Quick Note on July New Homes Sales: It Is a Big Deal

August 23, 2013

23 Agosto 2013

The Census Bureau reported a 13.4 percent drop in new home sales in July. This could be a really big deal.

House prices had been rising rapidly in many parts of the country and there was a real basis for concern about bubbles in many markets. While these bubbles were not driving the national economy, as they had been in the years 2002-2007, there was a real risk that many homebuyers would again buy into seriously over-valued markets and face large losses on their homes.

It appears that the interest rate hikes in May-June curbed the enthusiasm of investors for real estate, thereby taking the air out of the bubble. The reason why the July new home sales data is important information on this point is that it is giving us data on contracts signed in July. Most other data sources are about sales which reflect contracts that were typically signed 6-8 weeks earlier. The July sales data strongly reinforce realtor accounts of a weakening market in the last two months.

The Census Bureau reported a 13.4 percent drop in new home sales in July. This could be a really big deal.

House prices had been rising rapidly in many parts of the country and there was a real basis for concern about bubbles in many markets. While these bubbles were not driving the national economy, as they had been in the years 2002-2007, there was a real risk that many homebuyers would again buy into seriously over-valued markets and face large losses on their homes.

It appears that the interest rate hikes in May-June curbed the enthusiasm of investors for real estate, thereby taking the air out of the bubble. The reason why the July new home sales data is important information on this point is that it is giving us data on contracts signed in July. Most other data sources are about sales which reflect contracts that were typically signed 6-8 weeks earlier. The July sales data strongly reinforce realtor accounts of a weakening market in the last two months.

NYT Falls for Bad Numbers on Household Income

By Dean BakerDean Baker

August 22, 2013

22 Agosto 2013

It’s good to see the NYT taking a serious interest in the wages and income of typical families. Unfortunately, they have picked a bad measure to highlight in relying on the reports of Sentier Research.

The Sentier measure is moved to a large extent by erratic patterns in income reported by respondents to the Current Population Survey fielded by the Census Bureau. Because the sample size in this survey is relatively small (the overall survey has 60,000 households, with only one quarter answering the income question each month), there will frequently be large movements which almost certainly reflect sampling error rather than actual changes in the economy.

For example, the Sentier index showed a sharp drop in before tax income in the early months of this year which has since been reversed. It showed an even sharper drop at the start of 2012, which was reversed over the course of the year. There were no obvious economic developments that could explain the drops in either year or their subsequent reversal. These movements were simply random fluctuations in the data, which is common in this series. That is why economists generally do not pay much attention to its short-term movements.

A much better analysis of trends in income can be found at the Economic Policy Institute’s (EPI) website. It has been providing solid analysis of wage and income trends for more than two decades. Unlike Sentier Research, EPI does not charge for its research findings.

It’s good to see the NYT taking a serious interest in the wages and income of typical families. Unfortunately, they have picked a bad measure to highlight in relying on the reports of Sentier Research.

The Sentier measure is moved to a large extent by erratic patterns in income reported by respondents to the Current Population Survey fielded by the Census Bureau. Because the sample size in this survey is relatively small (the overall survey has 60,000 households, with only one quarter answering the income question each month), there will frequently be large movements which almost certainly reflect sampling error rather than actual changes in the economy.

For example, the Sentier index showed a sharp drop in before tax income in the early months of this year which has since been reversed. It showed an even sharper drop at the start of 2012, which was reversed over the course of the year. There were no obvious economic developments that could explain the drops in either year or their subsequent reversal. These movements were simply random fluctuations in the data, which is common in this series. That is why economists generally do not pay much attention to its short-term movements.

A much better analysis of trends in income can be found at the Economic Policy Institute’s (EPI) website. It has been providing solid analysis of wage and income trends for more than two decades. Unlike Sentier Research, EPI does not charge for its research findings.

NPR Overly Optimistic on Housing Rebound

By Dean BakerDean Baker

August 22, 2013

22 Agosto 2013

Morning Edition had a segment on the housing recovery which substantially overstated its likely contribution to the recovery. The expert analyst the piece relied upon suggested that housing construction could add 1.0 percentage point to GDP growth over the next three years. This would imply a near doubling of its contribution over the last year.

According to data from the Bureau of Economic Analysis, housing has added an average of just less than 0.4 percentage points to growth over the last four quarters. Its peak contribution in this period was just 0.5 percentage points. Even assuming a multiplier of 1.5, the average contribution over this period would be just 0.6 percentage points, considerably less than the 1.0 percentage point suggested by NPR’s expert.

It is also remarkable that the piece never referred to the vacancy rate which is still near record highs. This is a key factor holding housing starts down.

Morning Edition had a segment on the housing recovery which substantially overstated its likely contribution to the recovery. The expert analyst the piece relied upon suggested that housing construction could add 1.0 percentage point to GDP growth over the next three years. This would imply a near doubling of its contribution over the last year.

According to data from the Bureau of Economic Analysis, housing has added an average of just less than 0.4 percentage points to growth over the last four quarters. Its peak contribution in this period was just 0.5 percentage points. Even assuming a multiplier of 1.5, the average contribution over this period would be just 0.6 percentage points, considerably less than the 1.0 percentage point suggested by NPR’s expert.

It is also remarkable that the piece never referred to the vacancy rate which is still near record highs. This is a key factor holding housing starts down.

Going Off the Deep End With David Walker

By Dean BakerDean Baker

August 22, 2013

22 Agosto 2013

Yesterday the Associated Press fielded its entry in the classics in bad reporting on economic policy contest: a profile it did of David Walker, the former head of the Government Accountability Office and also former president of the Peter G. Peterson Foundation. The piece presented everything that Walker said at face value, making no effort to put his scare story in any context nor to verify his assertions. The AP entry starts out strong with the third paragraph telling readers: "Next month, he will present a major report for the nonprofit he founded, the Comeback America Initiative, whose purpose is to raise awareness about the federal government’s swelling debt. It’s a chasm that isn’t top of mind for most Americans, he knows. But Walker, 61, wants it to be." Note the use of "swelling" instead of a more neutral term or maybe no adjective at all. Then we get the term "chasm" as opposed to a term like "issue." Then we are told that Walker passes around fake trillion bills because, quoting Walker: “Washington spends a trillion dollars like it’s nothing.” Is that true? I recall big debates in the last few weeks over spending $40 billion on food stamps over the next decade. We've had big debates over the $250 million (1/4,000th of a trillion) [number corrected] spent each year on public broadcasting. In fact, John McCain made a big issue in his 2008 presidential campaign over spending $1 million (one millionth of a trillion) on a Woodstock museum. There seem to be lots of very big debates in Washington on spending sums that are way smaller than $1 trillion.

When Loans Go Bad: Markets and Cartels

By Dean BakerDean Baker

August 21, 2013

21 Agosto 2013

Phillip Swagel used an Economix post to discuss the ramifications of debtors not paying their debts. While his basic point is valid, that reducing payments to creditors will affect their willingness to lend in the future, some of the specifics are questionable. His first example is the case of the auto bailouts, where the terms of the bailout put some commitments to the workers (most notably retiree health care benefits) ahead of bondholders, reversing the normal ordering of creditors in a bankruptcy. While Swagel refers to research that suggests that unionized firms paid a penalty in their borrowing in the period immediately following the bailout, the logic of the situation would not support this outcome. As a result of the government's intervention, all creditors, including bondholders, almost certainly got more money than would have been the case if the government had let GM and Chrysler go into bankruptcy without assistance. What would matter to a creditor is their expected payback in the event of a bankruptcy, not whether another creditor may be placed ahead of them in line. If the bailout allowed a higher payback for creditors than would have otherwise been the case, then it should reduce interest rates for unionized firms that might be more likely to be bailed out, not increase them. This is the outcome that Swagel indicates was supported by other research. Swagel also looks at the case of municipal bonds in the wake of the Detroit bankruptcy. He notes that creditors will likely have to take losses on general obligation bonds which are backed by tax revenues. He mentions that this appears to be leading to higher interest rates for other municipalities in Michigan. While this may be due to the fact that Detroit bondholders will be forced to take losses, it can also be attributed to the fact that creditors had not previously assessed risks accurately.

Larry Summers Thought the Stock Bubble Was Cool and Missed the Housing Bubble

By Dean BakerDean Baker

August 21, 2013

21 Agosto 2013

A Washington Post article on the battle over replacing Bernanke as Fed chair forget to mention these qualifications of Larry Summers.

Washington Post Discovers Efforts to Supplement Retirement Savings

By Dean BakerDean Baker

August 21, 2013

21 Agosto 2013

The Washington Post may not be the best place to get breaking news, but that doesn’t mean they never get the news. Today it ran a piece discussing a proposal by the Center for American Progress (CAP) to create state-run savings systems that workers could contribute to on an opt-out basis. In other words, they would be contributing to the system unless they explicitly asked not to contribute. The plan is intended to supplement Social Security, recognizing that the vast majority of workers have been able to accumulate little or nothing in 401(k) type plans. It would also provide a guaranteed benefit based on the contribution, similar to a cash balance pension plan.

While it’s good to see the Post take note of the CAP proposal, these types of plans are not exactly new. The Economic Opportunity Institute in Washington State has been working on a similar plan for almost 15 years. They got a bill through the legislature for a study of such a system just before the economic downturn in 2007. The budget crisis from the downturn made the state reluctant to spend even the seed money that would be needed to get a plan in place.

There were also efforts undertaken in Maryland, Connecticut, and California (in 2007), that came close to being approved by legislatures and put into law. (CEPR assisted several of these efforts.) Anyhow, it would be helpful to include some of this background.

The Washington Post may not be the best place to get breaking news, but that doesn’t mean they never get the news. Today it ran a piece discussing a proposal by the Center for American Progress (CAP) to create state-run savings systems that workers could contribute to on an opt-out basis. In other words, they would be contributing to the system unless they explicitly asked not to contribute. The plan is intended to supplement Social Security, recognizing that the vast majority of workers have been able to accumulate little or nothing in 401(k) type plans. It would also provide a guaranteed benefit based on the contribution, similar to a cash balance pension plan.

While it’s good to see the Post take note of the CAP proposal, these types of plans are not exactly new. The Economic Opportunity Institute in Washington State has been working on a similar plan for almost 15 years. They got a bill through the legislature for a study of such a system just before the economic downturn in 2007. The budget crisis from the downturn made the state reluctant to spend even the seed money that would be needed to get a plan in place.

There were also efforts undertaken in Maryland, Connecticut, and California (in 2007), that came close to being approved by legislatures and put into law. (CEPR assisted several of these efforts.) Anyhow, it would be helpful to include some of this background.

Robert Samuelson Explains a Housing Bust that Doesn't Exist by Lack of Access to Credit

By Dean BakerDean Baker

August 19, 2013

19 Agosto 2013

Robert Samuelson’s column today is devoted to explaining why housing has not recovered. According to Samuelson the problem is lack of credit. This in turn is the result of the fact that lenders are feeling so beaten up that they are scared to make loans. The moral is that if we don’t stop beating up on the banks then no one will be able to buy a house.

This is a nice story that unfortunately does not fit the data. At the most basic level the problem is that people are actually buying just about as many homes as we should expect. Samuelson focuses on the rate of housing starts, which is below trend, but the relevent measure for a discussion of homebuying and credit is the number of homes that people are buying.

Currently people are buying existing homes at close to a 5 million annual rate. They are buying new homes at close to a 500,000 annual rate for a total rate of home purchases of 5.5 million a year. If we go back to the mid-1990s, after the recession but before irrational exuberance began to dominate the housing market, existing home sales averaged around 3.5 million a year (1993-1995). New home sales averaged just under 700,000 a year for total sales of around 4.2 million a year.

The population is roughly 20 percent larger in 2013 than it was in 1994, which means that we should be seeing around 5.2 million home purchases a year if we are even with the pre-bubble pace. That’s about 5 percent fewer sales than we are actually seeing. This means that if we compare current sales levels to the pre-bubble period we are seeing somewhat more sales than we should expect, not less.

We are seeing considerably less construction than trend levels, but this really should not be any surprise to anyone familiar with housing data. Vacancy rates remain well above normal levels. With a large backlog of vacant homes it is hardly surprising that builders would be reluctant to undertake large amounts of new building.

If anyone wanted to check the credit story that Samuelson tells, they could also look at the Mortgage Bankers Association mortgage application index (sorry, no link). If homebuyers were having trouble getting mortgages then there should be a sharp rise in this index relative to sales, as homebuyers have to put in multiple applications to secure a mortgage and some may not even get a mortgage after many applications. The index actually tracked sales fairly closely through the downturn, which suggests that the percentage of people being denied mortgages had not changed much.

In short, Samuelson has a good story about how we are hurting the housing market by holding bankers responsible for reckless and/or fraudelent mortgage issuance, but it doesn’t fit the data. Nice try, though.

Robert Samuelson’s column today is devoted to explaining why housing has not recovered. According to Samuelson the problem is lack of credit. This in turn is the result of the fact that lenders are feeling so beaten up that they are scared to make loans. The moral is that if we don’t stop beating up on the banks then no one will be able to buy a house.

This is a nice story that unfortunately does not fit the data. At the most basic level the problem is that people are actually buying just about as many homes as we should expect. Samuelson focuses on the rate of housing starts, which is below trend, but the relevent measure for a discussion of homebuying and credit is the number of homes that people are buying.

Currently people are buying existing homes at close to a 5 million annual rate. They are buying new homes at close to a 500,000 annual rate for a total rate of home purchases of 5.5 million a year. If we go back to the mid-1990s, after the recession but before irrational exuberance began to dominate the housing market, existing home sales averaged around 3.5 million a year (1993-1995). New home sales averaged just under 700,000 a year for total sales of around 4.2 million a year.

The population is roughly 20 percent larger in 2013 than it was in 1994, which means that we should be seeing around 5.2 million home purchases a year if we are even with the pre-bubble pace. That’s about 5 percent fewer sales than we are actually seeing. This means that if we compare current sales levels to the pre-bubble period we are seeing somewhat more sales than we should expect, not less.

We are seeing considerably less construction than trend levels, but this really should not be any surprise to anyone familiar with housing data. Vacancy rates remain well above normal levels. With a large backlog of vacant homes it is hardly surprising that builders would be reluctant to undertake large amounts of new building.

If anyone wanted to check the credit story that Samuelson tells, they could also look at the Mortgage Bankers Association mortgage application index (sorry, no link). If homebuyers were having trouble getting mortgages then there should be a sharp rise in this index relative to sales, as homebuyers have to put in multiple applications to secure a mortgage and some may not even get a mortgage after many applications. The index actually tracked sales fairly closely through the downturn, which suggests that the percentage of people being denied mortgages had not changed much.

In short, Samuelson has a good story about how we are hurting the housing market by holding bankers responsible for reckless and/or fraudelent mortgage issuance, but it doesn’t fit the data. Nice try, though.

Getting to Full Employment: It Actually Is Not That Complicated

By Dean BakerDean Baker

August 18, 2013

18 Agosto 2013

There are two types of people in the world: those who make complicated things simple and those who make simple things complicated. Paul Solman seems determined to convince us he is in the latter camp with his insistence that there is little or nothing we can do to address unemployment. He raises many points in his response to my post, but I will start with a small one. Economics actually does not teach us that “every decision has both benefits and costs.” For example, if we can find a shortcut on our drive to work, that is a decision that will only have benefits. Just like finding a faster way to get to work, there are in fact many cases in economics where we can identify policies that have benefits with little or no obvious costs. Creating jobs in an economy that is suffering from inadequate demand, as is the case in the United States today, is in fact one of these cases. While Solman seems to believe that something bad happens if we put people to work, he never even hints at what it might be. Will aliens descend from the sky and steal our children? Will rivers flow upstream? What exactly is the bad thing that happens if the government spends money to put people back to work? Economists who oppose such spending usually argue that it will cause inflation, but most have recently become more quiet arguing this case because the argument suffers from a serious lack of evidence at this point. Inflation has been falling just about everywhere in spite of substantial deficits and vast amounts of money put into the economy by the Fed and other central banks. Of course Solman doesn’t make the inflation argument, so readers can only guess as to what bad event he thinks occurs if we run deficits to put people back to work. His main concern seems to be that demand will not come back to employ people even in the long-term, but this raises two issues. First, why is this an argument not to employ people now? Lives are being ruined today because workers can’t find jobs and properly support their families. Solman certainly gives no reason as to why he thinks demand will not return in the longer term, so what benefit are we getting by ruining people’s lives with unemployment? The second point is that there are intelligent things that can be said about the loss of demand and the long-term prospects for its coming back. Unlike the overwhelming majority of people who talk about economics on the Newshour, some of us were not all surprised by the economic collapse in 2007-2008. I in fact warned about the housing bubble for years and that its collapse would likely lead to a recession. This was not a random bad event from the sky; the downturn was a 100 percent predictable for anyone paying attention to the economy and doing their homework.

Steven Pearlstein Has Been to Ireland, Therefore He Is An Expert on Its Economy

By Dean BakerDean Baker

August 18, 2013

18 Agosto 2013

It's always fun to have conversations with people who will proclaim themselves great experts on a country about which they may know very little because they have been there. I have encountered people who tell me poor countries are rich because they saw opulent homes and expensive restaurants on a visit, or that there is no unemployment in the middle of a downturn because every business owner they talked to couldn't find enough workers. Steven Pearlstein gives us a wonderful example of such arguments in his piece on Ireland's economy in the Post. Pearlstein tells readers: "In the world beyond its emerald shores, meanwhile, another simple narrative about Ireland’s economy has found a receptive audience, this one about the Draconian spending cuts and tax increases that have been forced on Ireland by its creditors in order to reduce an annual government budget deficit that had reached 32 percent of the country’s annual economic output. The Irish themselves have long since accepted the urgent necessity of belt-tightening. But to Keynesian critics who believe in the healing power of fiscal stimulus, the country’s recent slide back into recession is offered as proof of the futility of austerity. "Neither of these fables — the one about the bank bailout, the other about austerity — is adequate to explain the rise and fall of the Celtic Tiger. You don’t have to spend much time here before discovering that the real story turns out to be both more complicated and more interesting. "In fact, you might say that what’s holding back Ireland’s economy is the same thing that is now holding back the once-fast growing economies of Brazil, Russia, India and China. It is the same thing that afflicts Greece, Italy, France and the other struggling economies of Europe. And, to a somewhat lesser degree, it is the same problem bedeviling the U.S. economy. "In each, it is the inability to make fundamental reforms to political and economic institutions that now prevents them from rebalancing their economy, from taking next leap in terms of their productivity and efficiency, from creating a new, more sustainable model for economic growth." Wow, Ireland and all these other countries need to make adjustments to adapt to a changing world! Who could have guessed?