The critics of the new $814 Billion stimulus have got it wrong. Lowering taxes helps the few, but spending monies on infrastructure, education, health care and state governments aids the many. The problem is that businesses are hurting because there is a lack of demand for their products. And demand comes mainly from consumers who are tapped out at present. So any programs that directly create more jobs—especially in the private sector—give the most bang for the stimulus buck.
The demand slack is now worldwide, so that even our exports are down, which has hurt many domestic industries. This is puzzling many of the 2500 economists, business and political leaders attending the annual Davos, Switzerland economic summit, according to New York Times columnist Thomas Friedman. They seem to be at a loss to find a solution to the current worldwide economic malaise.
Part of the puzzlement is due to the nature of the malaise. Such a complete breakdown in consumer spending hasn’t happened since World War II. And that is due to both the housing and credit crunches, which caused the soaring jobless rate. So any solution must also envision how to get banks lending again. But banks won’t lend, until they see a pickup in demand for products and services.
This recession is also puzzling because the old solutions aren’t working. The first half of the TARP funds went to shore up financial institutions, on the theory that they would begin to lend again. For the past 28 years the answer to any economic problem was what is called supply-side economics, which meant giving more breaks to businesses such as banks or cutting taxes of the investor class.
But that program didn’t work over the past 8 years. Only 5 million jobs were created, in spite of record corporate profits and incomes of the top 1 percent of income earners; whereas 20 million jobs were created in the prior 8 years. The result is that wages and salaries of most consumers haven’t risen at all when inflation is taken into account. And so consumers could only spend what they could borrow, and borrowing collapsed when housing values plunged.
Therefore, any solution has to boost the incomes of ordinary Americans. This was understood by British economist John Maynard Keynes during Roosevelt’s New Deal, and his theories helped the U.S. and Europe recover from the Great Depression. So what was forgotten is being resurrected, given the severity of the current recession.
There is a new twist to the solution that is missed by many economists, even, because Lord John Maynard Keynes’ economic theories continue to be misunderstood. He advocated more government spending only during the bad times. His real contribution was in the new field of behavioral economics. He was the first to take psychological factors into account to explain the behavior of individuals and the financial markets.
Keynes maintained that the Great Depression was caused primarily by a psychological depression in “animal spirits” that caused Americans to retreat into themselves, and so cease most economic activity. His most famous conclusion was that since governments already knew how to stimulate economies during wartime, they should also be able to do so during peacetime.
Many of his followers have been behavioral economists whose research has led to a greater understanding of what financial stimulus works and what doesn’t. For instance, the irrational exuberance that caused the housing bubble (and dot-com bubble before that) was predictable, since research has shown that investors and consumers are easily fooled by past history. Once home prices started climbing, for instance, there was a tendency to believe they would continue to climb.
And so part of the solution is create measures that prevent such bubbles from re-occurring. Hence the emphasis should be on better regulatory oversight of the financial markets. Such oversight not only fights fraud, but helps to establish programs that educate investors and consumers in the pitfalls of irrational exuberance.
Harlan Green © 2009
Wednesday, February 4, 2009
Mortgage Market Beginning Revival
When will we see an improvement in mortgage volume, and so real estate sales? This is probably the most asked question these days. Both the Fed and Congress are doing all they can to make mortgages reasonable and affordable to more borrowers. But in fact it is just Fannie and Freddie—now owned by the government—who are originating most of those mortgages.
So-called jumbo loans—those above $603,750 for a single unit in Santa Barbara County—are still not saleable on the secondary market, meaning that investors will only buy them for a tremendous premium. This has jacked up their rates into the 6-8 percent range for both jumbo ARMs and fixed rates.
But mortgage volumes are rising. The Mortgage Bankers Association (MBA) Weekly Mortgage Applications Survey for the week ending January 9, 2009 showed an increase of 15.8 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 95.7 percent compared with the previous week and was up 52.4 percent compared with the same week one year earlier.
It is mostly refinances, whose volume is back up to June 2003 levels, and now comprise 85 percent of transactions. So the purchase market is still hurting, as perhaps homebuyers are reluctant to buy until they see a bottoming out in prices. That is common during deflationary times.
It is incumbent upon Realtors in particular to chart the direction of home prices in their territories. For instance, Santa Barbara and South Coast prices seem to have bottomed out in the $700 to $900,000 median price range. And that is in the range of the new high-balance conforming loan amount.
Why have mortgage volumes fallen so drastically last year? It is not only because of the credit squeeze. Housing expenses—including rent or mortgage payments as well as the cost of utilities, property taxes, insurance, and maintenance—have grown much faster than incomes from 1996 to 2006, according the Harvard’s Joint Center for Housing Study. But household incomes grew just 36 percent during that time.
In fact, Americans' incomes since 2000 have grown more slowly than at any time since the 1960s. So most consumers had to borrow to even maintain their standard of living. Therefore there has to be a push to boost the jobs that will boost the wages and salaries of working Americans to bring this economy back into equilibrium.
This is a 180 degree turn for many economists who believed that smaller government and lower taxes were the prescription that fit all economic ailments. But we now know that such a philosophy led to the excesses that government is working to fix.
Harlan Green © 2009
So-called jumbo loans—those above $603,750 for a single unit in Santa Barbara County—are still not saleable on the secondary market, meaning that investors will only buy them for a tremendous premium. This has jacked up their rates into the 6-8 percent range for both jumbo ARMs and fixed rates.
But mortgage volumes are rising. The Mortgage Bankers Association (MBA) Weekly Mortgage Applications Survey for the week ending January 9, 2009 showed an increase of 15.8 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 95.7 percent compared with the previous week and was up 52.4 percent compared with the same week one year earlier.
It is mostly refinances, whose volume is back up to June 2003 levels, and now comprise 85 percent of transactions. So the purchase market is still hurting, as perhaps homebuyers are reluctant to buy until they see a bottoming out in prices. That is common during deflationary times.
It is incumbent upon Realtors in particular to chart the direction of home prices in their territories. For instance, Santa Barbara and South Coast prices seem to have bottomed out in the $700 to $900,000 median price range. And that is in the range of the new high-balance conforming loan amount.
Why have mortgage volumes fallen so drastically last year? It is not only because of the credit squeeze. Housing expenses—including rent or mortgage payments as well as the cost of utilities, property taxes, insurance, and maintenance—have grown much faster than incomes from 1996 to 2006, according the Harvard’s Joint Center for Housing Study. But household incomes grew just 36 percent during that time.
In fact, Americans' incomes since 2000 have grown more slowly than at any time since the 1960s. So most consumers had to borrow to even maintain their standard of living. Therefore there has to be a push to boost the jobs that will boost the wages and salaries of working Americans to bring this economy back into equilibrium.
This is a 180 degree turn for many economists who believed that smaller government and lower taxes were the prescription that fit all economic ailments. But we now know that such a philosophy led to the excesses that government is working to fix.
Harlan Green © 2009
When Will Real Estate Markets Improve?
December existing-home sales jumped 6.5 percent, according to the National Association of Realtors (NAR) with unsold inventory falling to 9.3-month supply. The Conference Board’s Index of Leading Economic Indicators (LEI) also rose for the first time in months, which may be a sign that economic activity is beginning to stabilize.
But concerns about the faltering economy and reluctant home buyers pushed builder confidence in the market for newly built single-family homes down further in January, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI). The HMI edged down a single point to a new record low of 8 in January.
Lawrence Yun, NAR chief economist, said home prices continue to fall significantly. “It appears some buyers are taking advantage of much lower home prices,” he said. “The higher monthly sales gain and falling inventory are steps in the right direction, but the market is still far from normal balanced conditions. Buyers will continue to have an edge over sellers for the foreseeable future.”
Meanwhile, builders are advocating more federal housing aid to jumpstart new home sales. Specifically, the NAHB is advocating for an enhanced home buyer tax credit and a government buy-down of mortgage rates for home purchases in 2009, moves that would rejuvenate demand for homes and trigger significant consumer spending across the board.
"Clearly, conditions in the nation's housing market aren't getting any better, and they aren't going to get any better until the federal government takes substantial action to encourage qualified buyers to get back in the market," said NAHB Chairman Sandy Dunn. Dunn noted that "The Obama Administration and the new Congress have a tremendous opportunity and responsibility to enact legislation that can spur home buyer demand and jump-start the national economy."
"Builder views continue to track with historically low consumer confidence measures," said NAHB Chief Economist David Crowe. "The fact that there has been microscopic movement in the historically low HMI and its component indexes over the last three months provides further evidence of the need for government action to rejuvenate housing demand. Qualified buyers are clearly in the wings, but they're looking for a significant signal from the federal government that now is the time to return to the market."
The Conference Board’s LEI predicts future economic activity, and “Taken together, the recent behavior of the composite economic indexes suggests that the recession that began in December 2007 will continue in the near term.”
Harlan Green © 2009
But concerns about the faltering economy and reluctant home buyers pushed builder confidence in the market for newly built single-family homes down further in January, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI). The HMI edged down a single point to a new record low of 8 in January.
Lawrence Yun, NAR chief economist, said home prices continue to fall significantly. “It appears some buyers are taking advantage of much lower home prices,” he said. “The higher monthly sales gain and falling inventory are steps in the right direction, but the market is still far from normal balanced conditions. Buyers will continue to have an edge over sellers for the foreseeable future.”
Meanwhile, builders are advocating more federal housing aid to jumpstart new home sales. Specifically, the NAHB is advocating for an enhanced home buyer tax credit and a government buy-down of mortgage rates for home purchases in 2009, moves that would rejuvenate demand for homes and trigger significant consumer spending across the board.
"Clearly, conditions in the nation's housing market aren't getting any better, and they aren't going to get any better until the federal government takes substantial action to encourage qualified buyers to get back in the market," said NAHB Chairman Sandy Dunn. Dunn noted that "The Obama Administration and the new Congress have a tremendous opportunity and responsibility to enact legislation that can spur home buyer demand and jump-start the national economy."
"Builder views continue to track with historically low consumer confidence measures," said NAHB Chief Economist David Crowe. "The fact that there has been microscopic movement in the historically low HMI and its component indexes over the last three months provides further evidence of the need for government action to rejuvenate housing demand. Qualified buyers are clearly in the wings, but they're looking for a significant signal from the federal government that now is the time to return to the market."
The Conference Board’s LEI predicts future economic activity, and “Taken together, the recent behavior of the composite economic indexes suggests that the recession that began in December 2007 will continue in the near term.”
Harlan Green © 2009
Saturday, January 3, 2009
Why Did Fed Drop (short-term) Rates to 0%?
The Federal Reserve did something for the first time in its history. It dropped its fed funds overnight rate—the overnight rate it lends to banks—to between 0 and 0.25 percent. This meant in effect that it will print as much money as necessary to encourage financial institutions to begin to lend and/or invest again, which they are reluctant to do at present. But will it work without other stimulus programs?
Its FOMC press release highlighted the Fed’s concern for the economy: “The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”
Why such a drastic measure? This is in spite of more than $1 trillion to date lent or invested in our largest financial institutions. It highlights a problem often debated by economists. How to get the most bang for the stimulus buck? Classical economists who hark back to the free market philosophy of Adam Smith believe that giving the largest financial institutions as much money as they need—either via a stimulus package, or more tax breaks—will encourage them to lend and invest in businesses.
But with consumer incomes and spending having declined more than 40 percent, there is little incentive for businesses to expand. The auto industry is just one example, with sales of both domestic and foreign cars down around 40 percent, as well. Industries are cutting jobs, not creating them at the moment.
It was the last, Great Depression that brought a new economic philosophy, named after British Lord John Maynard Keynes. And the Roosevelt Administration liked his ideas, since it wanted to stimulate consumption by directly creating jobs rather than waiting for the private economy to recover. Until then, the captains of industry and finance believed only the private sector should control resources, except during wartime. Any other economic model smelled of socialism.
But Lord Keynes, a British monetary expert thought differently in a famous essay:
“…there will be no means of escape from prolonged and perhaps interminable depression except by direct state intervention to promote and subsidize new investment. Formerly there was no expenditure out of the proceeds of borrowing that it was thought proper for the State to incur except for war. In the past therefore, we have not infrequently had to wait for a war to terminate a major depression. I hope that in the future we shall not adhere to this purist financial attitude, and that we shall be ready to spend on the enterprises of peace what the financial maxims of the past would only allow us to spend on the devastations of war.”
As a precursor to modern economic theory that took into account the psychological behavior of consumers and investors, Lord Keynes saw that emotions (and so confidence) helped to determine how humans behaved in both good and bad times.
We are currently in a recession that began last December and could last into 2009. And this has affected how consumers and businesses see the world. That is the reason why there is such an emphasis by the incoming Obama administration on job creation, as well as providing better health care and educational opportunities. It provides aid and relief to the consumers who power this economy—with their pocketbooks.
So though 0 interest loans help to grease the wheels, it is such job creation and training programs that puts money into consumers’ pockets and will ultimately bring the U.S. economy back. Without healthy consumers, what bank will lend or business expand?
© Harlan Green 2008
Its FOMC press release highlighted the Fed’s concern for the economy: “The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”
Why such a drastic measure? This is in spite of more than $1 trillion to date lent or invested in our largest financial institutions. It highlights a problem often debated by economists. How to get the most bang for the stimulus buck? Classical economists who hark back to the free market philosophy of Adam Smith believe that giving the largest financial institutions as much money as they need—either via a stimulus package, or more tax breaks—will encourage them to lend and invest in businesses.
But with consumer incomes and spending having declined more than 40 percent, there is little incentive for businesses to expand. The auto industry is just one example, with sales of both domestic and foreign cars down around 40 percent, as well. Industries are cutting jobs, not creating them at the moment.
It was the last, Great Depression that brought a new economic philosophy, named after British Lord John Maynard Keynes. And the Roosevelt Administration liked his ideas, since it wanted to stimulate consumption by directly creating jobs rather than waiting for the private economy to recover. Until then, the captains of industry and finance believed only the private sector should control resources, except during wartime. Any other economic model smelled of socialism.
But Lord Keynes, a British monetary expert thought differently in a famous essay:
“…there will be no means of escape from prolonged and perhaps interminable depression except by direct state intervention to promote and subsidize new investment. Formerly there was no expenditure out of the proceeds of borrowing that it was thought proper for the State to incur except for war. In the past therefore, we have not infrequently had to wait for a war to terminate a major depression. I hope that in the future we shall not adhere to this purist financial attitude, and that we shall be ready to spend on the enterprises of peace what the financial maxims of the past would only allow us to spend on the devastations of war.”
As a precursor to modern economic theory that took into account the psychological behavior of consumers and investors, Lord Keynes saw that emotions (and so confidence) helped to determine how humans behaved in both good and bad times.
We are currently in a recession that began last December and could last into 2009. And this has affected how consumers and businesses see the world. That is the reason why there is such an emphasis by the incoming Obama administration on job creation, as well as providing better health care and educational opportunities. It provides aid and relief to the consumers who power this economy—with their pocketbooks.
So though 0 interest loans help to grease the wheels, it is such job creation and training programs that puts money into consumers’ pockets and will ultimately bring the U.S. economy back. Without healthy consumers, what bank will lend or business expand?
© Harlan Green 2008
Is Housing Market Beginning to Stabilize?
How close are home sales and housing values to "bottoming out"? This headline in a recent Business Week attempted to show that housing prices in many cities were already below their “correct” prices using household population, mortgage rates, and relative income levels. But, it hedged the results by saying that there was a +/- 14 percent error factor in the results!
This included San Francisco (- 16 percent), San Diego (-19 percent) in California, and Phoenix, Arizona, still 4 percent overvalued. So is there a more meaningful way to measure home values? This is crucial, as banks (other than government-owned Freddie Mac, Fannie Mae, FHA/VA) will not be ready to lend again until they are sure of future housing values.
Among the factors that directly determine housing values are household incomes, mortgage rates, population growth and the supply of housing. All else—rents, default rates, and even the credit crisis—derive from these factors.
Only some of these factors are beginning to turn positive. Perhaps the most important is household income, which has shrunk 1 percent to $50,233 from 2000-2008 after inflation, while personal household debt including mortgages ballooned from around $8 trillion to $14 trillion over that time. The main factor that will turn around household incomes is both lower inflation, and better tax breaks for wage earners. To date it is only the top 1 percent of income-earners whose incomes have improved since 2000.
But population (and household formation) continues to grow. Harvard’s Joint Center for Housing Studies predicts 1.2 million households per year will be formed over the next 10 years that will require housing. This much pent-up demand will be the basis for a recovery, once housing values stabilize.
And interest rates should continue to remain low, both due to government efforts and the recession. So it is static household incomes and a 1 million plus excess of unsold housing—a result of the housing boom—that are weighing down housing values. The federal proposal for cheaper mortgage rates that would specifically target home purchases should help to lower housing inventories.
That is why the housing recovery will be so uneven. The old rust belt regions have seen the biggest loss in incomes, which is why cities like Columbus, Ohio and Indianapolis are 14 and 16 percent undervalued, respectively, according to the Business Week article. Values are even lower in cities like Dallas and Houston, Texas because of overbuilding; where housing is undervalued 31 and 34 percent, respectively.
But Chicago, New York, and Los Angeles—our largest metropolitan areas—are already at their “correct” price level, according to Business Week. In fact, only 4 of the 25 cities surveyed seem to be overpriced.
The incoming administration’s middle class tax cuts and proposal to create or retain at least 2.5 million jobs in the next 2 years can help to solve the drop in household incomes. Housing values nationally have returned to 2004 levels, which is why it is important to arrest any further decline in values.
© Harlan Green 2008
This included San Francisco (- 16 percent), San Diego (-19 percent) in California, and Phoenix, Arizona, still 4 percent overvalued. So is there a more meaningful way to measure home values? This is crucial, as banks (other than government-owned Freddie Mac, Fannie Mae, FHA/VA) will not be ready to lend again until they are sure of future housing values.
Among the factors that directly determine housing values are household incomes, mortgage rates, population growth and the supply of housing. All else—rents, default rates, and even the credit crisis—derive from these factors.
Only some of these factors are beginning to turn positive. Perhaps the most important is household income, which has shrunk 1 percent to $50,233 from 2000-2008 after inflation, while personal household debt including mortgages ballooned from around $8 trillion to $14 trillion over that time. The main factor that will turn around household incomes is both lower inflation, and better tax breaks for wage earners. To date it is only the top 1 percent of income-earners whose incomes have improved since 2000.
But population (and household formation) continues to grow. Harvard’s Joint Center for Housing Studies predicts 1.2 million households per year will be formed over the next 10 years that will require housing. This much pent-up demand will be the basis for a recovery, once housing values stabilize.
And interest rates should continue to remain low, both due to government efforts and the recession. So it is static household incomes and a 1 million plus excess of unsold housing—a result of the housing boom—that are weighing down housing values. The federal proposal for cheaper mortgage rates that would specifically target home purchases should help to lower housing inventories.
That is why the housing recovery will be so uneven. The old rust belt regions have seen the biggest loss in incomes, which is why cities like Columbus, Ohio and Indianapolis are 14 and 16 percent undervalued, respectively, according to the Business Week article. Values are even lower in cities like Dallas and Houston, Texas because of overbuilding; where housing is undervalued 31 and 34 percent, respectively.
But Chicago, New York, and Los Angeles—our largest metropolitan areas—are already at their “correct” price level, according to Business Week. In fact, only 4 of the 25 cities surveyed seem to be overpriced.
The incoming administration’s middle class tax cuts and proposal to create or retain at least 2.5 million jobs in the next 2 years can help to solve the drop in household incomes. Housing values nationally have returned to 2004 levels, which is why it is important to arrest any further decline in values.
© Harlan Green 2008
Are Lower Interest Rates the Recession Cure?
Now that we know this recession started in Dec. 2007, what are the various tools to help us climb out of it? We can look at the stimulus packages already in the works, but immediate help may come from several proposals to lower interest rates that would stimulate real estate sales.
The Federal Reserve has agreed to use $500B to buy up all manner of debt and Mortgage Backed Securities from the GSEs, including Fannie Mae, Freddie Mac, and FHA/VA. This will in effect bring down the cost of new mortgages by relieving them of any questionable assets on their books. Just the announcement of this plan has already driven down conforming fixed rates one half percent in a week.
And the new Jumbo-conforming product with higher loan limits that takes effect in 2009 should give real estate a boost if rates remain as low, or lower than they are now. The 2009 jumbo-conforming 30-year fixed rate is currently quoted at 5.25 percent, for loans that will be funded in 2009.
And lastly, the Treasury is talking about buying down fixed rates to around 4.5 percent for home purchases, in order to reduce the huge inventory of unsold new and existing homes. This will give a boost to housing values, which is what lower interest rates tend to do. In fact, rates are still too high for most homeowners. Some 10 million homebuyers have negative equity in their homes and that total will continue to climb if values don’t stabilize, thus causing more foreclosures.
The latest housing price indicators are still falling. The Case-Shiller index said all three aggregate indices and 13 of the 20 metro areas are reporting new record rates of decline. Looking at the returns of the U.S. National Index, prices are back to where they were in early 2004. As of September 2008, the 10-City Composite is down 23.4 percent from its peak, the 20-City Composite is down 21.8 percent and the National Composite is down 21.0 percent.
But pending purchase contracts for existing homes have begun to level out. The National Association of Realtors’ Pending Home Sales Index, a forward-looking indicator based on contracts signed in October, slipped 0.7 percent to 88.9 from an upwardly revised reading of 89.5 in September, and is 1.0 percent below October 2007 when it was 89.8.
Lawrence Yun, NAR chief economist, said a review of the past year is instructive. “Despite the turmoil in the economy, the overall level of pending home sales has been remarkably stable over the past year, holding in a generally narrow range,” he said. “We did see a spike in August when mortgage conditions temporarily improved, which underscores two things – there is a pent-up demand, and access to safe, affordable mortgages will bring more buyers into the market.”
There is no question that any further drop in interest rates will continue to help home sales and prices. The NAR’s Affordability Index has continued to climb and is up a whopping 34 percent from 2006, at the height of the housing boom. This is both due to the lower interest rates, and the fact that the national median existing-home price has fallen 18 percent since 2006.
© Harlan Green 2008
The Federal Reserve has agreed to use $500B to buy up all manner of debt and Mortgage Backed Securities from the GSEs, including Fannie Mae, Freddie Mac, and FHA/VA. This will in effect bring down the cost of new mortgages by relieving them of any questionable assets on their books. Just the announcement of this plan has already driven down conforming fixed rates one half percent in a week.
And the new Jumbo-conforming product with higher loan limits that takes effect in 2009 should give real estate a boost if rates remain as low, or lower than they are now. The 2009 jumbo-conforming 30-year fixed rate is currently quoted at 5.25 percent, for loans that will be funded in 2009.
And lastly, the Treasury is talking about buying down fixed rates to around 4.5 percent for home purchases, in order to reduce the huge inventory of unsold new and existing homes. This will give a boost to housing values, which is what lower interest rates tend to do. In fact, rates are still too high for most homeowners. Some 10 million homebuyers have negative equity in their homes and that total will continue to climb if values don’t stabilize, thus causing more foreclosures.
The latest housing price indicators are still falling. The Case-Shiller index said all three aggregate indices and 13 of the 20 metro areas are reporting new record rates of decline. Looking at the returns of the U.S. National Index, prices are back to where they were in early 2004. As of September 2008, the 10-City Composite is down 23.4 percent from its peak, the 20-City Composite is down 21.8 percent and the National Composite is down 21.0 percent.
But pending purchase contracts for existing homes have begun to level out. The National Association of Realtors’ Pending Home Sales Index, a forward-looking indicator based on contracts signed in October, slipped 0.7 percent to 88.9 from an upwardly revised reading of 89.5 in September, and is 1.0 percent below October 2007 when it was 89.8.
Lawrence Yun, NAR chief economist, said a review of the past year is instructive. “Despite the turmoil in the economy, the overall level of pending home sales has been remarkably stable over the past year, holding in a generally narrow range,” he said. “We did see a spike in August when mortgage conditions temporarily improved, which underscores two things – there is a pent-up demand, and access to safe, affordable mortgages will bring more buyers into the market.”
There is no question that any further drop in interest rates will continue to help home sales and prices. The NAR’s Affordability Index has continued to climb and is up a whopping 34 percent from 2006, at the height of the housing boom. This is both due to the lower interest rates, and the fact that the national median existing-home price has fallen 18 percent since 2006.
© Harlan Green 2008
Tuesday, December 2, 2008
Will Millenium Generation Save Economy?
1 unit - $603,750 2 - $772,900 3 – $934,250 4 - $1,161,050
First, note the 2009 conforming loan limits for 1-4 residential owner and non-owner residences for Santa Barbara County. Los Angeles and Ventura Counties’ conforming limits are higher. Conforming interest rates are back to their 2003 lows, while jumbo rates are much higher because that secondary market is still frozen. I predict this boost in loan limits should give a tremendous boost to real estate sales and values next year.
And, it is now official. The National Bureau of Economic Research (NBER) has pronounced December 2007 as the start of this recession. It was an easy call that I made several columns ago, since most of their indicators began to decline in November 2007. But the NBER folk being overly cautious, waited until now to be sure it wasn’t a temporary decline in business activity.
When will it ‘officially’ end? The NBER’s Business Cycle Dating Committee probably won’t tell us for at least another year. My prediction is that we will see an uptick in business activity beginning in the New Year. That doesn’t mean we will feel it right away. Usually the last to pick up in a recovery is the job market. It took almost 2 years into the 2001 recovery for jobs to grow again.
There is more good news. A new generation is coming of age that could give a boost to economic growth over the next 5-10 years, and which could mitigate fears that baby boomers might bankrupt social security/Medicare when they begin to retire in 2010. They are being called the Millenium Generation, formerly the echo boomers or children of the baby boomers who were born from 1980 to 1996. And, get this, they number some 90 million!
At least 40 percent of them are now 18 or older, according to demographers, a group even bigger even than their baby boomer parents. And precisely because they haven’t lost 50 percent in the stock market meltdown, they will be the leading edge of an economic recovery, according to a recent CBS Marketwatch article.
“They’re educated, technologically savvy, inspired, driven to succeed personally but also concerned for the greater good,” said CBS Maketwatch’s Jonathan Burton. Also, they are part of the under-thirty cohort, more than two-thirds of which voted for President-elect Obama.
What will create their affluence? Job seekers can call their own shots in the next 4 years, according to demographers. More than 200,000 per month entered the job market during the baby boomers era, whereas just 73,000 per month are projected to enter the work force through 2012. And since job creation won’t slow during that time, it will mean a huge shortage of workers. Much of the labor shortfall will be made up with more efficient technology, increasing labor productivity, and so higher worker wages and benefits.
Hence the reason for the incoming Obama administration’s focus on job creation. Nobel laureate economist Joseph Stiglitz even believes that Obama’s 2.5 million job creation goal over two years is too small. Dr. Stiglitz would like to see a job creation goal of 5 million.
We have already lost approximately 1 million of the meager 5 million jobs created over the past 8 years, as we said in last week’s column. So this is a huge and worthwhile goal. Those who want to check the NBER data can look up the info on its website for themselves—www.nber.org.
© Harlan Green 2008
First, note the 2009 conforming loan limits for 1-4 residential owner and non-owner residences for Santa Barbara County. Los Angeles and Ventura Counties’ conforming limits are higher. Conforming interest rates are back to their 2003 lows, while jumbo rates are much higher because that secondary market is still frozen. I predict this boost in loan limits should give a tremendous boost to real estate sales and values next year.
And, it is now official. The National Bureau of Economic Research (NBER) has pronounced December 2007 as the start of this recession. It was an easy call that I made several columns ago, since most of their indicators began to decline in November 2007. But the NBER folk being overly cautious, waited until now to be sure it wasn’t a temporary decline in business activity.
When will it ‘officially’ end? The NBER’s Business Cycle Dating Committee probably won’t tell us for at least another year. My prediction is that we will see an uptick in business activity beginning in the New Year. That doesn’t mean we will feel it right away. Usually the last to pick up in a recovery is the job market. It took almost 2 years into the 2001 recovery for jobs to grow again.
There is more good news. A new generation is coming of age that could give a boost to economic growth over the next 5-10 years, and which could mitigate fears that baby boomers might bankrupt social security/Medicare when they begin to retire in 2010. They are being called the Millenium Generation, formerly the echo boomers or children of the baby boomers who were born from 1980 to 1996. And, get this, they number some 90 million!
At least 40 percent of them are now 18 or older, according to demographers, a group even bigger even than their baby boomer parents. And precisely because they haven’t lost 50 percent in the stock market meltdown, they will be the leading edge of an economic recovery, according to a recent CBS Marketwatch article.
“They’re educated, technologically savvy, inspired, driven to succeed personally but also concerned for the greater good,” said CBS Maketwatch’s Jonathan Burton. Also, they are part of the under-thirty cohort, more than two-thirds of which voted for President-elect Obama.
What will create their affluence? Job seekers can call their own shots in the next 4 years, according to demographers. More than 200,000 per month entered the job market during the baby boomers era, whereas just 73,000 per month are projected to enter the work force through 2012. And since job creation won’t slow during that time, it will mean a huge shortage of workers. Much of the labor shortfall will be made up with more efficient technology, increasing labor productivity, and so higher worker wages and benefits.
Hence the reason for the incoming Obama administration’s focus on job creation. Nobel laureate economist Joseph Stiglitz even believes that Obama’s 2.5 million job creation goal over two years is too small. Dr. Stiglitz would like to see a job creation goal of 5 million.
We have already lost approximately 1 million of the meager 5 million jobs created over the past 8 years, as we said in last week’s column. So this is a huge and worthwhile goal. Those who want to check the NBER data can look up the info on its website for themselves—www.nber.org.
© Harlan Green 2008
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