US Housing Market Remains Confusing, Contradictory

The first two months of 2018 saw some rather negative news about the housing market–concern about Trump’s tax cut and how it would impact home ownership, lack of housing inventory, increasing interest rates and declining home sales seemed to dominate news about the housing market.  Over the last week, however, the headlines have changed and we are seeing a mixed bag of positive and negative news.

First, the good news is that it appears home sales are increasing after several months of declining sales:

Contract closings increased 3% month-over-month to a 5.54 million annual rate (the estimate was 5.4 million) from an unrevised 5.38 million. The median sales price rose 5.9% year-over-year to $241,700. The inventory of available properties declined 8.1% year-over-year to 1.59 million, the lowest for February in data going back to 1999.

Tucked away in the last paragraph of the same article, however, we see some fairly negative news about condo sales.  And what is the old saying?  Condos are the first to go up and the first to go down?  Are they leading the way down this time?

Purchases of condominium and co-op units declined 6.5% to a 580,000 pace. First-time buyers made up 29% of all sales in February, unchanged from prior month. Homes sold in 37 days, compared with 41 days in January and 45 days in February 2017.

Inventory continues to remain tight, and realtors are wondering out loud if sellers don’t want to sell because they’d rather keep their current low interest rate than buy a new home with a higher interest rate:

“The one concerning trend is the interest rate lock effect,” said Lawrence Yun, chief economist at the NAR. Sellers are telling agents increasingly that they do not want to move because they will lose the record-low mortgage rate they have locked in.

Meanwhile, people are pulling back on refinancing their homes and also cutting back on their spending.  Are people getting nervous about something called “interest rates?

Affordability is weakening across the nation due to the combination of short supply, high demand and rising interest rates. And the respite for interest rates was short lived. They began rising again this week in advance of the Federal Reserve’s expected rate hike Wednesday.

Or are other factors bothering homeowners?

“Treasury rates declined slightly on average last week, as a mixed bag of economic news and geopolitical concerns made investors more cautious overall,” said Joel Kan, an MBA economist. “A significant driver of the decline was retail sales data showing less than expected spending by U.S. households for the third month.”

Whatever is spooking investors and homeowners, we know for a fact that builders are getting very concerned about increasing interest rates and overhead:

Like 2017, 2018 isn’t setting up to be particularly favorable for builders — construction materials and permitting costs are high and rising, labor is tight, and desirable, buildable land is scarce and expensive,” wrote Aaron Terrazas, senior economist at Zillow. “It seems clear that we shouldn’t expect a big breakthrough in new home sales any time soon, and should instead look for incremental progress at best. At this point, we’ll take whatever we can get.

The quote above is from an article that is a few weeks old and written before the slight bump in sales that is being reported today.  Nonetheless, we are seeing the concerns expressed by builders being played out.  As a result…

“This one-two punch has created a situation in which existing sales appear to be plateauing at around 5.5 million sales per year, well below the 6 million or more we might otherwise expect to see,” said Aaron Terrazas, senior economist at Zillow.

Reverse mortgages–where the bank pays you a monthly payment until you die then takes the house, are booming (according to a company’s press release)…

 Reverse Mortgage Lending, Inc., a San Diego–based HECM provider, announced today it ended 2017 with record growth and received top honors from partner Liberty Home Equity Solutions. Reverse Mortgage Lending CEO Collin Knock attributed the growth to his team and credits them for earning Liberty’s Top TPO Sales Producer award for the final quarter of 2017.

Meanwhile, Fox News has taken to calling the lack of affordable housing being built a “crisis.”  Naturally, as Fox does, it blames Obama and democratic policies for the problem.  At the end of the article Fox begrudgingly admits that the problem is actually a labor shortage:

The construction industry is suffering from a shortage of workers, potentially facing a 1.5 million shortfall in personnel by 2020. That is restricting the number and type of jobs that companies are willing to take on.

Stay tuned.


America, the 21st Century Debtor Nation

It’s strange to talk about economic problems in what the media and most Americans would agree is a booming economy.  Record housing prices, record jobs, growing income, tax cuts, what’s not to like?  What alarm bells could their be?

As was recently reported by the Washington Post, Americans have been spending money like crazy the last few years.  Their spending has increased more than their income:

For the past two years, spending has risen faster than disposable personal income, as pointed out by Jason Furman, a senior fellow at the Peterson Institute for International Economics and a former chair of the White House Council of Economic Advisers under Barack Obama. For most of the recovery, the two measures remained relatively close. But as the labor market tightens, consumers are getting frisky even though hourly earnings aren’t growing any faster than prices right now.

Americans have almost entirely stopped saving anything:

Americans have never been the world’s best savers (our thin welfare state doesn’t exactly make it easy). But even by our own low recent standards, we’re collectively putting away an exceptionally small slice of our paychecks. In December, the personal savings rate dropped to 2.4 percent, its lowest level since 2005. Before that, the only other time it dropped below 3 percent was in Oct. 2001.

Americans are using the credit card like crazy and racking up debt at a record pace:

According to, the average indebted household today carries roughly $8,600 in outstanding credit card debt. “The last time we came close was before the recession — Q4 of 2007 — and we deemed that level unsustainable at $8400,” said Jill Gonzalez, an analyst for WalletHub. “It’s not good news to start off 2018.

In addition to record low savings and record high debt, Americans have almost nothing in their savings for emergencies or tough times.  A staggering 61% of all Americans can not get their hands on $1,000 cash even if they needed to in an emergency:

According to Bankrate’s latest financial security index survey, 34 percent of American households experienced a major unexpected expense over the past year. However, only 39 percent of survey respondents said they would be able to cover a $1,000 setback using their savings.

Even worse is what appears to be the complete and wholesale destruction of the middle class A full 75% of Americans do not have at least $10,000 in the bank.  This isn’t just your typical working-class or poor working single parent, this crosses wide parts of the economic spectrum in America.

Meanwhile, younger Americans, the 35 and under crowd, are finding it almost impossible to purchase a house.  Prices are sky high, and the ability to come up with a down payment is quite difficult–which isn’t hard to imagine given that 75% of people can’t even manage to save $10,000:

Listen to Ralph G. DeFranco, Ph.D, global chief economist, Mortgage Services, Arch Capital Services Inc.: “With interest rates and home prices both on the rise, first-time homebuyers – largely millennials – may want to consider making the jump from renting to owning sooner rather than late.”

In other words, everything is really expensive, and it’s going to stay expensive for a while.  In fact, it might even get more expensive. And why aren’t the younger folks able to buy anything?  Well, they are just flat out broke:

Relative to earlier generations, today’s cohort of young people is making less money, given their levels of education; more indebted with student loans; more likely to be underemployed; struggling harder to sock away savings; and facing shallower income-growth trajectories.

In short: Millennials want to buy houses, but they simply can’t afford to.

Meanwhile, the market for the other big ticket item most Americans will deal with, their vehicle, also is having some problems.  Not only are car prices at record highs, car loan debt is at a record, and people are having a problem making that car payment, which seems to be turning into a second mortgage given how high car prices have risen:

The US closed out 2016 with just shy of $1.2 trillion in outstanding auto loan debt, a rise of 9% from the previous year and 13% above the pre-crisis peak in 2005, in inflation-adjusted terms. The number of cars and trucks on the road, meanwhile, rose by only 1.5% last year, and 9% since 2005, according to US transportation department data. Total household debt levels are now a hair under their 2008 peak, with some of the fastest growth in recent years down to auto loans.

Families with median income can’t afford to buy a car:

A new analysis from found that a median-income household could not afford the average price of a new vehicle in any of the 50 largest cities in the country, though cars are more affordable in some cities than others.

If you can’t afford it, finance it!

That sort of squeeze helps explain why many people are borrowing more, for longer periods of time, to finance a car purchase. Experian Automotive said that in the first quarter of this year, the proportion of new cars bought with the help of financing rose to more than 86 percent, and the average loan amount topped $30,000, which is the highest since Experian began tracking the data.

In addition to a fat car payment and impossible mortgage, don’t forget that student loan payment:

Of the more than 40 million Americans who have student debt, 5.9 million—about 14% of the total group—owe more than $50,000. That’s nearly triple the percentage who owed that amount in 2000, and it’s a share that’s continuing to grow: Among one of the most recent cohorts, the group of borrowers who entered repayment in 2014, nearly 18% owed more than $50,000.

So yes, the economy is doing well.  At the same time, most Americans are facing a set of financial challenges the likes of which we have never seen before.  If the economy stays strong perhaps people will find a way to manage.  However, it wouldn’t take much to push people off a financial cliff, especially if they are thousands in debt and have a big fat car payment, mortgage payment, home equity line of credit payment, credit card payment, and student loan payment, on top of all the other costs of living.  We’ll see how this show ends soon enough.

Trump Financial Meltdown?

As Quartz reports, usually a roll back in regulation and less oversight lead to the next financial meltdown.  With news that Trump will now use the Consumer Financial Protection Bureau to protect predatory lenders, it seems we are in the slash and burn phase, with the meltdown phase to follow. The only question is when?

The blame for financial meltdowns often focuses on irresponsible traders and greedy bankers. But politicians, whose policies sometimes fan the flames, deserve scrutiny as well, according to a fascinating analysis of booms and busts since the 18th century by Jihad Dagher, an economist at the IMF. The research serves as a warning, of sorts, as the Trump administration seeks to relax banking regulations introduced after the last crisis.

High End Real Estate Market Goes Soft

The usual real estate market forecasters have been saying for at least a year now that the U.S. real estate market is due for a major correction. Their position seems to largely be based on the “fundamental” fact that average income is not keeping pace with the extremely fast-growing and high-flying prices of homes. In focusing on these “basics” these forecasters ignore all the big words and complicated theories that tell most economists that the real estate market is strong.

But it seems like things are starting to break up, after many months of warning the  forecasters clearly are seeing something going wrong in the high end real estate market.  The big players are still trying to play it cool, for example the Fiscal Times reports that the luxury real estate market is “cooling off.”

Coast to coast though, we seem to have a problem.  For example, we see “Billionaires Row” in New York, New York, headed for its first foreclosure.  We also see what the Wall Street Journal calls a “fraying” of the luxury housing market in Greenwich, Connecticut.

Meanwhile, on the West Coast, some are saying that San Francisco’s high-end real estate market has finally “peaked” after years of growth that is divorced from all economic realities…which created a market where a small “starter home” goes for $730,000.

  Folks on the lower end who do not live in the red-hot markets (SF, LA, Portland, Seattle, NY, etc.) never really saw much of a recovery after the 2007 crash.  Thus, if we see another real estate “correction” it stands to reason that people in fly-over Trump country will be hardest hit when their homes suffer another blow after never fully recovering from the last one.  A double whammy, ten years in the making.  Why should you care about the high-end luxury United States real estate market?  How would a crash in New York impact me in Omaha?  It’s simple: shit flows down hill.

Massive Tax Increase Under Trump Tax Plan

The Trump tax plan will, of course, save the rich millions of dollars.  It will also help some people at the bottom by pushing them off the tax rolls.  The middle class, however, will get beaten over the head with a massive tax increase.  Essentially, Trump’s plan would eliminate the mortgage interest deduction that middle-class American homeowners depend on.  It would also eliminate other tax deductions middle-class Americans depend on such as the mortgage insurance deduction and state income tax deduction.  Translation: if you are in the middle class, be prepared for Trump to tax you heavily if his plan passes.

An example:

Take a single female who’s earning $65,000 a year and paying $1,000 a month in rent in Colorado. She decides to make a little higher monthly payment to become a homeowner. She puts 5 percent down on a $265,000 condo, which increases her monthly housing costs to $1,193 (principal and interest). That’s a common scenario for a first-time buyer like her, because while her costs go up, she now has a home of her own and the chance to build equity over time.

But under today’s tax code, her monthly costs actually go down, according to an NAR analysis, because when she claims all of the itemized deductions available to her as a home owner, she ends up with a net tax benefit of over $3,300, or roughly $275 a month, compared to what she would get by taking the standard deduction. When that $275 a month is factored into her monthly housing costs, she’s paying significantly less than she was as a renter.

Under the Administration’s tax plan, that advantage goes away almost entirely because she can only deduct her mortgage interest and charitable contributions Without the option to deduct real estate taxes, state and local taxes, and mortgage insurance premiums, her net tax advantage over taking the standard deduction falls to a little more than $150. Although that’s still a net gain, it’s just a shadow of her current benefits and not nearly enough to bring her monthly housing costs down to what she was paying when renting.

The bottom line is that for 95% of homeowners in America, the Trump tax plan will destroy the mortgage interest deduction.  The middle class bailed out the rich and the poor during the Great Recession–they bailed out the rich bankers who destroyed the economy and the poor who took out loans they couldn’t afford.  Looks like the middle class will be bailing out the rich and the poor once again.

Another Banking Crisis?

A few days ago the New York Times reported that people were starting to get nervous over the stability of the world’s biggest banks:

An unsettling trend has emerged from the heavy selling that sent global markets tumbling this year: Investors are getting nervous about the world’s biggest banks.

On February 10, 2016, however, European banking stocks had dramatic rises.  As of now, however, they have given back most of those gains as fears continue to simmer over the stability of the world’s biggest banks:

The banking sector staged a strong comeback on Wednesday,following sharp declines in recent sessions. Germany’s Deutsche Banksaw shares jump, closing up 10.2 percent, after a Financial Times report said the lender was considering buying back several billion euros of its debt, to soothe concerns about its funds.

Some experts say that the fears over the stability of global banks are overblown, and contend that banks are in far better shape than they were in 2008:

Analysts caution against doomsday scenarios, arguing banks are in much better shape than in

But today, February 11, 2016, stocks continue on their downward trajectory while investors look for a safe place to wait out the plunge:

Stock indexes worldwide tumbled on Thursday on fears over the health of the global economy, with banking shares slumping on both sides of the Atlantic, while safe-haven 10-year Treasury yields hit their lowest since 2012.


It does not seem like investors are buying the argument that the “fundamentals” are “strong.”  Full me twice, I suppose.

Meanwhile, concerns over just how bad the Chinese slowdown might get continue to grow:

A Chinese credit crisis would see the country’s banks rack up losses 400 percent larger than the hit U.S. banks took during the subprime mortgage crisis, storied hedge fund manager Kyle Bass has warned in a letter to investors.

A 401(k) Is Actually a Tax Loophole

The U.S. is one of the only first world countries that essentially ended pension programs–retirement programs funded by employers.  Pensions used to be a popular benefit in the U.S. to keep workers loyal to a company while at the same time making retirement decent and reasonable.  pensions were eventually replaced with 401(k)s.

What you may not know is that 401(k)s are not retirement plans designed by law.  They are actually derive from a loophole in the 1978 tax code which was never meant to be used as a retirement system for essentially the whole country.  As a result, must Americans have to save until the age of 70 and hope against a market crash in order to have a retirement.

Few people realize that what is now the most popular retirement savings vehicle in the U.S. was not seriously debated or discussed by the U.S. Congress.  Rather, it was created by a loophole of the law which a smart benefits consultant figured how to exploit in the 1980s.

Nobody has done anything to fix it since.  Meanwhile, pensions continue to decline and Social Security funding continues to dwindle.