Feb042015
Why the federal reserve will not raise rates in 2015
Conditions don’t warrant raising interest rates, and the risks of doing so outweigh any perceived reward.
From the beginning of the Great Recession, many concerned citizens, and particularly the wealthy, feared the government and federal reserve would institute policies that would devalue the currency, cause bond prices to collapse, and create hyperinflation. With near-zero inflation, a rallying dollar, and the 10-year bond yielding record lows, it’s obvious none of the predictions of economic doom have come to pass.
The only reasons the federal reserve would have to raise interest rates is a decline in currency value, crashing bond prices, or high inflation; since we have none of those, only the fear of this happening in the future would prompt a rate increase.
The federal reserve is not a proactive entity. They will not raise rates until forced to do so reactively, and nothing in the current economic circumstances suggests any reaction is necessary. Most influential economists, right or wrong, warn against any change in economic policy that might derail the economic expansion.
Larry Summers warns of epochal deflationary crisis if Fed tightens too soon
Former US treasury secretary also says eurozone QE has come too late to lift the region off the reefs on its own.
By Ambrose Evans-Pritchard, 22 Jan 2015
The United States risks a deflationary spiral and a depression-trap that would engulf the world if the Federal Reserve tightens monetary policy too soon, a top panel of experts has warned.
“Deflation and secular stagnation are the threats of our time. The risks are enormously asymmetric,” said Larry Summers, the former US Treasury Secretary.
What does he mean that the risks are asymmetric? It’s a bit like driving on a cliff-side road. If you leave the road to one side, you hit the side of the mountain and crash your car; it’s bad but not fatal. However, if you leave the road to the other side, you plunge off the cliff to your death. That’s an asymmetric risk.
Is inflation and deflation truly an asymmetric risk? Based on the experience with inflation and deflation in the 19th century, policymakers deemed that it is. The federal reserve was largely created to prevent a recurrence of the deflationary bouts of the 19th century, and despite criticisms to this approach, the federal reserve still exists 100 years later, and they still act more strongly to avoid deflation than to curb inflation.
And our federal reserve is not alone in this practice. If you like very long term charts, check out this one from the UK:
“There is no confident basis for tightening. The Fed should not be fighting against inflation until it sees the whites of its eyes. That is a long way off,” he said, speaking at the World Economic Forum in Davos. …
Any error at this critical juncture could set off a “spiral to deflation” that would be extremely hard to reverse.
Economists live in fear of a repeat of the 1937-1938 recession. The American economy took a sharp downturn in mid-1937, lasting for 13 months through most of 1938. Industrial production declined almost 30 percent and production of durable goods fell even faster. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938. Manufacturing output fell by 37% from the 1937 peak and was back to 1934 levels.
Keynesian economists assign blame to cuts in federal spending and increases in taxes at the insistence of the US Treasury. Historian Robert C. Goldston also noted that two vital New Deal job programs, the Public Works Administration and Works Progress Administration, experienced drastic cuts in the budget which Roosevelt signed into law for the 1937-1938 fiscal year. Monetarists, such as Milton Friedman, assign blame to the Federal Reserve’s tightening of the money supply in 1936 and 1937.
Not everyone agrees with the Keynesian interpretations of the causes of the recession, but most people empowered to make decisions in Washington do, so it’s unlikely they will risk a repeat of the 1937-1938 recession if the price is only a little inflation.
This next issue seems unrelated to the first, but it provides another reason I believe the federal reserve will allow inflation to grow large and go on for longer than most anticipate.
Why mortgage debt threatens boomers’ retirements
Published: Feb 2, 2015 12:02 p.m. ET
A new study finds that, by many measures, debt levels among Americans age 55 and older continue to climb, putting millions of families—and their homes—at risk.
The report, “Debt of the Elderly and Near Elderly, 1992-2013,” comes from the Employee Benefit Research Institute in Washington, D.C. On the positive side, total debt payments as a percentage of income within this group fell to 10% in 2013, from 11.4% in 2010. At the same time, average debt decreased, to $73,211 from $80,465.
Overall, though, more older Americans find themselves in debt. The percentage of American households where the head of household was age 55 or older that had financial liabilities increased to 65.4% in 2013 from 63.4% in 2010. In 1992, the level was 53.8%.
What’s more, the percentage of these families with debt payments greater than 40% of income—a traditional signal of excessive liability—increased to 9.2% in 2013 from 8.5% in 2010.
The upshot: The “percentages of families whose debt payments are excessive relative to their incomes are at or near their highest levels since 1992,” the report states. “Consequently, even more near-elderly and elderly families are likely to find themselves at risk for severe changes in lifestyle after retirement than past generations.”
If the Baby Boomers carry too much debt into retirement, how will they cope? Since they are retired, they can’t work harder, change jobs, or otherwise increase their income, so it only leaves one viable option: they lobby politically for increased benefits, and since retired people vote at much higher rates than younger workers, politicians will accommodate them.
The political pressure to increase retirement benefits puts the Baby Boomers in direct conflict with Millennials and everyone still working in between. Politicians will want to take the path of least resistance, which won’t be raising taxes, so that leaves only one alternative: inflation.
Inflation does two things for over-indebted retirees: first, it makes the currency less valuable, so they are repaying debt with less valuable dollars, and second, it inflation increases retiree income through their cost-of-living adjustments from social security.
Inflation allows politicians to stealthily tax the working class and avoid political repercussion for direct tax increases, and it allows seniors to devalue their debts and increase their incomes. The solution solves everyone’s problems — except for the holders of currency and wealth who will see their holdings diminish due to inflation.
The political left will embrace inflation specifically because it reduces the value of wealth. One of the biggest problems of modern times (according to the political left anyway) is the huge divide between the wealthy and the middle class. Sustained inflation reduces this problem by raising wages for the middle class and reducing the value of stored wealth. Judgements about the morality of this approach aside, it’s politically palatable, and therefore, I believe that’s how the future will play out.
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Mortgage Purchase Applications Plummet an Astounding 2%
Mortgage applications increased 1.3% from the previous week, continuing their upward trajectory for the fourth week, according to data from the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending January 30, 2015.
The Market Composite Index, a measure of mortgage loan application volume, increased 1.3% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 15% compared with the previous week. The Refinance Index increased 3% from the previous week. The seasonally adjusted Purchase Index decreased 2% from one week earlier. The unadjusted Purchase Index increased 16% compared with the previous week and was 3% higher than the same week one year ago.
“Following several weeks of already elevated refinance activity due to falling interest rates, FHA refinance applications increased 76.5% in response to a reduction in annual mortgage insurance premiums which took effect January 26,” said Lynn Fisher, MBA’s Vice President of Research and Economics. “Conventional refinance volume was up only 0.5% for the week while VA refinance volume was down 24.3%. FHA purchase applications were also up 12.4% over the week prior, despite a decrease in purchase applications in the rest of the market.”
Now I’m genuinely curious how they calculate the holiday adjustments.
For instance:
Total Index: +15% unadjusted; +1.3% adjusted
Purchase Only: +16% unadjusted; -2.0% adjusted
So without any adjustments, the purchase index increased more than the total index. Throw in adjustments, and the purchase index shows a decline but the total index shows an increase. How does that make any sense?
Whatever the case may be, purchases have been exceeding the prior year for the past several weeks, so that is a good sign for the housing market to start 2015.
I’m getting the sense they input a random number with little or no bearing on past performance. It seems to have a margin of error of about 100%.
Exceeding the low bar of 2014 shouldn’t be too hard, particularly with mortgage rates well below last year’s levels and an improving economy.
Let’s have a look at what all of the other “good signs” look like ‘charted’ going back several years…
https://confoundedinterest.files.wordpress.com/2015/02/mbapsa020415.png
Q: What is plain as day??
A: There are no good signs.
Wow.. You mean purchases apps are down from the peak? I wouldn’t have thought that. Let me alert my superiors and I’ll refer them to this link if they have any questions.
Google launching built-in mortgage calculator
Lenders who were unhappy with the Consumer Financial Protection Bureau’s new mortgage payment calculator will soon have a new target for their ire, Google (GOOG).
That’s because the internet search monolith began very quietly rolling out a mortgage payment calculator of its own on Tuesday. The built-in mortgage calculator will apparently appear when a user searches for terms like, “mortgage calculator,” “loan interest calculator,” and “interest calculator.”
The native mortgage calculator was first spotted by Searchengineland.com, which captured a screenshot of the tool. Subsequent searches by HousingWire were unable to locate Google’s mortgage calculator within several Google searches.
While the roll-out of the Google mortgage calculator seems to be limited thus far, Google did share some news on the mortgage calculator on its Google+ page.
“Preparing for homeownership just got a bit easier,” Google’s post states. “Starting today you can ask Google things like ‘How much can I borrow at $200 a month?’ or ‘At 5% APR how much can I borrow over 10 years?’ You can even adjust the mortgage amount, interest rate, mortgage period and more to see which financial options fit your needs.?”
87% of properties qualify for down payment assistance
The biggest obstacle for first-time homebuyers?
A joint analysis by RealtyTrac and Down Payment Resource shows that 87% of homes and condos would qualify for down payment assistance.
For the report, RealtyTrac looked at 2,290 down payment programs from Down Payment Resource’s Homeownership Program Index and found out of more than 78 million U.S. single family homes and condos, more than 68 million would qualify for a down payment program available in the county where they are located based on the maximum price requirements for those programs and the estimated value of the properties.
The average amount of down payment assistance across all counties is $11,565.
“Many homebuyers, especially millennials, haven’t fully investigated their home financing options because are pessimistic about qualifying for a mortgage. Our Homeownership Program Index highlights the wide range and availability of down payment programs available to today’s homebuyers. In fact, 91 percent of the 2,290 programs in our registry have funds available to lend to eligible buyers. Plus, income limits vary depending on the market and programs extend beyond just first-time homebuyers,” said Rob Chrane, president and CEO of Down Payment Resource. “It’s important for buyers to research down payment programs as part of their loan shopping process.”
Mortgage Demand Fades Despite Easing Standards
Loosening mortgage standards in the last few months failed to spur demand from borrowers, according to responses in the Federal Reserve’s latest Senior Loan Officer Opinion Survey.
Bank respondents reported less stringent lending criteria across most mortgage categories in January, with credit loosening most on GSE-eligible loans and jumbo loans falling under the Consumer Financial Protection Bureau’s qualified mortgage (QM) standards.
On net, standards were also slightly looser for government-backed mortgages; non-jumbo, non-agency QM loans; and non-QM jumbo loans; though those changes were offset by the number of banks reporting tightening criteria.
For non-QM, non-jumbo loans, the same shares of banks (7 percent) reported tightening and easing. None of the handful of banks dealing in subprime mortgages reported any changes in credit standards.
Jibing with another recent survey from Fannie Mae, larger banks were about twice as likely to report easier standards in any given category as smaller institutions.
Despite the net easing in standards, banks reported that demand for mortgages was weaker overall in every category. Declines were most evident for GSE-eligible mortgages, with 32.8 percent of officers reporting “moderately weaker” demand, and subprime mortgages, with 37.5 percent of officers saying demand was weaker.
Gauging Housing Demand for the Spring of 2015 – Caution in the Wind
2014 was unique but predictable in regard to mortgage demand for purchase applications. Looking back on the data now, it was down every single week of the year, year over year, and negative by double digits every week except for four weeks. The good news ( cough cough) is we have pulled ourselves out of the morass that was 2014 and the New Year is upon us.
Comparatively speaking, my outlook for purchase applications is not as negative this year. My 2015 housing predictions include at least 5%-10% growth, year over year, in purchase applications. This is primarily due to having such a low bar in 2014.
Because we experienced 21st century lows in mortgage purchase applications in 2014 and we are now in the 7th year of this economic cycle with employment to population rising, it is not a stretch to expect at least 5%-10% year growth in this purchase applications in 2015. Of course, year over year growth in purchase applications doesn’t mean a recovery when we experienced such low numbers in 2014. Expect housing bulls to highlight the year over year growth without adding the appropriate context.
With regards to interest rates, the ten-year note is near my predicted low-level range of 1.60% , keeping mortgage rates near the lowest rates of this economic cycle. If the 1.60% level breaks lower, expect a new low print of 1.34%.
However, if I am wrong and we don’t see any growth in 2015 purchase applications and existing home sales stay flat or even go negative, then we will need to admit that home prices have surpassed peak affordability in relation to income capacity. We know this is true for some areas of the country already. The rich can only buy so many homes and there hasn’t been strong household formation to drive first time home-buyer demand. No matter how low rates go, no matter how many jobs are created, no matter what all the king’s horses and all the king’s men try to do… if we don’t have and uptick in household formation and see wage growth, we will not have a true housing recovery.
“The rich can only buy so many homes…”
This is another way of saying, there are a finite number of households in any given area able to afford million dollar homes. So far, in the Irvine area, it’s starting to look like Pavilion Park absorbed all of those households desiring and able to buy million dollar homes. Sales at the expensive end are slow, with Beacon Park coming to market in a few months!
Cheers to supply!
I think that’s an accurate assessment. Plenty of supply is in the pipeline, and builders have standing inventory. If the spring rally doesn’t materialize, builders will begin offering major incentives to move those empty homes. Prices might even come down.
According to Zillow’s Home value index the higher cost cities 700k + are almost all experiencing price declines year over year. Some of the declines are almost at double digits.
My monthly reports show several areas with Y-o-Y declines. I was surprised by this because the report also shows a Y-o-Y decline in mortgage rates of nearly 15%. Affordability is actually getting better.
If mortgage rates remain below 4%, we should get a strong spring rally. If we don’t, the housing market has deeper problems.
Larry,
would you mind sharing some of that data or is there some place I can go to look at that data on this website?
If you register with the site, you can find the reports in two places:
http://ochousingnews.g.corvida.com/members-lounge
http://ochousingnews.g.corvida.com/subscriber-s-reports
I will be uploading the January updates in the next couple of days.
Ability-to-Leverage Drives Foreclosure Risk
a study that reveals the obvious: excessive debt leads to foreclosure
Leverage is known to play an important role in loan default, but while theoretical research on leverage exists; to our knowledge there has been virtually no long-term data driven empirical analysis on the impact of leverage on residential foreclosure.
CoreLogic research highlights four key findings.
First, while homeownership rates today are the same level as five decades ago, foreclosure risk is two to three times higher.
Second, the primary driver of default risk over this period has been leverage. Leverage has played such a strong role that has rendered changes in income and savings as insignificant drivers of default from a long-term macro perspective.
Third, the stabilization in foreclosure rates in the 1970s and 1980s was driven by high inflation rates, which propelled nominal home prices and reduced aggregate LTV, thus lowering default risk – a reminder of real estate’s role as a hedge against inflation.
Fourth, the centerpiece of government regulations to help make the mortgage market safer for consumers was an income based ability-to-pay rule manages delinquency risk, but is less aimed at the market’s foreclosure risk.
Therefore, leverage as the most important driver of foreclosure performance over the last five decades remains unaddressed for the market. In the future, policy makers may need to consider exploring their ability to manage the leverage cycle to promote residential financial stability.
CoreLogic findings illustrate how important leverage has been both historically and in today’s recovery. While leverage is the dominant driver of foreclosure trends, the unemployment rate captures the impact of short-term economic cyclical fluctuations. A less important but still influential factor has been periods of accelerating inflation, which ease the burden of the monthly mortgage payment and masked the rise in leverage via higher nominal home prices. Interestingly, the savings rate and household income were not at all important, which was a surprise given that traditional underwriting focuses on affordability. Over the next year the continuing improvement in prices should help further reduce leverage, but the renewed emphasis on low down payment lending may in the future beyond 2015 lead to an increase in leverage.
All four points are conclusory, with no analysis provided. Each one of these points needs a “because” at the end with an explanation. Yes, 3.75% 30-year fixed rates allow much more leverage than 7.5% rates. So in theory, there is greater risk associated with the lower rate, even though the monthly expense is equivalent.
Why Warren will run against Clinton in 2016
The Democratic race: Why Sen. Elizabeth Warren (D-Mass.) will run in 2016 against former Secretary of State Hillary Clinton.
1. Warren is the only national politician today from either party who conveys a sense of outrage over our current — deteriorating — national situation. Her passion is her signature calling card in a time when all the other candidates for president seem to have passion only for themselves and their candidacies.
2. At a recent 12-person in-depth focus group in Denver conducted by Peter Hart and reported in The Washington Post by Dan Balz, the only national politician who was viewed favorably was Warren — even by some of the Republican voters in the focus group.
3. Why? Because she is the only politician who is even talking about the powerlessness of the average person — and the seemingly too powerful corporate and Wall Street entities.
4. This issue cuts across all political lines. It is the issue that catapulted President Teddy Roosevelt into the political hall of fame. His trust busting led to today’s anti-trust regulations and the belief that the federal government’s role is to act as a neutral referee to ensure a fair playing field. But no one today believes the feds are neutral — or fair. Instead, big government is seen as corrupt and as “rigged” as big business.
5. Indeed, there isn’t that much that separates Occupy Wall Street from the Tea Party. One blames big business while the other blames big government for our problems. But more and more, people see the two as in bed with each other in a cynical game to line their own pockets and to preserve their power — all at the expense of the average American.
6. This underlying fear is the hidden issue in the 2016 race — and so far, only Warren is even talking about it.
7. Her solution is murky — and probably will be more government regulation — but so far, she isnt being asked to provide specifics. Instead, she has a current monopoly on this topic while all the other candidates — including Clinton — seem basically oblivious to it.
8. Speaking of Clinton, as someone put it: “Hillary and her campaign are a large balloon floating around in search of a pin.”
9. That pin will be Warren, who in 2016 will be 67 years old. It is now-or-never time for her to run. If she defers, as she now claims to be doing, it is unlikely she gets another shot at the White House. Her moment — and the stars — align now for her to puncture that Clinton balloon with precisely the issue that Warren understands: Hillary and Bill Clinton have sold their money-grubbing souls to Wall Street. The left wing of the Democratic Party — those who attend the Iowa caucus and vote in snowy New Hampshire in February — will choose Warren over Hillary Clinton.
10. Former Bill Clinton pollster Doug Schoen last week published two specific polls of 400 likely Democratic Iowa caucus-goers and 400 likely New Hampshire primary voters. The results prove that Warren could knock off Hillary Clinton in these two states. Indeed, Clinton is much more vulnerable than these useless national polls — like the recent CNN/ORC poll that showed her ahead 66 percent to 9 percent — that only measure name ID.
11. In Iowa, Clinton – who has already run a statewide campaign there in 2008 — led Warren 51 percent to 36 percent. That 51 percent is not very impressive for a national celebrity figure like Clinton. On issues and message, Clinton only led 35 percent to 31 percent.
12. In New Hampshire, Clinton — who won the Granite State’s 2008 primary — only leads Warren by 9 percentage points, 51 percent to 42 percent, but when the message about Wall Street is factored in, Warren actually leads 47 percent to 42 percent.
13. In other words, Warren conceivably could beat Clinton in both Iowa and New Hampshire — a feat that does not take that much money as they are small states — which would indeed be a death knell to Clinton’s campaign.
14. So here is the big question: Will Elizabeth Warren run — after repeatedly saying she is not running?
15. The answer is simple: Everyone in politics — despite denials — actually wants to be the president of the United States. But few have the opportunity. Warren is now uniquely positioned — as Barack Obama was in 2007 and 2008 — to take on the presumptive frontrunner on a specific issue (Obama’s was Clinton’s support of the war in Iraq) that plays to her strength and exploits Clinton’s weakness.
16. Thus, despite all the denials, it is inevitable that at some point this year, Warren will come to the conclusion that she must run against Clinton in 2016.
17. She has nothing to lose. The worst that happens to her if she runs and loses to Clinton is that she becomes the “black sheep” of the Clinton Democratic Party; Bill Clinton could treat her the way he has treated former Gov. Bill Richardson (D-N.M.) for the past six years. But so what? She’ll still be a U.S. senator.
18. Because she is sincere in her passion, she will decide to run — no matter the potential political downside.
19. Whether she succeeds is a different story. But we know — from Schoen’s polls — that she could defeat Clinton in Iowa and New Hampshire. After that, who knows?
20. Right now — today — Elizabeth Warren is repeatedly considering this possibility. She is being dragged by political reality and her own inner passion to do something she may not at first really want to do. But she knows that she must do it — and that is why, at some point in the next six months or so, she will announce that she is challenging Hillary Clinton in 2016.
The amount of money Wall Street firms contributed to then Senator Hillary Clinton gives you an idea of how “tough” on Wall Street she would be.
If Warren gets the nomination, they will flood her campaign with money too, mostly as a defensive measure. The hope that if they contribute to both campaigns, they won’t make enemies of whoever wins.
There is nothing to be concerned with in the $700 trillion derivatives market because it is a zero sum game.
If True, Then…
” …the net economic impact is zero because … “
This is what I’ve described many times: the only risk to the system is counter-party risk. It’s also the main reason this market needs to be regulated because it’s possible to build up huge counter-party risks, particularly if the insolvent party is knowingly committing fraud, or if they are just plain stupid (AIG).
I believe it is entirely likely this event has already developed and all we are waiting for is the event which reveals it.
“This is what I’ve described many times: the only risk to the system is counter-party risk.”
The ONLY risk? Do you understand how large that ONLY risk is? Maybe I was mistaken, but when I bring it up, you seem to minimize it by flippantly saying, “It is a zero sum game”, as if it is no big deal. What the author is saying and what I have been saying for the last 8 or 9 years is that when the counter party can not pay, the notional values become the REAL values. Saying it is a zero sum game is saying that if no one can pay anyone else, it’s no big deal; no money lost, no money gained. Except that the TBTF institutions become quickly insolvent.
Dodd-Frank regulated this by denying FDIC coverage to institutions with this type of exposure. And the cromnibus that just passed gave back FDIC coverage to the TBTF institutions thereby transferring the risk to the taxpayer.
Do you and your readers understand that when you deposit money into your savings account, it is no longer your money? It is now the banks money. You have loaned the deposited funds to the bank and you are a creditor on the banks balance sheet. If the bank becomes insolvent, you get to stand in line, unless that bank is insured by the FDIC.
If you have money at a brokerage in anything but a level one account, guess what? Yeah, exactly, and there is no FDIC coverage for brokerages, but they do contribute to “insurance” in cases of fraud.
If I had bet $1000 on Seattle, but had hedged by putting $900 on New England, what is my net exposure? $100 ? And what if the counter-party to my $1000 bet used it as a hedge for another bet? The “zero sum game” apologists are saying that the net will end up only being $100 or less because everybody has to pay everybody else. What can possibly go wrong? What if my New England hedge can not pay? My notional immediately becomes my net, $1000. And guess what? None of them, the banks, can pay. Could they pay when CDSes went south? They are ALL knowingly committing fraud, but they aren’t stupid. They know the government, that’s us, will bail them out. Heck, they just paid off enough politicians to pass the cromnibus.
Do you see where this is going? If you look at the recent past, is there even the slightest chance that the derivatives market, especially the interest rate swaps market will not crash?
Every time I hear, “It’s a zero sum game”, I am reminded of Charlie Brown saying to himself that Lucy won’t pull the ball away this time. But, we are all too smart to fall for that again, right?
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