Denial and Avoidance Won’t Fix Housing or Grow Economy
De-Nile is a river in Egypt, not a growth strategy.
I was reading about the 1930s…
Unemployment climbed from 3.2 to 8.7 percent… the year is 1930.Â In 1931, the unemployment rate rises to 15.9 percent.Â In 1932, unemployment continues upward to 23.6 percent, and in 1933 it goes to 24.9 percent.
In 1934, we are said to be starting on a road to recovery as unemployment falls to 21.7 percent.Â In 1935, it falls again to 20.1 percent, in 1936 itâ€™s down to 16.9 percent and in 1937 it falls to 14.3 percent.
Then in 1938, unemployment spikes back up to 19.0 percent, it is remembered as the â€śdepression inside the depression.â€ťÂ In 1939 unemployment edged back down to 17.2 percent.
Between January and April of 1930, stocks rose by 13 percent… and then fell from that high by 40 percent as of the end of that year.Â On New Yearsâ€™ Day of 1931, predictions that the economy would recover by the end of that year were in the news.
The fact is that throughout the decade that we refer to as the Great Depression our economic recovery was always â€śjust around the cornerâ€ť according to many â€śexperts.â€ťÂ What else would you expect â€śexpertsâ€ť to say?Â That the ship is sinking, head for the lifeboats?Â That would just make a bad situation worse.
The British economist everyone loves to either quote or debate, John Maynard Keynes, referred to our â€śanimal spirits,â€ť the unpredictable factors that impact both consumer and business confidence.Â And in 2009, George Akerlof and Robert Shillerâ€™s book, building on Keynesâ€™ theory, titled: â€śAnimal Spirits: How Human Psychology Drives the Economy,â€ť claimed to â€śoffer a road map for reversing the financial misfortunes besetting us today.â€ť
As a result, there are an awful lot of people that would say just about anything if they thought it might improve our economy even temporarily.Â Truth is not a factor in this discussion, we simply have to cheer people up in a big way and theyâ€™ll take it from there.
In case you wondered why you almost never see economic news that isnâ€™t flagrantly cheerleading for recovery, itâ€™s because there arenâ€™t many people who would pay someone to tell the truth about our economic condition when the truth paints not so rosy a picture… since no one benefits from that sort of news being spread around town.
Fed Chair Bernankeâ€™s quantitative easing is an attempt to create the same sort of confidence game solution to stimulating consumer spending… pump money into the financial system to increase liquidity and the stock market will soar the way an alcoholic revels when provided with an uninterrupted pipeline of booze.Â That will make people feel richer and theyâ€™ll rush right out and start spending like they always have.Â Next thing you know the increased consumer spending will cause employers to expand and presto… unemployment will fall.
Has it worked?Â Not even a little bit.Â Did anyone think it would work?Â Well, I certainly didnâ€™t and I wrote thousands of words explaining why, but Iâ€™m not claiming to be in any way special… I could easily make a very long list of those who said quite clearly that Bernankeâ€™s plan could not succeed.Â And without going into great detail, there are at least three reasons that should be simple for anyone to see and understand.
For one thing, our financial problems are not psychological, theyâ€™re real.Â Our illness is not in our heads, weâ€™ve actually got broken bones with which to contend.Â Weâ€™re not depressed… weâ€™re poorer.Â A second factor is that weâ€™ve fallen too far down for too long.Â Hand me an extra ten grand today and Iâ€™m more likely to stuff my mattress with it than buy a new anything, fearful that the next rainy day will feel more like the storm of the century than April Showers.Â And third, while the stock market may in fact be soaring to new highs, we all know how tenuous that sort of glee can be, and besides that, any new wealth the market is creating has been more than offset by the drop in home equity that weâ€™re much closer to than the DOW or S&P 500.
So, the bottom line is Mr. Bernanke can keep easing until he turns blue, and he still wonâ€™t get the effect heâ€™s dreaming of creating, no more so than will the unabashed cheerleading that continues to inundate the mainstream press with claims that our economic recovery is upon us and growing stronger every day.
A Look at Unemployment In the U.S. Today…
At the end of this yearâ€™s first quarter, unemployment was up in 25 states.Â In 17 states it was flat.Â According to â€śMishâ€ť Shedlock, whose blog, Global Economic Analysis tracks our unemployment picture in great detail, based on numerous sources including the Bureau of Economic Analysis (â€śBEAâ€ť), sums it up as follows:
â€śThe official unemployment rate is 7.7%. However, if you start counting all the people who want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is.
U-6 is much higher at 14.3%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.
Digging under the surface, much of the drop in the unemployment rate over the past two years is nothing but a statistical mirage. Things are much worse than the reported numbers indicate.â€ť
Long-term unemployment is the terms used to describe someone out of work for at least 27 weeks, but still looking for a job.Â Understandably, after six months out of work, quite a few lose hope and stop looking.Â Mish points out that 38 percent of the unemployed were classified this way during the first quarter of this year… until March when long-term unemployment went up to 40.2 percent.
The unemployment numbers reported in the headlines come from the BEAâ€™s Household Survey… basically they call people and ask, among other things, who in the household is out of work, but has sought employment during the last month.Â If someone has stopped looking for work, theyâ€™re no longer counted as being unemployed, rather they are considered no longer in the work force and this number is reflected in the â€śparticipation rate.â€ť
According to Mishâ€™s numbers, and his numbers can absolutely be trusted, over the last year, we stopped counting 1,693,000 people, while during the same period our reports showed the number employed up by 1,473,000, including those only employed part-time.
Hereâ€™s the problem in a bigger picture sense… Peter Ferrara writing for Forbes explains that since 2008, the U.S. population increased by almost 12 million people of employment age.Â So, when you really look at the employment picture today, weâ€™ve got 3 million fewer people working in this country, and if the participation rate today were the same as it was in 2008, even our happy headline unemployment rate as of December 2012 would have been 11.4 percent… instead of 7.8 percent as was reported by the U.S. Department of Labor in January 2013.
Even more sobering is that in December of 2007, our unemployment rate was only 4.9 percent.
Now letâ€™s take a quick look at the numbers instead of the percentages.Â As this year began, based on the Department of Laborâ€™s report, there were 12.2 million Americans out of work… 2.6 million workers no longer looking for work… 2.6 million workers classified as â€śmarginally attached,â€ť meaning they want work and have looked for a job in the last 12 months… and 1.1 million referred to as â€śdiscouraged,â€ť meaning theyâ€™ve simply stopped looking.
Run a tape of those numbers and youâ€™ll find 15 million Americans not working as of the end of last year, and as a footnote to that statistic… 7.9 million Americans could be found in the column labeled, â€śinvoluntary part-time,â€ť which means exactly what it sounds like… your hours have been cut so we wonâ€™t see you until next Thursday… hope you enjoy your time off.
According to the National Bureau of Economic Research, the longest recession this country has seen since the Great Depression was reported to last 16 months… the average recession since the 1930s lasted only 10 months.Â Our Great Recession reportedly began in December of 2007 (and is said to have ended in June 2009, if you can believe that), but as of this month itâ€™s been 65 months since then and not only do we have the downright awful unemployment picture just described, but in addition, over the last five years median household income has fallen by roughly 9 percent as the commodity price index (food, fuel, etc.) has risen by 20 percent.
And this is the performance of an economy being bailed out with untold trillions in corporate welfare, federal spending thatâ€™s up by 41 percent in five years, Fed Chair Bernankeâ€™s ongoing and unprecedented quantitative easing, interest rates being kept at historic lows, the FHA financing home buyers with 520 FICO scores and what some might call a relative pittance as a down payment, and as I recall weâ€™re still at war somewhere, arenâ€™t we?
All of that and more… and this is what our economy looks like?Â This is recovery?
Recently, economist Bill Conerly, who earned his PhD in Economics from Duke and has worked both as a professor and in the corporate world, writing for Forbes, forecasted the economy in 2013-14 to experience â€ślight to moderate growth,â€ť saying that there were both positives and negatives ahead.
Okay, so that’s fair enough, right?Â I mean, thatâ€™s not exactly going out on any sort of limb in terms of a forecast.Â Just about anything short of a complete catastrophe could happen and he could likely claim to have been at least partially correct.
So, what were Billâ€™s positives?
The first he phrased as our normal â€śtendency toward growth.â€ťÂ As a nation, we’ve tended to grow in the past… and so, Bill forecasts… we probably will… you know… grow… in the future.
Now, I donâ€™t know about how you feel about that sort of sentence being at the top of his list of â€śpositives,â€ť but when I read it, I fantasized momentarily about kicking Bill in his shins for having written it.Â It’s about as non-specific as one can get, and if you have a doctorate in economics, with the resume of Mr. Conerly, well… I’m hoping for a little more frankly.
I “tend” to be healthy, but that’s not any sort of assurance that I will be next year, especially if I do unhealthy things.Â It’s like Mark Zandi, the economist whose forecasts have predicted our recovery annually since the crisis began… it’s always, next year… then next year when it doesn’t happen then it’s coming the year after that.Â Eventually, I suppose, he’ll be right.
Next in his list of positives was QE3… once again with Bernankeâ€™s easy money machine.Â Never mind that QE hasnâ€™t accomplished anything thus far, Bill simply says that we havenâ€™t given it enough time.Â The thing is… QE has had enough time to have a significant impact on the equities markets.Â So… what else should we expect it to do and why… I need details.
After that predictable little gem came, â€śavailable labor, equipment,â€ť and by that I suppose he means unemployment is still high and therefore workers are â€śavailable.â€ťÂ As far as “equipment” goes… I donâ€™t even care what he meant by that.Â If the United States of America has to list â€śequipmentâ€ť at the top of the list of positives that will create economic growth, then weâ€™re in even more trouble than I had thought.
And last he listed â€ślow interest rates,â€ť yet another factor that has been consistently present since 2008, and yet has failed to do much of anything except help pump up the stock market and leave retirees with essentially no interest income on which to survive their golden years.
After that,Â Conerly threw out three negatives… the first being â€śfiscal policy,â€ť which he explained had to do with how the American people feel about the national debt and deficit spending, and how that will impact federal spending.Â It’s an idea that I think should be presented with a laugh track from a sitcom.Â It doesnâ€™t matter whether Republican or Democrat, our government always spends more year over year… and many of the Americans yelling about the debt and deficit are members of the Tea Party that learned everything they know about government spending on Fox News.
The next negative was Obamacare… Bill says itâ€™s causing â€śworry,â€ť and I have to agree with him here… in fact, itâ€™s causing a lot more than just worry.Â My health coverage has increased by close to $1,000 a month since the presidentâ€™s health insurance reform legislation passed into law, and Iâ€™m not just worried… Iâ€™m at risk from being less covered.Â To keep the cost from killing me, we lowered our coverage to 70 percent, and if youâ€™ve ever seen what 30 percent of a decent hospital bill looks like, you know itâ€™s enough to break the bank all by itself.
And last on Billâ€™s list of negatives that could threaten our economic growth this year and next… are you ready for it… drum roll please… survey says: â€śanimal spirits.â€ťÂ Ding, ding, ding, ding.
Yes, following the crowd, Bill went straight for the Keynes econo-bible saying:
â€śToday the common mood seems to be dour, which itself depresses economic growth.â€ť
So, itâ€™s OUR fault once again?Â Weâ€™re causing this with our dour common mood?Â Damn it Bill… weâ€™re unemployed, less employed or just plain poorer… our home values have been slashed by at least a third… our access to credit is about on par with where it was in the 1970s… weâ€™re paying back student loans that look a lot like the balances of a mortgage… our parents and kids are moving back into our homes… and youâ€™re blaming our anemic economic growth prospects on us… on the collective mood we’re in?
Well, fine… why not… after all, we caused the whole mortgage meltdown by buying homes we couldnâ€™t afford, right?Â We caused all that and now weâ€™re so damn dour as a result that weâ€™re threatening our nationâ€™s â€śtendency to grow?â€ťÂ Well, shame on us for being such a problem for the planet.Â We’ll try to do better in the future.Â Should we be apologizing to Goldman Sachs, you jackass?
Our Always Recovering Housing Markets…
I know, Iâ€™ve responded to this so many times, but once again we’re being told that our housing markets are defying gravity again and one thing Iâ€™ve learned is that when it comes to our homeâ€™s values, I suppose because we want it so badly… weâ€™ll believe just about anything.
It seems that nary a month goes by without someone telling us that our homes are increasing in value and even though we should know enough to wonder how that could be when NOTHING ELSE has changed in the least, we run with it like we got the information on stone tablets engraved by the hand of God.
First of all… foreclosures are down?Â What does that even mean?Â Are we calling â€śforeclosuresâ€ť what happens when a Notice of Default is sent to a borrower?Â Or is it when a home is repossessed by a lender or servicer?Â Or, is it when a home is sold at a trustee or sheriffâ€™s sale?Â I donâ€™t even know anymore, all seem to be interchangeable depending on who wants to spin the news into a golden yarn.
Pre-foreclosure activity in California is up by 200,000 year-over-year, and while some states are seeing less foreclosure activity, others are seeing more… and this cycle has continued in the same way for the couple of years.Â I saw data that said last month we had 143,000 foreclosures nationwide.Â So, whatâ€™s new or encouraging about that?
You know, I could sit here and tear apart the nonsense about the crisis being over or foreclosures being behind us, but itâ€™s just too silly to consider even as a possibility.Â Two months ago, Lender Processing Services reported something like 3.3 million loans being in the seriously delinquent category.Â The Mortgage Bankers Association puts that number at 2.38 million as of March of this year.Â So, whatever the number you like, itâ€™s a big one… so where did they all go… did everyone get a signing bonus and pay up their arrearages?Â Nonsense.
Banks are slowing down in states that have made it tougher to foreclose… certainly.Â They may also repossessing fewer homes at the moment, but these sorts of things arenâ€™t an indication that borrowers arenâ€™t still unable to pay their mortgages, itâ€™s more likely an indication that banks donâ€™t want to take on more losses than they have to.Â And if fewer people are applying for loan modifications itâ€™s because theyâ€™ve heard about the nightmare and donâ€™t want any part of it.
Regardless, 245,000 homeowners were granted permanent loan modifications in the first three months of 2013, according to the latest report by the HopeNow Alliance, and during that same three months, there were 162,000 completed foreclosure sales and 472,000 FORECLOSURE STARTS, which represents a 30 percent increase over the fourth quarter of 2012!Â Does that sound like the crisis has ended, or is even coming to an end?Â Not to me.
Now, look at April home sales in Southern California for a moment.Â According to Dr. Housing Bubble, the site thatâ€™s entirely dedicated to tracking the reality of Southern Californiaâ€™s housing market… Jumbo loans made up 26 percent of all sales, and all cash deals accounted for 33 percent of the total.Â After that, FHA loans were used to finance 21 percent of homes sold in that month.Â Got the total in your head already?Â It comes to 80 percent of all home sales… does it look anything like a sustainable housing market to you?
Depending on whose numbers you want to believe, Southern Californiaâ€™s median home price increased by 28 percent in a year.Â Now, the volume is VERY LOW, so price increases driven by a small number of sales at the bottom end of the market may mean… nothing.Â But, even if you think volume doesnâ€™t matter… homes increasing by 28 percent in a year is not sustainable.Â In fact, thatâ€™s more than homes went up yearly during the last bubble.
All cash and jumbos alone represent 49 percent of the market… and who do you suppose was involved in those transactions?Â Iâ€™m thinking investors (flipping anyone?) and rich people, no?Â We should all understand by now that with inventories at record lows, as is the case today, the scarcity makes prices appear to rise as investors with tons of cash and fueled by low rates bid each other up to get whatâ€™s available.
In the Phoenix area, for example, where prices have increased by a reported 30 percent in a year, over half the sales are being driven by investors, and 40 percent of sales are all cash, but when half the market is being driven by one relatively small group, what do you suppose will happen when members of that group no longer see the opportunity for a quick buck they once did… and they pull out en masse?Â Once again, Dr. Housing Bubble covered this topic quite thoroughly, and the writing is more than just on the wall.
And the rising prices are bringing more homes onto the market, and when supply goes up… what happens to prices, boys and girls?Â Investor demand in the Valley of the Sun is already showing signs of waning, and since household incomes in Arizona have remained flat for better than a decade, itâ€™s hard to imagine that whatâ€™s been going on there will continue much longer.Â And with the FHA loans weâ€™ve been depending on to replace the sub-prime mortgages that went away with the likes of New Century are about to get quite a bit more expensive in June, so we can guess where that volume is headed.
So, thatâ€™s enough for me, for the moment anyway… I wish weâ€™d stop with the false bottoms and imaged recovery stories so we could actually concentrate on making some much needed improvements in how weâ€™re handling our economic malaise, because thatâ€™s the only way weâ€™re going to see any actual improvement in our quality of life.
Denial may help us sleep for a few nights, like giving a drunk alcohol makes him or her feel better too… but itâ€™s always short lived and the hangovers only get worse when we wake up and discover that nothing substantive has changed.