Tuesday, March 18, 2014

Analysis of the Job Market - Is It Strong?
Below is some recent research completed by the American Institute of Economic Research (AIER) that discusses the strength of the job or labor market.  The article is interesting because it goes behind the numbers indicating that one metric like the unemployment rate is probably too simple to explain the complexity of the labor market.  In addition the article puts numbers to the effect that the recent winter weather can have on the job market.  This is not opinion, but some objective numbers so you can decide.  The research turned out by the AIER is always worth a look.   
Severe weather was likely an important factor in the latest employment report from the Bureau of Labor Statistics (BLS), but the good news—for a change—is that the results weren’t terribly weak.
The unemployment rate ticked up to 6.7% in February from 6.6% in January, but that wobble is probably little more than statistical noise.  The big news is that non-farm payrolls rose by a stronger-than-expected 175,000 in February.  Most people who watch these numbers were bracing for a  weaker result, owing to the impact of severe weather.
Yes, the weather in February was worse than usual… yet again. But the timing last month was especially bad: Winter Storm Pax, which crippled most of the eastern half of the country, struck during the week in which the BLS conducts its employment surveys. While you might not lose your job because you are snowed in, the BLS will not include it in the payrolls tally unless you actually did paid work during the survey week. The number of people in February who reported having a job but not going to work because of the weather during the survey week was 601,000, compared to just 237,000 in the same month last year. What if an employer planned to start a new hire on February 12 but delayed the start date to the following week because of the storm? That new job won’t count toward the monthly gain in payrolls.
Considering the toll February’s bad weather probably took—the BLS does not provide a direct measure of weather effects—the 175,000 rise in payrolls suggests the labor market continues to strengthen, despite weaker readings (also weather-affected) of 129,000 in January and  84,000 in December.
Just how weak are those numbers? If you follow the economic data in the news, you might get the sense that a jobs report is not strong unless it includes at least a 200,000 gain in payrolls.  Last year’s monthly average was 194,000, which would make it slightly-less-than strong, and certainly not impressive. This assessment no doubt contributes to the widespread skepticism that the decline in the unemployment rate, from 10% at the peak to 6.7% in February, overstates the improvement in the labor market.
But it’s worth revisiting assumptions about what constitutes a “strong” or “weak” gain in jobs. For a number of reasons—most of which have nothing to do with the strength or weakness of the economy—our labor force just isn’t growing as fast as it used to. Baby boomers are a huge demographic bulge, and as they retire and leave the workforce in droves, they are offsetting much of the gain in new entrants to the labor force, which itself is not what it used to be.
In order to keep the unemployment rate from rising, the number of new jobs in the economy must match the net growth of the workforce—the difference between the number of new entrants and the number of “leavers.” Of course, some people hold more than one job, but only about 5% of the labor force as of the latest data.
If we want to see overall unemployment decline in the economy—bringing the unemployment rate down—then payroll growth must surpass the net growth of the labor force. There’s certainly a lot of ground to make up: The economy shed over 8.6 million jobs during the recession, and since then there has been a net increase in the workforce of about 1.6 million people. So far in this recovery, the economy has created about 8 million new jobs. So we still need to see bigger gains in employment than increases in the labor force to close the unemployment gap. But what kind of numbers are we talking about?
Take a look at our chart below, which lines up labor force growth and jobs growth. The labor force numbers are erratic from month to month, so we’ve smoothed them using 12-month averages. Every time the blue area rises above the red area, the economy is creating enough jobs to bring down unemployment. Over the last year, jobs growth has exceeded labor force growth by a much wider margin, and more frequently, than it did during the early 2000s, when monthly payrolls gains would regularly surpass 200,000.
Based on the trend in labor force growth since 2012, sustained gains in payrolls in excess of 75,000 per month are enough to reduce the unemployment rate over time. That means the average gains of 194,000 per month we saw last year were quite strong—and even the lackluster 152,000 average so far this year is enough to keep chipping away at the unemployment rate. Of course, the greater the gains in jobs, the faster the unemployment rate will come down.

What is Going to Happen to Fannie Mae and Freddie Mac?

A quick update on the fate of Fannie Mae and Freddie Mac from Market Watch.  The article below is an opinion piece with a few news updates added.  This post goes along with my previous post that home ownership is going to become more difficult in the future due to high minimum down payments, higher interest rates, higher credit standards, and higher transaction costs.  Whether this is a good or bad thing is another issue.  But, as stated in the previous post I do not see a strong home price appreciation in many markets going forward due to the rising cost of home ownership.
After decades supporting a political and economic creed that honored affordable and accessible home ownership, Washington is trying to shift gears on a $9.9 trillion system without grinding the machine to an abrupt halt.
A bipartisan team from the Senate Banking Committee reached an agreement Tuesday (March 11) on a broad bill that would unwind Fannie Mae and Freddie Mac the government-sponsored mortgage companies bailed out by taxpayers and placed under conservatorship during the financial crisis.
The plan replaces the god of government backed housing for a more private-market model. It would replace Fannie and Freddie with a new system of federally insured mortgage securities in which private insurers would be required to take initial losses before any government guarantee would be triggered.
Private enterprise was all but eliminated from the mortgage finance process as banks dumped massive amounts of mortgages into the laps of Fannie and Freddie in the run up to the meltdown. The government and taxpayers gradually shouldered the entire mortgage load.
The intended benefit of the system was that it made housing cheaper and available even to those with less than credit-worthy profiles. The unintended consequence was an uncompetitive and distorted marketplace where home buyers underpaid for their loans and the risk was borne by everyone.
The trick for the new bill will be its ability to reintroduce some shared risk-taking and market pricing to an industry that was, if not socialized, then financially engineered by the government in the politically driven zest to create the widest, easiest path to a “man’s (or woman’s) castle.”
Ultimately, prices will certainly go up as private insurers, bond originators and investors will demand more of a premium to offset risk. To shift a system built over four decades amid a fragile housing recovery will take a lot of patience and political nerve — the lack of which got us into this mess in the first place.
Further comments from the Senate later in the week indicated that the chances of this bill passing in a midterm election year are fairly slim (CNBC).  After all, how do you explain to your constituents that the government is not going to help the housing market in your district or state.  In addition both Fannie and Freddie (GSEs) provide some fairly nice profits that go back to the government.  Lastly, there is the question of who profits from the dissolution or break-up of these GSEs,  Right now it could be those "pesky" hedge funds.  All this needs to be sorted out before this bill can move forward.  There oftentimes is a big difference between economics and what can really be done politically.  "O what a tangled web we weave . . ." -Sir Walter Scott

Last note.  The bill was introduced in the Senate on Sunday March 16 (Market Watch).  

Friday, March 14, 2014

Is the Housing Market for Real or Just More Hot Air? The News of a Strong Market is not Supported by the Data.

For some time I thought all the talk about the housing market, that is, things are coming back, prices are going up, we will return to the days prior to the financial crisis, etc. was a lot of hot air.  Now I am convinced of it.

I admit that prices are going up.  I believe that some of that is basically the purchaser and seller thinking that things are back to normal, ergo the pre-2006 period.  Existing home sales have come back to the levels common during 2000 - 2002 (thanks to Calculated Risk), but not even close to the 2004 - 2006 period.

New home sales, however, have not recovered to the pre-2006 period (thanks again to Calculated Risk).  In fact current new home sales are at levels not seen since the recessions of the 1970s and 1980s.

In addition a recent article on the Washington Post Blog indicates that the expectation for housing price appreciation for the next 10 years has been declining since 2004.  The most recent survey shows that the sample of buyers in 4 major metropolitan areas expect an appreciation rate of 3% per year for the next decade.  This is lower than the current mortgage rate, not much of a return on your money.  As an aside this survey is completed by the Karl Case and Robert Shiller, the same people that bring us the Case-Shiller Housing Price Index.

Below is the results of the annual survey:
Screenshot 2014-02-26 12.42.12

A recent poll of real estate forecasters by Pulsenomics showed that experts expect a nationwide house price appreciation of 4.5% in 2014 declining to about 3.3% by 2018.  This is similar to the results of the Case-Shiller annual survey of home buyers.

So what is the housing market going to do?  The housing market is always local.  Some areas will appreciate and others will largely stagnate.  But, overall I am not seeing a lot of strength in the housing market.  Mortgage rates will increase over time as interest rates increase. Lending standards are going to remain tough.  Higher FICO scores and 20% down (except for first time home buyers) will become the standard.  Young people will continue to find home buying difficult because of the down payment and because of what they saw their friends and family go through as the real estate market collapsed after 2007.

You should look at the numbers and make up your own mind, but as for me, I am in no rush to buy a home.  I think owning a home will eventually become what it should have always been - not an investment issue, but a cash flow issue.