Pending Home Sales Show Weakness

The Mortgage Corner

Where is a housing bubble? Some pundits have been saying that housing prices, up some 13 percent in a year, may have been rising too fast. This is mainly because too few homes on the market, and also the pent up demand from 5 years of recession. But the pundits could be wrong about a price bubble. A slowdown in sales is now showing up in the NAR’s Pending Home Sales’ Index that has been declining steadily over the past few months—since last June, basically—and that should slow down the price rises.

Graph: NAR

The Pending Home Sales Index, a forward-looking indicator based on contract signings, fell 8.7 percent to 92.4 in December from a downwardly revised 101.2 in November, and is 8.8 percent below December 2012 when it was 101.3. The data reflect contracts but not closings, and are at the lowest level since October 2011, when the index was 92.2.

Lawrence Yun, NAR chief economist, said several factors are working against buyers. “Unusually disruptive weather across large stretches of the country in December forced people indoors and prevented some buyers from looking at homes or making offers,” he said. “Home prices rising faster than income is also giving pause to some potential buyers, while at the same time a lack of inventory means insufficient choice. Although it could take several months for us to get a clearer read on market momentum, job growth and pent-up demand are positive factors.”

The disruptive weather wasn’t reflected in personal consumption, up 3.3 percent in the initial 4^th Quarter GDP estimated growth of 3.2 percent. So there has to be more at work.

Bill McBride of Calculated Risk listed more possible causes for the decline: “My view is there were several reasons for the decline in this index: weather in some areas, fewer distressed sales, less investor buying, fewer "pending" short sales, and low inventories.  I think fewer distressed sales, fewer "pending" short sales, and less investor buying are all signs of a healthier market - even if overall sales decline.”
The 3.2 percent Q4 GDP growth was also heartening for 2014 growth prospects. In particular, the share due to real estate investment is growing again after plunging sharply before and during the Great Recession. Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

The graph shows that 4-5 percent is the normal range vs. the current 3 percent, and that would mean real estate investment has more room to grow to return to normal levels.

Graph: Calcuated Risk

The Great Housing Bubble busted during the Great Recession is probably a once-in-a-lifetime event. Although the late 1980’s Savings & Loan crisis caused prices to fall, overall housing prices recovered quickly because there were no recessions at the time. The so-called Gulf War recession of 1991-92 occurred as housing prices were already recovering.

In fact, 1991 was really the beginning of the Great Housing Bubble that ultimately burst in 2007-08. So we know that housing prices rise and fall with business activity, as well as inflation rates. And we are still at the beginning of this recovery cycle with very low inflation. These are the signs of a “healthier” housing market as distressed sales decline, and we return to a more normal housing mix.

Harlan Green © 2014

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

New-Home Sales In Seasonal Decline?

The Mortgage Corner

Sales of newly built, single-family homes fell 7 percent to a seasonally adjusted annual rate of 414,000 units in December, according to newly released figures from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. Despite the monthly drop, home sales in 2013 were up 16.4 percent over the previous year.  But several factors seem to be slowing down new-home sales.

This is while November sales were revised down from 464 thousand to 445 thousand, and October sales were revised down from 474 thousand to 463 thousand, raising fears that rising interest rates were crimping new-home sales. But prices were still rising. So this probably meant that new homes were becoming less affordable, maybe the reason for slower sales.

Graph: Calculated Risk

"December's decline in new-home sales follows elevated levels in the previous two months and means the fourth quarter was still much stronger than the third," said Rick Judson, chairman of the National Association of Home Builders (NAHB). "While we expect sales to gain strength in 2014, builders still face considerable constraints, including tight credit conditions for home buyers, and a limited supply of labor and buildable lots."

"Consumers are getting used to more realistic mortgage rates, which still remain favorable on a historical basis," said NAHB Chief Economist David Crowe. "As household formations and pent-up demand continue to emerge, we anticipate that 2014 will be a strong year for housing."

Regionally, new-home sales activity fell 36.4 percent in the weather-battered Northeast, 7.3 percent in the South and 8.8 percent in the West. The Midwest posted a gain of 17.6 percent. So much of the sales’ decline could also be due to the polar vortex and other abnormal weather factors.

And then we have the problem of lower inventories, as builders aren’t completing new homes fast enough. The inventory of new homes fell to 171,000 units in February, which is a five-month supply at the current sales pace. Although this is an increase over the previous month, it is due to the slower sales pace in December.

The good news is that the National Association of Realtors (NAR) had reported there were 5.09 million existing-home sales for all of 2013, which is 9.1 percent higher than 2012. It was the strongest performance since 2006 when sales reached an unsustainably high 6.48 million at the close of the housing boom, and is now back to the 2000 sales rate at the beginning of the housing bubble, but existing-home inventories have declined there, also.

Total existing-home inventories at the end of December fell 9.3 percent to 1.86 million existing homes available for sale, which represents a 4.6-month supply at the current sales pace, down from 5.1 months in November. This will create even more demand for new-homes.

Graph: Calculated Risk

So there is still a huge gap between new and existing-home sales, which should mean that with housing starts rising above 900,000 in 2013, new-home sales have to increase substantially this year.

The biggest question left, other than the effects of rising interest rates and low inventories on sales, is whether household formation will recover. Housing economists and the U.S. Census Bureau predict more than 1 million new households per year will be formed over the next 10 years, at least, says the 2013 Harvard Joint Center For Housing Studies report. After holding near 600,000 for the previous five years, household growth picked up to almost 1.0 million in 2012. Stronger immigration helped to boost the pace of growth, with the foreign-born population registering its largest increase since 2008.

Based on the Census Bureau’s latest population projections and recent estimates of headship rates, demographic drivers support household growth of approximately 1.2 million a year over the remainder of the decade—similar to the rates in the 1990s as well as in the years preceding the Great Recession. And that should further boost sales, as 50 percent of new households usually buy a home, according to past history.

Interest rates will also play a big part on home sales this year, but probably not rise much above current rates, even with higher economic growth. This is in large part because incomes are rising just 2 percent per year, after inflation. It makes both new and existing homes much less affordable. The 30-year conforming fixed rate has declined of late, and is averaging 4.0 percent in California for a 0.5 point origination fee, and high-balance 30-year conforming is averaging 4.125 percent for a 1 point origination fee, but that is still higher than earlier in the year.

And with both Fannie Mae and Freddie Mac charging higher fees, and imposing stricter qualification requirements, results are still out on whether current sales’ rates can be maintained.

Harlan Green © 2014

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

Where Are The Brave Ones?

Popular Economics Weekly

Now that China has replaced 1980s Japan as the economy that might surpass us, can we find one brave policy maker, (including President Obama), that’s willing to sound the alarm? China now has a robot roaming the moon, and various predictors say it could surpass the U.S. as the world’s largest economy in a matter of years. China is even predicted to lead the world in technological innovation within 40 years.

Yet no one in Washington seems to be concerned. We would rather obsess over debt than the main reason the U.S. is falling behind—the huge cutback in government research and infrastructure spending that would keep us competitive in world markets, as well as remain the world’s most sustainable democracy. And sustaining our democracy is really the main job of government, which means protecting the welfare of its citizens at home should be at the top of the policy list.

Government cutbacks are also the main reason for our soaring inequality and social immobility, as domestic austerity policies have endangered the social safety net while conservative state governments inhibit collective bargaining, voters’ and women’s rights.

There is no question that government research and development is the main driver of technological innovation; from the moon landing to development of the Internet to genome discoveries, yet research spending has been declining for years. It’s a sad picture, highlighted by what was really a worldwide Great Recession. Because we sneezed, the rest of the world caught our cold.

Harvard economist Jeff Sachs is one of a small number of economists brave enough to sound the alarm, and pronounce ways to increase government’s role in bringing back sustainable economic growth in a recent New York Review of Books article:

“A majority of public opinion favors action on the issues I have outlined: more taxation of the very rich, and more spending on education, clean energy, and job training. The public wants a smaller military and less meddling overseas. The problem is not with public opinion but with the narrow self-interest and social outlook of powerful corporations, interest groups, financial lobbyists, and large investors.

He also excoriates President Obama for allowing those very same lobbyists and special interests to vitiate his own progressive goals of creating jobs and alleviating poverty.

“Rather than taking on the problem of inflated health care costs, he (Obama) brought in the health care industry to support the expansion of health coverage. Rather than taking on the egregious tax abuses of the corporate sector and the very rich, he settled in January 2013 for an almost symbolic rise in taxes for those with incomes above $400,000. Rather than reforming the budget, he pursued a deficit-financed two-year stimulus that provoked the Republicans, piled up public debt, and achieved next to nothing for the long term.”

One can say that Republicans would have been provoked, no matter what he proposed, but certainly maintaining a strong economy and more progressive taxation policies (that would have reduced the record inequality) wasn’t at the top of President Obama’s goal list until now. But the hope is it will become a center piece in his upcoming State of the Union speech on Tuesday.

An American University blog piece catalogues China’s growth in research spending. By 2011, China had already become the world’s second highest investor in R&D. Government research funding has been growing at an annual rate of more than 20 percent. At the end of 2012, for example, 7.28 billion yuan was spent on promoting life and medical sciences, nearly 10 times the 2004 level. Even more troubling (for the United States), in 2011, 21 percent of the applications were supported, and for young scientists, the application success rate was 24 percent, both of which were higher than the U.S. level. It was predicted that if the U.S. federal government R&D spending continues to languish, China may overtake the U.S. to be the global leader in R&D spending by 2023.”

Need we say more about the priorities that are not at all conflicting? Less income and wealth inequality leads to stronger economic growth, higher tax revenues, and lower budget deficits. It even led to 4 years of budget surpluses under President Clinton. And the paths to more opportunity are now well-known. So where are the brave policy leaders that will show the rest of U.S. how to get there?

Harlan Green © 2014

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

2013 Home Sales Highest Since 2006

The Mortgage Corner

The National Association of Realtors (NAR) just reported that for all of 2013, there were 5.09 million sales, which is 9.1 percent higher than 2012. It was the strongest performance since 2006 when sales reached an unsustainably high 6.48 million at the close of the housing boom, and is now back to the 2000 sales rate at the beginning of the housing bubble.

Graph: Calculated Risk

Lawrence Yun, NAR chief economist, said housing has experienced a healthy recovery over the past two years. “Existing-home sales have risen nearly 20 percent since 2011, with job growth, record low mortgage interest rates and a large pent-up demand driving the market,” he said. “We lost some momentum toward the end of 2013 from disappointing job growth and limited inventory, but we ended with a year that was close to normal given the size of our population.”

But for sale inventories have declined and are putting upward pressure home prices. The national median existing-home price for all of 2013 was $197,100, which is 11.5 percent above the 2012 median of $176,800, and was the strongest gain since 2005 when it rose 12.4 percent.

The is in large part because total housing inventory at the end of December fell 9.3 percent to 1.86 million existing homes available for sale, which represents a 4.6-month supply at the current sales pace, down from 5.1 months in November. Unsold inventory is 1.6 percent above a year ago, when there was a 4.5-month supply.

The median existing-home price for all housing types in December was $198,000, up 9.9 percent from December 2012. Distressed homes – foreclosures and short sales – accounted for 14 percent of December sales, unchanged from November; they were 24 percent in December 2012. The shrinking share of distressed sales accounts for some of the price growth.

Ten percent of December sales were foreclosures, and 4 percent were short sales. Foreclosures sold for an average discount of 18 percent below market value in December, while short sales were discounted 13 percent.

Interest rates will play a big part on home sales this year, needless to say, but will probably not rise much above current rates, even with higher economic growth. This is because of the tremendous cash hoard of businesses that obviates their need to borrow, as well as consumers that are borrowing much less than in the past. The 30-year conforming fixed rate is averaging 4.0 percent in California for a 0.5 point origination fee, and high-balance 30-year conforming is averaging 4.125 percent for a 1 point origination fee.

Harlan Green © 2013

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

Higher Economic Growth In 2014

Financial FAQs

We should be seeing a huge jump in economic growth this year. Why? Most economists are saying businesses are more optimistic with the federal budget agreement for 2 years, and no more tax increases hanging over consumers (and businesses). Republicans even finally agreed to spend $1.1 trillion this fiscal year—that is, until September when another fiscal year begins.

I maintain the increase in government spending, healthier state tax coffers, and a reviving housing sector with housing prices up 13.6 percent annually according the S&P Case-Shiller Home Price Index, will be the main reasons for faster growth and more job creation this year.

We know this because the Census Bureau’s JOLTS report now shows 4 million job openings, and a rising ‘quit’ rate, which means job seekers are feeling optimistic enough about their prospects to voluntarily leave their current job.

Graph: Wrightson-ICAP

“After having risen by an average of 0.5 percent per month from the beginning of 2011 to the middle of 2013,” says Wrightson-ICAP, “the number of voluntary quits since July has climbed by 2.0% per month. The quit rate is important on two levels: it is both a general measure of worker confidence that tells us something about developments in the labor market, and it is a direct contributor to worker mobility, which is a key driver of productivity growth. (Matching workers to better jobs contributes to overall economic efficiency.)”

The best sign of an improvement in business optimism is the boost in capital expenditures. That expectation is based on a variety of factors, including the recent strength in the ISM factory orders index, a pick-up in capital spending plans by small businesses, and strong balance sheets and ample financing for larger companies. The capacity utilization data in Friday’s industrial production report reinforced that expectation. Total capacity utilization climbed to 79.2%, which is only one percentage point below the long-run (1972-2012) average that the Fed publishes as a reference point.

Wrightson-ICAP agrees with me on this, also. “As the aggregate level of capacity utilization rises, says Wrightson, many individual sectors are approaching or surpassing their previous cyclical highs. In the December data published last week, industries accounting for 33 percent of the Fed’s industrial production index had operating rates that were equal to or greater than their peaks in the previous cycle.

Graph: Wrightson-ICAP

There are other factors, as well, such as the pickup in consumer spending with higher December retail sales, and consumer confidence. This could lead to a GDP growth rate in the mid-3 percent range for 2014, up from the average 2 percent growth rate of late. It is a huge jump and just reflects the pent up demand for everything, as household balance sheets are turning positive and businesses begin to spend the cash they have been hoarding.

So the Federal Reserve will probably continue with its tapering of QE3 purchases that will cause long term interest rates to continue to rise. But it’s still the beginning of this business cycle, believe it or not. And there is almost no inflation, which will keep interest rates from rising too fast.

Harlan Green © 2014

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

Housing Construction Continues Increase

The Mortgage Corner

Residential investment and housing starts are usually the best leading indicator for economy, and they show continued growth.  This isn’t the only leading indicator, but it suggests the economy will continue to grow over the next couple of years, says Calculated Risk. Housing starts increased 18.3 percent in 2013 (initial estimate). This was another solid year-over-year increase.

After increasing 28 percent in 2012 and 18 percent in 2013, the 923 thousand housing starts in 2013 were the sixth lowest on an annual basis since the Census Bureau started tracking starts in 1959 (the three lowest years were 2008 through 2012).   But Single Family starts have increased by one-third since the end of the Great Recession, as the supply of foreclosed homes and existing-home inventories have sharply declined.

Graph: Calculated Risk

Starts averaged 1.5 million per year from 1959 through 2000.  Demographics and household formation suggests starts will return to close to that level over the next few years. That means starts will probably increase another 50 percent + from the 2013 level, says Calculated Risk.

But there is a caveat to this scenario. Most economists are banking on new Fed Chairwoman Yellen to maintain QE3 at least through this year, while the ‘Taperians’ such as Governors Lacker and Fisher want to end it sooner, which would continue to boost mortgage rates, needless to say.

The latest mortgage origination figures support the slowdown in applications since rates have risen, according to the MBA’s weekly survey. Though there is a growing demand for new homes with inventories of existing homes on the market down to a 5.1 months’ supply, whereas inventories were as high as 8 months post-housing bubble.

Mortgage applications increased 11.9 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 10, 2014.

But it is down to its lowest level during the Great Recession. The MBA’s purchase applications index is also down for the year. This is mainly due to rise in mortgage rates of some 1 percent since April and former Fed Chairman Bernanke’s announcement that QE3 would begin to end sometime this year.

Graph: Calculated Risk

So it is not a given that real estate sales and prices will rise in 2014 as they have in 2013, when the S&P Case-Shiller Home Price Index rose some 13.6 percent. The key will be construction spending, which has been robust in 2013.

Graph: Calculated Risk

The U.S. Census Bureau just announced that privately-owned housing starts in December were at a seasonally adjusted annual rate of 999,000. This is 9.8 percent below

the revised November estimate of 1,107,000, but is 1.6 percent above the December 2012 rate of 983,000. Single-family housing starts in December were at a rate of 667,000; this is 7.0 percent below the revised November figure of 717,000. An estimated 923,400 housing units were started in 2013. This is 18.3 percent above the 2012 figure of 780,600.

Harlan Green © 2013

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

Post-WWII Lessons—How to Reduce Debt?

Financial FAQs

There is a productive way to pay down the federal and consumer debt loads instead of the austerity policies currently in vogue both here and in Europe (i.e., that cut taxes and government spending). It’s means implementing policies that will increase average household incomes; and tax revenues in the case of governments. We know this works because it happened after World War II with its record 120 percent of GDP debt load that was reduced to as low as 31.7 percent in the 1974.

But the debt has climbed back to 100 percent of GDP today (including $5 trillion owed to the social security trust fund) for a variety of reasons; including spending for the 2 Wars on Terror + an extensive domestic security apparatus that wasn’t paid for, regressive tax policies, the decline in household incomes, and the Great Recession itself.

Graph: Trading Economics

The last 4 years of Clinton’s presidency also gave us 4 federal budget surpluses. This was because of a slightly higher maximum federal income tax rate while capping government spending, mainly because of the post-cold war drop in military spending during the longest growth cycle (10 years) in U.S. history.

The fallacy is to believe that it can’t happen today. Because, the story goes, only the immediate post-WWII society had lots of savings so that Eisenhower’s sky-high maximum income tax rate of 92 percent didn’t harm private spending and investment. That was why consumers could afford all those new consumer goods, fund a new freeway system and travel to the moon.

But there is as much wealth saved today. Only it has become very concentrated. Those with the wealth today—such as the top 1 percent that hold some 23 percent of our total wealth—also have very high savings rates. According to research from American Express Publishing and Harrison Group, the savings rate of the wealthiest 1 percent soared to 37 percent in the second quarter 2013. That's up from 34 percent in the second quarter of 2012—and more than three times their savings rate in 2007. And it contrasts with the current 4.2 percent personal savings rate for all consumers.

Studies in fact show that increasing the maximum tax rate to as high as the 80 percentage wouldn’t harm consumption, the main driver of domestic economic growth. Today, the richest 1 percent of Americans pay a top federal rate of 29 percent, according to Emmanuel Saez, an economist at the University of California, Berkeley. That’s because almost a third of their income derives from capital gains and dividends — which are now taxed at around 20 percent rate — while the rest is ordinary income taxed at a top marginal rate of 39.6 percent.

Today, people earning over $200,000 a year capture more than a third of national income. In fact, three decades of tax cuts may have gilded the pockets of the rich, but they didn’t provide much economic juice, says one study. Among developed nations, incomes per person grew no faster in countries like the United States and Britain that slashed their top tax rates than in countries like Spain, Germany or Denmark, which did not.

There is even evidence that higher tax rates encourage growth. For instance, reducing inequality through higher tax rates on the wealthy may promote wealth creation. What’s the mechanism? Bowles and Jayadev claim to have identified one element of it: inequality leads to conflict and tensions, and society has to waste resources dealing with those conflicts and tensions.

The people at the top have to spend a lot of time and energy keeping the lower classes obedient and productive. So-called “guard labor” is one such waste, says the study. Some estimates say that 1 in 4 Americans are employed to keep fellow citizens in line and protect private wealth. This waste includes corporate IT monitoring, CCTV at work, and mobilizing police forces to protect property.

Graph: Center For American Progress

And the above figure shows that there is no correlation between cuts in U.S. top tax rates and average annual real GDP-per-capita growth since the 1970s. Countries that made large cuts in top tax rates such as the United Kingdom or the United States have not grown significantly faster than countries that did not, such as Germany or Denmark.

How to increase household incomes is more difficult, as many right-to-work states have limited both collective bargaining and union membership for middle class workers that have prevented their incomes from even keeping up with inflation. But there are movements to increase the minimum wage, as well as strengthen collective bargaining laws for better wages and benefits. The ongoing economic recovery and increasing employment will also boost both incomes and tax revenues.

So there are many good reasons to support policies that increase tax revenues and household incomes, and no longer valid reasons for austerity policies that actually increase deficits, as well as depress household incomes.

Harlan Green © 2013

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