Dean Baker has always been good at explaining in terms of common sense why the speculative housing boom was extremely dangerous and completely unsustainable. By "common sense," we mean that Baker has covered this story for years using his training as a professional economist, using facts instead of advertising or blind academic free-market dogma, and bringing to his stories a humane perspective grounded in what all this means to ordinary working people.
Badlands Journal editorial board
June 3, 2009
Cheerleading the Recovery
Reporters With Pom-Poms
By DEAN BAKER
Last week we got a whole series of bad reports on the state of the economy. New and existing home sales both remain near their lowest level for the downturn, as house prices continue to drop at the rate of 2.0 percent a month. New orders for capital goods, a key measure of investment demand, fell by 2.0 percent in April. Excluding the volatile transportation sector, new orders were still down by 1.5 percent.
On Friday, the Chicago Purchasing Managers Index fell by more than 5 percentage points from its April level, approaching its low for the downturn. The employment component of the index did hit a new low.
These reports might have led to gloomy news stories, but not in the U.S. media. The folks who could not see an $8 trillion housing bubble are still determined to find the silver lining in even the worst economic news.
For example, National Public Radio told listeners that the new home sales figure reported for April was up from the March level . While this was true, the April figure was only 1,000 higher than a March level that had just been revised down by 5,000. April new home sales were 4,000 below the sales level that had originally been reported for March. USA Today touted a “surge” in durable goods orders, which was also based on a sharp downward revision to the prior month’s data.
The media have obviously abandoned economic reporting and instead have adopted the role of cheerleader, touting whatever good news it can find and inventing good news when none can be found. This leaves the responsibility of reporting on the economy to others.
Any serious examination of the data shows that recovery is nowhere in sight. The basic story of the downturn is painfully simple. We have seen a collapse of a housing bubble which has devastated the construction sector and also caused consumption to plunge.
The construction sector is suffering from the enormous overbuilding during the bubble years. Measured in months of sales, the inventories of both new and existing homes are close to double their normal levels. This inventory will ensure that construction remains badly depressed at least through 2010, if not much longer.
The plunge in house prices has send consumption plummeting. The problem is not consumer attitudes, as many commentators seem to believe. Rather, the reason that most homeowners aren’t buying a lot right now is the same reason that homeless people don’t buy a lot of things: they don’t have the money.
The decline in house prices since the peak in 2006 has cost homeowners close to $6 trillion in lost housing equity. In 2009 alone, falling house prices have destroyed almost $2 trillion in equity. People were spending at an incredible rate in 2004-2007 based on the wealth they had in their homes. This wealth has now vanished.
Housing is weak and falling, consumption is weak and falling, new orders for capital goods in April, the main measure for investment demand, is down 35.6 percent from its year ago level. And, state and local governments across the country, led by California, are laying off workers and cutting back services.
If there is evidence of a recovery in this story it is very hard to find. The more obvious story is one of a downward spiral as more layoffs and further cuts in hours continue to reduce workers’ purchasing power. Furthermore, the weakness in the labor market is putting downward pressure on wages, reducing workers’ purchasing power through a second channel.
Happy talk will not turn this economy around. The economy needs more demand, which can only be provided by another larger dose of stimulus from the federal government. There are easy, quick, and effective ways to boost the economy with additional stimulus.
First, let’s give more money to state and local governments so that they don’t have to lay off workers, cut back services and raise taxes. This should be a complete no-brainer since this spending will immediately boost the economy.
The government could also provide a large boost to the economy by jump-starting health care reform with an employer tax credit (e.g. $2,500 per worker) for firms who do not currently provide coverage. This could quickly get us to near universal coverage as Congress worked to restructure the system to contain costs.
It could also provide a $2,500 tax credit to employers for giving workers paid time off. This should both increase demand in the economy and provide workers with more leisure and flexibility at the workplace.
There are other ways in which the government could quickly generate new demand, but these will not be seriously discussed until there is more general recognition that additional stimulus is needed. At some point it will be impossible to conceal the bad news and Congress’ attention will return to stimulus. But the media’s reality defying happy talk on the economy is delaying this moment.
Our View: We can afford to buy a house again
Sharp decline in home prices no panacea, but it can be a good thing.
A silver lining in the foreclosure crisis is that Merced County once again has become a place where most families can afford to buy a home.
According to national home affordability statistics released recently, Merced County's median-income families can afford to buy more than 80 percent of the houses on the market today.
The reason, of course, is not that family incomes have risen, but that housing prices have dropped so dramatically -- which is discouraging to people trying to sell and depressing to those who owe more than their homes are worth.
But think about it: In 2005, only 3 percent of houses were affordable to average-income families. Many people were squeezed out of the market.
Other people did buy -- but shouldn't have. They started spending too much of their monthly income on housing and/or fell for subprime loans and other shaky deals that have led to today's housing mess.
To restart the housing market, the state and federal governments initiated income tax credits for homebuyers.
In addition, some first-time buyers may be eligible for down payment assistance programs. Put all of this together with low mortgage rates and it's obvious that housing truly is far more affordable.
In fact, Merced County now has one of the highest affordability rates in the state, right up there with Stanislaus and San Joaquin counties.
This dramatic turnaround has its negative sides, which are all too familiar. Lower home values have contributed significantly to the budget troubles facing cities and the counties because today they are collecting far less in property taxes than they did a few years ago.
Lower home prices also are prompting homebuilders to start pressing government agencies to reduce building fees or to delay when they are collected.
And our Valley still has a shortage of affordable rental units for the lowest income individuals and families -- people for whom buying is not currently an option and may never be.
The sharp decline in home prices is not a panacea for the many economic ills of today.
But being an affordable place to buy a home is a very good thing.
And it's good for morale and consumer confidence that Merced County ranks near the top of a list rather than at or near the bottom of one, as all too often has been the case.
Most over- and under-valued housing markets
Low prices bring investors back into many markets...Les Christie
...10 Most Undervalued
Home prices in these cities are well below normal.
Metro area Median home price %Undervalued
Vero Beach, Fla. $125.4 -42.5%
Houma, La. $113.5 -41.4%
Las Vegas, Nev. $140.0 -40.9%
Merced, Calif. $106.0 -40.1%
Cape Coral, Fla. $119.5 -39.1%
Houston, Tex $119.8 -36.9%
Midland, Tex. $126.7 -34.8%
Lafayette, La. $125.3 -34.4%
Vallejo, Calif. $196.3 -34.3%
Stockton, Calif. $144.0 -34.3%
Source:IHS Global Insight
13 cities post unemployment higher than 15%
93 metro areas at 10% or more. Rates rise year-over-year in all 372 metropolitan areas for fourth consecutive month...Julianne Pepitone
...Nationwide Unemployment - High
Top 5 cities with the highest unemployment rate in April 2009.
1. El Centro, Calif. 26.9%
2. Yuma, Ariz. 20.3%
3. Merced, Calif. 18.3%
4. Yuba City, Calif. 18.2%
5. Elkhart, Ind. 17.8%
Source:Bureau of Labor Statistics
Jobless rate hits 9.4 percent in May; layoffs slow...JEANNINE AVERSA , AP Economics Writer
WASHINGTON -- With companies in no mood to hire, the unemployment rate jumped to 9.4 percent in May, the highest in more than 25 years. But the pace of layoffs eased, with employers cutting 345,000 jobs, the fewest since September.
The much smaller-than-expected reduction in payroll jobs, reported by the Labor Department on Friday, adds to evidence that the recession is loosening its hold on the country. It marked the fourth straight month that the pace of layoffs slowed.
"This tide is turning," said Richard Yamarone, economist at Argus. "We expect this trend of slower job loss to continue throughout the year."
Still, the increase in the nation's unemployment rate from 8.9 percent in April underscores the difficulties that America's 14.5 million unemployed are having in finding new jobs. Economists had expected the rate to hit 9.2 percent last month.
If laid-off workers who have given up looking for new jobs or have settled for part-time work are included, the unemployment rate would have been 16.4 percent in May, the highest on records dating to 1994.
Labor Secretary Hilda Solis called the rise in May's unemployment rate "unacceptable" and pledged to help bring it down by aiding the unemployed get new skills or training.
President Barack Obama's stimulus package is expected to help bolster the economy. Vice President Joe Biden said he will join Obama on Monday in seeking to ramp up the pace this summer of the stimulus effort that Congress approved earlier this year.
Even with layoffs slowing, companies will be reluctant to hire until they feel certain that economic conditions are improving and that any recovery will last.
Since the recession began in December 2007, the economy has lost a net total of 6 million jobs.
As the recession - which is now the longest since World War II - bites into sales and profits, companies have turned to layoffs and other cost-cutting measures to survive the fallout. Those include holding down workers' hours and freezing or cutting pay.
The average work week in May fell to 33.1 hours, the lowest on records dating to 1964. The number of people out of work six months or longer rose to more than 3.9 million in May, triple the amount from when the recession began.
Stocks rallied on the better-than-expected number of payroll reductions, but then gave back some of the earlier gains. The Dow Jones industrial average gained about 45 points in afternoon trading. Broader indexes also edged up.
Job losses - while slower in May - were still widespread.
Construction companies cut 59,000 jobs, down from 108,000 in April. Factories cut 156,000, on top of 154,000 in the previous month. Retailers cut 17,500 positions, compared with 36,500 in April. Financial activities cut 30,000, down from 45,000 in April. Even the government reduced employment - by 7,000 - after bulking up by 92,000 in April as it added workers for the 2010 Census.
Education, health care, leisure and hospitality were among the industries adding jobs in May. Solis believes the stimulus already has helped "to stabilize employment in the retail and service sectors" and played a role in reducing job losses in construction in May.
In another encouraging note, job losses in both March and April were less than previously thought. Employers cut 652,000 positions in March, versus 699,000 previously reported. They eliminated 504,000 jobs in April, less than the 539,000 initially estimated.
The deepest job cuts of the recession came in January when 741,000 jobs disappeared, the most since 1949.
Federal Reserve Chairman Ben Bernanke repeated his prediction this week that the recession will end this year, but again warned that any recovery will be gradual.
Many economists believe the jobless rate will hit 10 percent by the end of this year. Some think it could rise as high as 10.7 percent by the second quarter of next year before it starts to make a slow descent. The post-World War II high was 10.8 percent at the end of 1982.
Friday's report "supports the notion that the recession will end this year," Yamarone said. But pain will linger and the jobless rate will move higher. He predicts it will peak at 10.2 percent early next year.
The Fed says unemployment will remain elevated into 2011 given the expectation of tepid recovery. Economists say the job market may not get back to normal - meaning a 5 percent unemployment rate - until 2013. Economic recoveries after financial crises tend to be slower, economists say.
Evidence has been mounting that the recession is letting up, with fresh signs emerging earlier this week.
The number of people continuing to draw unemployment benefits dipped for the first time in 20 weeks, and first-time claims also fell. Manufacturing's slide is slowing. Builders are boosting spending on construction projects and a barometer of home sales firmed.
Although shoppers remain cautious according to sales results from major retailers, Bernanke and other economists are hopeful that consumers won't return to the deep hibernation seen at the end of last year.
That's when the recession hit with brutal force, causing the economy to contract at a 6.3 percent pace, the most in 25 years. Consumers cut their spending at the time by the most in nearly three decades. Economic activity shrank at a 5.7 percent pace in the first three months of this year, despite a rebound by consumers.
Many analysts believe the economy is shrinking at about a 2 percent pace in the current quarter, and that the economy could return to growth as soon as the third quarter.
Ripple-effects from General Motors Corp.'s filing for bankruptcy protection - the fourth largest in U.S. history - could muddy the outlook, some analysts said. GM said earlier this week it will close nine factories and idle three others indefinitely as part of its restructuring. The closings, which will take place through the end of 2010, will cost up to 20,000 workers their jobs.
Mortgage applications sink
As rates jump, home refinancing demand drops off, according to a report from the Mortgage Bankers Association.
NEW YORK (Reuters) -- U.S. mortgage applications fell last week, reflecting a plunge in demand for home refinancing loans as interest rates surged to their highest levels since late January, data from an industry group showed on Wednesday.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended May 29 decreased 16.2% to 658.7.
Tom Marano, chief executive of mortgage operations at GMAC, said in an exclusive interview with Reuters on Tuesday that home loan volume at GMAC is about 75% lower now than when mortgage rates hit record lows several months ago.
"Up until the past week and a half, the Federal Reserve had been successful at bringing interest rates on mortgages down," he said.
Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.25%, up 0.44 percentage point from the previous week, its highest level since the week ended Jan. 30.
That level was also significantly higher than the all-time low of 4.61% set in the week ended March 27. The survey has been conducted weekly since 1990. Interest rates, however, were well below year-ago levels of 6.17%.
Thirty-year mortgage rates had mostly been on a downward trend since the Fed unveiled its plan to buy mortgage-backed debt in late November.
But the Fed has met resistance in the bond market. Treasury yields have risen sharply in recent weeks, and mortgage rates have responded in kind.
However, demand for home purchase loans, an indicator of home sales, rose last week. The increase may help gauge how the hard-hit U.S. housing market is faring this spring, the peak home buying season.
The MBA's seasonally adjusted purchase index rose 4.3% to 267.7, its highest level since the week ended April 3. The index, however, came in well below its year-ago level of 333.6, a drop of 19.8%.
Overall mortgage applications last week were 31.1% above their year-ago level. The four-week moving average of mortgage applications, which smoothes weekly volatility, was down 9.0%.
Weekly refinancing activity plunges
Celia Chen, senior director of housing economics at Moody's Economy.com in West Chester, Pa., said government policies are helping to stabilize the housing market but does not expect much of a rebound this year or even in the first half of next year.
"Prices will continue falling because of foreclosures," she said. "Without policy, conditions would be even worse."
"Mortgage rates are rising again, but the Fed's intention is to keep them low, so it will likely take steps to do so," she said.
The U.S. housing market is in the worst downturn since the Great Depression, and its impact has rippled through the recession-hit economy. Economists contend the economy might not emerge from its slump unless the housing market stabilizes.
The Mortgage Bankers' seasonally adjusted index of refinancing applications decreased 24.1% to 2,953.6, its lowest level since the week ended Feb. 6.
The index was up 97.4% from its year-ago level of 1,496.1.
The refinance share of applications decreased to 62.4% from 69.3% the previous week.
Fixed 15-year mortgage rates averaged 4.80%, up from 4.44% the previous week. Rates on one-year ARMs increased to 6.61% from 6.55%.