Posted by Jonathan J. Miller -Thursday, March 22, 2012, 7:22 AM Comments Off
The New York Fed publishes a coincident index using data on employment, real earnings, the unemployment rate and average weekly hours worked in manufacturing and its beginning to show nominal weakness. This comes out monthly and I keep an eye on it. The employment numbers were rebenchmarked in 2011 which made the second half of last year better than originally reported.
He was certainly part of the problem and I thought history would not be kind to his legacy of running a Fed that led us to two historic bubbles in stocks and real estate. The points being raised are akin to staring at the hood ornament of your 1991 Buick Roadmaster Estate Wagon while driving – and why so many economists and political types missed the eventual housing fail. They didn’t look ahead to the on-the-ground behavior of everyone connected to the housing process.
The piece begins with debunking the conventional wisdom that low mortgage rates were the problem and suggests that monetary policy was not loose. Perhaps the title of the piece has little to do with the point the author is trying to make. However it’s like NAR Research press releases whose titles scream statements that have little to do with the body of text that follows – it becomes worthy of pointed criticism.
While it’s undeniable that rock-bottom mortgage rates — at least rock-bottom for the pre-2009 world — helped fuel the subprime frenzy, it’s not true that these low rates meant monetary policy was excessively loose.
The Federal Reserve as an institution did not understand the housing run up as it was happening or when it began to crack. Think “contagion.“
So while we can argue that “tight policy” and low rates don’t mean monetary policy was “easy” all day long, that’s some sort of top level wonkiness that does not excuse Greenspan’s role. The author misses the progression of events interlaced with Greenspan’s presence which goes something like this:
So perhaps he didn’t maintain a loose monetary policy as the author insists, but that has little to do with whether Greenspan was part of the problem that created the housing boom and bust. The man acknowledged he was and yes, he clearly was.
Posted by Jonathan J. Miller -Wednesday, February 8, 2012, 2:41 PM 2 Comments
This research paper from the Boston Fed addresses the issue of “House Lock” – the idea that people who have negative equity on their homes are trapped and can not migrate to where the jobs are.
…These observations have raised concerns that the prolonged weakness in the U.S. housing market is keeping unemployment high by preventing homeowners who have negative equity from relocating to other states with better job markets. Having a negative equity position in their homes is likely to further deter homeowners from selling in an already weak housing market. Other options, such as engaging in a short sale or strategically defaulting on the loan, can be costly in terms of lost value or a damaged credit record. And in all likelihood, the number of underwater households is likely to persist as house prices continue to fall in many areas due to continually high levels of unemployment and foreclosure.
The report concludes that there is NOT a strong correlation between people stuck in their homes and the high unemployment rate.
home owners are already less transient than renters and account for only 20% of state-to-state migration.
negative equity reduces the probably of migration but does not impact unemployment rates.
Still it seems to me that Fed has become much more focused on housing as the way to fix the economy as of late. Of course, this is not official Fed policy speaking in this paper, but with what feels like an increase in housing related research (or I am super sensitive to this as of late), maybe it represents the “Id” of the Fed mindset. You can see it in the last sentence of the paper:
Instead, increased efforts to alleviate the housing sector’s drag on the economy— such as helping more homeowners to refinance or stemming the tide of foreclosures—may be more effective at stimulating aggregate demand and reducing the high rate of joblessness during the recovery.
Are American Homeowners Locked into Their Houses? The Impact of Housing Market Conditions on State-to-State Migration [Federal Reserve Bank of Boston]
Posted by Jonathan J. Miller -Monday, January 9, 2012, 9:58 AM Comments Off
[click to expand]
I’ve been outspoken about the misuse of seasonal adjustments in housing statistics. While they are not all bad and are favored by economists for their ability to smooth out a year’s worth of information so one can see where greater than normal changes stand out, there cause more harm than good when it comes to understanding housing.
The basic problem with seasonally adjusting the numbers are as follows:
there is no standardized methodology or period for making the adjustments
the adjustments are rarely disclosed
they often adjust already adjusted numbers (i.e. annualizing NAR existing home sales)
the reader often doesn’t understand what it is
while it may be useful for analysis, the results often contradict current conditions
and most importantly…
the adjustments become skewed shortly after a significant market change.
While seasonally adjusted data can be extremely helpful, they should be used with care. In particular, the statistical methods used for seasonal adjustment may generate misleading results when applied to data with structural breaks, where the underlying properties of the data change significantly during the period studied.
Case in point is the National Association of Realtor’s Pending Home Sales Index that has basically been a mess for the past 18 months after the expiration of the federal home buyer’s tax credit. The disparity between the indices. The NAR press releases sharply contradict the feeling on the street with agents, buyers and sellers, marginalizing the meaning of the report results.
Cash Assets of Foreign Banks: An Example of Seasonal Adjustment Gone Awry [FRB NY]
Posted by Jonathan J. Miller -Monday, January 9, 2012, 6:00 AM 1 Comment
Ok, so I thought my son shooting a basket would be better than a boring graphic of the Fed – indulge me. I’ll say “the Fed took the ball drove and took a well executed shot.” Ok, back to the Fed’s sort of full court press…
From the FT: Finally, a regulatory body offers tangible realistic advice on housing to Washington policy makers:
Among the ideas is forming a national strategy to facilitate the conversion of foreclosed properties into rentals; allowing banks to rent their repossessed homes rather than forcing lenders to sell them; changing the compensation structure for mortgage servicers, companies that collect payments from borrowers and pursue foreclosures in the event of a default; creating a national online registry of liens to track ownership interests; and altering existing Obama administration policies to allow for more refinancings and mortgage restructurings.
The insight was provided to the Financial Services committees (who brought us Dodd-Frank) and while much of this has already been considered or is in the works, it’s presentation by the Fed all in one message helps bring clarity.
I like these ideas since they are foreclosure-centric and US housing doesn’t recover until we clear the market of excess foreclosure volume.
Here’s the Fed’s white paper - what jumped out at me came in the beginning with the fed identifying housing as a key economic problem:
a persistent excess supply of vacant homes on the market, many of which stem from foreclosures
a marked and potentially long-term downshift in the supply of mortgage credit
the costs that an often unwieldy and inefficient foreclosure process imposes on homeowners, lenders, and communities.
I really like the rental idea for REO houses stuck in lender inventory. In many cases, lenders are forced to sell so they don’t fall below their capitalization requirements by the regulators. Now they would be able to rent the property out to get the cash flow going plus having an occupant helps protect the asset.
Here’s a crazy and too simplistic but-it-sounds-like-a-reasonable-foreclosure-failure-spiral:
Home sales are weak because credit is so tight
The rental market is strong because credit is tight – rents are rising.
Consumers have less disposable income to help the economy because rents are high.
As more rental supply becomes available from Fed recommendation, renting becomes more affordable.
More affordable rents delay increase of home sales.
Posted by Jonathan J. Miller -Tuesday, November 29, 2011, 10:00 AM Comments Off
The New York Fed publishes a coincident index using data on employment, real earnings, the unemployment rate and average weekly hours worked in manufacturing and its beginning to show nominal weakness. This comes out monthly so I’ll keep an eye on it.
In October, the New York City Index of Coincident Economic Indicators (CEI) decreased at an annual rate of 0.4%, following a 0.1% increase in September. The index has risen 2.4% over the past year.
Since NYC housing’s future in the region partially depends on where the regional economy is going (it’s not all about foreign buyers), this suggests the NYC economy slipped a bit last month but is better than last year.
Here are my favorite semi-housing related points of his presentation:
*…the output of the U.S. economy—grew at a 3 percent annual rate from mid-2009 through 2010. While hardly a blistering pace, this growth was sufficient to add nearly 1 million jobs and reduce the unemployment rate by a half percentage point during 2010. Then, during the first half of 2011, growth slowed abruptly to a 0.8 percent annual rate. Job growth slowed so much that the unemployment rate rose back up to 9.1 percent.
Growth slowed partly because of temporary factors…Energy and commodity prices rose sharply…April’s tragic earthquake and tsunami in Japan disrupted many global supply chains.
Residential construction—which typically boosts economic activity during a recovery—is at a standstill. Moreover, many homeowners are now consuming less because the decline in house prices reduced their wealth…
Mortgage rates are at record lows…but obstacles to refinancing and access to credit for home purchases are limiting the support provided by low rates to house prices and consumption…the prospect that unemployment and negative equity will continue to feed the foreclosure pipeline—continues to put downward pressure on home values.
…cutbacks in employment and spending by state and local governments intensified in 2011 and are likely to continue…states are likely to cut spending further as the federal government stimulus aid to states peters out.
…the federal government will soon end much of the support it has been providing to the economy through stimulus programs….it will be very important to avoid excessive short-term cutbacks or tax increases that could harm the recovery.
…the sovereign debt crisis in Europe has weakened the outlook for global growth and with it, U.S. exports…some financial institutions are facing pressures to cut back lending.
Without robust growth, the economy is more vulnerable to negative shocks, which unfortunately seem to keep coming. It is like riding a bicycle—at a slow speed, the bicycle wobbles and the risk of falling rises. Politics here and abroad have not helped. The intense debate around raising the debt ceiling and the subsequent downgrading of the federal debt took a toll on household and business confidence.
Stabilizing the housing sector is particularly important because housing equity is an important part of household wealth...Taken together, such efforts could help shift people’s expectations about future house prices. If prospective homeowners no longer fear that prices could decline further, they will be more willing to enter the market to take advantage of reduced prices and low financing costs, and existing homeowners will feel more confident about spending. A vicious cycle could be replaced by a virtuous circle, in which stabilization in house prices supports spending, growth and jobs.
Citywide employment fell by nearly 4 percent during the downturn, much less than the nationwide job loss of 6.5 percent. During the recovery, New York City has already regained half of the net jobs lost during the recession. This has happened without much help from the securities industry (Wall Street), which has been a driving force behind local economic recoveries in the past. This time, the strongest contributors to job growth have been professional and business services, leisure and hospitality.
Posted by Jonathan J. Miller -Wednesday, October 5, 2011, 12:30 PM 1 Comment
PART I OF II
I’ve been on a 6 month hiatus from podcasting after 150+ interviews over the previous 2 years – had a bunch of other things going and I needed to take a little break. I’ve been itching to return and was talking to my friend Barry the other day and he wanted to do another one (his 3rd) and here it is.
Posted by Jonathan J. Miller -Wednesday, August 10, 2011, 9:20 AM Comments Off
Sorry, but being stuck for hours on an airport tarmac yesterday with the pilot telling us every 20 minutes he was trying to get a departure time as soon as the storm passed at our destination did wonders for my outlook in the economy and the housing market. No irony that the airline was AA or Double A (American Airlines).
Never mind that this is the sort of thing a coach tells Little Leaguers as they’re about to get mercy-ruled. By heaping scorn on Standard & Poor’s, President Obama, and the rest of official Washington, Monday violated Gross’s Second Rule of Punditry: Don’t Pick Down, Pick Up. When you engage in verbal fisticuffs with people below you on the pecking order, it only brings you down and raises them up to your level. Besides, this isn’t an episode of Crossfire.
My political observation is that we seem to have reached the end of the road, err, politically. How do politicians cut costs when they are elected by their constituents who want them to bring home the bacon or deliver tax breaks? I cringe each time I hear phrases like “we need to cut costs” and “we need to eliminate tax loopholes.” After all the brinksmanship and positioning, we end up with some sort of bland compromise and the totality (sp?) of decades of this sort of thing has left us with a massive deficit and reactive fiscal policy with regulatory oversight on things that already happened.
One is that the U.S. political system at some point has to adjust to the reality that we are just one more country trying to make it in a big, bad global economy and probably ought to stop shooting ourselves in the foot on a regular basis. The debt ceiling debate was one example of this; the seeming inability to get a handle on increasing health care costs (or to talk rationally about it in the political arena) has been another. This was the most convincing justification the S&P gave for its downgrade, and while I’m enough of a Pollyanna to believe we’ll eventually get our act together, I don’t see any short-term fix.
The Fed announcement yesterday struck me as further political posturing until after the next election cycle. Good grief.
It was agreed that the key issue remains job creation. While we are seeing some positive growth it continues to fall well behind population growth. Need job creation for credit to improve and housing to recover.
Foreclosures need to be allowed to be absorbed. Moratoriums simply delay the problem.
We’ll see at least 3-5 more years of current market conditions.
Low interest rates are keeping credit tight.
Ken has been a long time econ hero of mine and I found out he reads my research – even better! He says “Washington is dumb” – they shouldn’t be reigning in spending when economy is floundering.
Doug and Gary shared some great insights as well. Since the economic news was basically gloom and doom, I asked the panel at the end of the session to provide something encouraging even if they had to extract it from the dark depths of their pysche.
Mortgage rates at record low and far more impact to lock in a lower rate even if prices slip more.
Trade deficit dropping by leaps and bounds – helpful for manufacturing jobs.
Most types of credit (other than residential) is starting to show signs of (nominal) easing.
Note: David Pogue was crushing it with the audience as the keynote before us and we were hunkered down in the green room – 1 appraiser + 3 economists (ie the dismal science) fretting about going on after him. Thankfully there was a short presentation before us to diffuse the enthusiastic audience and I think we even got a few laughs.
Had a fun interview with Tom and Sara this morning on the always MUST watch/listen Bloomberg Surveillance. We talked housing, rentals, vacancy and inventory. An added bonus was the addition of Adam Davidson – co-founder and co-host of Planet Money... Read More