Rate Watch #768 Housing: Sales and Starts

March 25, 2011
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

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Analysis

The fact is that the economic picture is improving but still faced with more than average uncertainty. While there are encouraging pieces, unemployment remains high and there are substantial risks that both monetary policy and fiscal policy will create inflation. The gain we are seeing in GDP is not nearly large enough to generate tax revenue to come close to the increasing cost of deficits.The effects of what happened in Japan two weeks ago will continue to ripple through the economy as supply-chains become disrupted and U.S. GDP will be negatively impacted. In the longer run this will create and even bigger debt problem for Japan. Rebuilding will create higher GDP there but this will be deficit spending induced GDP. This spending is replacing destroyed infrastructure wealth. Japan already has a national debt greater than 200% of its GDP. A move up in GDP to replace that which was destroyed makes GDP look good but is only really replacing destroyed wealth with debt.

With the U.S. economy still in a state of modest recovery, the EU in a crisis regarding sovereign debt, Japan borrowing more, China still flirting with issues from its insistence on pegging its currency to the dollar, social unrest in the MENA, and commodity prices up sharply the world economy bears too much resemblance to a NASCAR race for my taste. There could be a lot of caution flags.

Housing Sales and Starts

Recent data on Housing Starts and new Home Sales has been something worse than dismal. New Home Sales are impacted by at least four factors: 1) the supply of existing homes for sale is large because of foreclosures 2) potential buyers are still concerned about the economy or, on a personal level, their jobs 3) builders are reticent to build because of the difficulty of obtaining construction loans and the fact that the prices of what they are producing are falling 4) continued sociopolitical forces have slowed down the foreclosure process and will serve only to prolong the time it takes to recover from the effects of the bubble. One of the significant factor remains the "shadow inventory" of foreclosures. This NAR report shows shadow inventory by state.

The Basics

As the population steadily increases the number of households should increase and each household needs a place to live. At present, household formation has been slowed by the recession. There are a large number of adults who have moved back in with their parents because they can no longer maintain the expense of their own household. There are a number of young adults who, in times past, would be moving out of their parents home and starting their own household but are not doing so at present because the unemployment rate is so high that they may already be unemployed or fear becoming unemployed in the near future. In the recent past many kids got down payment gifts from their parents but the disappearance of wealth consequent to the recession ate some of the wealth which mom and dad may have used to get the kids out of the house. Yesterday the Federal Reserve reported that the average American family's household wealth was -23% from 2007 to 2009. The report said that: income was down, the average person lost 1/3 the value of their equity portfolio and that debt was up in that period.

Let's distinguish between forming a household and owning a home. If you move out of your parents home into an apartment or a rental of a residential property you create a new household. The homeownership rate was driven up artificially high by bad mortgage lending. The homeownership rate should be allowed to fall to a natural level so that the people buying homes can actually afford them. This could be expedited by encouraging more investor loans but instead the government has concentrated on keeping people in these homes with mortgage modifications and getting them in homes with first-time homebuyer tax credits. People who suffer foreclosure do not stop existing. They may become renters and are still a household. They may move in with parents, relatives or friends. My point is that the number of households is not diminishing significantly because of foreclosures but because of unemployment, loss of wealth and uncertainly about the near future.

What may be needed is less concentration on preserving home ownership and more on getting the foreclosure inventory cleared by encouraging entities such as REITs to buy these and rent them. Clearing the existing inventory and the inventory of about-to-be foreclosures is a necessary condition to get Housing Starts going again.

Lurking in the background is a pent up demand for Housing Starts in the future. We need something in the range of 1.3-1.5 million new units a year to keep pace with the demands of expanding population and the scrappage of existing homes due to disaster or obsolescence. Housing Starts last month were 1,000,000 (annual) less than that inherent demand. Those 1,000,000 units will need to be added in the future to accommodate for the underproduction this year.

As dismal as the housing situation is at present a latent demand bubble is being created. It will be interesting to see if we learned anything from the last bubble.

Dick Lepre
RPM - SF
1400 Van Ness Avenue
San Francisco, CA 94109
DRE License # 01143973
NMLS Individual ID 302379
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 244-9383
(866) 488-2051 fax

California Department of Real Estate - real estate broker license #01201643

Rate Watch #767 Read This. Comment on It and Distribute It.

Rate Watch #767 A Political & Economic Solution to the Deficit

March 18, 2011
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

A Call for a Council on Fiscal Sustainability
By Jurgen Brauer and Dick Lepre

On December 1, 2010, the National Commission on Fiscal Responsibility and Reform issued a comprehensive plan for fiscal sustainability. It has been ignored by Congress and the administration. Fiscal responsibility, and hence sustainability, appears incompatible with the politics of reelection. We suggest a way to eliminate this incompatibility.

What taxes are to be raised and what the government spends money on are value issues best left to those elected. But the economics of the size of the deficit is best handled by economists. This dichotomy is the essence of our proposal.

Congress recognizes that the country's debt path is unsustainable. While the economics of the matter is straightforward - cut spending, raise taxes, or both - the politics is not. And if voters cannot insist, or are not going to insist, on fiscal sustainability, and if Congress is not going to control public finances on its own accord, then one must conclude that the fiscal process is lacking a necessary ingredient. To supply it, we propose the creation of an independent Council of Fiscal Sustainability. Under enabling legislation, its members - presumably economists - would be appointed by the President, and confirmed by the Senate, to nonrenewable 14 year terms and report to Congress twice a year. This is not a revamped Congressional Budget Office, nor a refurbished Council of Economic Advisers, but an independent agency akin to the Federal Reserve Bank.

The CFS would have a single task: It would place before Congress an annual maximum budget deficit figure that is economically sound over the medium to long term. (Alternatively, it would annually set the federal debt limit.) In planning the budget, Congress would look at projected spending and revenue and, if the difference exceeded the CFS number, it would have to cut spending or increase taxes or some combination of the two. Our notion is not idealistic: It just recognizes a fundamental constraint of the current political structure to act in the best interest of the nation's long-term economic health.

The enabling legislation must mandate that the deficit limit presented to Congress be accepted unless it is voted down by a resolution of disapproval. There is precedent: The Base Realignment and Closure (BRAC) process regarding military base closures is an example whereby a "this takes effect unless you vote to disapprove" process helped achieve the desired goal in a manner that was politically acceptable. We believe that this process meets the requirement of constitutionality. Creation of the CFS thus gives each member of Congress a new degree of political freedom. "You folks needed those roads, and under the CFS deficit limit, taxes had to increase to pay for them". Or, "I voted to limit spending because under the CFS deficit limit, the alternative would have been to raise your taxes."

We know from the experience of the very many countries - eighty nations as of 2009 - that have introduced so-called fiscal rules that two issues are key: The rule needs to be credible, and it needs to be flexible. For instance, the United Kingdom put its fiscal rule in abeyance when it found that it was not sufficiently flexible to deal with the extraordinary economic environment of 2008/9. Thus, writing legislation to set up the Council will need to address budgetary eventualities, pre-commitments of when it is, and is not, permissible to breach annual deficit limits. It would also have to come with phase-in provisions, such as those passed in Germany, so that the transition from unsustainable to sustainable public debt can proceed in an orderly way.

Flexibility, however, can make rules less credible. To be credible, ultimately the Council needs to be free of short-term political meddling. To deal with that problem, Germany, Poland, and Switzerland for instance changed their constitutions. For the United States, we believe that structuring the Council so that its recommended annual deficit number takes effect unless voted down by Congress will be sufficient to break the current log jam.

(c) Jurgen Brauer is Professor of Economics, James M. Hull College of Business, Augusta State University, Augusta, GA. Dick Lepre is a Senior Loan Officer with RPM Mortgage of San Francisco, CA. [Reprint permission granted, provided the text is reproduced in full and the authors' are fully credited.]

 

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Dick Lepre
RPM - SF
1400 Van Ness Avenue
San Francisco, CA 94109
DRE License # 01143973
NMLS Individual ID 302379
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 244-9383
(866) 488-2051 fax

California Department of Real Estate - real estate broker license #01201643

Rate Watch #766 Jobs

March 11, 2011
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

Jobs

I do not really believe that the way markets reacted to Thursday's Initial Jobless number said as much about the jobs market as it did about the gullibility of investors.

In 2001 we had a mild recession. In fact that was a very mild recession. What was strange was that job recovery was weak even as the recession ended. The loss of jobs became a political issue which obfuscated the underlying realities. We may well discovery that emerging from the 2008 recession also has this annoying jobless feature.

A Keynesian-inspired stimulus bill in 2008 created a brief spike in GDP but little growth in jobs. If we had a recovery it was another jobless recovery. This is where the political view of the economy becomes useless or worse.

Presidents tend to pitch economic policies as creating jobs. That is politics much more so that it is economics. In reality job creation is little influenced by the President or Congress.

This line represents the extent to which a president affects the jobs market
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This line represent the extent to which the President is affected by the jobs market
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Jobs are, in essence, like any other commodity. There is a supply - the work force - and a demand. The demand for jobs varies according to the demand for the products and services of businesses. Businesses and, consequently, job creation run in cycles. These cycles are not some unseen or metaphysical force. They are a result of the nature of the way businesses work. Opportunity knocks, business builds, jobs get created, supply exceeds demand, business contracts, jobs are lost. It's that simple.

Business opportunities are seen by a number of different companies and individuals who devote time and capital to business creation and expansion and the cycle always results in an oversupply. The consequence is recession.

The recession of 2008 was particularly bad because what was in oversupply was bad mortgage loans which undermined the banking system and created a liquidity crisis which cascaded to other businesses. Some jobs will come back apart from whatever the government does. Construction jobs will return when there are signs that the current oversupply of housing has diminished. There may be some reticence because of tougher lending standards and the perception that construction is less likely to be profitable if values are flat.

New home constriction is hard to forecast for these reasons:

- there is a large inventory of foreclosures to clear. The head of BofA's Legacy Servicing division said this week that it will take them 3 years to work thought their backlog of delinquent mortgages.

- massive deficits will create inflation and higher interest rates not only for the Treasury Department but also for mortgages.

- uncertainty about the status of the GSEs and mortgage securitization will likely create pressure on mortgage rates.

- flat or lower home prices create no incentive to buy now.

Significant jobs growth will occur as the result of new technological breakthroughs which create new industries and the jobs which go with them. The problem is that this happens on its own schedule. The jobs expansion which went with the growth of the Internet was not a planned event. It also was not accident. The work of a lot of individuals came together and created opportunities. For the present, jobs are being eliminated by technology: book and music retail stores close, ATMs replaced tellers, retail stores have automatic checkout

This past recession was nefarious because it corrected the housing bubble which unlike the dot-com bubble was a borrowed money bubble. This recession hurt the banking system and only extraordinary liquidity interventions by the Federal Reserve kept disaster from occurring. Nonetheless, until the housing inventory created in the bubble is cleared the housing sector will not recover and home-building is a large jobs creator.

The ability of Keynesian deficit spending to affect the economy and jobs is severely limited by a structural problem. Government moves at too slow a pace to meaningfuly identify and affect jobs of the future. Instead entrenched industries and unions lobby for the past. The Kurzweil ideal of an increasing rate of technological development decreases the effectiveness of Keynesian notions.

On thing is sure about jobs. When companies think that hiring someone will produce more profit they hire people It's that simple.

 

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Dick Lepre
RPM - SF
1400 Van Ness Avenue
San Francisco, CA 94109
DRE License # 01143973
NMLS Individual ID 302379
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 244-9383
(866) 488-2051 fax

California Department of Real Estate - real estate broker license #01201643