Personal income rose 0.5% in July, matching expectations and up from an unrevised 0.6% increase in June. Spending rose 0.8%, also in line with expectations, and above Junes unrevised 0.4% gain. The core PCE deflator rose 0.1%, it smallest gain of the year, while the top line deflator rose 0.3%. The saving rate fell to -0.9%.
While a 0.5% monthly increase is great by any standards, it is important to note that this is not inflation adjusted. On anannualy basis this is like a 6% increase (12months * 0.5%), but on an inflation adjusted basis it is closer to a 3% annualized increase.
In terms of housing I think the bigger story is wealth distribution. The gini coefficient (a measure of wealth inequality) has been increasing for the past 30 years. Population growth will likely stay relatively steady (the echo echo boomers time frame has been distributed pretty evenly, and immigration will likely remain constant), which just leaves one question: "What percent of the current working population can't afford a house?" This can be answered by lookin at the number of people in below $8/hr jobs, and that number is definitely increasing.
"The California Housing Finance Agency is offering $7.5 million in low-interest loans to help promote affordable housing projects in the state, the agency announced Monday."
"California cities, counties and housing agencies can apply for loans with an interest rate of 3.5 percent to assist in the acquisition, development or preservation of affordable rental housing... Applications must be submitted to CalHFA by 5 p.m., Oct. 20, 2006."
Many of the state affordable housing agencys are having a lot of problems. Foreclosures have been rising (especially in the north east), and the money is not able to help as many people. As less loans are able to be subsidized (since the money is tied up with losses on other loans), housing demand will be reduced. States with the largest affordable housing programs may see large housing price declines if they do not increase affordable housing funding over the next couple years. It is a bad cylce of:
Price declines -> Increased foreclosures -> Affordable Housing Authority loses money on foreclosures -> Housing demand is reduced since AHA doesn't have money to give -> Prices decline....
Housing inventory now stands at 7.3 months, the highest since 1993.
NAR President Thomas M. Stevens from Vienna, Va., said interest rates have been trending down in recent weeks. “This is good news for buyers who have been on the sidelines; now there is a window of opportunity in the market,” said Stevens, senior vice president of NRT Inc. “In most of the country, buyers can take their time to make an informed decision.”
Two Fed economists just released a very bullish report on housing. While I believe several of the conclusions they make are disconnected from reality, the paper can not be completely discounted. The conclusion of the report is:
Our main findings are as follows. First, it appears that the housing boom has not been driven by unusually loose monetary policy. This is not to say the monetary policy has not been unusually loose, but that to the extent it has been loose, this is not what has been driving spending on housing. Second, the current levels of spending on new housing are largely explained by technology-driven wealth creation over the previous decade. Third, changes in the demographic, income, educational, and regional structure of the population account for about one-half of the increase in homeownership. That is, without any other developments, the homeownership rate is likely to have gone up anyway, but not by as much as it has done. The last finding is that substitution away from rental housing made possible by developments in the mortgage market, such as subprime lending, could account for a significant fraction of the increase in residential investment and homeownership.
The conclusion that the housing boom has not been driven by loose monetary policy is supported with vague points. It is based on a model relating to different types of interest rate and economic shock (p 33-37), but does little to discuss what has actually historically happened with interest rates. It is odd that the first main point of this paper is a counter-argument to the hypothesis that loose policy has caused the run up in prices. I disagree with this conclusion, but I disagree for different reasons then the typical(certainly not all) real estate expert who experienced the 1980's. The argument presented by the typical expert is that interest rates dropped to unbelievably low levels in 2002/2003 and this must be greatly contributing to housing appreciation. The fact is, the 80's were the exception, and 90's have been returning to historic norms. The 12% + mortgage rates of the 80's were a glitch that will not likely ever happen again. Because of this, housing has been appreciating, but the increased demand lower rates have caused is somewhat sustainable. The paper argues that the lower interest rates have not signifcantly increased demand... So I disagree with what the paper says, but agree with the conclusion that it makes. While the use of I/O, ARM, and <5% down loans will decline, they will not go away.
I highly doubt the wealth accumulation argument has legs. The premise is that because personal investment has increased, wealth has increased? Either the conclusion paragraph is not worded correctly or I am missing something. There would have to be a hell of a lot of pent up wealth to make the housing boom start immedately AFTER the 50% decline of the stock market in 2001. It has been argued that lots of personal investor money became scared of stocks in 00/01/02 and moved into housing, and I agree with this concept, though that argument is not the same as what the paper articulates.
The final argument about demographics is not supported enough. I have been a believer that California will not suffer as severe of a loss as placed such as Boston due to immense population/immigration increases (see http://www.housejockey.com/blog/2006/06/wake-up-boston-you-are-here.html), but this argument is not given in the paper. All that is really presented is that younger people are able to get into homes due to looser financing (p42), but the sustainability of this change is not addressed. It is hard for me to believe a paper of this caliber is really spending 3 pages saying "New types of loans have allowed more people to buy homes and the ownership rate is up... therefore housing wont' crash", but that seems to it. Why don't they explain why?? Again, with this argument, I agree that there has been some structural shifts and this financing sustainability idea has some merit, but the details presented in the paper do not support it and this paper certainly gives no indication as to the magnitude of this effect.
1. Inventory is now at 9 year highs, having increased in many areas 75-150% over last year; That inventory issue is why the Home builders Index is down 50% from recent highs;
2. Home affordability index is at 15 year lows, as rates AND prices have moved higher during the past 36 months;
3. Real Income gains have been negative for the past 5 quarters, challenging middle income buyers to afford new homes;
4. Home ownership ticked up to record levels after Mortgage Rates dropped to 5.25%; there simply aren't many new buyers coming into the market;
5. Residential construction accounted for about 6.1% of the economy -- close to a 50-year high; When that reverts to the mean, it will take 0.75-1% off of GDP; If, as I suspect, it swings past the mean, as these things tend to do, 1-3% of GDP can get lost;
6. The NAHB Home Builders Index -- a sentiment reading of builders -- fell to a 15 year low last month;
7. Mortgage Apps for new purchases are down 24% year over year; Refis are off 37% year/year; ARMS are still 42% of dollar volume.
On the other hand... 1. The FED is aware of these things. Bernake has written papers specifically talking about how he believes the FED has made mistakes in the past by popping bubbles
2. The economy is prepared for a crash more so then it was in the late 80's crash. For instance, assume you buy a house today for $600,000 with a 0% down I/O loan. In 2008 you lose your job and need to sell but can only get $450,000 for it... This leaves you with one choice: Send your keys back to the bank and move on. PMI insurance companies will take a hit, but they have such juiced up premiums I doubt they will go BK even if nominal prices revert back to nominal prices in 1995.
3. Immigration can save the southwest. If our border opens up with Mexico the population inflow and economy boosting will keep housing afloat. Many of the currently stressed home owners will have problems, as jobs become harder to find - but the economy will likely be fine.
4. The price to build a house has been moving up in the last 5 years, and it will not likely decline back to 1990's levels. Housing starts are dropping fast, and if market prices really are as disconnected from economic fundamentals as the bears claim, starts would not be dropping now. If prices really are 50% inflated, wouldn't starts only start dropping after a 30 or 40 percent decline? If I could build a $900,000 house for $300,000 why would I care if the market value dropped to $860,000 in recent months?
Building permits are dropping considerably, which is a plus for current home owners. If you are a home owner living in a bubble market, you can at least know there are price floors relative to the cost to build. Unless there is a severe economic shock, housing value can not stay below the cost to build for long.
Housing starts indicates the same idea as permits.
Here are 6 key economic variables at the 2006 halfway mark:
1. Second quarter GDP growth was 2.5%, down from the first quarter's above-trend rate of 5.6%. This is not likely a signal of more to come, but instead is reflecting the Q1 / Q2 up/down volatility.
2. Following several years of positive GDP contributions from the housing sector, residential fixed investment declined in the first half of 2006. This is not likely to change in the second half of 2006, but should recover in early 2007. The midwest and many areas in the south have not appreciated much over the last 5 years and the nationally reported numbers will not stay below water long.
3. Consumer revolving credit growth increased significantly in the second quarter, following several years of nominal growth. Early indicators suggest that consumers are shifting to greater usage of credit cards as the draw-down of home equity slows. These numbers are highly volatile, and it is always difficult to predict which way the trend is moving.
4. Average monthly job growth has slowed to 112,000 in the past four months, following average gains of nearly 170,000 over the previous twelve months. The job market still remains favorable, with unemployment at a 5 year low of 4.6% in June (though had a slight uptick in July).
5. Inflation is rising, with the annual CPI up 4.1% and the core rate up 2.7% in July. Rising energy prices have been the primary cause, but an upward trend in the core rate suggests wider price pressures. While the market is rejoicing over these "low" July numbers, I would suggest holding out until at least August before declaring a trend.
6. Productivity slowed significantly to 1.1% in the second quarter, while unit labor costs rose 4.2%. Declining productivity and rising labor costs raise the risk of wage-based inflation.
Tax cuts and cash out mortgage refinancing provided consumer funding in past years as 5% yoy income growth now provides the means outside of credit. Credit cards (revolving credit) make up 37% of total consumer credit which stands at $2.19 trillion. Nonrevolving credit helps finance auto purchases, tuition (including Sallie Mae), vacations and other forms of consumer spending. Annual growth currently stands at just 2.4% as tougher bankrupcy laws introduced in Oct have helped to slow growth.
Consumer credit increased $10.3 billion or 5.7% at an annual rate in June. The latest increase in consumer credit was driven by gains in both nonrevolving and revolving credit.
I don't think the national housing market will land as "hard" as many are predicting. In selected markets it may be another story.
The data can't be broken into regions, so I am not sure how much better or worse it is in different areas. The data is based on a simple average, and not median price, so take it for what it is (I wish I could get median price). This is from a database many residential real estate appraisers use
Nonfarm payroll increased by 113,000. Unemployment spiked up from 4.6% to 4.8%, confirming to many that the fed is done raising interest rates. Job gains occurred in several service-providing industries, including professional and business services, health care, and food services. Average hourly earnings rose by 7 cents, or 0.4 percent, in July.
