MORNING BID – The economic state of things

Aug 1, 2014 13:19 UTC

The jobs report takes a bit of heat off of Thursday’s selloff, which was predicated in part on some nonsense out of Europe and more importantly some kind of growing consensus that the economy is getting hot enough that it might force the Federal Reserve to start raising rates a bit earlier than expected, given a sharp and unexpected rise in the employment cost index on Thursday. And while it’s fair to suggest the stock market has gotten a bit ahead of itself when the Fed is rapidly moving toward the end of its stimulus policies, it’s also possible that stocks have gotten ahead of themselves for a far more prosaic reason – the economy isn’t strong enough to support the kind of valuations we’re seeing in equities right now.

That’s not to say we’ve got bubbles all over the place in stocks – they’re pretty few and far between – but credit standards in various places have loosened, and if the Fed starts raising rates we’re going to see a pretty quick reversal of that before long. There are significant signs of concern emerging in places like the high yield market, which has dropped off sharply in recent days, particularly among the weakest credits, and the housing and auto markets, which are better leading indicators than the jobs data, also suggest that the slack credit standards may end up hitting a wall before long.

Jim Kochan at Wells Fargo Fund Management pointed out that with the U-6 unemployment rate picking up to 12.2 percent this month, it conforms to what Fed Chair Janet Yellen has said in the past – that the “report is consistent with Ms. Yellen’s view that it is too early for the Fed to be contemplating a ‘liftoff’ in the fed funds rate.” That’s caused the expectations for a rate hike – per CME Fed Watch – to back off a bit, with April odds now down to 37 percent (from 43 percent a couple days ago) and June down to 52 percent from 58 percent a couple of days ago.

The U-6 rate ticked up as more people entered the workforce.

The U-6 rate ticked up as more people entered the workforce.

As the labor market improves, there are growing concerns about leading economic areas that point to a slackening in activity and will serve as the real test of the economy’s ability to survive as monetary policy recedes from the picture and interest rates start to rise (even with the Fed still at near-zero and expected not to raise rates until April at least, if not thereafter).

The Detroit team of Bernie Woodall, Ben Klayman and Paul Lienert teamed up for a piece that notes how a minority of groups are seeing real concerns about credit standards being loosened to a point that suggests auto sales demand is being driven by too-easy money. People have long talked about how auto loans tended to be on average about five years – matching approximately a value of a car (to a point) and now the average loan has risen to about 66 months, which means there are plenty more people offering terms to seven or eight years.

Cars are made to last longer than years ago, but it still represents an extension of debt payments over a longer period of time that’s worrisome. Car sales figures are due out later today – July auto sales are expected to show a slight dip to a 16.7 million annualized rate from 17 million in June, and full-year forecasts are set to hit their highest rate since since 2006. Similar action can be seen in the housing market as well, where the four-week moving average of the MBA’s purchase index has been steadily declining for several weeks now. That’s probably to some extent a summer effect but that index now sits far below levels seen in mid-2013 when it rose to a four-year peak.


That said, again – it’s a bit early to conclude that the leading areas of the economy have given up the ghost and we’re now headed for an inexorable descent into a recession – housing and auto sales fluctuate quite a bit, and even in expansions sharp declines can be seen. The 12-month moving average of U.S. housing starts are still on an uptrend from a year-over-year basis.

On the other hand, the 12-month average of existing home sales has slipped to 4.908 million. Sales of existing homes have had long periods of stagnation amid economic expansions before – they were weak from mid-1994 to mid-1995 and were slack from mid-1987 to mid-1989 as well. The most recent experience in housing – boom-and-bust – seems overstated of yet. So give it a few months.

MORNING BID – Closet cases

Jul 10, 2014 12:57 UTC

Usually when retailers warn of earnings weakness – particularly if they’re saying the entire economy is in a funk – there are two possible explanations:

1: They’re right, and the real economy is truly suffering, or
2: It’s all their own fault.

That the likes of Lumber Liquidators and Container Store Group should warn of comings earnings shortfalls and weak results in the next few quarters – pegging to a consumer that didn’t rebound after the weak weather-hammered first quarter – would seem to fall into the former category, at least at first glance. After all, Container Store, despite stocking its shelves with all sorts of bric-a-brac designed to keep other bric-a-brac, has built its reputation on its Elfa closetizing system that to the normal person is a weird Rube Goldberg contraption but yet stores all 300 of your pairs of shoes, et cetera. And Lumber Liquidators is pretty binary – they sell discounted hardwood flooring. And so with both citing weak conditions that persisted past the weather-related mishegoss that dominated the first quarter of 2014, that’s at least enough to raise some eyebrows.

Both companies deal with the kinds of purchases that speak to substantial renovation and therefore depend specifically on the housing market, which of course weakened in the first half of the year and hasn’t rebounded to levels seen last year. Existing-home sales are still about 5 percent below the level reached a year ago, according to the latest from the National Association of Realtors, even though the May figures did represent an increase from April, suggesting a bit of increased momentum. But if the first-quarter housing weakness then gives way to an ongoing lag in the kind of spending that had people expecting a rebound in the second quarter, well, all the optimism about earnings that’s been baked into stock prices in recent days will surely unravel.

Of course, it’s plenty possible that the companies are screwing things up on their own. Container Store only went public for the first time last year, and after a brief rally that brought shares to a 52-week high of $47 around the end of 2013, it’s been a dog since, losing 43 percent of its value in short order. More than 10 percent of the shares are being shorted right now, and StarMine shows a whole load of worrying metrics with the company – it ranks worse than 90 percent of U.S. names in terms of its price-to-earnings ratio, and also sports a high price-to-book and price-to-cash flow level right now.

Lumber Liquidators doesn’t look much better in this regard. About 13 percent of shares are being borrowed for short bets, and it ranks in the lowest quartile in terms of relative value, given it’s very high price-to-book ratio and price-to-cash flow ratio, which again, just suggests investors are valuing the company’s assets pretty highly given the weak earnings expectations and ongoing reductions in its outlook. The stock is down nearly 32 percent year-to-date, and that doesn’t even include what is likely to be another selloff on Thursday, as it was down about 20 percent in overnight action.

The day’s earnings do not include too many names that can be seen as corollaries for these retailers; Kaufman & Broad, a homebuilder, is about the closest. Interestingly, in late May, Home Depot did reaffirm its earnings outlook for the year and raised its per-share earnings outlook in part due to improved expectations for sales growth. HD has a way of crowding out others – but another such update of that kind might settle just whether there’s a bigger storm coming in retail, or if it’s just warping the hardwood floors.

from Data Dive:

Housing on the rebound

Jun 23, 2014 16:14 UTC

Did someone say housing recovery? Existing home sales numbers for May were released this morning, handily beating economists’ expectations. Existing homes are now being sold at an annual rate 4.89 million units, up 4.9 percent month-over-month, Reuters reports. Forecasts had put the growth rate at only 2.2 percent. The number of properties on the market is also up, suggesting that the housing market is finally pulling out of its late 2013 slump.

We’re not quite out of the slump yet, however. Sales are still down 5 percent from May of 2013, particularly in the western part of the country:


The big question now is whether this growth will continue. Just last week, the Mortgage Bankers Association cut its forecast for combined new and existing home sales this year to 5.28 million. It’s the first time since the recession that both MBA and Fannie Mae are predicting lower growth than in the previous year.

from Data Dive:

Charting global real-estate bubbles

Jordan Fraade
Jun 17, 2014 16:41 UTC

Wonder what house prices are doing around the world? Then take a look at the International Monetary Fund’s new Global Housing Watch project, which tracks global housing booms and busts. There are quite a few markets that are more inflated than ever. This chart from Matt O’Brien at Wonkblog ranks national housing markets by how much current price-to-rent ratios — that is, how much it costs to buy vs rent a similar property — deviate from the historical average.

The US is thoroughly average right now. Go us.

O’Brien explains why Canada, New Zealand, and Norway are looking so bubbly right now:

These countries' central banks were able to fight the Great Recession on their own, which kept unemployment from rising too much and, consequently, housing prices from falling much either. But, especially in geographically-constrained places like New Zealand and Norway, there are only so many places you can build—so it's easy for demand to outstrip supply. Especially when, as James Surowieki points out, rich Chinese (and Russians and Arabs, etc.) are eager to buy up foreign properties as either vacation spots or insurance against unrest back home.”

With the top three countries in this chart sporting ratios that are anywhere from 68 to 88 percent higher than the historical average, it might be time to reconsider whether you really need that pied-a-terre in Vancouver.

Renters get owned

Ben Walsh
Dec 19, 2013 23:15 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to

In 2012, the federal government spent $240 billion on housing aid, according to a new study by the Center on Budget and Policy Priorities. Despite the fact that 65% of American households are homeowners, 75% of housing aid, or $180 billion, is set aside for homeowners. Not only is federal housing aid disproportionately targeted to homeowners, it’s disproportionately targeted to the wealthiest homeowners. Here’s the CBPP:

The bulk of homeownership expenditures go to the top fifth of households by income, who typically could afford to purchase a home without subsidies… More than half of federal housing spending for which income data are available benefits households with incomes above $100,000.  The 5 million households with incomes of $200,000 or more receive a larger share of such spending than the more than 20 million households with incomes of $20,000 or less.

At the same time as housing aid focuses on relatively well-off, home-owning Americans, more renters need aid. HUD data show that the number of renters with household incomes that are 30% or less of the local median income (that’s about $19,000 nationally) has risen from just over 8 million in 1999 to 11.8 million in 2011. A recent Harvard study pointed out that for these 11.8 million renters, there “just 6.9 million rentals affordable at that income cutoff—a shortfall of 4.9 million units”. Affordable, at 30% or less of the local median income, means $375 a month or less. The Harvard study also pointed out that the problem is getting worse: the number of extremely low-income renters is rising, and 2.6 million of the affordable rentals are being occupied by higher-income households.

Felix looked at that data, combined with the “inexorable rise of rents”, and concluded that there “is an unprecedented squeeze on the people who can least afford the shelter they need”. The rest of America is starting to look more and more, he wrote, like San Francisco.

The Washington Post’s Lydia DePillis reports that San Francisco’s unaffordable housing problem is beginning to be taken seriously by at least some of the city’s tech elite. Peter Thiel thinks “the way rent and housing costs have gone through the roof in a number of cities where people go to start companies is a tremendous problem”. Thiel’s solution is to loosen zoning regulations. Surveying housing-related startups, DePillis observes that the focus is “on helping people navigate what’s already a terrible situation, not ameliorating it”.

Emily Badger points to a longer-term demographic shift that may drive even more demand for rentals: baby boomers downsizing. After moving to bigger and bigger houses in further and further afield suburbs and exurbs, boomers are beginning to reverse that trend by moving into smaller urban homes. And they are increasingly likely to be renters: “between 2002 and 2012, the number of renters ages 55 to 64 increased by 80%”. Badger points out that the big unknown is whether anyone will want to buy the McMansions boomers are moving out of. — Ben Walsh

On to today’s links:

Maybe don’t name your group chat “The Mafia”, Wall Street traders – Bloomberg
In case of a real war on Christmas, here’s how to invade the North Pole – Mother Jones

The cult of Vitamix – Bloomberg Businessweek

New Normal
The 49 states of rising child poverty – WaPo

The MIT group researching how to decrease long-term unemployment – Evan Soltas

New Normal
How cities and states royally screwed up the staid, old-fashioned pension fund – James Surowiecki

Is the safety net just masking tape? The problem of “pity charity” liberalism – Thomas Edsall
Previously: Are we at the completion of the liberal project? – Mike Konczal

Health Care
An interactive map of nearby ERs with the shortest wait times – ProPublica

20 things DC journalists can do to be happy besides moving to Kentucky – Jason Linkins

Primary Sources
The CFPB just won a $2 billion settlement with Ocwen over shoddy loan servicing – CFPB

“You would be better off letting a cat manage your money” – The Economist

How to shutter a bank in Europe. It’s so simple! – FT

Financial Arcana
The difference between risk premia and “behavioral craziness” – Noah Smith

The Hack List 2013: the best entry in Alex Pareene’s brilliant takedown – Salon

An apple a day could save thousands of lives a year – BBC

Follow Counterparties on Twitter. And, of course, there are many more links at Counterparties.

Housing market rising

Jul 24, 2013 22:40 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to

The US housing market continues to gain steam: New home sales for June were up by 8.3% to a rate of 497,000 units annually — the highest level in five years — despite rising mortgage rates. Compared with June last year, single-family home sales were up 38.1 percent, the largest increase since January 1992, writes Reuters. Bill McBride notes that the supply of new homes has also returned to normal (after peaking in 2009) and, furthermore, even with the increases, sales rates are just at the low levels of previous recessions, which “suggests significant upside over the next few years”.

Who, though, is doing all of this buying? Back in May the buy-to-rent business was exploding, fueled by Wall Street-backed institutional investors like the Blackstone Group and the aptly named American Homes 4 Rent, the latter of which announced an IPO last week. Barry Ritholtz argues this can’t possibly continue, pointing to the massive surge in rental properties on the market in Scottsdale, Arizona in the last four months: “How the hell can they be making money when there are so many empty houses cooking in the desert sun?”

The Los Angeles Times reported last week that investors continue to buy, albeit at a slightly slower pace, even after a nearly 30% average price increase in Southern California in the last year. Buyers who don’t intend to live in the home accounted for 29% of purchases in June, and more than 30% of purchases in the region were in cash. But that seems to be changing: “The smart money has left the building,” broker Glenn Kelman told the LA Times.

Meanwhile, individuals seem to be taking more risks in the housing market. CNBC reports that 136,184 homes were flipped in the last six months, up 19% from this time last year, and 74% from the first half of 2011. Adjustable-rate mortgages, in which rates change after a fixed period of 5-10 years, are also more popular than they have been since 2008, according to Bloomberg.

However, lest your takeaway from today’s email be “Have we learned nothing?” just remember that attempts to bring back the synthetic CDO in the past couple of months have failed miserably. – Shane Ferro

On to today’s links:

Be Afraid
“One of FratPAC’s top priorities is a tax break for fraternities” and stopping anti-hazing legislation – Bloomberg

New Normal
Welcome to the lucky-take-all society – Economist

The Justice Department expects to charge SAC Capital on Thursday – Matthew Goldstein and Emily Flitter

EU Mess
Is the euro zone recession over? Not quite yet… – Open Europe Blog
“Europe’s recession has either come to an end, or it’s about to” – Joe Weisenthal

Popular Myths
Summer vacation was a response to urban squalor, not rural necessity – Grand Rapids Press
What sequester? Defense on contractors are doing just fine – WaPo

Greats Minds
SAC’s lawyer channels Jerry Seinfeld channeling Kevin Costner – Bess Levin

Longs Reads
Inside Al-Shabaab, the Al Qaeda affiliate in Somaliland – Mark Hay

Data Points
54% of U.S. adults think we’re still in a recession – WSJ

The federal court fight over Detroit’s right to declare bankruptcy has begun – Reuters
The US killed an IMF amicus brief in favor of the Supreme Court taking up Argentina’s pari passu case – Joseph Cotterill

Who works the longest days – NYT

Chinese hospitals depend on bribery to keep running – Kazunori Takada

Strange Bloomberg Headlines
“Humans Beating Robots Most Since ’08 as Trends Shift: Currencies” – Bloomberg

Follow Counterparties on Twitter. And, of course, there are many more links at Counterparties.


It’s amazing house flipping has increased by 74% since the first half of 2011. People are obviously feeling much better about the housing market to take the risk and make a house flipping investment. Even with some people freaking about the rise in mortgage rates, other indicators of improvements in the housing market prove that things are on the right track- increased new home sales, new home construction increases, rising home prices. We’ll eventually get back to where we want to be! ~Christina, Current Mortgage Rates Today

Posted by ChristinaCMRT | Report as abusive

from Shane Ferro:

The dark side of homeownership

Jun 6, 2013 17:06 UTC

Owning your home, long a pillar of the American dream, could actually be bad for the economy. In a new paper, economists Andrew Oswald, of the University of Warwick, and David Blanchflower, at Dartmouth, found that rates of high homeownership lead to higher rates of unemployment in both the United States and Europe.

Not only do high rates of homeownership keep people from moving to areas with good jobs, it also turns out that they tend to stunt job creation where the people live. What’s more, because suburbanites are unlikely to have a jobs in the same place that they live, they often spend a lot more time in traffic than they need to  -- time that could surely be used more productively.

This is not a new idea for Oswald and Blanchflower. They’ve been working on this area of research for the better part of two decades, although this is the first time they’ve had the hard data to show how the labor market in the US is affected when homeownership rates increase. Even though individual homeowners aren’t necessarily more likely to be unemployed than their renter counterparts, a doubling of the homeownership rate leads to more than doubling of the unemployment rate, the researchers find.

High rates of homeownership lead to fewer businesses being formed, says Blanchflower. The authors aren’t fully able to explain this correlation, though they hypothesize in the paper that it could be a result of zoning restrictions in residential areas and/or a NIMBY (not in my backyard) attitude from homeowners. Fewer businesses in the area mean fewer jobs, which lowers the employment rate. People who cannot find a job near their home, but are tied down by a mortgage, then end up commuting long distances for work.

Switzerland is a prime example of low homeownership and low unemployment. Only about 30% of the Swiss own their homes, and unemployment in the country hovers just above 3%. Spain is at the opposite end of the spectrum, with 80% homeownership and more than 25% unemployment. The paper shows that OECD countries and every state in the US fall somewhere in between Spain and Sweden. Here’s the scatter chart: the higher the homeownership rate, the higher the unemployment rate, generally.

As the subprime crisis hit, Oswald’s ideas became somewhat popular, as various people began to argue that perhaps homeownership shouldn’t be the bedrock of our economy. Clive Crook argued back in December 2007 that the focus on housing could be holding our economy back. “If investment in housing goes up, investment in things that would expand the economy and improve future living standards—such as commercial building and business equipment—goes down”.

As Free Exchange added, putting people to work efficiently means having a labor force that can move around to where the jobs are. “Roots are for vegetables”, as the article puts it.

In a panel discussion on the Canadian television show The Agenda back in 2010, both Yale economist Robert Shiller (of the Case-Shiller home price index) and urban studies theorist Richard Florida argued that homeownership should be less idealized, and the government shouldn’t promote homeownership through tax breaks. As Crook notes in his piece, the UK abolished mortgage tax breaks and saw no change in housing prices. “In the US, labor mobility and residential mobility tend to go hand-in-hand, and it’s really put a crimp in the US ability to adjust to this time of economic restructuring”, said Florida.

There are reasons to argue for homeownership, of course. Not only is it a leveraged investment that can pay off handsomely (if prices go up), it’s a commitment device, “which forces people to build wealth rather than fritter away their income on consumer products”, as Felix Salmon pointed out, also back in 2007. Shiller responds that if you have the discipline and self-control to put that money in the stock market, you’d likely get a better return.

In 2007, as the economy was spiraling downward, no one really wanted to talk about taking action that might further collapse the housing market. But perhaps now that the economy is slowly marching towards recovery, it’s time to bring it up again and ask ourselves whether being a nation of homeowners is worth the price we pay in stunted economic growth. It may be time to do away with the mortgage-interest tax deduction, rezone the suburbs, or simply embrace Blackstone’s quest to own as many single-family homes as possible.

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