1980s and mid-1990s while homeownership rates within age groups (under 65) are currently lower than their respective averages in the mid-1980s to mid-1990s suggests that factors other than age may be affecting the average person's decision to buy or rent.”

I believe it has to be declining household incomes that haven’t yet returned to pre-recession levels, even with record low interest rates. According to the Federal Reserve, the median household income was $51,939 in 2013, below the 1999 peak of around $57,000. The Census Bureau estimated real median household income at $53,657 for 2014 and $54,462 in 2015. Household income varies by race, with Asians the highest in 2014 at over $74,000 and African Americans the lowest around $35,000.

Graph: FRED

So household incomes have a long way to go to return to historic highs. A major reason has to be the soaring inequality that could take decades to correct; if and only if more progressive economic policies can be enacted—such as a wealth tax on large financial assets, and a higher maximum personal tax rate, which hasn’t yet even returned to 1980, Reagan era levels.

The nation’s aggregate household income has substantially shifted from middle-income to upper-income households, driven by the growing size of the upper-income tier and more rapid gains in income at the top. Fully 49 percent of U.S. aggregate income went to upper-income households in 2014, up from 29 percent in 1970. The share accruing to middle-income households was 43 percent in 2014, down substantially from 62 percent in 1970.

The bottom line is that married couple families still have the highest homeownership rate, whereas non-married singles have the lowest rate. What better reason to own a home than raising a family? And millennials are just now entering the age when they are beginning to form their own households, so their homeownership rate may also rise.

Harlan Green © 2016

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

Existing-Home Sales On Rise Again

The Mortgage Corner

The NAR just reported total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, climbed 2.6 percent to a seasonally adjusted annual rate of 5.04 million in June from an upwardly-revised 4.91 million in May. Sales are at the highest pace since October 2013 (5.13 million), but remain 2.3 percent below the 5.16 million-unit level a year ago, due partly to inventory shortage, and affordability problems.

Graph: Calculated Risk

Total housing inventory at the end of June rose 2.2 percent to 2.30 million existing homes available for sale, which represents a 5.5-month supply at the current sales pace, unchanged from May. Unsold inventory is 6.5 percent higher than a year ago, when there were 2.16 million existing homes available for sale.

NAR chief economist Lawrence Yun says “Inventories are at their highest level in over a year and price gains have slowed to much more welcoming levels in many parts of the country. This bodes well for rising home sales in the upcoming months as consumers are provided with more choices,” he said. “On the contrary, new home construction needs to rise by at least 50 percent for a complete return to a balanced market because supply shortages – particularly in the West – are still putting upward pressure on prices.”

The most important statistic is the inventory of existing homes for sale, and other agencies show higher inventory levels. For instance, though the NAR reported that inventory was up 6.5 percent year-over-year in June, Housing Tracker shows inventory up 15 percent year-over-year in July, and Trulia chief economist Jed Kolko has seasonally adjusted the inventory, which is up some 10.9 percent, said Calculated Risk.

Yun also noted homebuyers are having affordability problems, in that stagnant wage growth is holding back what should be a stronger pace of sales. “Hiring has been a bright spot in the economy this year, adding an average of 230,000 jobs each month,” he said. “However, the lack of wage increases is leaving a large pool of potential homebuyers on the sidelines who otherwise would be taking advantage of low interest rates. Income growth below price appreciation will hurt affordability.”

Given the political realities at present, it looks like the only way to boost incomes—and housing sales—is to creep closer to full employment when employers will have to bid up wages. We know Fed Chairman Yellen is all for boosting employment, which is why she is resisting pressures to raise interest rates prematurely, when the real unemployment rate for the long term unemployed and part time workers is still 12.1 percent.

And that may not happen until mid-2015, at the earliest. So look for continued slow growth in housing sales (and lower interest rates) until next year, if Lawrence Yun and Janet Yellen are correct in their forecasts.

Harlan Green © 2014

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Affordable Housing In Decline

The Mortgage Corner

The Harvard Joint Center for Housing Studies has just come out with their rental market report, and it shows very little low rent housing available, due mainly to both increased household formation and those who have lost their homes from the busted housing bubble. Almost all of the 2.7 million abandoned and/or foreclosed homes are gone; most becoming rentals that do not meet the expanding need for rental housing.

Millions of Americans are in precisely that situation, according to a study released today by Harvard’s Joint Center for Housing Studies. The availability of apartments, especially cheaper ones, hasn’t nearly kept up with demand, and the problem has worsened since the 2007-09 recession, the study says.

In 1960, about one in four renters paid more than 30 percent of income for housing. Today, one in two are cost burdened,” according to the study, America’s Rental Housing.

Graph: Harvard Center for Housing Studies

Rick Judson, chairman of the National Association of Home Builders (NAHB), issued the following statement on the rental housing report:

"The report released today by the Harvard Joint Center for Housing Studies highlights serious affordability problems for many of America's renter households, and NAHB supports many of the policy initiatives outlined in the study to meet this ongoing challenge.  Of primary importance, efforts to reform the housing finance system must include a federal backstop to maintain broad liquidity during all economic cycles and ensure that rental housing can continue to be built and preserved.”

Judson and the NAHB have supported maintaining some form of Fannie Mae and Freddie Mac to guaranteed conforming loans that currently cover more than 90 percent of mortgages originated. There have been no viable alternatives proposed to date.

"It is clear that the federal role in ensuring the availability of financing for multifamily rental housing for low- and moderate-income households is critical,” said Judson. “Other ways to reduce the costs of providing affordable housing must be pursued as well, such as strengthening the Low Income Housing Tax Credit program, removing regulatory barriers to construction, providing gap financing to help reduce construction costs, streamlining program rules and allowing agencies to align administrative procedures across programs.”

Graph: Boston Globe

So the real problem is rising housing prices, coupled with very low housing inventories that are putting pressure on affordable housing. The good news is that a lot more rental housing is being constructed with strength in the multifamily component that spiked a monthly 15.3 percent after a 20.1 percent surge in September. The multifamily component is up 22.5 percent on a year-ago basis while the single-family component is up 8.8 percent.

Harlan Green © 2013

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

Our Poor Inflation Record

Popular Economics Weekly

Inflation has fallen so low that it threatens this economic recovery. Why? Producers can’t charge more for their products, therefore can’t increase profits unless they use fewer workers and greater automation to replace them.  So there is no incentive to hire more workers, which would increase the demand for their products, and so increase economic growth.

The median household income declined some 10 percent from 2000, after inflation because of less need for highly skilled workers.  And the unemployment rate is still above 7 percent, some 4 years after the end of the Great Recession.

Chart: Trading Economics

That’s because with automation and the Global Information Age, things can be produced more cheaply anywhere in the world where things are cheapest to produce, which puts pressure on workers’ incomes everywhere.  So we know there can’t be as much inflation with unemployment remaining so high. 

In fact, it is remarkable how closely disinflation (falling inflation) has tracked historical unemployment rates in these charts that begin in 1948, the beginning of the modern consumer economy.  For instance, inflation began its steep decline after 1980 when Fed Chairman Volcker pushed interest rates as high as 16 percent, causing the 1981 and 1983 recessions, and a jobless rate of more than 10 percent. The result of the Great Recession has been the same—high joblessness with too low inflation.

Chart:  Financial Times

            So Fed Chairman Bernanke basically inherited an almost deflationary economic environment in 2006, with the Great Recession that began December 2007 and ended June 2009.  That is why the Fed has been keeping interest rates so low, and why the Fed Governors aren’t yet ready to end the QE3 purchase of securities.  Without QE3, we could be in deep trouble with real estate still in the doldrums.

Chart: Calculated Risk

            The good news is that July existing-home sales rose to the highest level in 4 years, since the end of the Great Recession.  The consensus is that most of these homes were put into contract before the recent rise in interest rates, and that the current rise in mortgage rates since then will slow down sales.

            Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 6.5 percent to a seasonally adjusted annual rate of 5.39 million in July from a downwardly revised 5.06 million in June, and are 17.2 percent above the 4.60 million-unit pace in July 2012, said the National Association of Realtors. 

But with just a 5.1-month supply, inventory levels are historically low during this sales season.  That means values haven’t raised enough to allow more homes with positive equity on the market that would create a sustained recovery.  With such a low inventory level there is no danger of either a new housing bubble (meaning too many homes for sale), or inflationary pressures.

Harlan Green © 2013

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

New Home Sales Surging—First-timers Being Priced Out?

Financial FAQs

New-home sales are surging, reports the U.S. Census Bureau. But who is buying them with interest rates up 1 percent since Chairman Bernanke made his infamous remark that QE3 bond buying could begin to slow in September? The damage has already been done for middle-income buyers with mortgage applications plunging, though interest rates have moderated. The conforming fixed rate is back to 4.25 percent with zero origination points cost in California. This has caused housing affordability to decline for many buyers, though still up for the year.

Sales of new single-family houses in June 2013 were at a seasonally adjusted annual rate of 497,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 8.3 percent above the revised May rate of 459,000 and is 38.1 percent above the June 2012 estimate of 360,000.

Graph: Calculated Risk

Months of supply is also shrinking, with the seasonally adjusted estimate of new houses for sale at the end of June just 161,000. This is a supply of 3.9 months at the current sales rate.

Graph: NAR

This is while mortgage applications have been falling, as we said, although purchase applications are up for the year. The culprit is that real incomes have not been rising enough to overcome higher mortgage rates. In fact, incomes have been rising at the slowest rate since World War II. Average household incomes have declined 10 percent just since 2000.

The National Association of Realtors, reports that affordability has declined 18 percent since January, hitting 172.7 in May, but is 17 percent above its average over the past decade. A reading of 100 means that a household with median income would have exactly enough income to qualify for buying a median-priced existing single-family home

NAR chief economist Lawrence Yun said many areas are experiencing a seller’s market.  “The supply/demand balance is clearly tilted toward sellers in a good portion of the country,” he said.  “Inventory conditions are expected to remain fairly constrained this year, so overall price increases should be well above the historic gain of one-to-two percentage points above the rate of inflation.  If home builders can continue to ramp up production, then home price growth is expected to moderate in 2014.”

So the question is will mortgage rates continue to climb, or has Chairman Bernanke realized his mistake in prematurely talking rates higher without any real evidence that the overall economy is indeed recovering?

Harlan Green © 2013

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

Home Sales Are Rising—In Spite of Bad News

The Mortgage Corner

In spite of all the bad news—higher foreclosures (one Florida home foreclosed on that didn’t even have a mortgage!), falling prices, and record lower mortgage rates—buyers still want their dream home, say several reports.

Existing Home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, increased 7.6 percent to a seasonally adjusted annual rate of 4.13 million in August from an upwardly revised 3.84 million in July, but remain 19.0 percent below the 5.10 million-unit pace of one year ago.

NAR chief economist Lawrence Yun said, “The housing market is trying to recover on its own power without the home buyer tax credit. Despite very attractive affordability conditions, a housing market recovery will likely be slow and gradual because of lingering economic uncertainty”.

There is no uncertainty about housing affordability, however, which is still hovering near its record high in spite of a 12 percent price rise in the median existing-home price, according to the Realtors. This is because 30-year fixed mortgage rates have dropped to 4.125 percent for conforming, 4.375 percent for so-called super conforming loans to $727,750, so that just a $37,392 annual income is need to qualify for a median-priced home with 20 percent down. This is 30 percent less than the income required to qualify in 2007.

Yun added, “Affordability could reach a generational high in the second half of this year because of rock-bottom mortgage interest rates, helped partly by the Fed’s very accommodative monetary policy. The loan underwriting standards are tighter, but home buyers can improve their chances of getting a loan by staying well within their budget.”

Total housing inventory at the end of August slipped 0.6 percent to 3.98 million existing homes available for sale, which represents an 11.6-month supply at the current sales pace, down from a 12.5-month supply in July.

“Home values have shown stabilizing trends over the past year,” said Dr. Yun, “even as the economy shed millions of jobs, because of the home buyer tax credit stimulus. Now that the economy is adding some jobs, the housing market needs to steadily improve and eventually stand on its own.”

Pending home sales in July also rose 5.2 percent to 79.4 based on contracts signed in July from a downwardly revised 75.5 in June, but remains 19.1 percent below July 2009. The data reflects contracts and not closings, which normally occur with a lag time of one or two months, indicating better numbers for future existing-home sales.

And first-time home buyers, a growing segment of the housing market, are contributing to an increase in demand for smaller and less expensive new homes, according to research from economists at the National Association of Home Builders (NAHB). A recent biennial American Housing Survey, which was conducted by the Department of Housing and Urban Development and the Census Bureau in 2009 finds that 41 percent of the 8.4 million households who bought a home between 2007 and 2009 were first-time buyers.

The market share of first-timers was up from 35 percent in both 2005 and 2007. Although some of the demand was fueled by the initial version of the home buyer tax credit in mid-2008, which was specifically targeted to those buying a home for the first time, the upward trend is expected to continue as children of baby boomers -- members of a generation that is larger than their parents' -- move into their household formation years in the period ahead.

"Builders are increasingly gearing their homes to the needs of first-time buyers, and we expect the trend to continue in the period ahead as the economy begins generating more jobs and more people in their 20s form households," said Chairman Bob Jones of NAHB.

Housing won’t truly stabilize until the foreclosure rate has dropped significantly, and there are still too many in the 90-day late category of mortgage delinquencies. So there may be another spike in foreclosures, as banks clear their books of bad loans. The new Basel III capital requirements were less than feared, which frees up more bank capital, and so banks may be gearing up to do business as usual again.

Harlan Green © 2010

Housing Affordability Still Improving

The Mortgage Corner

A very pessimistic Harvard University Joint Center for Housing Studies’ 2010 annual report says with the job market in dire straits, household incomes declining and foreclosures dragging down home values, the housing market may take years to recover. But the Harvard study is already outdated. Affordability is much better in 2010, and jobs and incomes have improved substantially.

The Harvard study says affordability is still a problem because household incomes have been falling; though not as much as housing prices. Calculate in record low interest rates that are forecasted to last at least through 2011, and we see that affordability is in fact very high. The good news is that prices have fallen up to 50 percent in some regions since 2008, while household median income has fallen about 6 percent.

“Very low mortgage interest rates and recovering labor markets, however, should be enough to shore up sales and housing starts once an expected dip due to the expiration of the federal homebuyer tax credit passes. “If history is a guide, what happens with jobs will matter the most to the strength of the housing rebound,” says Eric S. Belsky, Executive Director of the Joint Center for Housing Studies. “Right now, economists expect the unemployment rate to stay high, but if employment growth surprises on the upside or downside, housing numbers could too.”

In fact, the National Association of Realtors (NAR) reports that the median existing-home price has actually risen 6 percent in 2010, while the median household income is hovering around $60,500. This has kept the NAR’s affordability index at 167 percent—a family with a median income can afford 167 percent of a median priced home. Whereas, it was as low as 115 percent in 2005 when housing prices were in bubble territory (and interest rates were 1.5 percent higher).

Consumers are paying down their debts, in part because of high mortgage debt levels. The year-over-year debt to household income measure that includes mortgage debt has fallen from 23.5 to 21.5 percent, while total outstanding credit is still contracting at slightly less then 4 percent per year, as we said last week.

Consumer credit rose $1.0 billion in April in a gain far offset by a $7.4 billion downward revision to March which now shows a $5.4 billion contraction. Non-revolving credit, reflecting strong car sales, jumped $9.4 billion in April but was offset by a nearly as large of a fall in revolving credit. The drop in revolving credit reflects consumers’ reluctance to buy non-essential items.

What were consumers buying in May? Gasoline led the way because of higher gas prices, but the trend in overall sales is upward and healthy—in spite of the May decline.  Overall retail sales on a year-ago basis in May came in at 6.9 percent compared to 9.0 percent the month before.  Excluding motor vehicles, the year-on-year rate slipped to 6.1 percent from 7.8 percent in April. 

The other pleasant surprise was the continued rise in pending home sales. Already, February and March had spiked with help from last minute buyers wanting to ensure time to close before May 1. But apparently, many buyers decided to push their luck and buy during April in hopes of expedited paperwork by mortgage lenders. Pending home sales extended their surge through April, jumping 6.0 percent, following a 7.1 percent spike in March.  Year-on-year, pending home sales are up 22.4 percent.

The Harvard study seemed to concentrate on the bad news—an estimated one in seven homeowners has a home worth less than they owe on their mortgage, and 5 million need their home price to rebound by 25 percent before they are again above water. But there are more than 45 million outstanding home loans, and the inventory excess is in fact making home ownership more affordable—for those who can afford to buy.

Harlan Green © 2010

When Will Housing Market Bottom?

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in January, fell 7.7 percent to 80.4 from a downwardly revised reading of 87.1 in December, and is 6.4 percent below January 2008. The index is at the lowest level since tracking began in 2001, when the index value was set at 100.

Since it is a leading indicator of future activity, what does this mean for reaching a housing bottom? Pending sales track escrows that close in 30-60 days. The West was the only region that showed increased activity, with it seasonally adjusted pending index up 2.4 percent in a month and 13.5 percent over last January. The West includes states like California, Nevada and Arizona that have seen the greatest price declines.

Lawrence Yun, NAR’s chief economist, said the downturn in the economy also weighed heavily on the data. “Even with many serious potential home buyers on the sidelines waiting for passage of the stimulus bill, job losses and weak consumer confidence were a natural drag on home sales,” he said. “We expect similarly soft home sales in the near term, but buyers are expected to respond to much improved affordability conditions and from the $8,000 first-time buyer tax credit.”

NAR’s Housing Affordability Index rose 13.6 percentage points in January to 166.8, a new record high. The HAI, a broad index of affordability that tracks the ability of a household with median income to buy a median-priced existing home, shows that the relationship between home prices, mortgage interest rates and family income is the most favorable since tracking began in 1970.

The HAI indicates a median-income family, earning $59,800, could afford a home costing $283,400 in January with a 20 percent down payment, assuming 25 percent of gross income is devoted to mortgage principal and interest; affordability conditions for first-time buyers with the same income and small down payments are roughly 80 percent of that amount. A year ago, the typical first-time family could afford a home costing $263,300.

The just unveiled Housing and Affordability Sustainability Plan (HASP) should also stimulate mortgage volumes for distressed borrowers with loan amounts less than $729,750. Eligible borrowers have to show either that their homes are more than 80 percent encumbered, or loan payments—including taxes and insurance—are more than 38 percent of monthly gross income. Lenders can then either cut the interest rate as low as 2 percent, forgive principal, and if that doesn’t work, extend amortization period to 40 years.

Harlan Green © 2009