Oct212015
Declining export employment weakens housing demand
If high-paying export industry jobs are eliminated because of the rising dollar, then home sales will suffer due to diminished demand.
The fundamentals of housing demand are job and wage growth. Lenders and the federal reserve can manipulate borrowing costs to impact prices, and they can manipulate mortgage qualification standards to create more temporary homeowners, but this chicanery does not represent fundamental support. The powers-that-be already manipulated rates as far as they can push them, and the endless pleas from realtors to lower lending standards fall on deaf ears. The props are played out.
Endless market props can mask a weak market for a time, but for the housing market to really improve, the economy needs to produce more jobs that pay well enough to buy homes. Eventually, the housing market will need to stand on its own.
A durable housing recovery based on improving fundamentals would be hard to deny, and it wouldn’t need so many artificial boosts. A real recovery would be characterized by surging new home construction and steady gains in sales and prices commensurate with strong job growth and rising incomes. If the economy stops producing high-paying jobs, housing demand necessarily weakens.
Unfortunately, the rising value of the dollar is hurting export employment, and if the federal raises rates, it’s likely the dollar will get even stronger exacerbating a problem with dwindling export employment.
This Drag on U.S. Job Growth Isn’t Going Away Anytime Soon
Export industries may keep losing about 50,000 jobs a month into mid-2016
Sho Chandra, October 16, 2015
Employment is taking a dive in industries that sell a lot of U.S.-made goods abroad, and things could get worse before they get better.
The double whammy to exports from the stronger dollar and cooling overseas markets was bound to hit employment in the world’s largest economy. JPMorgan Chase & Co. has put numbers to the damage.
Export-oriented industries have been losing about 50,000 jobs a month for most of this year, after adding 9,000 a month on average in 2014, according to JPMorgan economist Jesse Edgerton. Recent manufacturing surveys hint the impact could worsen, and the employment erosion may extend into the first half of 2016, he predicts.
In effect, that would mean private payrolls growth takes a step down to around 150,000 a month, from the booming 250,000-plus average of 2014.
“Employment is declining in industries exposed to exports, and we haven’t seen any sign the decline is slowing down,” Edgerton said. “The drag from job losses in export industries will linger on for some time at least.”
Considering export-oriented jobs are among the better paying ones, that’s a pretty sobering forecast. U.S. jobs supported by goods exports, for example, pay as much as 18 percent more than the national average, according to government estimates. At a time of increased concern that growth is losing momentum, a strong labor market backed by jobs that pay well is key to sustaining consumer spending, the biggest part of the economy. …
We are losing exactly the kind of jobs necessary to buy houses.
Trends in the top four industries with the largest export share — transportation equipment excluding motor vehicles; machinery; computer and electronic products; and primary metals — offer another reason for concern, Edgerton said. Payrolls have been slowing for decades in capital-intensive manufacturing businesses that dominate exports. So there’s little reason to expect export jobs will see a return to positive territory.
One consolation is the job losses are “pretty much confined” to exporters, while “plain vanilla” industries selling to U.S. consumers have been largely shielded, Edgerton said. He found payrolls at non-export employers, typically service providers, are currently posting an average monthly gain of 203,000 . While that marks a downshift from 296,000 as recently as June, it’s within the 150,000 to 300,000 range seen since 2013.
At least the jobs in McDonalds and Wal-Mart are safe, right?
What the housing market needs to get back on track is growth in jobs and incomes. People who get high paying jobs either form new households or make move-up trades, but the jobs created need to be of high quality. Creating low-paying or part-time jobs may pad the government stats, but they do little to stimulate the housing market. Although the job market has been steadily improving since early 2010, the rate of job growth has been relatively weak when compared to previous recessions, and the quality of these jobs has been suspect at best.
In a housing market where lenders, the federal reserve, and government officials don’t conspire to artificially inflate house prices, the primary driver of prices is job and wage growth that leads to new household formation. If businesses expand and create new, high-paying jobs, those new employees take their new wages and bid up the price of available housing alternatives. If the the jobs are low paying, the new employees will bid up rental prices or occupy new rental units. If the jobs are high paying, the new employees will bid up the prices on nearby residential real estate.
In an economy that sheds higher paying jobs, like those in export industries, the housing market suffers. If 2016 has disappointing sales numbers, the disappearance of export jobs may be the culprit.
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U.S. Home Builder Optimism Hits 10-Year High
Result of builder’s selectively reading Pollyana financial media reports
The NAHB/Wells Fargo Housing Market Index for October jumped three points from a one-point downwardly revised September. The October level of 64 conforms to levels last seen as the boom began to taper in late 2005. Even with headwinds in the supply chain, builders still report increasing consumer interest in buying a home. Customers are taking advantage of low mortgage rates and competitive prices. Any value over 50 means the majority of builders see the market getting better rather than getting worse.
Two of the three components also increased. The component measuring current sales increased three points to 70 and the component gauging expected sales increased 7 points to 75 after dipping slightly in September. The traffic component remained the same at 47. Builders continue to believe the considerable pent up demand from slow movement and existing home turnover over the past 7 years is finally being released.
All four regions also saw increases in their three-month moving average: the Northeast, Midwest and South increased one point to 47, 60 and 65 respectively and the West rose 5 points to 69.
Concerns remain finding qualified labor and the search has caused some slowdown in production time. Good location lots are also in short supply and prices are rising, forcing builders to raise their sales prices as well. NAHB foresees continued modest growth in production even with these headwinds.
Dumb Money Piling in to Real Estate Ventures They Don’t Understand
Major banks are now presenting their major customers investment opportunities in real estate construction and renovation across the country.
JPMorgan, Citigroup and HSBC are among banks, Bloomberg’s Peggy Collins reports, that are offering ultra-rich clients equity in mega construction projects, like the tallest residential building in Manhattan – 432 Park Ave., – Las Vegas’s Hooters hotel and a Four Seasons Hotel in Boston.
“What we’re seeing some of the private banks doing,” Collins said, “from JPMorgan to Citigroup, over the past four years or so, is essentially go out and find projects where they pool money from their private bank clients and they can actually offer them specific deals.”
And it looks like there will be more of these investments in the future. “The competition, these banks said to us, is definitely ramping up,” Collins added. “There are certainly a lot more people who are seeing these properties as something international investors want to go in on. It’s kind of nice to say you helped build a Four Seasons Hotel in Boston or the tallest residential tower in New York. It’s a nice cocktail party tag.”
Boomers feeling squeezed by the rise in rents
Rising rents have been cited as a reason millennials aren’t moving out of their parents’ basements. But higher rents could force some boomers to move in with their children.
So says Don Lawby, president of the Real Property Management franchise, a property management company based in Utah. He says it is shaping up to be a crisis for some boomers for the following reasons:
* The average rent for a three-bedroom single-family home in the U.S. was $1,363 in the third quarter of 2015, a 5.7% increase over the last year, according to Real Property Management and Rent Range, a rental information company.
* Workers 55 and over have, on average, saved only $150,300 for retirement, according to a Fidelity report from 2013. Assuming they withdraw 4% of their savings for income in retirement, their savings will generate about $500 a month, Lawby figured. With Social Security benefits, monthly income will average $1,791 (using figures from the Social Security website).
* That monthly income means the average retiree is likely to have a housing budget of $609 to $681 a month (going by the recommendation that 34% to 38% of income be used toward housing costs), way below the cost of renting a three-bedroom home.
Rental growth rates are the highest they’ve been since the recession, said Ryan Severino, senior economist and director of research for Reis, Inc., a provider of commercial real estate information. Reis data shows that rents rose more than 4% over the last 12 months.
“Vacancies have been tight for a very long period of time,” Severino said. “That kind of environment gives landlords leverage to raise rents.” Rents are eventually expected to taper off, however, as more apartment inventory hits the market, he added.
What Could Raising Taxes on the 1% Do? Surprising Amounts
A populist storm is brewing
When it comes to paying taxes, most Americans think the wealthy do not pay their fair share.
There is a sharp divide, however, between Republicans and Democrats when it comes to taxing the rich, who provide most of the cash for political campaigns.
All the Republican tax proposals, in fact, cut taxes for the wealthiest Americans. Democrats, on the other hand, are prepared to raise taxes at the top, though they have not been very specific about how they would do so.
“Right now, the wealthy pay too little,” Hillary Rodham Clinton said at this week’s Democratic debate in Las Vegas, “and the middle class pays too much.”
But what could a tax-the-rich plan actually achieve? As it turns out, quite a lot, experts say. Given the gains that have flowed to those at the tip of the income pyramid in recent decades, several economists have been making the case that the government could raise large amounts of revenue exclusively from this small group, while still allowing them to take home a majority of their income.
It is “absurd” to argue that most wealth at the top is already highly taxed or that there isn’t much more revenue to be had by raising taxes on the 1 percent, says the economist Joseph E. Stiglitz, winner of the Nobel in economic science, who has written extensively about inequality. “The only upside of the concentration of the wealth at the top is that they have more money to pay in taxes,” he said.
And this is why I hold my nose and vote for Republicans, while keeping it completely to myself.
The problem is the 1% have lawyers and accountants who are smarter and better paid then the government bureaucrats writing the codes. The only way to tax the wealthy would be a progressive flat tax and a much more simplified tax code which would nullify their teams of million dollar accountants and lawyers.
I believe a populist wave is coming to tax the rich. Perhaps the Republicans can buy one more election, but eventually, the working class is going to rise up and change the balance of power. The populist undercurrent is already strong as evidenced by the success of Bernie Sanders and Donald Trump. If a Republican gets in and cuts taxes for the wealthy further, the populist irritation will grow even stronger.
The president has no power to levy taxes. Congress has sole authority and while congressional approval is dismal their individual approval in their districts is high. Everybody wants to make the next guy suffer (higher taxes lower spending) but nobody want to accept they have to suffer as well.
The President doesn’t have this power directly, but he/she has tremendous influence over the process, particularly if they win with a convincing mandate.
The main problem is that “the rich” definition gets dumbed down to a couple making $250k. That’s two college educated professionals in OC (or NoCal), who are already squeezed by the high home prices complained about here.
I have a populist streak against the crony capitalists making big bucks off democrat government connections (Tesla, GE, Nancy Polisi’s husband, etc.). The vast majority of the uber rich (including Uber) donate and vote democrat. So democrats talk about taxing “the rich” while letting their connected friends feed on the government trough of government loans, contracts, tax incentives for “green”, low income housing,and the like. Those who focus on just the marginal tax rate are dogs distracted by squirrels.
Anyone who says republicans are the party of “the rich” people unable to see objective reality.
There are rich people in both parties, but only the Republicans are proposing endlessly lower taxes on the very rich.
GSE leadership no longer expecting reform
The government-sponsored enterprises are getting back to their core mission, shaking the idea that a resolution to conservatorship is just around the corner and reshaping their business models to reduce risk to taxpayers while expanding access to credit.
Mayopoulos reviewed recent new initiatives and ones from last year designed to expand access for buyers.
“Changes at the front end are driving changes to expand access to qualified buyers,” Mayopoulos said.
Mayopoulos said that the company’s primary revenues are now coming through guarantee fees as a stable, more reliable revenue source, he said, and that the company is shifting more credit risk to private investors.
He called it a “more sustainable and reliable business structure.”
Layton noted that the GSEs are into their eighth year of conservatorship, and that a “big bill” out of Washington to “redo our entire housing finance system” is years away.
“Conservatorship will be with us for a while. And there is no playbook for running a company in conservatorship,” Layton said.
Layton emphasized the focus on credit risk transfer.
“Credit risk transfer is our entire business model now,” Layton said.
Lower Rates in China May Prevent Fed Rate Increase In USA
The Federal Reserve will not raise interest rates from near zero until central bankers see signs of wage growth, BK Asset Management’s Boris Schlossberg said Monday.
“I think we’re just in a ‘Jerry Maguire’ economy. Show me the money,” BK’s director of FX strategy told CNBC’s “Squawk Box.” “We have just not had income growth, and that’s really the determinant factor. Job growth has been good to keep us alive, and keep the economy slowly moving forward.”
While the U.S. unemployment rate has fallen to 5.1 percent, the Fed has put off hiking rates from near zero in the absence of signs that inflation is nearing its 2-percent target.
According to Schlossberg, the Fed’s policymaking committee may have an even tougher time normalizing rates because currency strategists are starting to predict China’s central bank will cut rates, which would presumably strengthen the dollar.
On Monday, China reported its economy cooled off less than expected, but industrial production and fixed-asset investment — seen as a crucial driver of China’s economy — came in weaker than anticipated.
The Fed now faces the critical challenge of being the first major developed nation to return to normal monetary policy conditions following the era of quantitative easing, Schlossberg said.
“No central bank has been able to come back from QE, as far as we know in our history right now,” he said. “The Fed is going to have to be first one to actually come out of QE.”
Lamar Odom Paid $75,000 for Round-the-Clock Sex at Brothel
Redefines “Going out with a bang”
Retired basketball star Lamar Odom, who remained unresponsive Thursday in a Las Vegas hospital after he was found unconscious at the Love Ranch this week, paid $75,000 for 24-hour-a-day companionship from two women, the brothel’s owner told NBC News Thursday.
Odom used a credit card to take care of the five-day package, which Love Ranch owner Dennis Hof said included sex and activities like cooking, watching TV together and going out to dinner — a deal commonly called the “girlfriend experience.”
Odom arrived last Saturday at the brothel in the western Nevada town of Crystal. He had planned to extend his stay through this Saturday to celebrate Hof’s birthday but had yet to renegotiate his bill, Hof said.
Trickle down economics at its best. The trickle down effect will be felt.
How many days before Bk becomes the topic with Lamar?
Well the average for NBA players is 5 years after retirement. His last NBA season was 2014 with the knicks so it would mean sometime around 2018-2019.
Who said money can’t buy you love?
Economist Proves He is Clueless
Ask the Economist: Consumers, Labor Market Improvements Have Built Momentum in Housing
Much has been made of the economic progress the country has made in the last year as well as the progress in housing. What role has housing played in the economic progress?
Housing should also continue to provide some fuel for consumer spending, and therefore the overall economy. The recent pickup in household formation rate also points to a more sustainable improvement in housing which helps support the overall economic growth. This is one of the strongest areas of the economy with a lot of pent-up demand.
According to the latest numbers, housing starts are up, with upward revisions. Housing permits are trailing housing starts so there might be some volatility going forward, but housing market is finally catching up to the labor market in terms of showing steady growth although the labor market is beginning to moderate.
The single family housing market seems to be heating up, despite some potential volatility. Construction companies and workers are busy while home prices and mortgage rates remain favorable. In the overall economy, if wage gains pick up, housing could get another boost, but the moderation in the number of new jobs could prove to be a speed bump—hopefully, not a road block.
Why, in your opinion, is this housing recovery more sustainable than the “bubble” from 2005 to 2008?
I like that question a lot. I think what we’re seeing is a cyclical recovery due to the improvement in household incomes and finances, signs of household formation returning, and pent-up demand for housing. The improvement seems to be going hand in hand with the moderate improvement in the overall economy. Finally, the financial conditions that led to the “bubble” are arguably a little more restrained this time around.
With regard to most economists and current housing bulls, I suspect it has more to do with ‘vested interests’ and/or livelihoods being dependent on selling people something v being clueless.
I often wonder about that too, particularly when I read homebuilding economists forecasts.
I was struck by his answer to the last question. How could anyone who understands what happened fail to mention lowering mortgage rates from 6.5% to 3.3%?
The big difference between the bubble of 2005 and the reflation rally of 2012-2013 is the financing terms. In 2005, we used higher rates applied to toxic loan terms. In 2015, we have very low rates applied to stable loan terms. That’s the key difference.
Finally something we can both agree on. There’s an old adage: “You can’t expect someone to know something when their livelihood depends on them not knowing it.”
Volitional consciousness.
Human beings are the only animals that can perceive reality, all its implications, and then willfully ignore it. It takes effort to know the truth.
As far as economists, a broken clock is right twice a day. Some economists are like broken clocks that are wrong all the time. That defies physics.
I’m working with a manager who’s ignoring signs of an incompetent hire because he doesn’t want to see or admit the truth. At some point, reality will set in, but the willful ignorance is astonishing to watch.
Which cities give you the highest return on a rental investment?
Rents are going up all over the country in hot markets where people are priced out of homeownership. But increasing rents don’t tell the whole story, as this list from RentRange demonstrates. While Florida and California had some of the biggest rent increases — accounting for seven of the top 10 in that category — the places that saw the largest average yields in the third quarter were a little off the beaten path.
The list was put together by RentRange, which gathers rental data on approximately 250,000 single-family houses per month from a variety of contractual sources, including multiple listing services, property managers, landlords and listing web sites. Yields are derived from RentRange’s proprietary automated valuation model.
Here are the eight best areas for getting a return on your rental investment, listed with the average yield for the third quarter.
1. Birmingham-Hoover, Alabama 14.8%
Rental rates in Birmingham increased 9.8% in the third quarter, far less than the average MSA in California, but the city’s affordability means that investors got more ROI than anywhere else in the country.
2. Houston-Sugar Land-Baytown, Texas 14%
The Houston area joins the Dallas MSA, below, in delivering Texas-sized returns for investors profiting from the sharp increase in housing prices in the Lone Star State.
3. Dallas-Fort Worth-Arlington, Texas 13.4%
Like Houston, the DFW metro area benefits from increased job growth combined with rising home prices and limited inventory, a combination that spells good news for SFR investors.
4. Kansas City, Missouri/Kansas 12.7%
This area of the midwest doesn’t always appear on lists for hot housing markets, but the Kansas City MSA is yielding more than just great barbecue for investors right now.
5. Columbus, Ohio 12.4%
Houses are being bought before they even go on the market in this capital city, so it’s no surprise that there are plenty of rental gains to be had as well.
6. Tulsa, Oklahoma 11.7%
The rental return on investment is outsized for this Tornado-Alley city, which is home to only about 400,000 people.
7. Tampa-St. Petersburg-Clearwater, Florida 11.5%
The Tampa area saw rents rise 10.3% in the third quarter.
8. Orlando-Kissimmee-Sanford, Florida 10.6%
A steady stream of theme-park workers no doubt contribute to the pool of renters in this MSA, home of the Magic Kingdom and Universal Studios.
The dollar has risen from unusually low levels, which resulted from QE. Since a weak dollar is good business, export jobs rose to unusually high levels as a result of the weak dollar.
Now that the dollar is strengthening, US goods are less competitive in international markets.
The flip side is that US consumer purchasing power is also higher. With falling energy costs and cheaper imports, the US consumer can now afford to buy more domestically produced goods formerly tagged for export. While export jobs may fall, domestic demand will rise; and production costs will fall as energy prices fall and export associated costs are avoided.
As Europe and Japan recover, their currencies will strengthen, and US exports will rise again. Exports, like mining and energy, are a small part of the US economy.
The rising dollar would be good for all foreign countries if the emerging markets hadn’t amassed massive dollar denominated debt (Turkey, Brazil, South Africa, India, Mexico, Chile, Malaysia, Indonesia).
Now, any benefit of the increased purchasing power of the US will be offset by a setback to the economies of these countries.
Thanks QE! Debasement is slowly becoming inevitable.
But for QE, everything would be great!
“The rising dollar would be good for all foreign countries if the emerging markets hadn’t amassed massive dollar denominated debt.”
That would depend on how the debt is structured, and whether the corporation has dollar denominated revenues. If you sell goods to the US, in dollars, take that revenue and pay your debt in dollars there is no currency risk. If the debt is at a fixed rate, then rising US rates won’t make the debt service more expensive. If emerging market exports rise because of a stronger dollar, then expanding production with fixed-rate dollar denominated debt, serviced with rising dollar denominated revenues is a pretty good business strategy.
I thought that a weak dollar from QE was killing emerging markets. Now a strong dollar from no QE is the issue? It can’t be both!
http://www.barrons.com/articles/what-to-do-about-emerging-market-debt-1444457038
If the shedding of export jobs is offset by an increase in high-paying domestic jobs, then this trend won’t have much impact on housing, but if that’s not the case, or if there is a lag between the two, housing will suffer.
We were adding 200,000+ jobs per month until August as the impact of a rising dollar became apparent.
This also tells me there is little or no chance of raising interest rates this year, and perhaps into the 2nd or 3rd quarter of next year.
The fed won’t raise interest rates going into an election. If not in next six months then not until 2017.
Personally I think they boxed themselves into a corner. There is always and excuse not to raise them and government borrowing now depends on ZIRP.
In the past, the federal reserve didn’t raise rates until inflation hit levels too high to ignore. With inflation well below 2%, I don’t see the impetus to raise rates. It certainly isn’t needed to curb inflation.
“With falling energy costs and cheaper imports, the US consumer can now afford to buy more domestically produced goods formerly tagged for export.”
Except that is exactly the opposite of what is actually happening in the real world.
People are buying more gallons of gas because they have more money. Some of the oil used to produce that gas is extracted domestically. Most all of the oil is refined domestically. More gallons of gasoline sold means higher profits for domestic refiners, since they have set margins above wholesale oil prices. Gasoline is a volume business. Lower prices in this case means higher profits.
Now, what you might have mentioned was that just because consumers can better afford domestically produced goods, that doesn’t mean that they will buy them. Foreign goods are even cheaper with the rising dollar. Some consumers will buy American regardless. Others will go for the lowest price on similar quality goods. Both consumers will see their monthly nut stretch farther.
Some domestic services can’t be substituted with cheaper foreign labor. These sectors will see rising prices, and perhaps wages, as a result of rising consumer demand.
Rates are a bit of an enigma. On the one hand, higher rates mean higher borrowing costs. And higher borrowing costs weigh on balance sheets and discourage sales of debt-financed goods.
On the other hand, higher rates mean more interest income. This income is either spent or saved. If it’s spent, more goods and services are purchased and the economy expands. If it’s saved, then more capital is available for lending which depresses rates.
Either way, higher rates have positive effects as well as negative. Whether higher rates are net-good depends on specific circumstances.
My intuition tells me that slightly higher rates would be positive for the economy as a whole. Sure, it would hurt home and car prices/sales, but it would help consumer spending for non-debt-financed goods and services as interest income rises. Some stock prices would fall, but others would rise. Savings would be increasingly more desirable than debt – which has to be a good thing.
On the third hand, zero-percent rates are potentially too high. Maintaining high prices and full-employment has a cost. That cost is the economic growth rate. Avoiding deflation means prices are artificially high – the hallmark of inflation. Keeping inflation at 1% when prices should be falling 1% is equivalent to 2% inflation. Maintaining an anti-deflation stance for an extended duration causes prices to compound higher resulting in diminished economic activity when nobody can afford anything. You can’t fight the Fed, but you also can’t fight fundamentals.
In summary, rates are too low but they are also too high. We’re f-ed, or maybe we’re not. Have a nice day.
I think you are right that modestly higher rates would actually stimulate the economy. With savers earning zero, they aren’t spending money that should be coming their way. For hundreds of years, the Bank of England refused to reduce rates below 2%, for the stated reason that they believed savers should be paid something, even if it isn’t very much. The distortions caused by zero interest rates are becoming evident, and perhaps higher rates are what’s needed to increase the velocity of money and get the economy moving again.
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