Why Still A Housing Shortage?

The Mortgage Corner

  Graph: Econoday

A recent survey of California’s housing market reaffirmed the well-known fact that California has an affordability problem. The median home price is now $544,900, up 80 percent from 2011—though that’s a deceptive comparison because mostly due to bottoming of housing prices during the busted housing bubble when the median price sank below $400k.

And the California Association of Realtors (CAR) reports the California Housing Market Experiencing Shift as Home Sales Continue Descent in September, per Calculated Risk. “The California housing market posted its largest year-over-year sales decline since March 2014 and remained below the 400,000-level sales benchmark for the second consecutive month in September, indicating that the market is slowing as many potential buyers put their homeownership plans on hold,” said the CAR

California has always been a trend setter.  So what is causing the affordability problem? Most respondents (28 percent) in the USC survey thought the lack of affordability was due to the lack of strong rent control laws, while 24 percent said it was due to lack of low-income housing funds. Sixth on the list was insufficient home building.

There is a statewide rent control law that allows landlords to raise rents to market rates when tenants move out, but otherwise increases are capped at 2 percent annually. This obviously hasn’t been enough to slow rising rents in pricey California.

That’s in large part because the 1995 Costa-Hawkins Rental Housing Act said any local rent control passed after February 1995 would not apply to large amounts of housing stock, including new apartment buildings occupied after that date, single-family homes, duplexes and condominiums. Local politicians and activists wanting to pass new laws could only limit rent increases for tenants living in housing built before that year.

Then what does that tell us about the housing shortage and affordability? Californian homeowners, at least, don’t want to see more homes built too close to them, or higher density zoning laws enacted that over crowd neighborhoods, but would rather be NIMBYs that want affordable housing built in someone else’s neighborhood.

National housing starts in September came in on the low side of expectations, down 5.3 percent to a 1.201 million annualized rate with completions very weak, down 4.1 percent to a 1.162 million rate that's the lowest since November last year. Hurricane Florence certainly didn't help the South where starts fell 13.7 percent but the Midwest, which was not affected by the hurricane, saw starts fall 14.0 percent.

Existing home sales were also disappointing. Sales of existing homes fell 3.4 percent in September to a 5.150 million annualized rate. September's result is the weakest in nearly three years, since November 2015.

This weakness on the national level happened despite price discounting by sellers, said Econoday. The median sales price for an existing home fell a monthly 2.8 percent in September to $258,100. A comparison of year-on-year rates, at plus 4.2 percent for prices, with the sales rate, at minus 4.1 percent, suggests that prices may have further down to go.

So despite the housing shortage, many neighborhoods are reluctant to add to their housing shortage. And rising mortgage rates are also denting demand. What about rents? Apartment List reports that nationally, real spending on new multifamily construction showed a long-term upward trend prior to the collapse of the housing bubble, and it has rebounded strongly in the aftermath of the collapse, such that it is currently near its 2006 all-time high.

This is resulting in lower rent increases in many large cities. Of the 25 biggest cities in the U.S., Apartment List found seven — Baltimore, Chicago, Pittsburgh, Portland, Seattle, St. Louis and Washington, D.C. — where median rental rates actually decreased year over year—another reason new homebuyers are holding back.

Economists at Freddie Mac that analyzed the pace of new housing construction found that years of underbuilding has left the U.S. with a cumulative shortfall — that is, supply compared to historical averages — of 4.6 million housing units in the years since 2000, as I said recently. That number is especially stark considering that builders constructed a 1 million unit surplus of homes in the bubble years of the last decade.

There is still a housing shortage, in other words, with affordability the main problem holding back sales.  So no housing bubble, yet!

Harlan Green © 2018

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

Government Is the Solution, Not the Problem

ANSWERING THE KENNEDYS CALL

Graph: NOAA.gov

“With clear benefits to people and natural ecosystems, limiting global warming to 1.5ºC compared to 2ºC could go hand in hand with ensuring a more sustainable and equitable society, the Intergovernmental Panel on Climate Change (IPCC),” said on Monday in its prelease.

And that can’t happen without the support of governments. Ninety-one authors and review editors from 40 countries prepared the IPCC report in response to an invitation from the United Nations Framework Convention on Climate Change (UNFCCC) when it adopted the Paris Agreement in 2015.

This means the U.S. should rejoin the Paris Agreement on global warming, or voters select a more climate-friendly administration as soon as possible. The Trump administration is doing everything in its power to deny and defeat any support for mitigating the effects of global warming, even recently transferring funds from FEMA that aid hurricane and tornado victims occurring with more frequency to fund its border wall and zero immigration policy.


Best-selling author Michael Lewis in his latest book, The Fifth Risk, details how the Trump administration is doing everything in its power to neuter any government functions that hinder the profitability of his mega-donor supporters at a time when government is most needed to protect Americans from any number hazards—not only the environmental hazards from global warming, but growing costs of healthcare, and record income inequality.

Lewis says the risk a society runs in thinking short term, rather than long-term solutions, “…is the innovation that never occurs and the knowledge edge that is never created, because you have ceased to lay the groundwork for it.”

“Government is the problem” was President Reagan’s call to downsize government, which he characterized as full of waste and inefficiency, then tried to convince Americans private enterprise was a paragon of efficiency and prosperity for all.

Yet history has shown that none of this prosperity and progress would have happened without government research and support. We wouldn’t have built our highway system, gone to the moon, invented the internet, or even constructed the energy grid without government mandates.

Such progress has always required strong national leadership, with an ethos that it should benefit all Americans, not just the wealthiest. “Government is the problem” has always meant cutting taxes that take away programs lifting the many, and benefit the few most favored by circumstances or birth.

Now we have the dangers arising from global warming that scientific research tells us is man-made, and only leadership from governments can mitigate.

A recent New York Times article highlighted the necessity of government support. “None of the major technological transformations of the 19th and 20th centuries were the product of the private sector acting alone and responding only to the market. Railroads, radio, telegraph, telephone, electricity and the internet were all the result of public-private partnerships,” said its authors, science historians Naomi Oreskes and Erik Conway. “None was delivered by the “invisible hand” of the marketplace (a favorite rationale of conservative economists). “All involved significant interventions by the visible hand of government.”

In fact, “The internet was created by scientists funded by the federal government’s Advanced Research Projects Agency,” said the authors. “Al Gore didn’t build it, but he did sponsor the 1991 legislation that made it public, which laid the foundation for the World Wide Web, Silicon Valley, smartphones and our information-driven society.”

Union of Concerned Scientists

Australia, the U.S., and Canada lead the world in per capita emissions of CO2, yet the Trump administration withdrew from the Paris Accord within months of his inauguration in a sop to the fossil fuel magnates that funded much of his campaign. It was pay-and-play, politics as usual, in a deeply cynical ploy that endangers not only Americans, but the rest of the world, as Americans with only 5 percent of the world’s population consume 25 percent of its resources.

“Mr. Trump’s decision to abandon the agreement for environmental action signed by 195 nations is a remarkable rebuke to heads of state, climate activists, corporate executives and members of the president’s own staff, who all failed to change his mind with an intense, last-minute lobbying blitz,” said the NYTimes then. “The Paris agreement was intended to bind the world community into battling rising temperatures in concert, and the departure of the Earth’s second-largest polluter is a major blow.”

Need we say more about the necessity to make government the solution to our problems, not the problem?

Harlan Green © 2018

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

Record Income Inequality = U.S. Credit Downgrade?

Financial FAQs

Graph: MarketWatch

The current debate whether the U.S. will escape the ‘new normal’ of slower economic growth since the Great Recession (when homeowners lost a collective $9 trillion in value) is taking a new turn with Moody’s Investor Services now warning of a credit rating downgrade of U.S. Treasury securities from its AAA rating, something Standard & Poor’s had already done in 2011 when Republicans threatened to shut down the Federal government over their refusal to raise the debt ceiling.

Why the Moody’s downgrade now, when it has kept U.S. sovereign debt at AAA rating? America’s income inequality has worsened since the Great Recession and more pressure will be put on our government to increase so-called transfer payments—especially social security, Medicare, Medicaid, and other government benefits paid to seniors and lower income household just to keep them out of poverty—at a time of record federal debt, said Moody’s.

Only the top 10 percent income earners have seen their incomes increase since the Great Recession. Most American households have seen either flat income growth or an actual decline for the bottom 40 percent of income earners.

In fact, the income declines have been happening since the 1970s, as globalization of the workforce by multi-national U.S. corporations have steadily shipped many of the best paying manufacturing jobs to cheaper countries and regions, while American workers’ salary bargaining rights have been steadily chipped away by more conservative congresses and compliant Republican and Democratic administrations.

Now new evidence has surfaced of another reason for decline in higher-paying jobs—robots, mainly concentrated in manufacturing regions. The Brookings Institute originated a study on the effects of robots replacing mainly manufacturing jobs. To no one’s surprise, most of the robots are concentrated in ‘rust-belt’ manufacturing right-to-work states in the Midwest and South that severely restrict union collective bargaining rights.

Brookings Institute

Brookings’ analysis of data from the International Federation for Robotics determined that more than half of more than 233,000 industrial robots in the country are found in just 10 Midwestern and Southern states, led by Michigan, Ohio, and Indiana. As of 2016, the overall national average for red states” was 2.5 robots per thousand workers. The national average for blue states that mainly vote Democrat was 1.1 per thousand.

Moody’s has become decidedly pessimistic about the future of America’s credit worthiness because it sees little that the U.S. can do to mitigate the increased income inequality, the worst in developed countries “…fiscal consolidation efforts that attempt to reduce the burden of entitlement spending, by hiking payroll taxes or cutting benefits, would ultimately exacerbate inequality,” said Moody’s.

What can be done to reduce the worst household income inequality since 1928, just prior to the Great Depression? The CIA World Factbook ranks the U.S. 39^th from the bottom in the distribution of family income based on the Gini Coefficient Index that measures income inequality.

I respectively disagree with Moody’s pessimism about the prospects for improving U.S. credit worthiness. Cutting benefits would certainly harm growth, taking away incomes that increases consumer spending of the bottom 40 percent; spending that in turn increases tax revenues. And states with the political will to restore bargaining rights of union and government workers would restore some of the lost wages that increase tax revenues.

Then there is a need for massive investments in public infrastructure in all the sectors that increase efficiency and labor productivity—from physical structures to education and R&D that sent us to the moon and created the Internet. Studies show they more than pay for themselves, which also increases tax revenues and pays down federal debt.

There is in fact no reason for pessimism if such ‘antidotes’ are applied to America’s ailing fiscal health, and Moody’s as a responsible credit rating agency should be the first to recommend them.

Harlan Green © 2018

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

What Is ‘New Normal’ U.S. Growth?

Popular Economics Weekly

Graph: Seeking Alpha/BLS

There is a current debate whether the U.S. will escape the ‘new normal’ of slower economic growth since the Great Recession, when American households lost a collective $9 trillion in value and consumers cut back on their spending to make up for the losses.

It is part of the debate among economists whether the U.S. and other so-called ‘mature’ economies are locked into what is called secular stagnation, an era where markets can no longer expand enough to boost economic growth that benefits all segments of the population.

The answer, alas, is slower growth in the U.S. for the foreseeable future, unless the 80 percent of wage-earning consumers find a way to bring back their lost incomes that have barely kept up with inflation since the 1970s, or governments find a way to raise enough taxes to make up for the shortfall in household incomes by funding more public sector benefits, such as increasing the social safety net and public investments in education, infrastructure, and basic research that increase future productivity.

Why have workers’ wages and household incomes remained stagnant for so long? There has been a sharp shift of incomes and wealth away from the working classes to rentiers, or the owners of capital and their managers.

There was a sharp decline in labor productivity since 2007, for the same reason. Along with the Great Recession, businesses invested even more of their profits to enhance their own stock prices (and CEO salaries), rather than in new equipment and factories that would expand labor’s productivity, which is the preferred way to boost workers’ standard of living.

Economists also postulate that economic growth is the sum of the growth rates of labor productivity and population—the working-age population, in particular. The working-age population began its decline as baby boomers began to retire in 2001, and another six million of those workers have elected not to return to work since the Great Recession.

Graph: Seeking Alpha

The above graph illustrates that equation. When the worker population increased—particularly when women and baby boomers entered the workforce from the 1970s onward—the U.S. had 3 percent plus economic growth. But in 2001 the boomers began to retire and we have the current worker shortage.

Graph: Wikipedia

Real vs. Potential GDP charts as above show the departure from what would be its potential—when GDP growth averaged 3.25 percent, historically. Consumer spending makes up roughly two-thirds of aggregate demand, which is the economic term for total dollars spent for goods and services that make up U.S. Gross Domestic Product. When its other elements—net exports, capital investments, and government expenditures—also decline, we have slower growth, which has been the case since 2007.

Today we have an even worse labor problem—the current White House wants to cut back immigration quotas by 50 percent and deport as many undocumented workers, as possible—including Dreamer children who have grown up in the U.S.—when only immigrants and their offspring will provide enough working age adults to make up for the loss of the baby boomer workforce.

Harlan Green © 2018

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

Tuition-Free College Is Possible

ANSWERING THE KENNEDYS CALL

Graph: ;MarketWatch

Yes, an excellent, tuition-free college education is possible. In fact, it’s become a movement supported by non-profit organizations, as well as cities and states that support their institutions of higher learning with taxpayer monies. Nationally, the College Promise Campaign is making news with its message and outreach stated on its website, CollegePromise.org.

“The College Promise Campaign is a national, non-partisan initiative to build broad public support for funding the first two years of higher education for hard-working students, starting in America’s community colleges. We want the first two years of college to become as universal, free, and accessible as high school has been for nearly a century,” said College Promise on it website.

That’s a start. College students have borrowed some $1.5 trillion to date with an average debt load of $35,000 per student. This wasn’t always the case for public colleges and universities. Until the 1960s, taxpayers paid most of the cost for state-run higher education, such as at the University of California system of nine UC universities and the 23 California State college campuses created to take in all eligible students that weren’t accepted to the nine UC campuses.

The programs vary, from scholarships that pay for 2 years of community college, to grants and scholarships that pay for all four years. But many of those colleges and universities are in smaller, out of the way locations, where educational costs are cheaper, and said institutions are eager to lure students away from the major metropolitan centers.

The above MarketWatch graph shows the huge cost disparities between public and private colleges, and many studies confirm that a public college or university education breeds as much success on reaching student life goals as do private schools.

The College Promise Campaign, a clearinghouse and advocacy organization for free-college initiatives, counts more than 200 programs across the country offering some version of a promise program. But that is hardly enough, when most other developed countries offer a tuition-free higher education.

In fact, most EU and non-EU Nordic countries offer tuition-free college education to foreigners, as well as their own citizens. They can be found on the Top Universities website, and include France, Germany, Norway, Iceland, Finland, Denmark, and Sweden. Even South American countries, such as Argentina offer a tuition-free college education to foreign students.

These countries put the American educational system to shame. They seem to understand the importance of higher education in improving the productivity and prosperity of their citizens. What could be more important that educating our workforce in an ever-changing world, where a college degree becomes even more important?

Cornell University is the only major U.S. land-grant institution that is tuition-free for students from low and middle-income families earning less than $60,000 annually. Its description is heartening—if only other large, public universities would follow:

“Established in 1865, Cornell University is a privately endowed research university and a partner of the State University of New York. As the federal land-grant institution in New York State, Cornell has a responsibility—unique within the Ivy League—to make contributions in all fields of knowledge in a manner that prioritizes public engagement to help improve the quality of life in New York state, the nation, the world. Cornell is located in Ithaca, New York and enrolls nearly 22,000 students. With an acceptance rate of over 10%, Cornell is the Ivy League institution with the highest acceptance rate.”

America needs more such education programs, if we are to compete in the modern world.

Harlan Green © 2018

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

A Weak Jobs Report?

Popular Economics Weekly

Graph: MarketWatch

“The unemployment rate declined to 3.7 percent in September, and total nonfarm payroll employment increased by 134,000, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in professional and business services, in health care, and in transportation and warehousing.”

Why fewer jobs this month? A special mention of Hurricane by the BLS attempted to explain the low job formation number, said the survey. “Hurricane Florence affected parts of the East Coast during the September reference periods for the establishment and household surveys. Response rates for the two surveys were within normal ranges.”

It is possible the east coast hurricane affected Leisure and hospitality and Retail trade, which lost -37,000 jobs cumulatively. White-collar firms added 54,000 job and health-care providers filled 26,000 positions. Builders hired 23,000 workers and manufacturers 18,000.Pundits and economists are saying this happened during prior bad weather episodes as well.

“We have seen this time and time again after big hurricanes (last September being a very good example after Hurricane Harvey, when payrolls fell 33K in the initial print),” said Thomas Simons, senior money market economist, Jefferies LLC as cited by MarketWatch. “So, ignore the weakness in payrolls.”

A lack of skilled workers is holding back more job gains, particularly in construction. The number of people working in construction was 315,000 higher compared to a year earlier. But there were 273,000 open construction jobs at the end of July, according to a separate Labor Department report. And the pay is better, with average hourly wages now $30.18 per hour vs. $27.24 for all hourly workers.

The smaller Household Data survey that calculates the unemployment rate was more upbeat. “The unemployment rate declined by 0.2 percentage point to 3.7 percent in September, and the number of unemployed persons decreased by 270,000 to 6.0 million. The unemployment rate and the number of unemployed persons declined by 0.5 percentage points and 795,000, respectively, over the year,” per the BLS.

We could be reaching the lower limits of the unemployment rate, now at 3.7 percent, in other words, the lowest in 48 years. This could in itself prevent further GDP growth as hiring stagnates and more than 6 million job opening go unfilled, per U.S. Labor’s JOLTS report.

“The number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 1.4 million over the month; these individuals accounted for 22.9 percent of the unemployed. In September, the labor force participation rate remained at 62.7 percent, and the employment-population ratio, at 60.4 percent, was little changed,” said the BLS.
“The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) increased by 263,000 to 4.6 million in September. These individuals, who would have preferred full-time employment, were working part time because their hours had been reduced or they were unable to find full-time jobs."

There will also be workers either unable or unwilling to return to work, in part because of our aging workforce. The baby boomers are retiring en masse, and the native-born U.S. population isn’t growing fast enough to replace them. So it will be up to newly arrived immigrants or the children of immigrants to continue economic growth, as I said in my last blog.

The current administration seems to know very little of basic economics, if they don’t understand this basic fact—economic growth largely mirrors population growth. Labor productivity is the other part of the economic equation for GDP growth, but labor productivity has been declining steadily since 2000, mostly because corporations have used their record profits for increased stock buybacks and stockholder dividends rather than boosting labor productivity—even after the latest corporate tax cuts.

This is not a formula for the prosperity of future generations.

Harlan Green © 2018

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Housing Supply Still Lacking

The Mortgage Corner

Graph: Econoday

Most of the construction activity is in the commercial sector, at the moment, though sales of newly-constructed homes rose 3.5 percent compared to July. The pace of new-home sales in August was 12.7 percent higher than a year ago. But large revisions to prior months were all downward, a reminder that the housing recovery still can’t satisfy the demand for single-family housing, in particular.

Economists at Freddie Mac that analyzed the pace of new housing construction found that years of underbuilding has left the U.S. with a cumulative shortfall — that is, supply compared to historical averages — of 4.6 million housing units in the years since 2000. That number is especially stark considering that builders constructed a 1 million unit surplus of homes in the bubble years of the last decade.

The median selling price in August was $320,200, 1.9 percent higher than year-ago prices. Year to date, sales were 6.9 percent higher than the same period last year. The year-to-date comparison has declined over the course of the year, a sign of flagging momentum, as higher mortgage rates and home prices are discouraging some buyers and pushing up the supply of available homes to 6.1 months at the current sales rate.

Commercial construction held most of the action. “In August, the estimated seasonally adjusted annual rate of public construction spending was $316.7 billion,” said the Census Bureau, “2.0 percent (±2.8 percent) above the revised July estimate of $310.5 billion, with much of it in education, a good sign that states are spending on their public infrastructure.”

Strongest in the report was highways & streets, up 1.7 percent in the month. Educational spending was also strong with a 1.0 percent gain. Government spending was also very active in August, up 5.9 percent at the Federal level and up 1.7 percent for state & local, reported the Census Bureau.

The Fed made good on its promise to raise their overnight rate one-quarter percent to 2.25 percent, boosting the Prime Rate used in most revolving credit to 5.25 percent. This hasn’t dampened consumer enthusiasm yet, as consumer spending is rising at 3.8 percent in the latest revision to Q2 GDP growth, which held at 4.2 percent. Maybe it’s one last holiday fling before reality and higher inflation set in from the tariff wars?

Fed Chair Powell said in his announcement after the latest FOMC meeting: “I see the current path of gradually raising interest rates as the FOMC's approach to taking seriously both of these risks. While the unemployment rate is below the Committee's estimate of the longer-run natural rate, estimates of this rate are quite uncertain. The same is true of estimates of the neutral interest rate. We therefore refer to many indicators (my bold) when judging the degree of slack in the economy or the degree of accommodation in the current policy stance. We are also aware that, over time, inflation has become much less responsive to changes in resource utilization.”

It’s good to see commercial construction making a comeback, even with congress seemingly unable to pay its fair share of infrastructure spending that will be needed just to upgrade the federal highway system, as well as our energy grid that is being seriously threatened by Russian cyber attacks, according to our spy agencies.

Housing starts are attempting to catch up, as starts ran at a 1.282 million seasonally adjusted annual rate in August, the Commerce Department said Wednesday. That was 9.2 percent higher than July’s pace, and 9.4 percent higher than a year ago. But that still won’t be enough to satisfy demand.

Stephen Stanley, chief economist at Amherst Pierpont, Securities interviewed by MarketWatch’s Andria Riquier, was more blunt: “To be clear, there is fundamental softness in housing. Industry sources suggest that the relentless torrid home price appreciation in recent years has finally reached a point that numerous prospective buyers are balking. In addition, high-end homes in high-tax states are starting to see some effect from tax law changes implemented in December. On top of that, new home construction has been impacted by a run-up in materials costs this year, squeezing builders in a vice between rising costs and a diminishing appetite of prospective buyers to pay up.”

Add to that we will be soon entering the tenth year of this boom cycle, which would put it on a par with the 1991 to 2001 boom years that paid down our national debt. If only that were the case today, instead of the surging federal deficit and debt that is squeezing future public sector investments and growth.

Harlan Green © 2018

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