Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 0.6 percent to a seasonally adjusted annual rate of 4.97 million in April, reports the National Association of Realtors. This could be a trend, as housing inventories are also increasing, while foreclosure rates continue to fall, allowing more homes on the market. Sales activity is 9.7 percent above the 4.53 million-unit level in April 2012.

Graph: Calculated Risk

Total housing inventory at the end of April rose 11.9 percent, a seasonal increase to 2.16 million existing homes available for sale, a 5.2-month supply at the current sales pace, compared with 4.7 months in March. Listed inventory is 13.6 percent below a year ago, when there was a 6.6-month supply, with current availability tighter in the lower price ranges. Inventories are improving, but more homes need to be available for sale to continue the upward trend.

Lawrence Yun, NAR chief economist, said the market is solidly recovering.  “The robust housing market recovery is occurring in spite of tight access to credit and limited inventory.  Without these frictions, existing-home sales easily would be well above the 5-million unit pace,” he said.  “Buyer traffic is 31 percent stronger than a year ago, but sales are running only about 10 percent higher.  It’s become quite clear that the only way to tame price growth to a manageable, healthy pace is higher levels of new home construction.”

Meanwhile, according to the First Look report for April by Lender Processing Services (LPS), the percent of loans delinquent decreased in April compared to March, and declined about 10 percent year-over-year, reports Calculated Risk. Also the percent of loans in the foreclosure process declined further in April and were down almost 25 percent over the last year.

LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) decreased to 6.21 percent from 6.59 percent in March. Note: the normal rate for delinquencies is around 4.5 to 5 percent. The percent of loans in the actual foreclosure process declined to 3.1 percent in April from 3.37 percent in March, but that is still higher than pre-recession levels.

One danger signal to a continued housing recovery are rising mortgage rates, however. They have been rising from as low as 3.25% for the conforming 30-year fixed rate to 3.625 percent today.  And this has caused mortgage applications to drop. The Refinance Index decreased 12 percent from the previous week. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier.

“Mortgage rates increased to their highest level since March last week, leading to the largest single week drop in refinance applications this year,” said Mike Fratantoni, MBA’s Vice President of Research and Economics. “The refinance index has fallen almost 19 percent over the past two weeks and is back to its lowest level since late March. Purchase activity declined over the week but is still running about 10 percent above last year’s pace at this time.”

Given consumers’ slow growing incomes, such low interest rates have been the main driver of housing sales. We can only hope the Federal Reserve continues its Quantitative Easing purchases of securities to keep interest rates low enough for housing to fully recover.

Harlan Green © 2013

Follow Harlan Green on Twitter: www.twitter.com/HarlanGreen

Both the University of Michigan’s Consumer Sentiment survey and Conference Board’s Index of Leading Indicators rose in May, signaling that employment and growth may be stronger than forecast by most economists.

How can that be with 7.5 percent of the workforce looking for work and some 18 million that have either part time, or no work at all? The real answer is the U.S. economy is almost too complex to accurately measure, and economists have their biases when predicting growth. In fact, few understand what is called macroeconomics, which helps to predict how government polices affect growth.

For instance, Haver Analytics surveys monthly a group of leading economists, and found that the latest Blue Chip survey foresaw U.S. economic growth of 1.6 percent in Q1’13 following an anemic 1.4 percent rise during Q4′12, when Q1 GDP growth was actually 2.5 percent.

“There is, however, divergence as to the degree of further improvement,” wrote Haver Analytics in a major understatement. “By the end of 2013, the consensus foresees GDP growing at 2.7 percent rate with the top 10 forecasts at 3.6 percent and the bottom 10 at 1.8 percent. The same divergence holds true for next year’s expected growth. The consensus of a 3.0 percent advance in real GDP for Q4 2014 is derived from 3.8 percent at the top end and 2.2 percent at the bottom.”

The Blue Chip Indicators also forecast a 7.5 percent unemployment rate by the end of 2013, when it has already dropped to that level in May. The Congressional Budget Office also forecasts 2 percent growth this year, rising to 3.5 percent in 2014.

Graph: Calculated Risk

Consumer spirits are improving dramatically this month in what very well may be a reflection of improvement in the jobs market. The consumer sentiment index jumped to 83.7 for the mid-month reading vs 76.4 for the final April reading and vs April’s mid-month reading of 72.3. The Econoday consensus was looking for 78.0 with the high-end estimate at 82.5. The latest reading is near the recovery high set in November.

Boosted by strength in housing permits, the Conference Board’s index of leading economic indicators (LEI) surged 0.6 percent in April, double the rate of growth expected by the Econoday consensus and at the high-end of the Econoday consensus. The gain points to rising economic momentum six months out.

Also showing strength are financial measures, including credit activity, as well as jobless claims and the stock market. On the negative side are manufacturing measures, which reflect this sector’s ongoing bumpy ride, as well as consumer expectations. This latter factor, however, is very likely to turn positive in May judging by this morning’s big jump in the consumer sentiment report.

Graph: Haver Analytics

The bottom line is that conditions may be improving enough that consumers are willing to spend again. The household debt-service ratio - an estimate of the share of debt payments to disposable personal income - fell to 10.38 percent in Q4’12, reported the Federal Reserve.

That was the lowest since the series started in 1980. In comparison, the ratio, which takes into account outstanding mortgage and consumer debt, was 10.56 percent in the third quarter. It peaked in the third quarter of 2007, shortly before the U.S. economy fell into recession. This may give consumers, who power 70 percent of economic activity, enough confidence to spend again.

Harlan Green © 2013

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DataQuick just reported Southern California homes sold at the fastest pace for an April in seven years amid the release of pent-up demand for move-up homes and high levels of investor purchases. This is while April new-home construction dipped slightly, though housing permits for new construction are increasing at 1 million units, annually.

The median sale price rose to a 58-month high, reflecting both home price appreciation as well as the simultaneous plunge in foreclosure resales and surge in mid- to up-market buying. On average, sales between March and April have risen 1.0 percent since 1988, when DataQuick’s statistics begin.

The median price paid for all new and resale houses and condos sold in the six-county Southland was $357,000 last month, up 3.3 percent from $345,500 in March and up 23.1 percent from $290,000 in April 2012. Last month’s median was the highest since June 2008, when the median was $360,000.

Last month’s sales were the highest for the month of April since 27,114 Southland homes sold in April 2006, but they were 11.8 percent below the April average of 24,291 sales. The low for April sales was 15,303 in 1995, while the high was 37,905 in April 2004.

“This is a market that is still re-balancing. Sales of deeply discounted properties in affordable neighborhoods are way down. Activity in middle and high-end communities is on its way up. Now it’s catch-up time, with a healthier economy spurring more demand and rising prices tempting more people to put their homes up for sale,” said John Walsh, DataQuick president.

Graph: Econoday

Privately-owned housing starts in April were at a seasonally adjusted annual rate of 853,000. This is 16.5 percent below the revised March estimate of 1,021,000, but is 13.1 percent above the April 2012 rate of 754,000. Single-family housing starts in April were at a rate of 610,000; this is 2.1 percent below the revised March figure of 623,000. The April rate for units in buildings with five units or more was 234,000.

But Privately-owned housing units authorized by building permits in April were at a seasonally adjusted annual rate of 1,017,000. This is 14.3 percent above the revised March rate of 890,000 and is 35.8 percent above the April 2012 estimate of 749,000. So we can see that future construction looks promising and continues the building surge in 2013.

So it is no surprise that builder confidence in the market for newly built, single-family homes improved three points to a 44 reading on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for May. This gain, from a downwardly revised 41 in April, reflected improvement in all three index components – current sales conditions, sales expectations and traffic of prospective buyers.

Harlan Green © 2013

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The total amount of debt held by Americans fell again in the first three months of 2013 and stood at the lowest level since the middle of 2006, the New York Federal Reserve said Tuesday. The level of household debt fell by $110 billion, or 1 percent, to $11.23 trillion, mainly because consumers reduced their mortgage obligations and used credit cards less. Household debt is now 11.4 Percent lower vs. a peak of $12.68 trillion in 2008.

Graph: New York Federal Reserve

This is one reason retail sales are holding up. Mortgage debt slid to $7.93 trillion from $8.03 trillion in the fourth quarter to mark the lowest amount since late 2006. Mortgage debt fell in the first quarter even though more home loans were issued than in the prior quarter.

Delinquency rates improved across the board: mortgages (5.4 percent from 5.6 percent), HELOC (3.2 percent from 3.5 percent), auto loans (3.9 percent from 4.0 percent), credit cards (10.2 percent from 10.6 percent) and student loans (11.2 percent from 11.7 percent).  The overall 90+ day delinquency rate dropped from 6.3 percent to 6.0 percent this quarter, below the 8.7 percent peak from three years ago.

“After a temporary deceleration in the previous quarter, the data suggest that household deleveraging has resumed its previous trajectory,” said Wilbert van der Klaauw, senior vice president and economist at the New York Fed. “We’ll look to see if this pace of debt reduction and delinquency improvements will persist in upcoming quarters.”

Retail sales beat expectation in April, up 0.1 percent, 3.75 percent in a year, following a drop of 0.5 percent in March (originally down 0.4 percent). Analysts forecast a 0.3 percent decline. Motor vehicles were unexpectedly up 1.0 percent after a 0.6 percent dip in March. Unit new motor vehicle sales slipped in April but from high levels, according to manufacturers’ data. Core strength was in building materials & garden equipment; clothing; nonstore retailers; general merchandise; and food services & drinking places. There may be some seasonality issues but discretionary spending appears to be picking up.

Graph: Econoday

Other positive developments in the Q1 New York Fed report included a rise in the share of 30-60 day delinquent mortgage balances that transitioned to current and a decline in the rate at which current mortgages transition into delinquency.  Nearly 35 percent of 30-60 day delinquent balances became current compared to 28 percent in the previous quarter. Moreover, 1.6 percent of current balances became delinquent compared to 1.8 percent in the previous quarter.   
Highlights from the report include:

• Outstanding student loan debt increased $20 billion to $986 billion.
• Total mortgage debt decreased to $7.93 trillion from $8.03 trillion.   
• Auto loans increased $11 billion to $794 billion.
• Credit card balances decreased $19 billion to $660 billion.
• HELOC balances fell $11 billion to $552 billion. 
• Mortgage originations rose for the sixth consecutive quarter, to $577 billion.

Inflation and energy prices in particular are declining, giving consumers more room to spend, which will boost Q2 economic growth as well.

Harlan Green © 2013

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The Federal Housing Finance Authority that supervises the so-called Government Supervised Enterprises (GSE), now including Fannie Mae and Freddie Mac, just announced restrictions that not only weaken Fannie and Freddie’s mandate, but the mortgage and housing markets in general. The FHFA just announced that it will no longer allow Fannie and Freddie to purchase or guarantee so-called “non-qualified” mortgages with more than 30 years amortization or that have interest only payments, among other restrictions.

Fannie and Freddie’s mission is to “Ensure that the housing GSEs operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment”. So why has it just made a ruling that will restrict their ability to be the most “reliable source of liquidity and funding”, and so real estate in general?

FHFA’s answer is the “Adoption of these new limitations by Fannie Mae and Freddie Mac is in keeping with FHFA’s goal of gradually contracting their market footprint and protecting borrowers and taxpayers,” said the announcement.

Yet Fannie Mae and Freddie Mac are the gold standard for mortgage underwriting, with the toughest qualification criteria, which is why these GSEs have the lowest default rates—some 3.13 percent vs. 6.7 percent for all private label mortgages, as I said in a past column (Saving Fannie and Freddie). That means first time home buyers and those with lower incomes will have to depend on portfolio lenders for those programs. These lenders therefore tend to use weaker qualification criteria and so either have to keep those mortgages on their books, or who package them as less credit worthy securities.

So Fannie and Freddie are the most “reliable source of liquidity and funding for housing”. There are really no other viable mortgage programs to sustain the housing market, in particular. They now guarantee some 90 percent of mortgage originations precisely because private label lenders have not come back into the market, even as housing prices have risen.

FHFA’s actual announcement said, “Beginning January 10, 2014, Fannie Mae and Freddie Mac will no longer purchase a loan that is subject to the “ability to repay” rule if the loan:

· is not fully amortizing,

· has a term of longer than 30 years, or

·includes points and fees in excess of three percent of the total loan amount, or such

other limits for low balance loans as set forth in the rule.

“Effectively, this means Fannie Mae and Freddie Mac will not purchase interest-only loans, loans with 40-year terms, or those with points and fees exceeding the thresholds established by the rule, said its announcement.”

Yet both interest only and 40-year amortized mortgage lower the payments for first time homebuyers, in particular. It also means shutting out lower-income buyers, even though Fannie and Freddie qualify them at the fully amortized rate.

There is no other way to interpret this ruling, other than another attempt to lower the overall quality of mortgage lending at a time when housing and real estate in general is at the beginning of its recovery.

Fannie Mae just reported pre-tax income of $8.1 billion for the first quarter of 2013, compared with pre-tax income of $2.7 billion in the first quarter of 2012 and pre-tax income of $7.6 billion in the fourth quarter of 2012. Fannie Mae’s pre-tax income for the first quarter of 2013 was the largest quarterly pre-tax income in the company’s history.

Need we say more? A financially sound Fannie Mae and Freddie Mac will continue to be the mainstay of housing finance, unless those who do not want or support a healthy mortgage market for all home buyers succeed in limiting their mission to “serve as a reliable source of liquidity and funding for housing finance and community investment.”

Harlan Green © 2013

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The Federal Reserve just published its quarterly Senior Loan Officer survey on lending standards by the largest banks. They basically adhere to the strictest Fannie Mae and Freddie Mac guidelines for residential loans, such as minimum 620 credit score and debt-to-income ratios around 45 percent. Banks were a bit more liberal with commercial and industrial loans—apartment lending in particular, which is red hot due to dropping vacancy rates.

The banks“…on balance, reported having eased their lending standards and having experienced stronger demand in several loan categories over the past three months,” said the report.

But not in housing, perhaps the largest segment and one that gives consumers the greatest feeling of financial well-being. Even with record low interest rates banks are being stingy, which is why there is a record some $1.76 trillion in excess reserves sitting at the Fed. Banks’ overall lending has increased just 3 percent per annum of late, versus the historical 6 percent during good times, as in this Federal Reserve graph that dates from 1987 Q1 to 2013 Q1.

Graph: Federal Reserve

This could change, however, as loan delinquency rates continue to decline and banks become less risk averse. Calculated Risk just reported Processing Services (LPS) released their Mortgage Monitor report for March. According to LPS, 6.59 percent of mortgages were delinquent in March, down from 6.80 percent in February. LPS reports that 3.37 percent of mortgages were in the foreclosure process, down from 4.19 percent in March 2012.

This gives a total of 9.96 percent delinquent or in foreclosure. It breaks down as:
• 1,842,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,466,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,689,000 loans in foreclosure process.
It is a total of ​​4,997,000 loans delinquent or in foreclosure in March, down from 5,589,000 in March 2012.

The March Mortgage Monitor report also found that new problem loan rates (seriously delinquent mortgages that were current six months ago) have fallen below 1 percent for the first time since 2007. At 0.84 percent, the March new problem loan rate is approaching pre-crisis levels, and nearing the conditions of 2000-2004 when the rate averaged 0.55 percent. However, as LPS Applied Analytics Senior Vice President Herb Blecher explained, a borrower’s equity position is still a key indicator of his or her propensity to default.

“There has always been a clear correlation between higher levels of negative equity and new problem loan rates,” Blecher said. “Looking at the March data, we see that borrowers with equity are actually outperforming the national average — at 0.6 percent, this group is quite close to pre-crisis norms. The further underwater a borrower gets, the higher those problem rates rise. Borrowers with loan-to-value (LTV) ratios of just 100-110 percent are actually defaulting at more than twice the national average. For those 50 percent or more underwater, we see new problem rates of 4 percent.

Graph: LPS

“Still, the overall equity trend has been a very positive one,” Blecher continued. “LPS’ latest data shows that the share of loans with LTVs greater than 100 percent has fallen 41 percent from a year ago. In total, there were approximately 9 million such loans, or about 18 percent of active mortgages. Some states, including the so-called ‘sand states’ (Arizona, Florida, Nevada and California), are still well above the national level, at an average 28 percent, but they, too, have seen improvement over the last year, with negative equity dropping over 40 percent across those four states since January 2012.”

So we know that rising housing values will continue to benefit homeowners and lenders. As foreclosure rates continue to fall, there is less downward pressure on housing values, since foreclosed homes sell on average some 33 percent below market prices.

Corelogic just reported that home prices nationwide, including distressed sales, increased 10.5 percent on a year-over-year basis in March 2013 compared to March 2012. This change represents the biggest year-over-year increase since March 2006 and the 13th consecutive monthly increase in home prices nationally. On a month-over-month basis, including distressed sales, home prices increased by 1.9 percent in March 2013 compared to February 2013.

Banks are not doing much for the housing market, in particular, leaving Fannie Mae and Freddie Mac to guarantee 90 percent of current home loans originated by lending institutions. Meanwhile, the Federal Home Loan Bank Board has just announced it will no longer allow Fannie and Freddie to guarantee so-called ‘non-qualified’ loans after 2013, which are basically those loans that don’t amortize principal to be paid off in 30 years or less, such as interest only mortgages.

The hugely excess reserves held by banks once again highlight their conservative nature. And with Fannie and Freddie withdrawing from all but the most basic mortgages, we can only hope that other lending institutions—such as Mortgage Banks and Credit Unions—will recognize the lending opportunities that rising housing prices afford, if the housing recovery is to continue.

Harlan Green © 2013

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Suddenly it looks like the U.S. economy isn’t stalling. Total nonfarm payroll employment rose by 165,000 in April, and the unemployment rate fell slightly to 7.5 percent from 7.6 percent in March, reported the U.S. Bureau of Labor Statistics last Friday. I suspected as much in my April 29 column (Will U.S. Growth Slow in 2012?) due to the large seasonal adjustments deducted from last month’s actual 729,000 increase in payroll jobs.

On top of that, the change in total nonfarm payroll employment for February was revised from +268,000 to +332,000, and the change for March was revised from +88,000 to +138,000. With these revisions, employment gains in February and March combined were 114,000 higher than previously reported.

Graph: Calculated Risk

So maybe the sequester cuts in government spending may not be harming growth as much as predicted—at least for the present. The Congressional Budget Office predicted a loss of up to 750,000 jobs and 1.5 percent in GDP growth in 2013 due to the sequestration cuts.

Why the large revisions to such an important economic indicator? Circumstances may be mirroring that of an earlier era. President Clinton saw some 22 million jobs created during his term, while government spending was reduced due to an earlier cutback in defense spending. The slack was made up by booming exports due to a reduced dollar exchange rate, a more accommodative Fed under Chairman Greenspan, the dot-com bubble that saw a boom in high tech investments, as well as the beginning of the last housing boom that ultimately resulted in the housing bubble.

It may be harder to identify the current growth drivers coming out of this Great Recession. But Fed Chairman Bernanke is pursuing the same business-friendly practices as predecessor Greenspan with record low interest rates and the QE securities’ buying programs that has also boosted exports.

Could it be the high tech, digital replace-workers-with-machines revolution has slowed, along with productivity growth, which means the current workforce has reached the limits of its output, so that hiring has to increase? Nonfarm business productivity rebounded an annualized 0.7 percent, following a decline of 1.7 percent in the fourth quarter. Unit labor costs rose 0.5 percent, following a 4.4 percent jump in the fourth quarter. That is usually a sign of the need for increased hiring, and Q1 seems to have confirmed it. We know the importance of keeping labor costs down, since such costs make up two-thirds of product costs.

Graph: Econoday

So increased hiring is probably why unit labor costs plunged in Q1 2013, which are the costs associated with producing ‘one unit’ of product. Year-ago unit labor costs were up 0.6 percent, compared to 2.0 percent in the fourth quarter. Hourly compensation was up 1.6 percent, following 2.7 percent in the fourth quarter.

More good news was the National Federation of Independent Business (NFIB) report that hiring had increased in the small business sector in particular. "April was another positive, albeit lackluster month for job creation—but small-business owners are expressing a bit more enthusiasm in hiring plans in the months to come”, said NFIB Chief Economist William Dunkelberg. “According to NFIB’s latest data, small employers reported increasing employment an average of 0.14 workers per firm in April. This is a bit lower than March’s reading, but still the fifth positive sequential monthly gain.”

Graph: NFIB

The higher payroll and small business hirings could mean productivity gains for robots and other high tech productivity aids are reaching their limits. It looks like robots can only do so much of the work.

Harlan Green © 2013

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The Federal Reserve Open Market Committee has just said it in the press release from its latest committee meeting in an otherwise ‘moderately’ upbeat announcement: “Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth.”

Austerinomics, or the policy of starving the beast of government by cutting both its revenues and spending doesn’t work at a time when 7.6 percent of those looking for work cannot find jobs, and some 4.7 million have been unemployed for more than 6 months. In fact, austerinomics is really starving most Americans of their wealth, as well as necessary public services and safeguards.

We know the restraints are across the board sequestration spending cuts on top of the $1.6 trillion in spending cuts enacted in 2011. The results, says the Congressional Budget Office are the loss of up to 750,000 jobs and up to 1.5 percent in GDP growth in 2013.

The real beef of Keynesian economists such as Paul Krugman, Joseph Stiglitz and a host of other Nobelists is that the advocates of austerity in both U.S. and Europe won’t acknowledge the evidence. Austerinomics hurts economic growth. The evidence is really overwhelming, both in Europe that is back in recession and the weak U.S. recovery. Cutting government spending and other stimulus measures during recessions, and consequent recoveries makes no economic sense, because it reduces the demand for more goods and services.

Austerinomics isn’t based on any economic theory (nor is Laffernomics, the theories of Arthur Laffer who predicted that lower tax rates would increase growth). It hasn’t happened, as GDP growth has been slowing since the 1970s rather than speeding up as tax rates have been slashed.

For what drives growth is both public and private spending, not just spending of the wealthiest few. Consumers spend less and investors invest less when unemployment is high and incomes are low, period. Even GW Bush understood this, which is why he refused to cut government spending after his first recession and 9/11 attacks.

Unfortunately, most of that spending was to finance 2 wars and tax cuts for the wealthiest individuals. But it did bring back full employment, until the housing bubble burst.

So what is the real goal of the advocates of austerinomics? It is the continued transfer of wealth to the wealthiest. Representative Paul Ryan’s budget proposals provide the blueprint, and Bush’s Brain Senior Advisor Karl Rove provided the rationale for re-creating the cartels and monopolies of President William McKinley’s time—1897-1901. Rove believed Republican principles and power would reign supreme for generations, if Republicans and their supporters accumulated enough wealth.

But that has never stuck with Americans. Vice President Teddy Roosevelt initiated the progressive era upon McKinley’s assassination, battling the monopolies and cartels of that era. The result was what he called the “New Nationalism”, a government that functioned for all the people, in his famous 1910 Osawatomie, Kansas speech.

“The new Nationalism puts the National need before sectional or personal advantage. It is impatient of the utter confusion that results from local legislatures attempting to treat National issues as local issues. It is still more impatient of the impotence which springs from over-division of governmental powers, the impotence which makes it possible for local selfishness or for legal cunning, hired by wealthy special interests, to bring National activities to a deadlock. This new Nationalism regards the executive power as the steward of public welfare. It demands of the judiciary that it shall be interested primarily in human welfare rather than in property, just as it demands that the representative body shall represent all the people rather than any one class or section of the people.”

We cannot turn the clock back to the beginning of the 19^th century, in other words, even if some people want to.

Harlan Green © 2013

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In spite of warnings from such as Robert Shiller of Irrational Exuberance fame that housing values could remain stagnant over the next ten years, housing prices are making a comeback, which is boosting economic growth. Some of the worst hit bubble cities have the largest price increases, and diminished inventories. Even better news is that housing prices have returned to historical levels as measured by the price-to-rent ratio, which measures the relationship between rents (which are closely tied to incomes) and housing values, signaling that housing values are no longer in bubble territory.

Graph: Calculated Risk

Data through February 2013, released today by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices … showed average home prices increased 8.6 percent and 9.3 percent, respectively, for the 10- and 20-City Composites in the 12 months ending in February 2013, said the press release.

“Home prices continue to show solid increases across all 20 cities,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “The 10- and 20-City Composites recorded their highest annual growth rates since May 2006; seasonally adjusted monthly data show all 20 cities saw higher prices for two months in a row – the last time that happened was in early 2005. Home sales aren’t doing badly either.”

For instance, we can say that housing prices in California cities, San Francisco, Los Angeles, and San Diego have recovered more than half their values lost since 2000. And the Price-to-Rent ratio is back to 1 to 1, meaning that the historical ratio held since January 1983 is probably the best indicator that prices have now stabilized for the longer term.

Graph: Calculated Risk

Some economists, including Dr. Shiller, seem to be puzzled by the price surge, in particular. But what about the return to more than 1 million plus new households being formed in 2012—a tripling of the recession lows, when children fled back to their parents homes because of the hard times?

And we mustn’t forget that employment has improved substantially, with some 6 million jobs now added to payrolls since the Great Recession. Dr. Shiller’s latest conclusions are based on surveys and his theories that much of consumer behavior comes from hearsay and not much research into investments, hence the housing bubble.

Dr. Shiller, an Economics Professor at Yale University, also says the biggest home price increases now are seen in multifamily rather than single-family homes which reflects a shift from home ownership to renting. The buyers are investors who rent their properties, in other words.

“Most of the increase in households in this country has been met by an increase in renting,” says Shiller. “My own survey data with Chip Case confirms that people feel more positive about renting.” He suggests that those investing in real estate are buying homes most suitable to convert to rentals, which means price increases will be more closely tied to rent increases, which means closely tied to inflation. Hence he is intimating the price-to-rent ratio should remain stable around its historical 1 to 1 ratio for years to come, which means housing prices won’t rise faster than rents.

But whether rental or primary residences, housing is contributing to overall economic growth. The First Quarter contribution by the U.S. Bureau of Economic Analysis shows that housing contributes more than 2 percent of GDP growth, and is on the upswing, particularly in single-family construction. Home improvements and broker commissions provide slightly less, while office and shopping mall investment provides contribute little at present, due to the high vacancy rates still prevailing, an overhang from the Great Recession.

Needless to say, construction spending means greater construction employment, and spending has been surging. Construction outlays rebounded 1.2 percent in February after dropping 2.1 percent in January. Private residential construction jumped 2.2 percent. For the latest month, the new one-family component was particularly strong, gaining 4.3 percent, following a 3.6 percent boost in January. The new multifamily component fell back 2.2 percent but followed a robust 6.1 percent jump the prior month. Public construction gained 0.9 percent, following a 0.2 percent rise in January. On a year-ago basis, overall construction was up 7.9 percent in February compared to 6.1 percent in January.

Graph: Econoday

Single-family investments is about to surpass home improvement outlays, says the BEA, with multifamily outlays still a minor component. So will Americans give up their home-ownership dream, and become a nation of renters? In fact, the current 64 percent home ownership rate is the long term ownership rate, which is one more factor that should tell us the housing bubble mentality Dr. Shiller so warns against has been deflated.

Harlan Green © 2013

Follow Harlan Green on Twitter: www.twitter.com/HarlanGreen

The naysayers are already at it. First Quarter GDP growth was 2.5 percent, slightly below forecasts. So many pundits are now saying it is a repeat of last year and the year before. An initial growth spurt started off those years, also, before a slowdown due to the U.S. Treasury debt downgrade by S&P and last year’s debt ceiling debate.

Now they say it’s sequester spending cuts and return of the payroll tax increase to its prior level that will suppress demand. Really? Real estate is beginning to recover, and job formation is still increasing. What does all that mean?

Graph: Calculated Risk

Friday’s unemployment report should tell us something about the future. Though just 88,000 payroll jobs were added in February when seasonally adjusted, the actual jobs increase was 729,000 before the seasonal adjustment. I therefore believe the seasonal adjustments were a bit draconian, as March is not usually a good hiring month, so the seasonal adjustment may be reduced—especially with the bad weather. Ergo, the February jobs numbers could be adjusted upward.

Home sales aren’t doing badly either. The NAR’s Pending Home Sale Index , a forward-looking indicator based on contract signings, rose 1.5 percent to 105.7 in March from a downwardly revised 104.1 in February, and is 7.0 percent above March 2012 when it was 98.8. Pending sales have been above year-ago levels for the past 23 months. (The data reflect contracts but not closings.)

Lawrence Yun , NAR chief economist, said the market appears to be leveling off. "Contract activity has been in a narrow range in recent months, not from a pause in demand but because of limited supply. Little movement is expected in near-term sales closings, but they should edge up modestly as the year progresses," he said. "Job additions and rising household wealth will continue to support housing demand."

Graph: Econoday

Household wealth, personal income, and spending also continue to increase, while inflation is declining. The Fed looks at Personal Consumption Expenditures (PCE), where overall prices have risen just 1 percent, annually. This is almost in deflation territory, which means the Fed will continue its QE3 purchases of Treasury bonds and mortgages. This is good for consumer spending, but signals less demand for consumer goods. Overall consumption spending is up 3.5 percent annually in March, a good number, vs. personal incomes that have been hovering around 2.5 percent.

The bottom line is that the loss of government payrolls and spending is bound to dent what otherwise would be a 3 percent GDP growth year. But it does look like real estate can take up some of the slack from those cut backs, as banks work off their backload of delinquent properties, the so-called “shadow inventory” of home held off the market.

Then we need to see state finances returning to health, but that is also dependent on a real estate recovery. Remember, much of the unemployment is happening in the states, where teachers, police and fire workers have been laid off en masse. So if real estate has a good year, the U.S. economy will continue to grow and maybe fool the naysayers.

Harlan Green © 2013

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