What's Hot and What's Not
Volume 17 Issue 2
February 2012
By:
U.S. Senator John Seymour (ret.)
NATIONAL ECONOMY:
The economy, at the beginning of this year, appeared to be on its way back with fourth quarter 2011 Gross Domestic Product (GDP) coming in at an estimated 3.2%. The cheering faded quicker than a politician changing course with his finger to the wind. The fourth quarter revise of GDP came in at 2.8%. Following that change, many economists lowered their predictions for GDP growth in 2012 from 3.5% to 3.0%. At the moment the 2012 outlook is for slow growth and national unemployment remaining at 8.5% to 9%.
Corporate America and therefore, the stock market, should have another prosperous year, despite the overall tepid economic growth. Their prospects are for continued growing profits resulting from previously hard but necessary decisions in cutting expenses and overhead. Backed with over $2 trillion in cash, most wait for some signs of stability in federal corporate taxes and a hoped for loosening of the job killing federal regulations on business. It is likely that a stable business environment won’t be found until after the November elections.
The biggest missing piece to the recovering economic puzzle is the housing industry. Historically, the housing industry has always lead our economy into a recession and the industry that leads the economy out of recession.
Historically, the Housing industry, including new construction and existing home re-sales, contributes in excess of $1 trillion annually to our GDP. That contribution represents approximately 18% of total GDP.
According to the National Association of Homebuilders (NAHB), for every new home that is built, three new jobs are created. In a normal economy, approximately 1.8 million new homes are built each year. In 2011, approximately 628,000 new homes were built. A healthy housing industry would create three million new jobs.
Recovery of the housing industry will not take place until the home foreclosure inventory is purged through the system. The good news is that buyers and investors stand waiting to buy up foreclosed inventories just as soon as they hit the market. The bad news is that the current administration and the federal regulators are doing all within their power to block, stymie, forestall and delay the foreclosure process. Most, including myself, would agree that we should extend a helping hand to those homeowners who are faced with foreclosure as a result of economic conditions beyond their control. However, in my opinion, our federal government is now trying to convert a helping hand into a federal handout that will only prolong the recessionary pain for all Americans.
A combination of factors has caused the prolonged logjam of necessary foreclosures that will free the housing market to restore economic growth and vitality.
First, the Federal Reserve and the federal banking regulators have removed the urgency and motivation of banks and mortgage lenders to complete foreclosures and rid their balance sheets of these failed assets and thereby increasing their appetite for new, safely underwritten mortgage home loans.
Prior to 2009, federal banking regulators required banks to conform to the “mark to market” capitalization requirement. Mark to Market required banks to re-evaluate their loan assets on a quarterly basis and adjust their capital requirements for any decline in asset values. There fore, if a bank’s home loan portfolio had dropped in value, the bank may have found it necessary to raise new capital in order to cover their losses. If they were unsuccessful in raising new capital, they had to close their doors and fail. In order to prevent large numbers of financial institutions from having to raise new capital, the banking regulators no longer required Mark to Market. This in turn, permitted financial institutions to “sit” on failed assets or slow their disposition, hoping for the housing market to begin recovery and make their failed assets whole.
The Federal Reserve, as an anti-recessionary monetary policy, began reducing rates for borrowing by banks in January of 2008. In that year, the Federal Reserve Bank dropped rates from 3.5% to 0-.25%. The borrowing banks now had “cheap money” to borrow and cover their losses on de-valued loan portfolios. Without Mark to Market and next to zero borrowing rates, banks could more easily forestall home foreclosures.
History had recorded this exact governmental policy with exactly the same results in creating what became known as “zombie” banks. The time was the mid-eighties and the overheated Japanese economy as well as their real estate markets collapsed. Japan’s banks became known as “zombie” banks because they ceased any appreciable lending, holding failed assets and remaining in business by borrowing from their federal government at 0% interest.
In a capitalistic system, bad economic decisions are rewarded with failure and then the private market heals itself and returns to profitability. In a socialistic system, the government props up the private market, hoping the bad economic decisions will heal over time. Government intervention does nothing more than extend the time for capitalism to return an economy to profitability. Sometimes, we learn nothing from history, and then plead insanity. Insanity is repeating the same mistake over and over, expecting a different result.
If that weren’t enough to constipate the disgorgement of failed home loans, the avarice of the trial lawyers entered the fray and prevented lenders from completing the foreclosure process by suing them over any missed dotted “I” or crossed “t.” The result of all of the above in California has been to elongate the foreclosure process from a normal 90 to 120 day period to a 24 plus months plus, uncertain, agonizing and convoluted procedure.
It’s hard to tell how long these conditions will postpone a robust recovery of the housing industry. My best guess is twelve to eighteen months.
FEDERAL PAYROLL TAX CUT EXTENSION: It has been said that “children should never be allowed to watch the making of laws nor sausage, for fear their young minds will be affected.” This is a brief story that illustrates the wisdom of the quotation.
On December 23rd, Congress passed, and President Obama signed a last minute bill to extend a 2% payroll tax cut for a period of “two” months. The $35.7 billion bill was paid for by taxing new homeowners and those that choose to re-finance the mortgage on their home.
I could be wrong but I have never…ever…heard of a “two month” tax cut. Are you kidding me??? Tax cuts are meant to stimulate long term private sector investment in new jobs and individual consumer spending. What business is going to invest in a new job based upon a tax cut that will be gone in 60 days? The average American consumer is more likely to save or reduce personal debt than to spend a 60 day tax cut. Estimates are that the average income earner will receive a total of $165.00 in an extended payroll tax cut for two months. Does Congress and the President really think that the average American consumer will go out and buy a new car or even a new refrigerator with the $165.00? These guys got to be “sniffing” the same stuff as Charlie Sheen and Lindsay Lojan!
To make matters worse, they pay for this $165.00 consumer benefit by taxing a new home loan or re-finance of $200,000 at the rate of $15.00 per month for a ten year period. For a $400,000 loan the monthly fee is $30.00 per month. That’s $3,600.00 so that I or a neighbor can get $165.00!!! Hellooooooo…didn’t you know that the housing industry continues to suffer from the worst housing slump since the great depression? And you want to raise a homeowner’s mortgage payment by $15.00 per month for 10 years!!! To do WHAT??? PULLEASE…tell me it isn’t so! Tell me you got into the “cooking sherry” the night before the vote and, in the fog of your hangover, thought you were voting for a resolution declaring “Tim Tebow Day.”
This story gets worse. Speaker of the House, John Boehner led his republican colleagues to a “yes” vote on the tax increase, because the bill was amended to require President Obama to approve or disapprove the controversial Keystone Pipeline within 60 days. The construction approval or disapproval of the 1,700 mile oil pipeline, running from Alberta, Canada to the oil refineries in Houston, Texas, has been stalled by Obama until 2013 and after the elections this coming fall. Obama’s labor union supporters want the pipeline and the expected 20,000 new construction jobs. Obama’s environmental supporters don’t want the pipeline under any circumstances. What’s a politician to do? Republicans want to force Obama to choose which friends, labor or environmentalists, he will upset before the elections. Obama had previously promised to “veto” any payroll tax cut bill that included the pipeline decision or any other “extraneous” matters, only to relent when his “bluff” was called by Speaker Boehner. “Ahhhh,” I smell the “sausage” and have forgotten what it looked like when it was made.
For those who might be thinking that this sordid story has ended…guess again. This 60 day payroll tax cut will be up for extension or expiration on or before March 1st. Stay tuned…
THE FED WATCH & MORTGAGE RATES: Big Ben Bernanke, Chairman of the Federal Reserve Board (FRB) and his Federal Open Markets Committee (FOMC) next meet on March 13th. Most expect a continuation of current monetary policies. In short, current policy is 0% - 0.25% borrowing rates for banks and continued purchase of mortgage securities in the open market. Both strategies result in continued record low mortgage rates. Bernanke says that they expect to hold this policy until early 2014.
In the bigger picture, the Fed’s inflation target is 2% annually and an unemployment rate of 6% or less.
The average 30-year fixed rate mortgage at both FNMA and FHLMC remain under 4%.
NATIONAL HOUSING MARKET: December, an historically slow month for housing sales, delivered a 5% increase in existing home sales compared to the previous month of November. Compared to December of 2010, sales rose 3.6%. Unsold inventories dropped by 9.2% during December compared to the previous month. December’s unsold inventory was a 6.2 months’ supply. Historically, a 6 months inventory has been considered a stable market.
Of the total sales for December, foreclosure and short sales combined represented 32% of total sales. Foreclosures sold, on the average, for a 22% discount while short sales sold for a 13% discount.
All cash sales represented 31% of all sales and investors represented 21% of total sales.
A close examination of this data, remarkably mirrors what I reported earlier in this newsletter. Foreclosures that are delayed extend the period of time that we experience declining or stagnated housing prices. Investors’ appetite for rental housing stands ready to absorb any foreclosure inventory.
New home sales eased off during the month of December with a 2.2% decline compared to the previous month. Unsold inventories of new homes remain at a stable level of a 6.1 months’ supply.
CALIFORNIA ECONOMY: For the fifth consecutive month California payrolls have grown, albeit at a snail’s pace. December’s unemployment rate came in a 11.1%. That’s down from 11.3% in the month of November. According to the state’s Employment Development Department, the Business & Professions sector grew 63,500 new jobs, Information & Technology contributed 23,300 new jobs and the Construction industry grew 21,300 new jobs. The industry job losers were Financial, Manufacturing, Leisure & Tourism and, Transportation.
Total new jobs created for the year of 2010 were 243,300. That’s better than losing jobs; however, the golden state continues as one of the nation’s most suffering employment markets with over 2 million people jobless and looking for work.
STATE BUDGET & NEW TAXES: Faced with an approximate $12 billion deficit and a falling bond credit rating, Governor Brown submitted a new state budget for the fiscal year beginning July 1, 2012 and ending June 30, 2013. His proposed budget calls for a combination of budget cuts and increases in taxes.
Compared to last year’s state budget, notable changes include State Consumer Services +11.3%, Business, Transportation & Housing -17.8%, Natural Resources -2.0%, Environmental Protection -7.8%, Health & Human Services -1.0%, Correction & rehabilitation +11.4%, K-12 Education +11.8%, State Colleges & Universities -4.5%, Labor & Workforce Development +26.6%.
In the event that voters do not approve new taxes in the November elections, the budget proposes to cut K-12 education by $4.8 billion. The overall net effect of what is proposed and a failure of voters to approve new taxes would be a 2.3% reduction in K-12 expenditures.
If the voters reject the proposed tax increase an additional $1.4 billion would be cut from Welfare & Child Services and $1 billion of reductions in Medical.
The reason that Labor & Workforce Development budget expenditures show a 26.6% increase is for required state unemployment benefit payments that are mandated under current state law.
The new taxes proposed for voter approval in November, include a 0.5% sales tax increase for a five year period. Personal income tax increases are proposed for a five year period. The proposed increases are 1% on incomes of $250,000 to $300,000. On incomes of $300,000 to $500,000, the increase is 1.5%, and for incomes above $500,000, the increase is 2%.
Currently, polls show that a majority of Californians will vote in favor of the tax increase. The reason that Governor Brown is going to the voters for the tax increases is that he has tried, unsuccessfully, to negotiate with the legislature’s Republicans, and therefore is unable to get approval from the required two-thirds of the state legislature. The reason that Republican legislators oppose the tax increases are that they wanted major financial reforms impacting major union organizations before they would approve any tax increases. More specifically, wage and benefit cuts to the California Teachers Association (CTA), California Correctional & Peace Officers Association (CCPOA) and the Service Employees Industrial Union (SEIU).
BULLET TRAIN UPDATE: Last month I reported on Governor Brown’s proposed $93 billion bullet train that would run from San Francisco to Los Angeles. The catalyst propelling the project is a $3.3 billion grant from the Obama Administration and a 2008 voter approved $10 billion bullet train bond issue. Of course, when the voters approved the project in 2008, the total cost was estimated to be $33 billion…not $96 billion. Today’s polls show a clear majority of voters oppose the “moonbeam express.”
Since I last reported, the following has occurred. The Executive Director of the California High Speed Transportation Authority, has resigned, under pressure. Congressional support for the $3.3 billion grant has evaporated faster than the Salton Sea on a hot day. The State legislature’s California High-Speed Rail Peer Review Group has issued a report opposing the issuance of $2.7 billion state bonds to initially fund the project.
Governor “Moonbeam,” who strongly supports the project and, proposes the first 140 mile leg to be built from Chowchilla to Bakersfield (Is that a train to nowhere?), has said that he wants to change the proposal to be built in a much shorter time-frame, thereby lessening the cost. Further, Brown hopes to pay the bonded indebtedness from taxes raised in the “Cap and Trade” legislation which when passed was described as a California job killer raising the cost of electricity on consumers and business by 15%.
Faced with 11.1% unemployment, a $12 billion state spending deficit, and a dismal ranking of 48 out of 50 states in which to do new business, and our Governor wants to build what??? Somebody has been sniffing glue in the Capitol Rotunda!
CALIFORNIA HOUSING: For the third consecutive month, existing home sales in the Golden State have improved. December existing home sales rose 3.3% compared to the previous month of November. Sales were up 0.1% compared to December 2010.
The median priced home sold in December rose 1.8% compared to the previous month; however it was down 6.2% when compared to December of 2010.
Unsold inventories continued to shrink with a 4.2 months’ supply of unsold homes in December compared to 5.0 months in November. Interestingly unsold inventories of homes priced at $1 million or more was 8.2 months while in the $300,000 to $500,000 category it was 4.4 months.
It is unfortunate that we are prevented from emptying the foreclosure pipeline because without that unknown overhang, our housing market would be growing at a much stronger and faster pace.
DISCLAIMER: This monthly newsletter is posted by Orange Coast Title Company and its family of companies. The opinions expressed herein are solely those of the author and not of management or their employees. Any criticisms, corrections or suggestions are always welcomed at jfseymour55@gmail.com.
SOURCES: LA Times, NY Times, Wall Street Journal, Desert Sun, OC Register, The Press Enterprise, San Diego Tribune, CAR, NAR, NAHB, MBA, & CBIA.
