Thursday, March 24, 2011

Today's links

1--U.S. New-Home Sales Unexpectedly Fall to Lowest on Record, Bloomberg

Excerpt: Purchases of new U.S. homes unexpectedly declined in February to the slowest pace on record and prices dropped to the lowest level since December 2003, adding to evidence the industry is floundering.

Sales decreased 16.9 percent to a 250,000 annual pace, figures from the Commerce Department showed today in Washington. Economists surveyed by Bloomberg News projected a gain to a 290,000 rate, according to the median estimate. The median price fell 8.9 percent from the same month in 2010.

Builders are struggling to compete with existing homes as foreclosures add to the overhang of unsold properties and drive down values. The figures underscore the Federal Reserve’s view that the housing market “continues to be depressed” even as the rest of the economy improves....

Previously owned home purchases dropped 9.6 percent in February, figures from the National Association of Realtors showed two days ago. The median home price fell to a 9-year-low, while the supply of unsold properties rose....

The supply of homes at the current sales rate rose to 8.9 month’s worth from 7.4 months in January. There were 186,000 new houses on the market at the end of February, the same as a month earlier....

Builders are putting off new construction as housing inventory builds. Housing starts fell in February to a 479,000 annual rate, the lowest level since April 2009, and construction permits slumped to a record low, Commerce Department figures showed last week.

The number of homes in foreclosure rose to a record 2.2 million in January, according to Lender Processing Services Inc. in Jacksonville, Florida. About 23 percent of homeowners with mortgages had negative equity in the fourth quarter, eaning their home-loan balances were higher than the value of their properties, CoreLogic Inc., a research company in Santa Ana, California, said in a March 8 report.

2--The GOP's lies about jobs, Robert Reich's blog

Excerpt: “Cutting corporate income taxes creates jobs.” Baloney. American corporations don’t need tax cuts. They’re sitting on over $1.5 trillion of cash right now. They won’t invest it in additional capacity or jobs because they don’t see enough customers out there with enough money in their pockets to buy what the additional capacity would produce....

“Cuts in wages and benefits create jobs.” Congressional Republicans and their state counterparts repeat this lie incessantly. It also lies behind corporate America’s incessant demand for wage and benefit concessions – and corporate and state battles against unions. But it’s dead wrong. Meager wages and benefits are reducing the spending power of tens of millions of American workers, which is prolonging the jobs recession....

“Regulations kill jobs.” Congressional Republicans are using this whopper to justify their attempts to defund regulatory agencies. Regulations whose costs to business exceed their benefits to the public are unwarranted, of course, but reasonable regulation is necessary to avoid everything from nuclear meltdowns to oil spills to mine disasters to food contamination – all of which we’ve sadly witnessed. Here again, we’re hearing little from the President or Democratic leaders.

3-- The Cost of Food and Energy across Consumers, by Daniel Carroll, Economic Trends, FRB Cleveland via Economist's View

Excerpt: The importance of food and energy prices to households’ bottom lines is not evenly distributed across the income distribution... For the median household, food and energy are roughly 17 percent of both expenditures and after-tax income. Households in the top 20 percent of the income distribution spend 11.6 percent of total expenditures on food and energy, which adds up to 7.9 percent of disposable income. For the bottom 20 percent these shares rise to 20.4 percent of expenditures and a whopping 44.1 percent of after-tax income!...

For those astutely wondering why food and energy expenditures are a larger fraction of total expenditures than of total income for the bottom 20 percent, there is a much higher fraction of households in this quintile which may be using savings and credit markets to consume above their annual income. Likely categories are the unemployed, business owners with temporary losses, students living on loans, and retirees drawing down their nest eggs.

4--The painless way to reduce the deficit, Dean Baker, CEPR

Excerpt: The NYT reported on the Federal Reserve Board's payment of $82 billion to the Treasury last year, more than 2.3 percent of the total budget. This is striking because this figure vastly exceeds most of the budget items that have dominated the attention of Congress and the media.

In principle, the Fed can offset much of the burden of the debt run up to boost the economy during the downturn by simply buying and holding it. In that case, the interest would be paid to the Fed and then refunded to the Treasury, leaving no net burden for taxpayers. The Fed could prevent this from leading to inflation when the economy recovers by raising reserve requirements. Of course most economists agree that a somewhat higher inflation rate would be desirable at the moment since it would alleviate the debt burden of consumers.

It is remarkable that this path towards dealing with the deficit has garnered so little attention. This could perhaps be explained by the fact that the Wall Street actors who are the main financiers of the anti-deficit crusade are not interested in a deficit reduction path that does not cut social spending and risks somewhat higher inflation. Higher inflation is generally anathema to the financial industry, since it devalues the debt it owns.

It is also worth noting that most people involved in the debate on economic and budget policy are not very astute observers of the economy. They were unable to see the $8 trillion housing bubble that both gave us the current downturn and the large deficits that have fixated Washington.

5--New homes sales crater 17% in February to lowest level yet, Housingwire

Excerpt: New sales of single-family homes fell nearly 17% in February from a month earlier, coming in well below analysts' estimates and at the lowest level recorded.

The Commerce Department said the seasonally adjusted rate of 250,000 units last month was considerably lower than 301,000 for January, which was revised upward by 15,000 units. February sales are down 28% from a year earlier.

The seasonally adjusted estimate of new homes for sale was 186,000 in February, representing an 8.9 month supply. A healthy market usually holds a six month supply.

Analysts surveyed by Econoday expected February home sales to climb to 290,000 with estimates ranging between 240,000 and 305,000. A survey projected home sales of 275,000 for the month. Analysts polled by Dow Jones Newswires expected February sales to rise 2.1% to 290,000.

In the Northeast in February, new homes sales cratered, falling 57% from January, according to the joint release from the Census Bureau and the Department of Housing and Urban Development.

The median sales price of new homes sold last month was $202,100, down nearly 14% from January, representing the largest monthly decline yet.

6--Bubble Spotting, Robert Schiller, Project Synidicate

Excerpt: But some places appear a little more likely than others to give rise to bubbles. The stock market is the first logical place to look, as it is a highly leveraged investment – and has a history of bubbles. There have been three colossal stock-market bubbles in the last century: the 1920’s, the 1960’s, and the 1990’s. In contrast, there has been only one such bubble in the United States’ housing market in the last hundred years, that of the 2000’s.

We have had a huge rebound from the bottom of the world’s stock markets in 2009. The S&P 500 is up 87% in real terms since March 9 of that year. But, while the history of stock-market prediction is littered with too much failure to try to decide whether the bounceback will continue much longer, it doesn’t look like a bubble, but more like the end of a depression scare. The rise in equity prices has not come with a contagious “new era” story, but rather a “sigh of relief” story.

Likewise, home prices have been booming over the past year or two in several places, notably China, Brazil, and Canada, and prices could still be driven up in many other places. But another housing bubble is not imminent in countries where one just burst. Conservative government policies will probably reduce subsidies to housing, and the current mood in these markets does not seem conducive to a bubble.

A continuation of today’s commodity-price boom seems more likely, for it has more of a “new era” story attached to it. Increasing worries about global warming, and its effects on food prices, or about the cold and snowy winter in the northern hemisphere and its effects on heating fuel prices, are contagious stories. They are even connected to the day’s top story, the revolutions in the Middle East, which, according to some accounts, were triggered by popular discontent over high food prices – and which could themselves trigger further increases in oil prices.

But my favorite dark-horse bubble candidate for the next decade or so is farmland – and not just because there have been stories in recent months of booming farmland prices in the US and the United Kingdom....

Moreover, people nowadays easily imagine that the housing and farmland markets always move together, because prices in both boomed in recent memory, in the early 2000’s. But, from 1911 to 2010 in the US, the correlation between annual real growth of prices for homes and farmland was only 5%, and the latest data on farm prices have not shown anything like the decline in home prices. By 2010, real farm prices in the US had fallen only 5% from their 2008 peak, compared to the 37% decline in real home prices since their peak in 2006.

The housing-price boom of the 2000’s was little more than a construction-supply bottleneck, an inability to satisfy investment demand fast enough, and was (or in some places will be) eliminated with massive increases in supply. By contrast, there has been no increase in the supply of farmland, and the stories that would support a contagion of enthusiasm for it are in place, just as they were in the 1970’s in the US, when a similar food-price scare generated the century’s only farmland bubble.

7---Remember the housing market, Dean Baker, CEPR

Excerpt: Some folks might have heard of it. We had an $8 trillion bubble in this market in the last decade. It led to a huge construction boom. The wealth created by the temporary run-up in house prices also led to a consumption boom. When the bubble collapsed, construction plummeted and consumption fell back to more normal levels. The collapse of this bubble has given us the worse downturn since the Great Depression.

Given the importance of the housing market for the economy it might be reasonable for the media to pay some attention to important economic releases. However, news outlets don't seem to share that perspective.

The news of a 9.6 percent drop in home sales in February seems to have escaped the notice of the New York Times and the Washington Post. The Wall Street Journal noticed the decline but raised the unlikely possibility that bad weather was a major factor explaining the falloff in sales.

This is unlikely since the data reports the number of sales that were closed in February. Since it typically takes 6-8 weeks between a contract's signing and the closing, most of the contracts for homes sold in February would have been signed in December and January. Weather would have only been a factor if bad weather at the end of the month had prevented people from coming in for a closing during February.

8---Living Beyond Your Means, Huffington Post

Excerpt: In a recent survey of Americans, my colleague Dan Ariely and I found that Americans drastically underestimated the level of wealth inequality in the United States. While recent data indicates that the richest 20 percent of Americans own 84 percent of all wealth, people estimated that this group owned just 59 percent – believing that total wealth in this country is far more evenly divided among poorer Americans.

What’s more, when we asked them how they thought wealth should be distributed, they told us they wanted an even more equitable distribution, with the richest 20 percent owning just 32 percent of the wealth. This was true of Democrats and Republicans, rich and poor – all groups we surveyed approved of some inequality, but their ideal was far more equal than the current level.

Why then, given the consensus on this more equal America, are Americans not clamoring for redistribution?

First, the expansion of consumer credit in the United States has allowed middle class and poor Americans to live beyond their means, masking their lack of wealth by increasing their debt. We might think that people who have "zero net worth” have nothing. But in fact, having zero net worth increasingly means owning a lot (cars, televisions, even houses) – but also owing a lot. As a result people with zero net worth, and even negative net worth, can still feel that they are living the American dream, doing “better” than their parents did while keeping up with the Joneses.

Second, poorer Americans’ belief in social mobility – despite strong evidence of its rarity – causes negative reactions to policies that would seem to benefit them, like raising taxes on those who earn and own a lot more. Why would the poor oppose taxes on the wealthy? Because many believe that they, or at least their children, will eventually be wealthy, voting for taxes on the rich may feel like voting for taxes on themselves. As a result, even the word “redistribution” has negative connotations.

My colleagues and I are now exploring whether educating Americans about the current level of wealth inequality (by showing them charts and pictures) might increase their support for policies that reduce this inequality. In addition, we are assessing whether different forms of redistribution – for example, raising the minimum wage, or longer term interventions like reducing disparities in education – are less likely to evoke heated opposition, and perhaps increase advocacy for greater wealth equality.

9--Rising Wealth Inequality: Should We Care?, Huffington Post

Excerpt: What we are missing is an understanding of why Americans desire less inequality. Far from believing naively in the American dream, Americans are well aware of barriers to opportunity, such as the dearth of good paying jobs and accessible, quality education for those with middle and lower incomes.

My research suggests that, in times like these, Americans hold the rich partially responsible because of their reckless stewardship of the economy, spurred to some degree by rising inequality. Taxing the rich does not seem to be the most direct solution to these problems, whereas putting the economy back on track through equitable growth does. Thus Americans support regulation (including curbing executive pay), job growth and fair pay (as we’ve seen lately in Wisconsin), and education.

It is often said that Americans care about opportunity and not inequality, but this is very misleading. Inequality can itself distort incentives and restrict opportunities. This is the lesson that episodes like the financial crisis and Great Recession convey to most Americans.

10--Inequality: Anger is growing, Huffington Post

Excerpt: Until this latest recession, many Americans papered over the issue. They ran up credit card debt. They took equity out of their homes. In short, they found ways to at least keep up appearances. They got comfortable living beyond their means.

Those times are gone and, as a result, we’re starting to see some anger manifesting itself in different ways. We looked at online supporters of various Tea Party groups and found membership was strong in places hard hit by the recession. That’s what much of the Tea Party talk about “getting America back” is really about -- getting back a way of life. The sentiment is understandable, even if the goal is impossible. The world has changed too much.

The global economic changes underway mean the days of succeeding by “working hard” and “playing by the rules” are disappearing. You need education and, increasingly, a head-start financially. In some communities in America those things are readily available. In others, they’re barely visible.

Up to now, many Americans have been waiting to see if their current economic problems are temporary, or something more. As they begin to feel the larger forces involved, they will grow increasingly frustrated and, yes, angry.

Get ready for a populist movement in years ahead -- one that could take many forms -- and a very bumpy ride.

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