Published on: March 19, 2018
The big economic news for this month is the much stronger than expected employment report; the big question is, why in the face of strong labor market, consumer spending (reflected in retail sales) has been trending steadily downward.
Employers added 313,000 jobs in February, representing the largest monthly increase in nearly two years. Positive labor reports and increasing confidence in the economic outlook lured more than 800,000 workers off the sidelines, holding the unemployment rate at 4.1 percent for the fifth consecutive month.
The increase in the labor pool – the largest since 1983 ─ provided further evidence of economic strength, but it also countered pressure on employers to increase wages. The 2.6 percent year-over-year wage increase reported for February was lower than analysts had expected after January’s initial report of a nearly 3 percent annual jump.
But January’s preliminary report was also revised downward. The result: bad news for workers, who saw a slim 0.1 percent wage increase over January; but good news for investors, who had feared a rapid jump in wages would prompt the Federal Reserve to increase interest rates more aggressively than expected.
Words matter, and a proposed change in HUD’s mission statement has alarmed housing advocacy groups. Agency officials are reportedly planning to condense the mission statement by eliminating 23 of its 63 words, among them, “free from discrimination.” The revised statement would also remove references to “inclusive communities,” consumer protections and “quality” homes for all.
HUD officials say the changes reflect HUD Secretary Benjamin Carson’s emphasis on self-sufficiency and empowerment – giving people the tools to help themselves. “It’s no secret that empowering people with the tools to ascend the economic ladder to self-sufficiency is one of the main missions of both this administration and Secretary Carson,” Lynne Patton, who oversees HUD’s New York and Jew Jersey regional offices, told the Washington Post. “Leadership simply wanted a motto that better reflects that goal, too.”
But HUD staff members, who say they were excluded from the decision, see the revision as “a symbolic shift. It’s the tip of the iceberg in terms of the kinds of changes they are making,” an unidentified former HUD staffer told the WSJ.
Diane Yentel, president and chief executive of the National Low-Income Housing Coalition, agreed. “Secretary Carson is sending a message to the country that he does not take discrimination in the housing market seriously,” she said in a press statement. It’s especially appalling, as we near the 50th anniversary of the Fair “Thankfully,” she added, “the law trumps a mission statement, so those legal obligations remain.”
INTEREST RATE OUTLOOK
Fed officials have made clear their intention to boost interest rates multiple times this year, although Jerome Powell, the newly installed Fed Chair, said recently that policy makers will “remain alert to any developing risks to financial stability.”
Increases in the Fed’s target rate will bring higher mortgage rates, raising obvious concerns about the impact on the housing market. The 30-year fixed rate, which has been rising steadily since the beginning of the year, is now hovering around 4.5 percent – its highest level in three years, according to Freddie Mac.
Although home buyers aren’t happy about the higher rates, “they can still make it work,” a mortgage broker told Bloomberg News. “But as we get closer to 5 percent,” this industry executive predicted, “that’s when [buyers] will start thinking about it.”
Hamstrung by limited choices for buyers, existing sales fell again in January, to a seasonally adjusted rate of 5.38 million units – down 3.6 percent year-over-year. That represents the slowest pace since last September and the largest annual decline in more than three years.
Although Realtors have been reporting steady foot traffic, those boots on the ground at open houses haven’t translated into closed sales, as rising interest rates, rising prices (up 6.6 percent year-over-year in January, according to CoreLogic), and scarce inventories have taken a toll.
Lawrence Yun, chief economist for the National Association of Realtors, continues to blame the “glaring” inventory shortage for the disconnect between a strong economy and lagging home sales.
“It’s very clear that too many markets right now are becoming less affordable and desperately need more new listings to calm the speedy price growth…. The underproduction of single-family homes over the last decade has played a predominant role in the current inventory crisis that is weighing on affordability,” he said in a press statement.
But Yun also sees some indicators that “the tide is finally turning,” reflected in what he termed a “nice jump” in new home construction in January and the rising confidence of home builders.
Housing starts did increase in January, to a one-year high, and building permits, an indicator of future construction, reached their highest level since 2007. But in both cases, the increases were attributable primarily to gains in the multi-family sector. Single-family starts increased by 3.7 percent over the January level, compared with a gain of nearly 20 percent in multi-family starts. While permits for multifamily construction were up by 25.4 percent, single family permits declined by 1.7 percent.
ANOTHER LEADING INDICATOR?
Economists have identified a new indicator of recession risks: Pregnancies. Using birth dates as a base line for calculating conception dates, researchers at the National Bureau of Economic Research discovered that conceptions declined before the recessions that began in July 1990, March 2001 and December 2007. The link, they suggest: Confidence, or the lack of it in the face of deteriorating economic conditions.
“We certainly don’t think it’s magic, we don’t think there are people out there with crystal balls,” Dan Hungerman, an economist at Notre Dame and one of the co-authors of the paper told the Wall Street Journal. “[But when] people sit down at home and have a conversation about having another kid, part of that [conversation] is going to involve their thinking about the future.” And based on what this study shows, Hungerman said, “it appears people are pretty good at anticipating recessions.”
Although this conception gauge turned out to be equally effective or better than other indicators at predicting recession, its practical applicability may be limited, Hungerman acknowledged, because “tracking conceptions in real time is pretty tough.” At a minimum, he noted, “more research will be needed” to find a viable proxy for pregnancies that could be used in forecasting models.
IN CASE YOU MISSED THIS
Finding a home in today’s competitive, inventory-deficient market takes time ─ an average of three months, according to a recent industry poll.
Underestimating the severity of cyber risks and overestimating their ability to defend themselves makes consumer vulnerable to cyber attacks, and criminals are taking advantage. Separately, the Council of Economic Advisors estimates that cyber attacks drained nearly $110 billion from the nation’s economy in 2016.
The relative advantage of owning vs. renting a home, which has tilted toward home ownership in recent years, seems to be shifting back toward renting.
Congress is considering legislation that would require Fannie Mae and Freddie Mac to consider credit scores in addition to Fair Isaac’s FICO score, on which the secondary market giants rely exclusively to qualify home buyers for mortgages.
Corporate executives and small business owners are equally optimistic about the economic outlook and equally concerned about the negative impact of a trade war.
Some condominium owners view their home as their “castle,” which they can alter in any way they choose. This decision by a Michigan Appeals Court (Thiel v. Goings) confirms that owners ignore an association’s architectural standards at their peril.
The defendants in this case, David and Helen Goyings, constructed a custom-designed modular home on a lot in the Timber Ridge Bay subdivision. The home consisted of three factory-built modules that were assembled on the site. Neighbors (the Thiels and others) sued the Goyings, claiming that the home violated the community association’s covenants. which barred modular homes in the community, and should be removed as a result.
A trial court found the covenants ambiguous because they did not define “modular.” The court also agreed with the Goyings on three key points:
- A substantial amount of the work required to complete the home occurred on-site, making it at least partly, if not entirely, “stick-built.”
- Many other homes in the community contained some prefabricated components; and
- There was no discernible difference in appearance or quality between the Goyings’ modular home and completely “stick-built” homes in the community.
“The wording of the restrictive covenants is too broad and does not clarify what percentage of a home is allowed to be prefabricated before the entirety of the home is barred by the restrictions,” the court said, concluding: “If a home having prefabricated components is allowed to remain in Timber Ridge Bay, this home, containing components built elsewhere, must be allowed to remain.”
The key question for the trial court was whether the home violated “congeniality standards” in ways that would offend the aesthetic sensibilities of other residents or threaten the value of their homes. The court found that this was not the case.
“In looking at the pictures of the home provided by Plaintiffs, it is apparent that the home is not an eyesore and it is unlikely that anyone would know that the home had been built anywhere but on the property,” the court found, adding: “This home meets all of the standards and specifications of a stick-built home. The aesthetics, quality and value are of the same standards as the other homes that exist and will be built within the subdivision.”
The Appeals Court, to whom the Thiels turned for review, reached a different conclusion. The court focused first on the covenants at issue, which included two key restrictions:
“No residences, including modular, manufactured, mobile or prefabricated homes, may be moved from a location outside the Premises and placed or located within a Parcel within the Premises;” and
“No manufactured homes whether classified as a mobile home, modular home, or otherwise, and no prefabricated homes shall be permitted on any Parcel in the Premises; regardless of which building codes are applicable to said homes.”
While the Appeals Court agreed with the trial court that the covenant failed to define “modular,” it did not agree that this made the provision ambiguous. “The term was not ambiguous and should have been given its ordinary and generally understood or popular meaning, without technical refinement,” the court said. And the home the Goyings built, the court concluded, matched the dictionary definition of modular – “composed of standardized units or sections for easy construction or flexible arrangement, such as a modular home.”
The court acknowledged that this conclusion produced a harsh result – the required removal of the home from the site – unfortunate, the court agreed, but unavoidable. Although the trial court’s effort to find an “equitable solution” was understandable, the Appeals Court said, it was not justifiable. “Where defendants’ home was in clear violation of the unambiguous restrictive covenant, the only solution was to grant injunctive relief and order that the non-conforming home be removed.”
The court also rejected what it termed the “labored attempt” to argue that the modular home the Goyings built matched the quality and appearance of other homes in the community. That might be true, the court said, but it is “of no consequence in the face of the plain reading of the restrictive covenant. The construction and value of the home is not at issue…. Justified or not, there is a perception that modular homes are of lesser quality and will bring down the value of the neighborhood. The restrictive covenant was drafted for that precise reason,” the court said, and “the trial court was not at liberty to decide whether it agreed with the covenant; it was required to enforce the restrictions as written.”
“In the next few years a recession will [probably] come and we will in a sense have already shot the monetary and fiscal policy cannons, and that suggests the next recession might be more protracted.” ─ Former Treasury Secretary Larry Summers.