Tuesday, February 13, 2018

2018 Housing Market To Stay Strong

The Mortgage Corner

Total existing-home sales, https://www.nar.realtor/existing-home-sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 1.1 percent in 2017 to a 5.51 million sales pace and surpassed 2016 (5.45 million) as the highest since 2006 (6.48 million).

This is a sign that 2018 could be a record year for housing sales, in spite of the housing shortage that slowed sales in the fourth quarter, and builders hard put to find enough construction workers to ramp up housing construction.

The home ownership rate is back up to historical levels, for starters. Marketwatch’s Andrea Riquier reports the home ownership rate jumped in the fourth quarter of 2017 to 64.2 percent, the Census Bureau said Tuesday to a 3-month high, and in line with 1980 and 1990 averages, before rising into bubble territory in the 2000s.

There were 1.52 million more owner households compared to a year earlier, and 76,000 fewer renter households, according to Riquier. It hit an all-time high of 69.1 percent in 2004 as the housing bubble inflated. In the aftermath of the crisis, it skidded lower and lower, finally bottoming out at 62.9 Percent in 2016.


Lawrence Yun, NAR chief economist, says the housing market performed remarkably well for the U.S. economy in 2017, with substantial wealth gains for homeowners and historically low distressed property sales.
“Existing sales concluded the year on a softer note, but they were guided higher these last 12 months by a multi-year streak of exceptional job growth, which ignited buyer demand,” said Yun. “At the same time, market conditions were far from perfect. New listings struggled to keep up with what was sold very quickly, and buying became less affordable in a large swath of the country. These two factors ultimately muted what should have been a stronger sales pace.”


That’s in part because total housing inventory3 at the end of December dropped 11.4 percent to 1.48 million existing homes available for sale, and is now 10.3 percent lower than a year ago (1.65 million) and has fallen year-over-year for 31 consecutive months. Unsold inventory is at a 3.2-month supply at the current sales pace, which is down from 3.6 months a year ago and is the lowest level since NAR began tracking in 1999.

What about new-home construction? A surprising but perhaps one-time drop in single-family starts masks what is otherwise a very solid housing starts and permits report for December. Starts fell 8.2 percent to a 1.192 million annualized rate and reflect an 11.8 percent plunge in single-family starts to an 836,000 rate that far offsets a 1.4 percent gain in multi-family starts to 356,000. But it’s probably the cold weather and snows that reach all the down to Florida in January. Starts are affected by the winter weather which along with related adjustments are always factors for this reading.

But the backlog behind future starts continues to build as permits came in very strong, virtually steady at a 1.302 million rate and showing a noticeable 1.8 percent gain for single-family permits to 881,000. Lack of homes has been holding down new home sales though new supply did move into December's market, as completions for single-family homes jumped 4.3 percent to an 818,000 rate.

We mustn’t forget interest rates either, which are still low in spite of the stock market panic over the possibility of higher rates. Guess what? That’s not happening, especially with the Fed’s preferred PCE core index still at 1.5 percent, and mortgage rates for the 30-year fixed conforming rate still @ 4.0 percent, just 0.50 percent above its low.

Harlan Green © 2018

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Wednesday, February 7, 2018

What is a Common Sense Stock Market?

Financial FAQs

Pundits and stock traders seem to believe Friday and Monday’s stock “massacre” was caused by too-quick trigger fingers—in computers controlled by algorithms, not people.

Whereas, investors and traders using their common sense would have seen the ‘yuge’ drop in valuations made no sense for many of the S&P 500 stocks of the largest US corporations that were making record profits.  Then they might not have oversold their holdings, as happened to those with the trigger-finger algorithms.

For instance, Boeing’s common stock price dropped $20 in a day when news came out that its profits are increasing and there are predictions of large future cash flows from its booming airline and defense businesses. And corporations such as Boeing will be saving $billions in future taxes due to the lower corporate tax rate.

What about the rest of the economy? Stocks have historically been a prediction of future economic activity, since they are priced at a discount to future earnings. So the total annual return of capital gains plus dividends can be a prediction of a company’s financial health.

Nobel laureate economist Robert Shiller in his best-selling Irrational Exuberance, a historical analysis of stock and bond yields, says stocks have earned $7 per year on average in capital gains plus dividends, bonds 4 percent per year for the past 100 years

And Dr. Shiller said Price-to-earnings ratios, another measure of stock values, averaged 15 to 1 historically. Today, the S&P P/E ratio is 17, meaning 17 times earnings, which is high, but not that high. In fact, the stock P/E’s reached 26 times earnings just before the Great Depression, and an oxygen-deprived 44 times earnings in 2000 on the eve of the dot-com crash.

That was why Dr.Shiller and Fed Chairman Alan Greenspan sounded the alarm over the  irrational exuberance that was “infecting” investors at the time. Dr. Greenspan’s famous warning was given in 1996, four years before the 2000 crash, when he said: “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

Japan has finally worked their way out of two decades of virtual deflation at a tremendous cost to growth, because of their spate of irrational exuberance. They now rank behind China and the European Union in the size of their economy.

Our stock market is in a similar circumstance today when too much money is chasing 50 percent fewer publicly listed stocks than in 1996, as I said in yesterday’s column. And there are already indications that corporations will be doing more of the same with the new tax savings.

But there is good news for employees. Friday’s unemployment report unveiled the largest pay increase in years. Average hourly earnings jumped to a year-on-year expansion best of 2.9 percent.  This is while the Fed’s core PCE inflation index is just 1.5 percent, way below its 2 percent stated target.

Graph: Econoday

Wages and salaries, the actual hourly incomes of normal working stiffs that excludes interest-bearing bank accounts, rental income, retirement benefits, stock dividends or annuities, actually rose year-on-year to 4.9 percent for its 5th straight climb and is now at its highest rate since November 2015.

And the just released JOLTS report of job hires and openings showed more workers quitting jobs voluntarily, which means they were finding better paying jobs. Job openings have slowed a bit, down 2.8 percent in December to 5.811 million, whereas Hires are steady, down fractionally in the month to 5.488 million. But that is keeping the spread between openings and hires also steady, at 323,000—which means 323,000 net job openings that haven’t been filled.

This might be why wages and salaries are finally increasing faster than the inflation rate, but it can also be that minimum wages in coastal states in particular are creeping toward $15 per hour by 2022, since 80 percent of the workforce depends on wages and salaries.

What should we make of the possibility of more irrational exuberance pushing stock valuations too high? Corporate profits will increase with the tax cuts, wages and salaries are soaring, and inflation is far away from the 2 percent target.

I believe investors should focus on price-to-earnings ratios, which also tell us whether stock prices have strayed too far from actual earnings.  Dr. Shiller warns irrational exuberance could infect investors again, if the S&P P/E ratio strays once more into the mid-twenties.

Harlan Green © 2018

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Monday, February 5, 2018

Why the ‘Yuge’ Stock Market Selloff?

Popular Economics Weekly

Stock indexes had the largest one-day drop in history today; what happened? The quick answer is that too much money is chasing too few stocks, believe it or not. The record low interest rates—the 10-year treasury yield just dropped back to 2.75 percent from 2.85 percent before Friday’s selloff—is an indication of the huge cash hoard held by corporations and Wall Street from the successive Quantitative Easing programs by Central Banks that have kept interest rates at record lows.

This is while a Credit Suisse report released last March titled “The Incredible Shrinking Universe of U.S. Stocks,” says between 1996 and 2016, the number of publicly-listed stocks in the U.S. fell by roughly 50 percent — from more than 7,300 to fewer than 3,600 — while rising about 50 percent in other developed nations.

Why do corporations and their Republican lobbyists keep pushing for lower taxes, as I said in an earlier column? They say it will create more jobs. But, alas, that isn’t shown by the record. An excellent New York Times Op-ed by Sarah Anderson at the Institute for Policy Studies points out that many corporations create very few jobs with those profits.

She reported on 92 public-held American corporations between 2008-15 that pay less than 20 percent in taxes. They had a median job growth rate of 1 percent vs. 6 percent for all private sector corporations during that time. And 48 of those companies actually cut 438,000 jobs, while their chief executives’ pay last year averaged nearly $15 million, compared with the $13 million average for all S&P 500 companies.

This should tell us who doesn’t use their profits to increase productivity and growth of their markets; as well as where corporate profits are spent; on stock buybacks that have reduced the number of outstanding publicly listed shares to enhance stockholder returns and CEO paychecks.

It means huge swings in stock prices from too much money chasing too few stocks, should traders panic; which is what they did today and Friday. Yet the panic selling had no underlying reason. Factory orders and the service sector economy is growing even faster than last year while the unemployment rate is still stuck at 4.1 percent and maybe going lower as fewer unemployed workers are even available to fill jobs.

The year-on-year growth for durable orders in the factory sector which has been sloping higher, is now 11.5 percent in December from 8.7 percent in November. This a sign that manufacturing growth is still trending higher, while the ISM non-manufacturing index is at an almost all-time high of 59; which means 59 percent of those surveyed see increased growth in the service sector.


The ISM non-manufacturing sample is also reporting some of the very best conditions in the 20-year history of this series, reports Econoday and the ISM. New orders are arguably more important than any composite result and the reading, at 62.7, is back at last year's peak. Employment is a special standout, up more than 5 points to a very rare plus 60 score of 61.6 which is by the far the best of the post-2008 expansion.

So what to make of the 'yuge' selloff? Some traders are saying it was a series of electronic trading “glitches” that sent prices plunging for no economic reason, and stock prices fall below their intrinsic valuations. Algorithms were at fault on selling billions of shares on the click of a button that had been pre-programmed to sell when prices dropped to a certain level, while other algorithms were programmed not to buy while stocks continued to fall.

It meant computers were chasing each other’s tails; as if they had them. That’s what happens when algorithms rule over common sense, and traders lose their common sense.

Harlan Green © 2018

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Monday, January 29, 2018

Q4 Growth Misses 3 Percent

Popular Economics Weekly

Consumers and businesses powered the economy to a 2.6 percent rate of gross domestic product growth in the final three months of 2017, according to the Commerce Department. But declining inventories and a wider trade deficit kept the U.S. from hitting the 3 percent mark for the third quarter in a row for the first time in 13 years. 


Q4 growth did not reach 3 percent as many pundits had hoped because producers produced less, depleting inventories. And imports grew faster than exports, because consumers are buying more, as more consumers are working in this full employment economy. Both numbers subtract from GDP growth, however.

On the plus side, consumer spending accelerated to a 3.8 percent annual pace of growth, the fastest pace in almost two years. Americans spent more on new cars and trucks, clothing and health care, among other things.

Businesses also invested more, after a long drought in capital expenditures. They increased spending on equipment by 11.4 percent, while investment in new housing jumped 11.6 percent. Inventories fell because companies slowed production in the fourth quarter. The value of unsold goods, or inventories, fell by $29.3 billion.

Imports rose 13.9 percent, while exports grew just 6.9 percent, and imports subtract from growth. That cut 1.1 percentage points off fourth-quarter GDP, and there is still very little inflation. The annual rate of inflation, measured by the PCE index is climbing; it rose to 2.8 percent, the highest pace since 2011. But the core PCE without more volatile food and energy prices rose at a slower 1.9 percent clip.

What does this mean? There is more room to grow, if consumers continue to spend as they have been, and businesses continue to invest in new plants and equipment, as they have in 2017, because more investment will increase worker productivity.

And economic growth needs higher productivity plus a growing population. Yet developed countries such as the US have slowing population growth, so robots, AI and other tech innovations have to replace the declining worker population. Republicans’ tax cuts should aid the corporate investment in more robots, which is good. But their wish to cut government spending is bad, because government is historically a 20 percent contributor to economic activity—and growth.

That’s because governments maintain our roads, bridges, energy grid, educational system, clean air and water; R&D for space exploration, Internet and airports—the list goes on and on. And government expenditures have been reduced since 2011, due to misplaced austerity measures in the US and Europe in particular.

This is a major reason GDP growth both here and in Europe has averaged just 2 percent since the end of the Great Recession. Corporations have garnered record profits over this time, but hoarded those profits, or returned them to their CEOs and stockholders, but not their employees.


That has to change for real economic growth to continue. Raising minimum wages in some states will help, but lower taxes don’t help with such a huge national debt and another $1.5 trillion being added over ten years in the new tax bill. Real wage growth has been declining for years, as collective bargaining and workers’ rights have been curtailed in the name of greater corporate profits.
We can hope GDP growth will continue, if paying down the national debt doesn’t become a priority.

The US dollar’s value has already declined 10 percent against other currencies, and the reason is not clear. But any further decline could motivate other countries to decide that investment in the US may not be a good idea; since much of our national debt is financed by other countries.

It is not a good idea to ignore what could happen to the $trillions in Treasury securities we have sold to the Chinese, in particular, that have financed that debt. Because it could suddenly become much more expensive to finance, should foreign governments and private entities no longer have confidence in the US economy.

Harlan Green © 2018

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Thursday, January 25, 2018

Existing-Home Inventory Lowest in 18 years

The Mortgage Corner

There aren’t enough home to sell. Sales of previously-owned homes tumbled in December as an ongoing inventory crunch became more worrisome with few homes to sell in parts of the country. Existing-home sales were down 3.6 percent for the month, though they were up 1.1 percent from a year ago, according to the National Association of Realtors. The NAR said November’s selling pace was revised down to 5.78 million.

The housing market performed remarkably well for the U.S. economy in 2017, said Lawrence Yun, NAR chief economist.
“Existing sales concluded the year on a softer note, but they were guided higher these last 12 months by a multi-year streak of exceptional job growth, which ignited buyer demand,” said Yun. “At the same time, market conditions were far from perfect. New listings struggled to keep up with what was sold very quickly, and buying became less affordable in a large swath of the country. These two factors ultimately muted what should have been a stronger sales pace.”
Graph: Econoday

There are two major reasons for the lack of inventory. Homebuyers are rushing to close deals before interest rates rise further. The 30-year conforming fixed rate is now 3.75 percent for a one point origination fee and climbing, with its maximum single-unit amount raised to $453,100 this January.
And there is a labor shortage with many workers having left the construction industry during the Great Recession, which is slowing the construction of new homes. The lack of inventory has also been driving up home prices, putting many first-time homebuyers out of the market.
“The lack of supply over the past year has been eye-opening and is why, even with strong job creation pushing wages higher, home price gains – at 5.8 percent nationally in 2017 – doubled the pace of income growth and were even swifter in several markets,” said Yun.
Those high-end markets include California, where the median home price now tops $500,000, vs. the new national median price for all housing types at $246,800. So who can afford to live in California these days?


That’s the reason Facebook unveiled plans for the massive new construction project at its Menlo Park, California corporate campus, which is part of Facebook's plans to expand its home base. The 56-acre site, which Facebook bought in 2015 for about $400 million, is located directly across the street from Facebook's headquarters. It will offer 1.6 million square feet of housing, or 1,500 units.
"Facebook is a strong supporter of its local community and consistently recognized as one of the best places in the world to work," said a Facebook spokeswoman. "This project advances both goals, by providing our employees an excellent new housing option within walking distance to campus while investing in new housing opportunities in our local community."
Must any new affordable housing in California and other high cost regions now depend on private corporations? California’s state legislators just passed a bill that would ask voters in November 2018 to approve $4 billion in general obligation bonds to build rental housing for low-income families and fund other existing housing programs. The bond would set aside $1 billion for the state’s veteran home-loan program, which would otherwise run out of money in 2018, according to SF Gate.

But that’s a drop in the bucket for what’s needed to keep up with the state’s population growth. The nonprofit California Housing Partnership estimates that California still needs about 1.5 million more subsidized housing units to meet current demand.

Harlan Green © 2018


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Monday, January 22, 2018

Shutdown vs. “S***hole” Countries

Popular Economics Weekly

The just ended government shutdown has little to do with 9 million children’s health insurance under the CHIP plan, or extending the Dreamers protection under DACA. It really has to do with President Trump’s insistence on shutting down immigration from non-white countries, as was evident from Trump’s “S***hole” comments that he wanted to limit immigration from African and other non-white countries.

What is so shocking about Trump’s comments is they repeat those of one who he claims not to admire. Adolf Hitler in 1928 openly admired America’s racist policies of that time that excluded non-whites and Jews from immigrating to the U.S.:
“The American Union feels itself to be a Nordic-German state and by no means an international porridge of peoples. This is revealed by its immigration quotas ... Scandinavians … then Englishmen and finally Germans have been accorded the largest contingent,” said Hitler even before the Nazi’s took power.
Specifically, Hitler admired the US Immigration Act of 1924 – also known as the Johnson-Reed Act – “which had erected openly racist barriers to immigration on the basis of a “national quota” system,” according to Yale Law Professor James Whitman.
“It was not until the 1965 US Immigration and Nationality Act that the US began to separate itself from the worst aspects of its racist past. And, as Trump’s presidency makes clear, that past has yet to be permanently overcome,” said Professor Whitman in a Project Syndicate article.
There is a reason why US immigration laws became more open. The US has always suffered from a labor shortage, so that it has been newly arrived immigrants that have filled the labor deficiency.


PEW Research states that More than 41 million immigrants lived in the U.S. as of 2013, more than four times as many as was the case in 1960 and 1970. By comparison, the U.S.-born population is only about 1.6 times the size it was in 1960. Immigrant population growth alone has accounted for 29 percent of U.S. population growth since 2000.

That is the most glaring sign that new workers are needed to maintain economic growth. US population growth cannot keep up with our demand for new workers. There is no other way to fill the 6 million job openings reported each month in the Labor Department’s JOLTS report.

Debate on the current House bill that doesn’t include an extension of the Dreamers’ protections was continued for 3 weeks, in the hopes that a bi-partisan bill keeping open the door for immigrants from what President Trump considers to be “S***hole”, non-white countries will be passed.

So this is important for economic reasons; as well as recognizing that America has always been a land of immigrants; that we keep a flow of qualified immigrants and their families coming from countries that can provide the workforce America has always needed to grow and prosper.

Harlan Green © 2018


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Wednesday, January 17, 2018

Immigration and Trump’s “S***Hole” Comment

Popular Economics Weekly

How should we remember Martin Luther King, Jr. on his holiday? That greater equality creates greater prosperity for all; as well as greater peace.

President Trump’s S***Hole comments were meant as a signal to his neo-nazi supporters that he wanted to exclude as many non-whites from immigrating to America as he could, and encourage more from European countries like Norway.

This means he isn’t interested in stronger economic growth over the longer term, since much of the economic growth today can be attributed to non-whites and women, according to an excellent column by the Conversable Economist, Tim Taylor, commemorating MLK Jr.’s holiday.


Non-whites and women have been contributing a larger share to our economic growth than White men since at least 1960 in high-skill occupations. Before then, many labored in the lower-skilled, unnoticed occupations that weren’t always included in growth statistics.

Professor Taylor quotes a policy brief from the Stanford Institute for Economic Policy Research cited by Peter Klenow. The percentage of White men in the high-skilled occupations of Doctors, Lawyers and Managers, “defined as lawyers, doctors, engineers, scientists, architects, mathematicians, executives/managers,” has fallen substantially, while that of Black men, White and Black women has soared. The number of White women entering these professions has tripled, Black men quadrupled, and Black women grown eight times from 1960 to 2008.

The result? Klenow estimates that economic growth increased by 15-20 percent due to these minorities entering the higher-skilled occupation, just from the fact that their numbers increased as a share of the overall profession, while the percentage of White men has fallen by approximately one-third.


It also highlights another important fact. Economic growth depends on population growth plus labor productivity. And annual labor productivity has declined approximately 50 percent since 2007, as has U.S. population growth. So the only way to boost economic growth from its current 2 percent range is to increase the working age population via immigration.

The lesson therefore is that we need greater diversity in our workforce, not less as President Trump and his racist supporters want, since our birth rates are declining; a valuable lesson to remember on Martin Luther King, Jr. Day.

Harlan Green © 2018

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