"Ten years ago, if I offered to buy your house with a 100 percent loan, you would have called it 'creative financing' and thought I was crooked. Today, everybody wants a 100 percent loan."
"Underwriting standards have loosened to almost historic levels," said Bill Dallas, a pioneer in no-money-down loans and a board member of the California Mortgage Bankers Association. "Nobody is heeding the yield signs."
"If there is a fissure in the economic system, it's in housing," Mr. Zandi said. "This is a big, rapidly growing market that has not been tested by higher interest rates. Many people got into their houses by the skin of their teeth."
They took out two mortgages this month, one for $280,000 at 6 percent and the second mortgage for $80,000 at 10.25 percent. Both are adjustable after two years, and the payments are virtually certain to rise, meaning that their budget will be further pinched unless their income rises, too.
"Thanks to God for finding me a mortgage program that let me buy my own house," Mr. Daneshi said.
[California] House prices have climbed so rapidly in the last few months that banks are refusing to appraise some properties as high as their selling prices.
Jennifer Tracy, a graphic designer, recently agreed to buy a condominium in Los Angeles for $235,000. But the same property had exchanged hands less than a year before for $114,000, and no appraiser would value it at more than $195,000. Ms. Tracy bought the condo anyway, but only after coming up with the extra cash to bridge the gap.
"What can I do?" asked Mr. Jackson, the manager of Bristol Home Loan, the subprime loan specialist. "My job is to help people realize the American dream."
The Daily Dose Maybe bad economics news invigorates me. I hope not. It's more like I've been holding my breath during a horror movie waiting for the killer to pop out of nowhere, and (s)he does, and my scream is a sense of release.
Durable goods orders fell 1.6% in May. This is on top of a 2.6% decrease in April. In March, durable goods orders had almost recovered to their previous peak of $220 billion set in June 2000. The current level of $187 billion was first reached in July of 1999. This does not bode well for manufacturing indices or employment, though this is a very volatile indicator and there have been several consecutive month declines both in the downturn and the recovery.
Weekly unemployment claims rose 13,000 to 349,000. Claims have stubbornly remained in the 325,000-350,000 range since late January. This pattern is similar to the one after the 1990-91 recession, when claims peaked at 509,000 in March 1991 and stayed above 300,000 well into the recovery. Weekly claims didn't drop below 300,000 for any extended period until 1999.
Continuing claims for unemployment are a better indicator of the pace of the recovery. These rose 75,000 to 2.967 million in the latest week. In the previous recovery, continuing claims peaked at 3.524 million in May 1991 and broke below 3 million for the first time in November 1992.
Unemployment claims seem to point to an extremely weak and fragile recovery for labor. These two news releases are related. In the state comments, states with the largest increases in unemployment claims pointed to increasing layoffs in manufacturing, construction, automobile, transportation and trade industries, the same ones seeing a decrease in new orders.
Over the first 29 months of the current economic recovery, real private wage and salary disbursements have increased a little less than 3% from levels prevailing at the trough of the last recession in November 2001. By contrast, over the same 29-month interval of the previous six economic upturns, the gain in this series averaged about 9%. The difference between these two trajectories — the anemic real wage income growth in the current cycle and the vigorous gains of the typical cycle — works out to a shortfall of $280 billion of inflation-adjusted income. Job growth is widely presumed to be the silver bullet that will close this gap. But it just hasn't worked out that way and American consumers remain as income-deficient as ever.
All that only serves to underscore one of the biggest pitfalls of all on the road to rebalancing — a persistent lack of internally generated labor income. In the absence of such fuel, the long awaited baton pass simply cannot occur. And, as a result, American consumers would have no choice other than to continue drawing support from the far more "toxic" sources of growth such as tax cuts, a further depletion of saving, increased indebtedness, and additional extraction of purchasing power from asset holdings such as property. The problem, of course, with this recipe is that the options are narrowing on most of these counts as well. Massive budget deficits limit the likelihood of further tax cuts. Personal saving rates of around 2% are near the lower bound of feasibility. Debt ratios are at all-time highs and debt service burdens are at the upper end of historical experience. And, as interest rates rise, the mortgage refi cycle stops, limiting the scope for further equity extraction from homes.
In the end, that's the problem with unbalanced growth paradigms — they're simply not sustainable. We debate endlessly the concept of the "breaking point" — when imbalances finally create enough stress in macro systems to force major corrections in financial markets and/or their real economic underpinnings. In fact, however, macro's strength is not in identifying these thresholds with any precision. Instead, it works best in providing a framework that depicts tensions in economic and market systems that must be resolved. To the extent that the US economy's income-generating capacity remains impaired and that the authorities, after allowing for a meaningful pick-up in the CPI so far in 2004, are running out of ammunition in providing alternative sources of growth, it seems reasonable to presume that the breaking point could be sooner rather than later.
The baton pass is the escape valve in all this — the means by which organic growth can alleviate imbalances. As I see it, two impediments are likely to keep blocking this transition — a return to subpar hiring and a persistence of muted wage increases. I concede that I will be wrong on my reservations over the baton pass if recent hiring vigor is sustained for another 6-9 months and/or real wage inflation suddenly accelerates. Yet I continue to believe that there is a compelling case against such a possibility.
The sharp recent upswing in hiring certainly draws this hypothesis into question. But three months does not render a decisive verdict, in my view, especially when it was preceded by 27 months of the so-called jobless recovery. Nor is there any reason to believe in the possibility of spontaneous leverage on the wage side of the equation; private industry wages and salaries are up only 0.9% in real terms in the 12 months ending March 2004 (a 2.6% nominal increase as measured by the Employment Cost Index less a 1.7% increase in headline CPI inflation over the same period). It is important, in this context, to make the distinction between cyclical and secular trends. I wouldn't at all be surprised to see another few months of rapid hiring as cyclical forces temporarily maintain the upper hand. But the secular overlay of limited pricing leverage, unrelenting cost cutting, and the new options of an IT-enabled global labor arbitrage all leave me convinced that as these cyclical forces subside, the US is likely to return to an underlying trend of subpar employment and limited wage income generation.
Financial Markets Center has a thorough retrospective on historical Fed policy and "the Great Easing" of 2001-2003. Paul Kasriel writes about the Fed "deep in the hole", raising interest rates from the lowest real interest rates ever.
Will rising interest rates sink American consumers? The Globe and Mail reports consumer debt is not solely a U.S. phenomenon. And the inflation rate is picking up but neither Alan Greenspan nor markets are concerned?
It continues to be difficult for me to post regularly here. The general direction of the economy hasn't changed and I generally find it boring to post on every number when the ones I feel are important are monthly or quarterly.
I've also had my time limited by a number of home improvement projects. As I'd assume is the case with most houses in the U.S., mine is over thirty years old with much of the original equipment. The previous owners have either owned it short-term for appreciation or hadn't been willing or able to shell out the money to properly maintain the place.
For starters, I nearly have a coronary every February and August opening the power bills. The windows on the house are original and horribly inefficient. The caulk is degraded and has gaps letting in air and insects (particularly ants). As ultimately we're paying the cost in Iraq to secure the energy for my horribly energy inefficient home, new windows were a priority. They aren't cheap, but I have found as with most things the best way to save money on everything is to call three or four companies and get quotes: they'll knock down the price quite a bit competing for the business.
After the windows, the air conditioning system will need to be replaced. After a second summer of replacing nearly all the refrigerant (and paying through the nose as the machine spun all day to cool nothing), it is time to jettison the 1988 Carrier for something better. I had a quote from Sears, which allowed me to get my usual HVAC company to throw in a new set of exhaust pipes and a year of maintenance along with the unit. The engineer who inspected our system was particularly entertained by the 3" exhaust pipe that was connected to a 4 1/2" inch one by what looked like chewing gum.
After we seal up the windows and put a more efficient cooling system in, the whole place needs to be topped off with insulation and the holes patched. My neighbor knocked out several of the walls of their similarly built residence and found that not only were the walls quite thin, but all the insulation had sunk to the bottom 1/3. The previous owner's satellite sytem means there are holes in all the bedroom closet ceilings for television wires (some of which are still in place). I'm not brave enough to go into the attic - I can hear something moving up there on occasion, meaning a possible call to pest control if whatever it is has made it inside the roof and is not just walking on it, but I can tell from the temperature differential of the closet under the entrance that there is nothing but air in its vicinity up there.
Anyway, the repairs will go into the five figures and the benefits will not return to me while I own the house. I could just as easily not do them and sell the house for slightly less and let the next owner take care of the problems. I could have just as easily not stopped contributing to my retirement plan and whittling down my savings to save up the money to do them. Why bother?
Well, this is an investment, meaning that the economic benefits will ultimately flow back to me, even if it is just a 0.0000001 cent reduction in energy prices because the improved house uses 50% less of it. I do place emotional value not cringing at opening my power bill each month. I feel less embarrassed when guests come over during the winter and there isn't cold air coming in through the windows and all the holes in the walls. If it means we're imperceptively less likely to spend trillions in the Middle East to secure dwindling energy resources, because those resources have become cheaper, it's a worthwhile investment. I value what is in my self-interest as well as the general interest. I will at least find good use for the $80 a month I won't be giving to PEPCO or Washington Gas.
The $87 billion of the Bush Administration's first funding request for Iraq and Afghanistan could have purchased four million hybrid cars or installed free solar systems on 3-4 million homes. In a broader scope, if we reduced our defense spending by half, we could easily use the $2 trillion over the next decade to provide a free electric car and solar power to every American home, and still have enough left over for medical care and education (particulary if we can cut health care expenses by 33% with a single-payer system).
I suppose you can make the argument, "Hey, what about Osama bin Laden?" I guess I could answer that if your willing to choose spending $2 trillion to hunt down one guy (or even 1,000 such guys) over a free car, home energy system, college tuition for your kids, and free health care, you should read this paragraph again. I know this sounds stupid spelling this out. It should. It really should.
It should sound stupid to spend trillions to blow stuff up, rather than to invest in things that can produce more things later. It should sound stupid to invest in an ICBM rather than a child that could develop a cure for cancer in five years rather than twenty.
But it's also naive we can change the system that does value these things overnight. The changes start with people doing a little bit every day. Our values will get put into the system and it will change. I mean value in the personal, economic and societal sense. Productive investment has a way of doing that. It returns itself over time, while non-productive investment does not.
There's a common argument that if we consume less energy, that will just drive the price down, which in turn will increase energy consumption. This kind of Malthusian thinking has never been correct. In fact, the opposite is true. We don't have more children when our standard of living rises - the birth rate of a country falls as per capita GDP increases. The reason is the value of children rises (not just the price of raising them).
Most people enjoy spending less time in rush hour traffic, having more money left over after filling the tank or paying the electric bill, not having children die in useless wars, not spending trillions on a useless military-industrial complex. Sure, things will happen faster and not be so costly if we devote resources to it or the price of oil goes up to $200 a barrel, but that doesn't mean it isn't happening now or individuals can't help the process along a little bit. Even if we can't or don't put a price on the costs, they still have a value, and I've often noticed there is an economic karma that comes around in unexpectedly beneficial ways.
Nothing depresses me more than when economists refer to our trade as "the dismal science". There is nothing dismal about it. Economics is how we value things and if our economy is screwed up it is because our values are screwed up and not the other way around. In addition, even though one individual can't change the system immediately, history is full of economists that laughed through disaster all the way to the bank. Richard Cantillon made a fortune during the Mississippi Bubble. Keynes managed to earn double-digit returns on stocks through the Great Depression. Just don't ask me what the market will do next Tuesday.
In closing, I'll be posting more when I'm not writing so many checks and having so many people tramp through my house. Hope this has been a fraction as good reading this as it has been to write it.