Wednesday, August 29, 2012

Pending Home Sales, Prices Up For the Year

The Mortgage Corner

Home prices are finally rising nationally, according to same sales in the S&P Case-Shiller Home Price Index. It showed that all three headline composites ended the second quarter of 2012 with positive annual growth rates for the first time since the summer of 2010. The national composite was up 1.2 percent in the second quarter of 2012 versus the second quarter of 2011, and was up 6.9 percent versus the first quarter of 2012. The 10- and 20-City Composites posted respective annual returns of +0.1 percent and +0.5 percent in June 2012.

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Graph: Calculated Risk

“Home prices gained in the second quarter,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “In this month’s report all three composites and all 20 cities improved both in June and through the entire second quarter of 2012. All 20 cities and both monthly Composites rose for the second consecutive month. It would have been a third consecutive month had we not seen home prices fall in Detroit back in April."

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Graph: Calculated Risk

And the National Association of Realtors reported that the Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 2.4 percent to 101.7 in July from 99.3 in June and is 12.4 percent above July 2011 when it was 90.5. The data reflect contracts but not closings.

Lawrence Yun , NAR chief economist, said the index is at the highest level since April 2010, which was shortly before the closing deadline for the home buyer tax credit. "While the month-to-month movement has been uneven, more importantly we now have 15 consecutive months of year-over-year gains in contract activity," Yun said.

While not yet overwhelming, the real estate recovery will continue to spur growth, with construction spending also up some 7 percent in the year. But lower inventories are the key, and Realtors are reporting rising prices and multiple offers in most of the metropolitan areas.

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Graph: Econoday

The FHFA house price index for homes financed with conforming mortgages extended a run of gains including a 0.7 percent rise for June. Year-on-year, the index is up 3.6 percent, which is slightly lower than May's upward revised 3.8 percent but otherwise well above prior months. Seven of the 9 regions posted gains in June led by a 3.5 percent rise in the Mountain region and followed by a 1.1 percent rise in the West North Central region. It showed very small changes in the West South Central and New England regions.

What can we say? That employment and personal incomes have increased enough, in combination with record low interest rates, to increase confidence that this economic malaise is finally coming to an end.

Harlan Green © 2012

Thursday, August 23, 2012

Real Estate Leading Recovery—Part II

The Mortgage Corner

Further evidence that real estate is recovering is the drop in both vacancy rates and so-called Real Estate Owned (REO) properties—i.e., that banks have taken back in foreclosure. Several analysts, including Calculated Risk, believe this is absorbing much of the excess housing inventory that has been depressing prices.

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Graph: Calculated Risk

Existing-home sales represent more than 90 percent of the market so they are the best measure of housing inventory. Inventory decreased 23 percent year-over-year in July from July 2011. It is the seventeenth consecutive month with a YoY decrease in inventory, and near the largest year-over-year decline reported. Months of supply decreased to 6.4 months in July from 6.6 percent in June. Listed inventory is 24.4 percent below a year ago when there was a 9.1-month supply.

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Graph: Calculated Risk

Existing-home sales increased 2.3 percent in July from a month earlier to a seasonally adjusted annual rate of 4.47 million, the National Association of Realtors said Wednesday. The month's sales were 10.4 percent above the same month a year earlier.

Lawrence Yun, NAR chief economist, said housing affordability conditions are very good.  “Mortgage interest rates have been at record lows this year while rents have been rising at faster rates.  Combined, these factors are helping to unleash a pent-up demand,” he said.  “However, the market is constrained by unnecessarily tight lending standards and shrinking inventory supplies, so housing could easily be much stronger without these abnormal frictions.”

While not yet overwhelming, the real estate recovery will continue to spur growth, with construction spending also up some 7 percent in the year. But lower inventories are the key, and Realtors are reporting rising prices and multiple offers in most of the metropolitan areas.

Lawrence Yun said inventory shortages are a factor.  “Buyer interest remains strong but fewer home listings mean fewer contract signing opportunities,” Yun said.  “We’ve been seeing a steady decline in the level of housing inventory, which is most pronounced in the lower price ranges popular with first-time buyers and investors.”

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Graph: FHFA

Hence the higher prices. Lastly, home prices climbed 0.7 percent on a seasonally adjusted basis in June, following a revised 0.6 percent increase in May, the Federal Housing Finance Agency said Thursday. In the 12 months through June, prices rose 3.6 percent, the agency said. The FHFA purchase-only index is based on transactions bought or guaranteed by Fannie Mae or Freddie Mac for so-called conforming mortgages.

Harlan Green © 2012

Tuesday, August 21, 2012

Increased Consumer Spending a Good Sign

Financial FAQs

The most recent retail sales show consumers are able to spend more, even as they borrow more. Add to that credit card delinquencies are at an 18-year low, according to credit reporting company Transunion Corp., and we have a picture of an improving economy. This is, the fact that consumers can continue to cure their debt problems, while spending more, is a good sign.

"The national credit card delinquency rate continues to remain at the lowest levels we've observed in 18 years," said Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit. "It's a positive situation because average borrower balances have increased over the past year as new card originations have grown."

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Graph: Econoday

Retail sales soared in July. Total sales rose 0.8 percent for the strongest rise since February with ex-auto sales also up 0.8 percent for, again, the best showing since February. All components show gains including motor vehicles, general merchandise, health & personal care, furniture, and restaurants. Clothing also shows a significant gain, one that points to strength for the back-to-school season. Ex-auto ex-gas the gain is 0.9 percent for the best showing since January, said Econoday.

This was predicted by the surge in consumer borrowing. Total credit outstanding rose $6.5 billion in June, following a $16.7 billion jump the month before, reported the Federal Reserve. The latest gain was led by non-revolving credit, gaining $10.2 billion in June after a $9.2 billion rise in May. Non-revolving credit is mostly for motor vehicle purchases and student loans.

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Graph: Econoday

What is behind greater consumer spending is the consumer feels better about the economy despite the recent run up in gasoline prices. Apparently it is due to a somewhat improved jobs picture with 163,000 net payroll jobs created in July. Strength was in the consumer's assessment of current conditions which was up solidly at 87.6 versus July's 82.7. This gain also underscores the improvement seen in weekly jobless claims, which are now down in the 350,000 range from more than 400,000 last year.

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Graph: Econoday

So there are signs that the recovery may be gaining a little more strength—emphasis on little, however.  The Conference Board’s July index of leading economic indicators rebounded 0.4 percent, offsetting the June decline of 0.4 percent. It is at its highest level since February 2007, which should boost consumer confidence even higher.

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Graph: Econoday

The improvement in jobless claims, which points to improvement in underlying job growth, together with improvement in building permits led the increase in the overall index with each component having a contribution of 0.18 percentage points.

Also with positive contributions were the report's credit reading, the stock market, and the report's imputed readings for new orders on both consumer and capital goods which are government data that have yet to be released, said Econoday.

So July was a good month for consumers, and points to further economic improvement for holiday retail sales, which should drive economic growth for the rest of the year. So consumers seem to be focusing more on improving their own financial condition, rather than the discouraging news about China, Europe, and a deadlocked Congress.

Harlan Green © 2012

Wednesday, August 15, 2012

Consumer Spending Continues to Improve

FINANCIAL FAQs

The most recent retail sales show consumers continue to spend, as consumer borrowing is increasing. Add to that credit card delinquencies are at an 18-year low, according to credit reporting company Transunion Corp., and we have a picture of an improving economy.

"The national credit card delinquency rate continues to remain at the lowest levels we've observed in 18 years," said Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit. "It's a positive situation because average borrower balances have increased over the past year as new card originations have grown."

Retail sales soared in July. Total sales rose 0.8 percent for the strongest rise since February with ex-auto sales also up 0.8 percent for, again, the best showing since February. All components show gains including motor vehicles, general merchandise, health & personal care, furniture, and restaurants. Clothing also shows a significant gain, one that points to strength for the back-to-school season. Ex-auto ex-gas the gain is 0.9 percent for the best showing since January, said Econoday.

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Graph: Econoday

This was predicted by the surge in consumer borrowing. Total credit outstanding rose $6.5 billion in June, following a $16.7 billion jump the month before, reported the Federal Reserve. The latest gain was led by non-revolving credit, gaining $10.2 billion in June after a $9.2 billion rise in May. Non-revolving credit is mostly for motor vehicle purchases and student loans. 

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Graph: Econoday

What is behind greater consumer spending is they continue to improve their financial position. Personal income in June gained 0.5 percent, following an advance of 0.3 percent the prior month.  The wages & salaries component also showed strength, rising 0.5 percent after a 0.1 percent rise in May.

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Graph: Econoday

And with 163,000 net payrolls jobs added in July, their condition should continue to improve. Both the goods-producing and service-providing sectors added jobs. Goods-producing jobs indicate that manufacturing is doing better than monthly surveys suggest.  Total goods-producing jobs rose 24,000 in July after a 13,000 gain the prior month.  Manufacturing rose 25,000 after a 10,000 boost in June.

So even the drag from Europe’s austerity-induced recession hasn’t kept American consumers down. Even housing is showing signs of life, with the NAHB’s builder confidence survey at its highest level since February 2007, which should boost consumer confidence even higher.

Harlan Green © 2012

Tuesday, August 14, 2012

It’s Ryancare vs. Obamacare

POPULAR ECONOMICS WEEKLY

Will Ryancare replace Obamacare? Ryancare could become the campaign buzzword with Mitt Romney’s choice of Wisconsin Republican Paul Ryan as his Vice Presidential candidate. Ryancare is bringing budget-cutting austerity that Paul Ryan once called his “Path to Prosperity” budget proposals now endorsed by two Republican-led House majorities, vs. President Obama’s program of stimulus spending via health care, infrastructure repair, and job creation.

Yet history says Ryancare won’t work. It is a battle between almost polar opposites—government austerity vs. government stimulus—when the two must work together to bring back prosperity to the 80 percent of us who are wage earners that have lost out on this recovery.

Romney has come off the fence, in other words, since being Massachusetts’s governor that supported abortion and universal health care. Mitt has said during the campaign that he supported Ryancare, which “will greatly shrink the government, largely undoing the social safety net by shifting more costs onto individuals and essentially converting Medicare into a capped voucher program. It would also alter the progressive income tax system, which, like the safety net, was built through the 20th century under Republican as well as Democratic presidents,” said the New York Times.

So Ryancare is really about more austerity when we know the track record of austerity programs. The latest is England’s Conservative Party program that has returned it into recession with their program to slash government spending while lowering taxes for the wealthy, thus starving the government of revenues during the euro crisis. Only President Clinton was able to slow government spending while balancing the federal budget. He did it by raising taxes back to pre-Reagan rates for the highest income brackets, while slashing defense spending.

In fact, though few economists will admit it, Republican economic policies since 1980 based on slashing tax rates have been disastrous for economic growth and budget deficits, which is why President Reagan had to raise taxes 11 times during his tenure.

While GW Bush helped to create the largest federal deficit since World War II with his tax cuts of 2001 and 2003 that starved the government of revenues at a time when spending soared. The historical fact remains: the recessions, President Bush’s tax cuts and the wars in Afghanistan and Iraq explain virtually the entire deficit over the next ten years.

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Graph: CBPP. Org

“In fact, the deficit for fiscal year 2009 — which began more than three months before President Obama’s inauguration — was $1.4 trillion and, at 10 percent of Gross Domestic Product (GDP), the largest deficit relative to the economy since the end of World War II,” said the Center for Budget and Policy Priorities, a progressive think tank.

So is it just coincidence that the historical record also shows all recessions since 1980 have occurred during Republican administrations? The recession score (gray shadings)—Presidents’ Reagan and GW Bush two recessions, GHW Bush, Sr. one, and Democrats zero.

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Graph: Calculated Risk Blog

If austerity in the guise of slashing taxes to shrink government isn’t the answer, then what is? That, also, is no secret to most economic historians, at least. Promote economic growth in both the private and public sectors. It turns out that growth has been greatest when tax revenues were higher, because those revenues also boosted private sector growth. How so? Through almost too many ways to be counted—via boosting spending on education, environmental protection, infrastructure, and Research and Development.

President Clinton proved it with his 23 million jobs created and 4 years of actual budget surpluses. In other words, all those public tax dollars boost growth, while the historical record shows that the Bush and Reagan tax cuts benefited the wealthiest; including those corporate CEO’s whose salaries and benefits have gone through the roof, leaving their own employees with little to spend.

And so does social welfare spending, which should be a no-brainer. Medicare and social security have almost no overhead, so that more than 95 percent of revenues flow to the elderly and health care providers, which boosts job growth in the health care professions, as well as consumer spending.

“Nonpartisan analyses of Mr. Ryan’s proposed income tax cuts reached conclusions much like those of Mr. Romney’s tax proposals in recent weeks’” said the same New York Times column. “The tax cuts in Paul Ryan’s 2013 budget plan would result in huge benefits for high-income people and very modest — or no — benefits for low-income working households,” Howard Gleckman, a senior fellow at the Urban Institute, a policy research organization, wrote in summarizing the findings of the Tax Policy Center.

Thus we have the consequences of Ryancare, or shall we now call it Romneycare, which will provide very little care for most Americans.

Harlan Green © 2012

Thursday, August 9, 2012

Real Estate Now Leading Recovery

The Mortgage Corner

Can it be that real estate will give a boost to the next stage of the U.S. recovery? Exports, and so manufacturing has stalled due to the China and European slowdown. Multiple indexes show rising real estate prices, as inventories of both market and delinquent properties continue to decline. And consumer incomes have risen of late, so real estate may be a better investment than the 0 percent interest banks are willing to pay these days.

Home prices nationwide, including distressed sales, increased on a year-over-year basis by 2.5 percent in June 2012 compared to June 2011, says Corelogic’s June Home Price Index, which closely follows the S&P Case-Shiller Home Price Index, without seasonal adjustments. On a month-over-month basis, including distressed sales, home prices increased by 1.3 percent in June 2012 compared to May 2012, a huge jump. “The June 2012 figures mark the fourth consecutive increase in home prices nationally on both a year-over-year and month-over-month basis,” said Corelogic.

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Graph: Calculated Risk Blog

Excluding distressed sales, home prices nationwide increased on a year-over-year basis by 3.2 percent in June 2012 compared to June 2011. On a month-over-month basis excluding distressed sales, home prices increased 2.0 percent in June 2012 compared to May 2012, the fifth consecutive month-over-month increase. Distressed sales include short sales and real estate owned (REO) transactions.

And Calculated Risk reports that housing inventories have dropped as much as 22.7 percent in one year, according to the National Association of Realtors. “On a seasonal basis, housing inventory usually bottoms in December and January and then starts to increase again through the summer. Inventory only increased a little this spring and has been declining for the last three months by this measure. It looks like inventory has peaked for this year,” said Calculated Risk.

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Graph: Calculated Risk

This decline in active inventory is a huge story. The lower level of inventory has to be a major reason housing prices are rising, needless to say. But the rise in personal incomes of late also has to be a factor. Personal income in June gained 0.5 percent, following an advance of 0.3 percent the prior month.  Wages & salaries also showed strength, rising 0.5 percent after a 0.1 percent rise in May.

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Graph: Econoday

Lastly, the Labor Department’s June Job Openings and Labor Turnover Report (JOLTS) may be boosting consumers’ confidence. It showed 3.76 million job openings in June, which the Labor Dept. characterizes as “little changed” from 3.66 million in May, but is up from 2.4 million job openings at the low point in June 2009.

Harlan Green © 2012

Monday, August 6, 2012

Taxes Shouldn’t Be the Main Worry

Financial FAQs

Economist and British Lord John Maynard Keynes opined in the 1930s that in the end we are all dead, so why worry too much about anything else? Well, this particular election year there is something else worrying both parties—taxes.

Taxes shouldn’t be our main worry.  Creating more jobs should take precedence in the debate over growth.  In fact, recent surveys have found it’s the lack of sufficient demand for goods and surveys that is holding up faster growth, not taxes, or regulations, or too big government.

“Data from the U.S. Department of Labor indicate the employers infrequently cite government regulations and intervention as the reason for layoffs. According to the most recent quarterly data on layoffs lasting more than 30 days, employers said business-demand problems were behind more than 40 percent of separations, followed by seasonal factors, financial issues and organizational changes, among other factors. Employers cited governmental regulations/intervention for less than 1 percent of layoffs.”

Republicans worry about inheritance (i.e., death) and capital gains taxes in particular, since so much of their wealth is either invested or inherited. It is reputed by Senate Speaker Harry Reid and others that Mitt Romney pays very little in taxes, and would like even to pay less in his 5-Year Economic Plan to Grow the Economy.

Democrats worry about overtaxing the middle consumer class, but not the upper class. But cutting taxes to anyone means lower tax revenues, which shrinks government at a time when the private sector isn’t expanding enough on its own.

The real problem with both approaches is that neither will pay down our humongous federal budget deficit, unless economic growth picks up and no one as yet is providing a realistic plan to do it. It’s no secret what that is. Someone has to start spending money to make money that creates jobs and so stimulates greater demand for goods and services.

Even our ‘Government is the Problem” President Reagan knew this when he raised taxes 11 times to bring us out of the 1980 and 1983 recessions, mainly spending those revenues on defense. He knew that government had to provide the funds for growth when record interest rates had choked off private credit in the early 1980s.

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Graph: CBPP

And President Obama’s $830B American Recovery and Reinvestment Act spending pulled us out of the Great Recession. The Recovery Act was designed to boost the demand for goods and services above what it otherwise would be in order to preserve jobs in the recession and create them in the recovery, says the CBPP.

The Congressional Budget Office finds that GDP has been higher each year since 2009 than it would have been without the Recovery Act (with the largest impact in 2010 when GDP was between 0.7 and 4.1 percent higher than it otherwise would have been). The economy is still benefiting from the Recovery Act, although as expected that effect is diminishing as the economy grows; CBO estimates that GDP in the third quarter of 2012 will be between 0.1 and 0.7 percent larger than it would have been without the Recovery Act.

So how to create more government revenues with which to simulate growth? A starter would be to allow all the Bush tax cuts to expire, bringing us back to Clinton-era taxes that created budget surpluses and 23 million jobs. This would save US about $3.6 Trillion in debt over the next 10 years, according to CBPP. And when estimating the revenue gained by just raising taxes on high-income groups, the Joint Center on Taxation and Treasury find that modest increases in the top marginal tax rates would also raise significant revenue. For example:

  • Treasury estimates that allowing the cuts in income taxes for high-income households (those with adjusted gross incomes above $250,000 for married filers and $200,000 for single filers) and estate taxes that were enacted in 2001 and 2003 to expire at the end of 2012 would save a $968 billion over the next ten years.

The ‘real’ jobs numbers I spoke about in June are beginning to show up in July, as jobs added, and 9,000 government jobs lost. The change in total nonfarm payroll employment for May was revised from +77,000 to +87,000, and the change for June was revised from +80,000 to +64,000.

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Graph: CBPP.Org

This points to further employment growth ahead. Why? Incomes are increasing, as are hours worked, which means increased demand for products and services in the fall; ergo, increased hiring. Although employers began to add jobs in 2010, the economy has recovered only about 4 million of the 8.7 million jobs lost between the start of the recession in December 2007 and early 2010, says the Center For Budget and Policies Priorities. As a result nonfarm payroll employment was 3.4 percent (4.7 million jobs) lower in July 2012 than it was at the start of the recession.

So the economy still faces a long and difficult climb out of the jobs hole created by the recent recession. The private sector created, on average, about 157,000 jobs a month in the past 29 months — a pace somewhat faster than population growth. That has contributed to a decline in the unemployment rate, but much faster job growth will be needed to restore normal labor force participation.

Harlan Green © 2012