Is The Housing Market About To Turn Positive?

One of the anomalies of the current economic rebound compared to past recoveries is the virtual absence of the housing market in the upturn. Not only has the housing industry – and its symbiotic partner, the mortgage market – failed to lead or even participate in the recovery, as it usually does, it’s been a laggard most of the way.

The main reason, of course, is the huge change in perception among young Americans about the attractiveness of home ownership. Most of them grew up during the housing boom of the early 2000s and the subsequent bust following the financial crisis – indeed, the housing bust was the root cause of the crisis – so homeownership for many of them has mostly negative connotations, as opposed to a symbol of the American Dream.

Then there’s the burden of student loan debt, which has made homeownership unaffordable for many, so it’s not hard to see why the U.S. homeownership rate has dropped to 64.3% most recently, down from the peak of 69.2% at the end of 2004.

Making matters even worse is the relative lack of homes for sale, which has created a huge supply-and-demand imbalance pushing prices in most areas of the country higher. The reason for the lack of supply is threefold: Older homeowners don’t want to give up the 3.5% mortgage they’ve refinanced into over the past several years. And many of them still can’t sell their homes at the price they want because the value is still below where it was 10 years ago. They’re also reluctant to sell their homes only to have to find a new home at an inflated price. Continue reading "Is The Housing Market About To Turn Positive?"

Where Do We Go From Here?

As expected, the Federal Reserve left interest rates unchanged at last week’s post-Election Day monetary policy meeting, while signaling another 25-basis point increase in the federal funds rate at its December 18-19 get-together.

But the results of last week’s elections, which returned control of the House to the Democrats, may put future rate increases next year in doubt. That bodes well for long-term Treasury bond prices – i.e., yields may have peaked.

As we know, Maxine Waters, D-California, is now the likely next chairman of the House Financial Services Committee. To put it mildly, she doesn’t like banks. Her first order of business, no doubt, is to impeach President Trump, as she’s said countless times. But a more realistic second goal will be to roll back all or most of the recent bank regulatory measures made so far by the Trump Administration, which, of course, rolled back much of the regulatory measures passed under the previous administration, mainly through the Dodd-Frank financial reform law.

If she’s successful, that will reduce the mammoth profits the banks have been making the past several years, which were boosted further by the Republicans’ tax reform law. That sharply reduced corporate income tax rates, not just for banks but all companies, although the banks seem to be the biggest beneficiaries. No doubt Waters and her Democrat colleagues have that in their gunsights also.

But that won’t be the end of it. Continue reading "Where Do We Go From Here?"

Are We Better Off Today Than Two Years Ago?

Two weeks from now Americans will head to the polls to vote in what has been billed as “the most important election of our lifetime.” That may be a bit of hyperbole, but it will no doubt be one of the most important – maybe not as important as the previous one in 2016, but certainly a close second.

Since then, there have been some huge changes in the financial markets and the economy, nearly all of them wildly – and demonstrably – positive. CNBC was nice enough to quantify them the other day in this chart, and the numbers are startling.

I’ll just mention a few:

  • S&P 500: Up 32% since the 2016 election.
  • Average hourly earnings: Up 5%, to $27.24 from $25.88.
  • Nonfarm payrolls: up 4.4 million, to 149.5 million from 145.1 million.
  • Unemployment rate: 3.7%, down from 4.9%.
  • Consumer confidence: up 37 points, to 138 from 101.
  • Corporate tax rate: 21%, down from 35%.
  • Assets held by the Federal Reserve: down 6%, to $4.22 trillion from $4.52 trillion.

Needless to say, there have been some negatives: Continue reading "Are We Better Off Today Than Two Years Ago?"

Onward And Upward

Apparently, the bond market just got the email that the U.S. economy is smoking and that interest rates are going up.

The yield on the benchmark 10-year Treasury note jumped 17 basis points last week to close at 3.23%, its highest level since March 2011. The yield on the 30-year bond, the longest maturity in the government portfolio, closed at 3.41%, up an even 20 bps.

The pertinent questions are, what took so long to get there, and where are yields headed next?

Analysts and traders pointed to the Institute for Supply Management’s nonmanufacturing index, which rose another three points in September to a new record high of 61.6. The group’s manufacturing barometer, which covers a smaller slice of the economy, fell 1.5 points to 59.8, but that was coming off August’s 14-year high.

Bond yields jumped further after the ADP national employment report showed private payrolls growing by 67,000 in September to 230,000, about 50,000 more than forecast. It turns out the ADP report didn’t precursor the Labor Department’s September employment report, but it was still pretty strong. Nonfarm payrolls grew weaker than expected 134,000, less than half of August’s total of 270,000, but that number was upwardly revised sharply from the original count of 201,000, while the July total was also raised to 165,000. The relatively low September figure was blamed not on a weakening economy but on the fact that employers are having trouble finding workers. Meanwhile, the unemployment rate fell to 3.7% from 3.9%, the lowest rate since December 1969.

Indeed, last week’s jobs report only confirmed Continue reading "Onward And Upward"

Can It Happen Again? Emphatically, Yes

The last few weeks the financial press has been filled with articles noting the passing of the 10th anniversary of the Lehman Brothers bankruptcy. A few of the articles have been hand-wringing of the sort that if Lehman had only been rescued – like AIG – or merged with a strong commercial bank – like Merrill Lynch – the crisis would have never happened, or at least it wouldn’t have been so severe.

That’s wishful thinking. There was plenty of reckless and irresponsible behavior taking place on Wall Street to create the crisis that did develop, whether Lehman was saved or not. Like giving home mortgages to anyone who asked while creating securities backed by these often worthless loans, which only magnified the risk by a huge factor, then slapping a triple-A credit rating on them, so everyone was assured that everything was fine.

But most of the recent articles have been about whether such a crisis can happen again. And the answer is, unfortunately, absolutely. We may already be seeing the seeds being planted right before our very eyes, although I’m not sure how close we are to the next crisis. It certainly bears careful watching.

Boom-and-bust cycles are endemic to any free-market capitalist system anywhere, unfortunately, since they’re largely based on self-interest and, too often, greed. The only system where that is not the case is a planned or Communist one, where the economy is perpetually in bust mode. When the next bust will hit is anyone’s guess, but it seems with each passing day that we keep moving closer and closer to it, and not a whole lot is being done about it. Continue reading "Can It Happen Again? Emphatically, Yes"