Tuesday, October 29, 2013

Why Isn’t Washington Working “For the good of the Country?”

Popular Economics Weekly

If we really want to know what is depressing consumers, look at how Congress is tied up in knots over the debt ceiling and spending losses from sequestration cuts--$109 billion per year, according to labor economist Jared Bernstein.

Former CIA assistant director Mike Morell on CBS’s 60 Minutes said he didn’t understand why congressional Democrats and Republicans couldn’t work together to boost economic growth for “the good of the country” when our weak economy was the greatest problem facing US, above even terrorist threats.

“I don’t understand the inability of our government to make decisions that push our economy and society forward,” he said. “Our national security is more dependent on the strength of the economy and society than anything else.”

But for “the good of whose country” are we talking about? We seem to be living in two countries at the moment, mainly divided into anti-government Republican Red states and pro-government Democratic Blue states. Most of the Red states adamantly oppose the expansion of voters’ rights, union collective bargaining, better healthcare, immigrants’ rights, environmental regulation, abortion and women’s rights, for starters.

Government gridlock not only endangers our security, but the resultant inequality endangers our democratic system itself. The CIA should know, as it has kept track of the economic well-being of nations in its World Factbook. The U.S. now ranks below other developed countries in income equality, birth-death rates, longevity, and health outcomes.

The problem today is the huge amount of damage gridlock is doing to economic growth, from downgrades of government debt by Standard & Poor’s rating agency, to higher borrowing rates. Even Moody’s has put U.S. debt on credit watch. The Red and Blue states seem to be fighting the Civil War all over again, after 150 years, as I’ve said.


Graph: Reuters

The latest evidence of the damage being done is orders for a wide range of U.S.-made capital goods plummeted in September and consumer sentiment weakened sharply in October, signs that the budget battle in Washington has held back the economy, said Thomson-Reuters. The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment fell to 73.2in October from 77.5 in September and was the lowest final reading since December 2012.

Then we have the latest unemployment report that showed more workers dropping out of the labor force, while the Labor Department’s JOLTS report of labor layoffs and hires remained stagnant over the past year.


Graph: Econoday

There were 3.883 million job openings on the last business day of August, up from July at a revised 3.808 million. The job openings rate improved slightly to 2.8 percent from 2.7 percent in July. But it has leveled off after increasing steadily since the end of the Great Recession.

So the question is, government should work for the “good of whose country”? Tea Partiers want to take back “their” country, a country that no longer exists. If that is their sentiment, how do we push our country and society forward?

Harlan Green © 2013

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Friday, October 25, 2013

Conforming Mortgage Limit Reductions Postponed

The Mortgage Corner

Federal officials will delay any reduction in the maximum size of home-mortgage loans eligible for backing by Fannie Mae and Freddie Mac until next spring at the earliest, said FHFA Administrator Ed DeMarco in a Wall Street Journal article--DeMarco: No Mortgage Limit Declines Before Spring 2014. It is reputably from heavy resistance from the real-estate industry and many lawmakers in Congress.

This is in the face of the recent government shutdown and debt ceiling debate that has slowed economic growth this year, and even next year, if a budget agreement isn’t reached by January 2014.

Couple this with a recent slowdown in real estate sales, including for new homes.  There appears to be little doubt that rising mortgage rates, combined with higher home prices, resulted in a material slowdown in net new-home orders last quarter, says Calculated Risk. Mortgage rates, of course, have fallen considerably since early September, though they remain well above levels since during the first five months of the year.

Currently, Fannie and Freddie can guarantee mortgages that have balances as high as $417,000 in most of the country and up to $625,500 in expensive housing markets, including parts of California and New York. Loans within the limits are called “conforming” or “High-Balance conforming loans.

Potential loan-limit changes will be announced six months ahead of their implementation date, said Demarco, and such changes wouldn’t be announced until November at the earliest. “Anything we do would have a long lead time and would be gradual and measured,” said Mr. DeMarco.

When the agency does move ahead with loan limit declines, the declines will apply to both the national limit and the high-cost limits, which were enacted on an emergency and temporary basis by Congress in 2008.

It will be politically difficult to lower these limits, and the limits probably wouldn't be adjusted down very much.  The conforming loan limit was $252,700 in 2000. Using the FHFA Purchase Only index, the national conforming loan limit might be lowered to around $360,000.

Using the CoreLogic or Case-Shiller Comp 20 indexes, the conforming loan limit might be lowered to $380,000 to $395,000. Not a large downward adjustment for the national limit.

Harlan Green © 2013

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Tuesday, October 22, 2013

Why Is Government So Important?

Popular Economics Weekly

So it turned out to be true, contrary to those who believed less government is better. The government shutdown proved just how important government is to our daily lives. Not only its cost—upwards of $24 billion in lost output over the next 10 years, for starters. Standard & Poor’s said the shutdown “to date has taken $24 billion out of the economy,” equaling $1.5 billion dollars a day and “shaved at least 0.6 percent off annualized fourth-quarter 2013 GDP growth.” And probably the future loss of jobs, as well, because employers have cut back on future hires over the uncertainty of another shutdown.

“As a consequence (of the shutdown), you may expect fourth-quarter growth in gross domestic product to be shaved by a half-point or more – bringing the rate of growth down to 2 percent or less”’ said Marketwatch economist Irwin Kellner. “Some of this might also carry over into the first quarter – especially since this brouhaha could well see a return engagement come early 2014.”

Economists are already speculating on why just 148,000 payroll jobs were created last month, in a report delayed some 2 weeks because of the shutdown. The 7.2 percent unemployment rate was lower because more were dropping out of the workforce, not because more were employed in the household study.


Graph: Calculated Risk

According to the Bureau of Labor Stat’s household survey, the labor force rebounded 73,000 after dropping 312,000 in August. However, the pool of available workers fell another 183,000 after a plunge of 532,000 in August-resulting in the fourth decline in a row. Again, a low labor force participation rate is at least partly behind the lower unemployment rate.


Graph: WSJ Marketwatch

The bottom line is that government provides too many services, and employs too many people in the private and public sectors, to be shut down for any length of time. That is the overriding lesson learned from this shutdown.

And the public knows it. In the aftermath if this shutdown, 8 in 10 Americans say they disapprove of the shutdown, according to a new Washington Post-ABC News poll. Two of three Republicans, or independents who lean Republican, share a negative view of the stalemate. And even a majority of those who support the tea party movement disapprove.

Does that mean it can’t happen again, or will history continue to repeat itself?

Harlan Green © 2013

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Wednesday, October 16, 2013

Government Shutdown Dims Builder Optimism

Financial FAQs

New-home construction is already a casualty of the government shutdown, and even sequestration agreement that has cut government hiring and spending more than $1.6 trillion to date. But its effect would be mitigated if interest rates remain low, and lenders continue to ease qualification criteria, such as lowering their super-high credit score requirement.

The National Association of Home Builders/Wells Fargo housing-market index fell to 55 in October from 57 in September. A prior September estimate pegged the level at 58, which matched the highest reading since 2005. Results above 50 signal that builders, generally, are optimistic about sales trends.



“Interest rates remain near historic lows and we don’t expect the level of rates to have a major impact on sales and starts going forward,” said David Crowe, NAHB’s chief economist. “Once this government impasse is resolved, we expect builder and consumer optimism will bounce back.”

Despite the recent decline, pent-up demand is supporting builder sentiment, which has increased 34 percent over the past year, outpacing home-construction growth.

"A spike in mortgage interest rates along with the paralysis in Washington that led to the government shutdown and uncertainty regarding the nation's debt limit have caused builders and consumers to take pause," said NAHB Chief Economist David Crowe. "However, interest rates remain near historic lows and we don't expect the level of rates to have a major impact on sales and starts going forward. Once this government impasse is resolved, we expect builder and consumer optimism will bounce back."

Interest have declined slightly from their recent highs, so that the 30-year conforming fixed rate today is approximately 4.25 percent with 0 origination points in California.

There is some good news. The average credit score among borrowers who received a mortgage in September was 732, down from a peak of 750 a year prior, according to new data released today by Ellie Mae, which provides mortgage lenders with loan origination systems.  And this is a sign both that lenders loosening their heretofore strict qualification standards, and that more eligible homebuyers will be allowed in the market.

“The share of purchase loans continued to grow in September 2013, climbing 1 percent to 58 percent of all loans even in the face of higher interest rates and seasonality,” said Jonathan Corr, president and chief operating officer of Ellie Mae. “This was the eighth consecutive month that the purchase loan percentage has increased or stayed steady. In January 2013, purchases represented only 27 percent of closed loans.

“The credit standards also continued to ease in September with average FICO scores for closed loans dropping to 732 compared to 734 in August. September’s averages were 15 points below where they were at the beginning of the year (January 2013) and the lowest level since we began our tracking in August 2011,” noted Corr. “When you drill down farther, the change is even more apparent. For example, 31 percent of the closed loans in September 2013 had FICO scores under 700 compared to 17.4 percent of closed loans in September 2012.“

That’s also the lowest average credit score since the company started tracking this data in August 2011.

This is important because even a 680 FICO score is a sign of good credit record, though credit balances may be high. But the overall debt-to-income ratio is more important in determining borrowers’ ability-to-pay in this case.

Lenders pulled back on giving mortgages to borrowers with less-than-perfect credit in 2008 as the number of borrowers who foreclosed on their homes spiked. That’s left millions of would-be home buyers shut out of the housing market. The findings suggest that some borrowers who were unable to gain financing as recently as a year ago could get mortgage approval now.

To be sure, the bar to getting a mortgage remains high. Applicants who were denied a mortgage in September had an average FICO score of 696, according to Ellie Mae—a score that’s relatively stellar by most counts. FICO scores range from 300 to 850. Before the recession it was common for borrowers with credit scores in the 600 range and below to get mortgages.

Harlan Green © 2013

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Monday, October 14, 2013

So-called Qualified Mortgages Are a Problem

The Mortgage Corner

The new rules coming into effect in January 2013 for most conforming loans—i.e., those guaranteed by Fannie Mae and Freddie Mac will cause a definite drop in mortgage lending. The Consumer Protection Financial Bureau, created under Dodd-Frank has labeled such mortgages as Qualified Mortgages.

Financial institutions in the business of originating mortgages that they plan to resell on the secondary market to government-sponsored mortgage buyers Fannie Mae and Freddie Mac will have to raise their standards for approving loans. That is likely to have the biggest impact on working-class families, many of whom are struggling with consumer debt and are living paycheck to paycheck.

Two of the most important new rules created by the Consumer Financial Protection Bureau related to housing are the Ability-to-Repay rule and the 3 percent test rule.

The Ability-to-Repay rule, also known as the Qualified Mortgage rule, says borrowers' total debt liability -- including housing -- should not exceed 43 percent of income. A Qualified Mortgage is one that would be qualified for resale on the secondary mortgage market.

Yet borrowers with up to 50 percent total debt liability (DTI), excellent credit and savings that qualify today, would be excluded. And other rules, such as no interest only programs, no more than 30-year amortizations, lower debt-to-income qualification levels, and perhaps lower maximum loan to value amounts, will severely restrict homeownership.

So the regulations also could have the unintended effect of making it more difficult for many working-class families to qualify for mortgage loans offered by major banks, as an example. This is because higher income is required, hence such families will qualify for lower-priced homes.

The 3 percent test rule says 3 percent of the mortgage amount is the maximum amount of fees that banks can charge a borrower in order for the home loan to be classified as a Qualified Mortgage that can be resold in the secondary market.

"If you are a bank that pretty much originates and sells your mortgages, you are now playing under these rules," said Ernie Hogan, executive director of Pittsburgh Community Reinvestment Group. "If you are a bank that originates mortgages but keeps them and holds them for 30 years, you can vary from some of these rules."

Mr. Hogan believes this rule will make lower-priced homes more expensive for banks because they will not make as much money on that kind of business.

"It will hurt working-class families buying homes for $75,000 or less," he said. "Those loans will be classified as a high-cost loan. You are going to lose people in the mortgage industry looking at that segment. That's what we think will happen. Banks will make a better spread on higher-priced homes."

Don Frommeyer, president of the National Association of Mortgage Brokers, said the 3 percent rule also will be a problem for mortgage brokers. He said brokers will have a harder time collecting their fee on homes priced below $160,000 because every cost to the customer in the home buying process goes toward the 3 percent. For a mortgage of $100,000, for example, all origination fees -- including the mortgage broker fee -- would be limited to a total of $3,000.

This will also mean a step backward in the incipient housing recovery, as qualification standards were already tightened by the Federal Reserve last year for conventional loans guaranteed by Fannie and Freddie, in an attempt to lessen mortgage fraud and predatory lending practices.

But predatory lending wasn’t much of a problem before subprime loan programs were introduced in early 2000 that were basically liar loans, with little or no attempt to verify incomes and assets. Conversely, loans underwritten to Fannie Mae and Freddie Mac standards have never had this problem, with default rates not much higher than historical averages since the housing bubble.

So there is conjecture that a major reason for even more restrictive rules is an attempt to get Fannie and Freddie, now wards of the government, completely out of the mortgage purchase and guarantee business. But who then would be left, since they have been guaranteeing more than 90 percent of all mortgages originated since the end of the Great Recession. Need we say any more restrictions on them could step this real estate recovery in its tracks?

Harlan Green © 2013

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Econ Robert Shiller’s Nobel Prize a Big Win

Popular Economics Weekly

Although much of what Yale economist Robert Shiller writes is about the importance of financial markets, he won the Nobel Prize in Economic Sciences for studying how financial markets misbehave. He is a pioneer in the new field of Behavioral Economics, or behavioral finance, as he has sometimes calls it.

“Mr. Shiller, 67, later introduced an important caveat to the idea that markets operate efficiently, finding that stock and bond prices show greater predictability over longer periods,” said the New York Times, in commenting on the award to Dr. Shiller, Eugene Fama, and Lars Peter Hansen. “Mr. Shiller and other economists see evidence that these movements cannot be entirely explained by rational decision-making, and instead reflect the irrational behavior of market participants.”

His recognition will ultimately swing the pendulum of economic thought away from the so-called Austrian school of free market economics that conservatives have long worshipped to justify their belief that small government and little taxes were the most “efficient” way to distribute wealth. We know the result of those theories—Inequality For All, to paraphrase Robert Reich’s latest book and film now in theatres.

He also boosted Keynesian economics with Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, written with Nobelist George A. Akerlof in 2009, which documented how financial behavior is tied to the vagaries of human nature, a clear tribute to John Maynard Keynes and his theory of animal spirits—today termed a greater or lesser confidence in an unknown future.

His biggest claim to fame comes from his 2000 book, since revised, Irrational Exuberance, which predicted the dot-com bubble bust. In it he looked at the empirical behavior of stock prices over the past 100 years. It showed that S&P price-to-earnings ratios had soared to unsustainable levels—as much as 44 to 1, almost double that of the Black Monday stock market collapse at the beginning of the Great Depression.

“The high recent valuations in the stock market,” said Shiller in Irrational Exuberance, “have come about for no good reasons. The market level does not, as so many imagine, represent the consensus judgment of experts who have carefully weighed the long-term evidence. The market is high because of the combined effect of indifferent thinking by millions of people, very few of whom feel the need to perform careful research on the long-term investment value of the aggregate stock market, and who are motivated substantially by their own emotions, random attentions, and perceptions of conventional wisdom.”

He also specialized in real estate and wrote books such as The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It, and with Karl Case set up the S&P Case-Shiller Home Price Index that tracks national same-home sale prices for 10 and 20 metropolitan districts.

But I predict that he will become known for an even greater contribution to economic thought. It is for his book, The New Financial Order, Risk in the 21st Century, Princeton U. Press (2003). In it, he uses his empirical knowledge and Big Data to tell us how to create hedging and insurance mechanisms that protect against major risks that have pummeled the financial markets.

“…the insights of finance have been applied in only a limited way,” says Professor Shiller in his introduction. “Finance has substantially neglected the protections of our ordinary riches, our careers, our homes, and our very abilities to be creative as professionals. We need to democratize finance and bring the advantages enjoyed by the clients of Wall Street to the customers of Wal-Mart”.

And that will continue to be is his real contribution to a world where equality is good for everyone. Understanding how markets misbehave will rip the shroud away from those who have been able to profit from the public’s lack of knowledge about how financial markets actually perform.

Harlan Green © 2013

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Sunday, October 13, 2013

Fed Chairman Yellen Will Boost Economic Growth

Financial FAQs

If we need any more evidence that Janet Yellen should be the next Federal Reserve Chairperson, it was the decision by the Fed Governors to continue their easing at the conclusion of their September 18 FOMC meeting, just 3 days after Larry Summers withdrew his candidacy for Fed Chairman.  Their action was basically an endorsement of Yellen’s policies as the Fed’s current Vice Chairperson that confounded the pundits who were sure the Fed would begin it’s ‘taper’ of bond purchases in September. 

In a word, Dr. Yellen has always been pro-job creation, and that is the big change in economic policymaking that should make this economic recovery self-sustaining, as opposed to Republican Paul Ryan’s latest budget proposal that is in fact anti-jobs. Instead, he wants to focus on reducing the budget deficit by cutting entitlement benefits for the elderly in return for lifting some of the sequester (i.e., Budget Control Act) spending cuts. 

But that doesn’t reduce the current debt or boost hiring directly, although lifting spending cuts and ending the government shutdown will bring back all those furloughed workers.  Labor’s share of national income has been steadily falling, which reduces the buying power of consumers who power 70 percent of economic activity, and so the overall demand for goods and services.


Graph: Economix

           Economist Jared Bernstein said as much in a recent New York Times column, illustrated in the Economix graph from 1995 to Q3 2012:  “In fact, as many inequality watchers have noticed, profits as a share of income are at or near record highs while the compensation share is around a 50-year low.” And as Robert Samuelson also reported in the Washington Post, “…labor’s share has plunged in the past decade. In 2013, it’s 57 percent (vs. 63 percent in 2000). This shifts about $750 billion annually from labor to capital.” 

The so-called supply-side policies of smaller government and lower taxes that have favored producers over employees are out of touch with the real economic problems today.  It is mainly a lack of demand, rather than the supply of goods and services that has stunted this recovery.  We are in fact awash in cheap goods produced globally.

The best sign that we have a demand problem that no longer requires lowest taxes for the producers and corporations is almost no sign of inflation and record low worldwide interest rates.  These indicators signal the sluggish circulation of money and so reduced demand.  Most of it is being saved, or hoarded.  Banks have almost $1 trillion in excess reserves that would normally be loaned out or invested, while corporations have more than $2 trillion in cash and cash ready reserves not being invested.

Why?  Because labor has been left out of the recovery as almost everyone knows.  Thomas Piketty and Emmanuel Saez have documented that 95 percent of the wealth created since 2009 have gone to the top 1 percent, while household incomes have fallen.  That is why debt is even a problem.  Simply put, debt can’t be paid down unless tax revenues increase.  Paul Ryan and the Tea Party stalwarts have it all wrong.  Cutting back on government spending directly translates to fewer jobs and less tax revenues, as the current shutdown illustrates.

How to right the imbalance in order to boost growth?  Raise the minimum age for starters, as I’ve said in past columns, and raise some of the tax rates. Or, close those tax loopholes that have the wealthy such as Mitt Romney and Warren Buffet with lower tax rates than their employees. Our policymakers and politicians have enough choices, if they choose to act.

But until such happens, we have only the newly nominated Janet Yellen to rely on to keep interest rates low enough to create a sustainable recovery.

Harlan Green © 2013

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Monday, October 7, 2013

Is This A New Civil War?

Popular Economics Weekly

The New York Times stated in a 2010 poll that the 18 percent of Americans who identify themselves as Tea Party supporters tend to be Republican, white, male, married and older than 45. History tells us the last time white males were willing to destroy the economy and maybe country. It was the United States Civil War, of course. Then it was about such men attempting to preserve slavery and state rights. Today, it is about not giving more rights to minorities and the poor.

Then it was about the south, desperate to preserve their privileges, today those Tea Party Republicans are desperate to preserve their traditions of power—low taxes and small government—even though our modern economy can’t function without an effective government that makes the rules that allow financial markets as well as our overall society to function smoothly.

So they are now desperate enough to use the debt ceiling as their Weapon of Mass Destruction. Not okaying an increase means the government is shut down, as well as the U.S. financial system that depends on debt to finance operations. And there are those on the right, such as Tea Party Republican Ted Cruz that would like to see this happen.

“The debt ceiling historically has been among the best leverage that Congress has to rein in the executive,” said Cruz to CNN’s Candy Crowley recently. “There’s great historical precedent. Since 1978 we’ve raised the debt ceiling fifty-five times. A majority of those times, twenty-eight times, Congress has attached very specific and stringent requirements, many of the most significant spending restraints, things like Gramm Rudman [i.e. the Gramm-Rudman-Hollings Balanced Budget Act], things like sequestration, came through the debt ceiling.”

The last Civil War cost some 600,000 lives. If prolonged, this civil war would cost millions of jobs. In a new report, the Treasury Department studied the economic fallout from a similar debt ceiling impasse in 2011 — when the nation came within days of defaulting on its obligations — and said that the country could see similar effects this year if lawmakers wait until the final hours to raise the debt ceiling.

“A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse,” the report said.

Yet as the New York Times reported, a loose-knit coalition of conservative activists led by former Attorney General Edwin Meese III and leaders of more than three dozen conservative groups put together a plan to defund Obamacare in 2012.

“It articulated a take-no-prisoners legislative strategy that had long percolated in conservative circles: that Republicans could derail the health care overhaul if conservative lawmakers were willing to push fellow Republicans — including their cautious leaders — into cutting off financing for the entire federal government.”

Yet this hasn’t sunk in to the general public, apparently. The 18 percent of the electorate, those Tea Party males, are willing to fight another civil war they cannot win, but could cause great damage to all of U.S.

So how long might this civil war last? “You’re here because now is the single best time we have to defund Obamacare,” declared Mr. Cruz, at a recent fundraiser. “This is a fight we can win.”

Will we need another Abe Lincoln to save the Union?

Harlan Green © 2013

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Thursday, October 3, 2013

It’s Not About Obamacare!

Financial FAQs

We know the federal government’s shutdown isn’t really about Obamacare. We know this because Tea Party Republicans have been trying to shut down government since the 2010 election, as MSNBC’s Rachel Maddow and others have pointed out. The uncertainties around such a major new social program as Obamacare has become the issue they are using to shut it down.

It’s even in their campaign promises. "We're very excited," Rep. Michele Bachmann (R-Minnesota), one of their leaders, told the Washington Post after the shutdown. "It's exactly what we wanted, and we got it."

"President Obama can't wait to get Americans addicted to the crack cocaine of dependency on more government health care," she said. "All they want to do is buy love from people by giving them massive government subsidies."

Who are the Tea Partiers? The New York Times stated in a 2010 poll that the 18 percent of Americans who identify themselves as Tea Party supporters tend to be Republican, white, male, married and older than 45.

So why shut down all of the federal government then? Many of its constituents live in those Red States with lower incomes that depend so much on government programs like social security, Medicare, and now the Affordable Care Act for insurance coverage. In fact, the 26 states who have rejected the Medicaid expansion for poorest Americans have about half of the population, but 60 percent of the uninsured, says the New York Times. These are the so-called ‘have-not’, mostly Republican-led states in the Midwest and south.

Wikipedia states the Tea Party is not a political party, but a movement named after the Boston Tea Party. “It is an American decentralized political movement that is primarily known for advocating a reduction in the U.S. national debt and federal budget deficit by reducing U.S. government spending and taxes.”

This is the Adam Smith philosophy from his The Wealth of Nations, written in 1776, of all years. And that has been the credo of conservatives since then. The problem is that most of the national debt and budget deficit was caused by Republican administrations who espoused Adam Smith's philosophy of lower taxes without cutting government spending.

The resultant record income inequality that helped to cause the Great Recession has left the rich and powerful free to accumulate as much wealth as they can, but not pay for the services that enabled them to do so, as was so clearly said by Senator Elizabeth Warren in a famous campaign talk.

"You built a factory out there? Good for you," she says. "But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did."

"…you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along."

So it is really about a much earlier economic system I’ve called medieval economics in past columns, which had a very different social contract. It was the philosophy that protected the privileged who were thought to be divinely protected in Adam Smith’s day. The less privileged were to be protected by an “invisible hand” of enlightened self-interest. That is, it should be in the interest of the powerful to take good care of their constituents. But that hasn't happened with the Tea Partiers, at least, who don't want to finance programs that aid the under privileged.

This is also the core Tea Party philosophy that believes the U.S.Constitution protects those privileges. Indeed, during its formation, this country was governed by the privileged who wrote the Constitution—those albeit enlightened white males who owned land. And that is the medieval system the Tea Party wants to restore, whether they realize it or not.

Harlan Green © 2013

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Tuesday, October 1, 2013

Mortgage Delinquencies Continue Decline

The Mortgage Corner

Freddie Mac reported that the Single-Family serious delinquency rate declined in August to 2.64 percent from 2.70 percent in July.   This has in large part to do with lower interest rates, which have declined again because the Fed decided not to begin to end its QE3 purchase program.

But it is also because housing prices are still rising strongly, with the Case-Shiller index up some 12.3 percent annually, and FHFA housing price index for conventional loans insured by Freddie Mac or Fannie Mae up 8.8 percent annually. This leaves about 5 million homes still with underwater mortgages, and so susceptible to serious delinquencies and outright foreclosure. But if economic activity continues to improve, then so will housing prices.

But rising housing prices are a two-edged sword, because though this helps existing home owners, it could become more difficult for homebuyers, since household incomes aren’t rising as well.


Graph: Econoday

Freddie's serious delinquency rate is down from 3.36 percent in August 2012, and this is the lowest level since April 2009. Freddie's rate peaked in February 2010 at 4.20 percent. These are mortgage loans that are three monthly payments or more past due or in foreclosure, said Freddie Mac.


Graph: Calculated Risk

Mortgage rates for a 30-year fixed conforming mortgage have declined to approximately 4.125 percent for 0 origination points in some California areas, from as high as 5 percent 2 weeks ago.  This still keeps the MBA Housing Affordability Index at its most recent low of 155 percent, which means households with a $62,868 annual median income can buy a home that is 155 percent higher than the national median price for existing-homes, or $331,700. The national median existing-home price has risen to $214,000, an increase of 25 percent from its 2012 low, which is why the Affordability Index isn’t rising.


Graph: Calculated Risk

Even if fewer prospective homebuyers are eligible to purchase, rental housing construction will benefit as rental vacancies are shrinking nationally and rents are rising. Reis, the commercial real estate research company, reported that the apartment vacancy rate declined in Q3 to 4.2 percent from 4.3 percent in Q2.  While in Q3 2012 (a year ago) the vacancy rate was at 4.7 percent. The rate peaked at 8.0 percent at the end of 2009.

The question is now where will those forming new households live with rising rents and rising home prices? This will in large part be dependent on the employment picture, as household incomes can’t rise, unless households are more fully employed. And we won’t see much improvement in employment, as long as the Federal Reserve is the only government entity providing stimulus by keeping interest rates at historic lows.

Harlan Green © 2013

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