Posts Tagged ‘Federal Housing Finance Agency’

The data coming out of the US has been so very good over the last few weeks that I am beginning to think the unthinkable. The thing they some said can never happen, if you like, a reverse Black Swan; the economic crisis that descended on the US in late 2006/2007, which deepened with the collapse of Lehman Brothers in October 2008, and then acted as a catalyst for the rest of the world to enter a sustained crisis period, is drawing to a close. The economic crisis may be over or almost over. This is why and these are the lessons we can learn.

If I were to list all the positive data relating to the US economy over the last few weeks this article would drag on and on, but instead let me focus on the highlights.

Number one: and most obvious, we have the markets. The Dow Jones hit a new all-time high on Tuesday (28 May). The markets don’t always get it right – in fact they often get it very wrong, but it is evidence.

Number two: US house prices. They rose 7.2 per cent in the year to March, according to the Federal Housing Finance Agency. That was the biggest annual increase recorded since May 2006. In fact as of Q4 last year, US house prices were 24 per cent down from peak and, according to the latest OECD report, the ratio of average US house prices to average US income is 85 per cent of the long term average.

Number three: US consumer confidence. According to the Conference board, this hit a five year high in May.

Number four: the US fiscal deficit. Earlier this month, the Congressional Budget Office revised its estimate of the US deficit for this year downwards by $200 billion. It is now saying the deficit will be $642 billion. To put this in context, last year the deficit was $1.1 trillion. And if the estimate proves right, it will be the first time the US budget deficit was less than $1 trillion in five years.

Number five: US household debt. This reduced by $11 billion in Q1, and now totals $11.2 trillion, from $12.7 trillion in 2008. According to the IMF, US household debt to income has fallen from a ratio of around 1.3 in the mid-noughties to about 1.06 at the end of 2012. See page five of this report.     The OECD has drawn similar conclusions. See page 20 of this report.

Number six: US inflation was just 1.1 per cent in April. In fact prices dropped no less than 0.4 per cent month on month between March and April.

Number seven: US unemployment fell to 7.5 per cent in April, the lowest level since Barack Obama became US President. Since last November the rise in US non-farm payrolls has been in excess of one million. The next jobs report is out at the end of next week (7 June), and Capital Economics predicts a 175,000 rise in non-farm payrolls. There are signs that companies are moving manufacturing back to the US as wages rise in China. Talk is that the much hyped new Google Android phone will be made in the USA.

Number eight: earnings at US banks in the first quarter of 2013 were $40.3 billion, which is the highest ever recorded. Over the past 12 months, US banks have maintained a capital tier one ratio of 13.3 per cent; that too is a record high.

Okay, so why? I can think of three key reasons. The first is creative destruction. Softer rules regarding bankruptcy, and the fact that when a home in the US is repossessed, any shortfall between the mortgage and the value of the home is covered by the bank, have all helped the US get the pain over with much faster. The second is less austerity. Contrast the US policy towards austerity with the UK and Eurozone. The third reason is shale gas, which has pushed down the cost of energy in the US.

The US still has problems. Household debt to disposable income is still higher than it was in 2000. See the aforementioned OECD report. I am very worried about the awful levels of income inequality in the US. Maybe if manufacturers do start moving from China to the US this issue will be partially addressed. I think economist Joseph Stiglitz is right when he says US student loans has the potential to be a crisis on a scale comparable to the sub-prime debacle.

Don’t think that because I am optimist on the US, I feel the same way about Europe. The continent is stuck in depression. I don’t see this ending any time soon, and I worry about the global implications of the Eurozone adopting a Germanic type export-led model. There is even a chance that an escalation in the Eurozone crisis could hit the US.

As for the UK, I think the jury is out. The UK economy usually follows the US, albeit with a time lag. But austerity, the fact that our main export market is in depression, the fact that real wages are still falling, and that the UK is not likely to see a US style shale gas revolution are reasons for caution. But on the other hand, house prices are going up. Whether you think the UK’s reliance on rising house prices is sustainable or not, the fact is that in the short run, in Blighty, rising house prices are often associated with rising GDP.

© The Share Centre Blog 

According to the Federal Housing Finance Agency, US house prices rose 7.2 per cent in the year to March, after rising in the two previous months. You would need to wind the clocks back to May 2006 to find the last time the annual rate of house price growth was so high.

According to Hometrack, UK house prices rose 0.4 per cent in May, which was the highest rate of month on month house price increases it has recorded since May 2007.

The similarities between the UK and the US are many, but there are also glaring differences, and it is the differences that are the key.

Take one similarity: the government. The US government set up Fannie Mae and Freddie Mac as a way to provide support to the US mortgage market, via the inference of government backing. The inference became real, of course, in 2008, when the US government was forced to step in. But Fanny and Freddie were the means by which the US housing market boomed for so many years.

In the UK it is a lot like this, it is just that the UK’s equivalent of Fannie Mae and Freddie Mac is still being fashioned by the creativity of George Osborne. At the moment, the UK version answers to the name ‘Help to Buy’, or even ‘Funding for Lending’, but the UK is adopting a similar idea to that adopted in the US many moons ago.

The difference is that Fannie Mae and Freddie Mac were formed in the past, and may have been the main contributors to the last US financial crisis. The crisis made from Osborne’s scheme is in the future. Here is another similarity: lack of supply. This is how Hometrack put it: “It is a lack of housing for sale that is acting as the primary driver of price rises.”

In the US, too, lack of supply lies behind the resurgence in the housing market. The difference is this: in the US supply shortage was preceded by over-supply, as repossessions in the US led to a massive inventory of unsold property. Because of this over-supply, house building was limited, and now that the inventory has been cleared to a large extent, we find a property shortage.

In the UK, limited house building was largely down to restrictive planning regulations, and lack of demand caused in part because house prices had become unaffordable.

In the UK, banks learnt from the lesson of the early 1990s, and did everything possible not to repossess property when its owners fell behind with payments. In the US, a more ruthless strategy was adopted. The high levels of repossessed property sales in the US led to over-supply. In the UK, too much supply never was an issue; rather the issue was lack of finance, and the massive ratio of average house prices to income.

Here is another difference. In the UK, the average house price in April was £166,094, or 4.58 times average earnings, according to Halifax. In the US, median house prices were around $184,000, (that is around £122,000) or the ratio of US house prices to income is around 3.

In the US, rising house prices may well provide evidence that the US economy is mending. In the UK they provide evidence that we have not moved forward.

© Investment & Business News 2013

It used to be a magic formula. Never mind what is happening in the real world; in industry, in business. Never mind what is happening with wages and productivity. If house prices were rising, households felt as if they were better off, and went out and spent more as a result.

It happened in the UK. It happened in the US. Raghuram Rajan, a former chief economist at the IMF, argued in his book ‘Faultlines’ that rising house prices in the US made up for the growing gap in income distribution. So during a period in which median wages in the US hardly changed, house prices surged on the back of low interest rates, and plentiful supply of credit.

Government backed agencies Freddie Mac and Fannie Mae also helped to ensure that house prices only ever rose, and that consumers – most of whom had forgotten the very concept of savings because it no longer appeared necessary – enjoyed the perception of growing wealth as their home rose in value.

It ended in tears of course. These things do. Maybe it will end in tears again, this time with bond prices, as factors beyond the control of central banks force up inflation and in turn lead to higher real interest rates.

But in the UK, George Osborne came up with a cunning plan in his latest budget. It is called “help to buy” and is there to give first time buyers who can’t rustle up the necessary deposit a lift onto the housing ladder. He is also looking to help existing home owners move up the ladder, too.

It’s a bit like a UK version of Freddie Mac and Fannie Mae, and, of course, if our George can engineer house prices upwards, consumers will feel richer, spend more, and electoral success may belong to the Tories.

Alas, Andrew Brigden, a senior economist at economic consultancy Fathom, does not see it that way. He said: “Help to Buy is a reckless scheme that uses public money to incentivise the banks to lend precisely to those individuals who, absent the scheme, would not and should not be offered credit… Had we been asked to design a policy that would guarantee maximum damage to the UK’s long-term growth prospects and its fragile credit rating, this would be it.” And to that the ‘Daily Mail’ and ‘Daily Express’ exclaimed with delight: “Look!– House prices are set to soar,” they said.

And with that, George Osborne is now preparing to create economic recovery with two new discoveries. Apparently, two plus two equals five, and black is white.

© Investment & Business News 2013