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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  Is Housing Healthier Than It Appears? Are Mortgage Lenders Loosening Up?
Posted Under: Home Sales • Housing

Clearly, tight credit has held back housing in recent years. Both markets, and regulators, bounce from one extreme to another – from too loose to too tight over the course of economic cycles. These days, if you do not have a credit score north of 720 and are able to put down 20% it remains tough to get a mortgage.

The market responded and all-cash buyers skyrocketed to about 30% of all existing homes sold over the past few years, up from just about 10% of the total sales before the bust.

But in August 2014, all-cash transactions suddenly fell to 23%, the lowest share of sales since December 2009, while non-cash (or, financed transactions) surged to 77% of the total. We wonder if this is a sign that lending standards may be easing? We think it might.

As the chart above shows, overall existing home sales (blue line) have bounced off the recession low, but have clearly remained subdued. Existing home sales are down 5.3% from a year ago and are down 6.1% from the peak in July last year.

But, let’s break it down. Cash sales peaked in September 2013. But financed sales (sales that used a loan) have risen for six consecutive months, are up 7.3% from a year ago, and are at the highest level since November 2009, back when sales were artificially inflated by the $8,000 homebuyer tax credit.

So, as cash sales flattened, and then fell, financed sales have picked up the pace. We would argue that this “core” housing market shows new signs of life in 2014. In other words, the housing market is getting healthier and if lenders are indeed finally easing mortgage credit, we believe home sales could show some acceleration over the next year.
Posted on Tuesday, September 30, 2014 @ 2:37 PM • Post Link Share: 
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  A Slight GOP Edge in the Mid-Terms
Posted Under: Monday Morning Outlook
There are only 36 days until the mid-term elections.

The only thing we know for sure is that the Republicans will keep the House.  They already have a majority and the president’s party almost always loses seats in mid-terms. Our best guess is that GOP ends up with an enlarged majority.

The Senate, however, is completely up for grabs.  More Democrats have to defend seats this year.  President Obama’s low popularity, a Plow Horse recovery, scandals, and continued problems in the Middle East, had set up 2014 to be an anti-incumbent election.  It could have been a huge Republican wave.  Instead, the GOP has put its collective head in the sand, avoiding any real controversy, passing bills just to get things out of the way.  This is a “pro-incumbent strategy,” managed by risk-avoiding GOP members already in power.  As a result, the GOP Senate seat in conservative Kansas is up for grabs.

Despite this, the cards are stacked so high against the Democrats that the GOP will probably pick up enough seats to take the Senate.  According to polls, they’re running ahead in eight states now controlled by Democrats, although some of the leads are narrow, like in Colorado and Iowa.

The most likely result is that the GOP will end up with between 51 and 53 Senate seats, even though the GOP hasn’t put forward a broad positive policy agenda, and even though the GOP is behind in the money game.  A “do nothing” strategy has left their base uninspired.

This outcome of a slight GOP majority in the Senate won’t be able to overturn any vetoes, which means any hardball politics that attempts to use the budget process to extract major policy concessions from the President is unlikely.

We expect two more years of gridlock, with the possible exceptions of more oil exports and approval of the Keystone pipeline.  The White House would go along with these moves because the changes would help spur economic growth, some of it in the heavily-unionized commercial construction business, which would help Democrats keep the White House in 2016.

President Obama will never face another election and doesn’t need youthful environmentalists anymore.  Meanwhile, any Democrat presidential candidate wouldn’t be responsible for the policy changes.  Cynical?  Yes, but this is politics.

It’s the next presidential election that has the ability to fundamentally change the policy course.  And mounting debt will force our next president, from either party, to be more pro-growth.  We will expound on this at a later date, but we expect policy to be supportive of equities in the years ahead.

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Posted on Monday, September 29, 2014 @ 10:19 AM • Post Link Share: 
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  Personal income increased 0.3% in August
Posted Under: Data Watch • PIC

Implications:  A solid report on consumer spending and income today.  Consumption rose 0.5% in August and was revised up for prior months.  This shouldn’t be a surprise; payrolls are up about 2.5 million in the past year.  Don’t let anyone tell you this is all unsustainable.  Total income – which also includes rents, small business income, dividends, interest, and government transfer payments – increased 0.3% in August, was revised up for prior months, and is up 4.3% from a year ago.  This is slightly faster than the 4.1% increase in consumer spending in the past year.  In other words, incomes lead spending and the US is not experiencing a credit-created increase in consumption.  One overlooked part of this economic report is the massive growth in government redistribution.  Medicaid, for example, is up 12.5% versus a year ago, largely due to Obamacare.  Overall government transfer payments – like Medicare, Medicaid, Social Security, disability, welfare, food stamps, and unemployment compensation – are a very large share of income.  Before the Panic of 2008, these transfers were roughly 14% of income.  In early 2010, they peaked at 18%.  Now they are 17%.  Redistribution hurts growth because it reallocates scarce resources away from productive ventures.  Keynesians try to say government spending is necessary to boost the economy in a recession, but this is certainly not the case anymore.  Private sector jobs have expanded for 54 consecutive months and private-sector wages & salaries are up 5.8% from a year ago, which is faster than the 5.3% gain in government transfers.  We expect both income and spending to accelerate in the year ahead as jobs and wages continue to grow.  In addition, consumers’ financial obligations are hovering at the smallest share of income since the early 1980s. (Financial obligations are money used to pay mortgages, rent, car loans/leases, as well as debt service on credit cards and other loans.)  On the inflation front, the Federal Reserve’s favorite measure, the personal consumption price index, was unchanged in August and is up only 1.5% from a year ago.  Given loose monetary policy, by the middle of next year, the Fed is going to struggle to keep inflation down at 2%. That’s part of the reason we expect short-term rates to move up in the first half of 2015.    

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Posted on Monday, September 29, 2014 @ 9:10 AM • Post Link Share: 
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  Real GDP Growth in Q2 was Revised to a 4.6% Annual Rate
Posted Under: Data Watch • GDP

Implications: Forget about GDP for a moment. The most important news this morning was that economy-wide corporate profits were revised up for the second quarter, rebounding 8.4%. In particular, profits in the domestic non-financial sector rose 11.9% to a new record high. All of these profit numbers are calculated by government statisticians and include “capital consumption and inventory valuation adjustments.” (Sorry for the jargon, but that’s what they call it.) These adjustments don’t affect cash flow. However, combined with the weather in Q1, they have made the profits data extremely volatile. Excluding the adjustments, overall corporate cash flow is at a record high and the highest share of GDP since the early 1950s. These figures support the case for optimism for equities in general as well as business investment. In terms of real GDP, the consensus got it exactly right, with an upward revision to a 4.6% annual growth rate in Q2. The upward revision from the prior estimate of 4.2% was unusually broad, with every major category of real GDP revised slightly higher. As a result, after declining in Q1, nominal GDP (real growth plus inflation) snapped back at a 6.8% rate in Q2, the fastest pace for any quarter since 2006. Nominal GDP is now up 4.3% from a year ago and up at a 3.8% annual rate in the past two years. These figures continue to signal that a federal funds rate of essentially zero makes monetary policy too loose. Regardless, the Federal Reserve won’t start raising rates until next year. Plugging today’s data into our models suggests real GDP is growing at about a 3% annual rate in Q3, still in the Plow Horse range.

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Posted on Friday, September 26, 2014 @ 10:36 AM • Post Link Share: 
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  New Orders for Durable Goods Fell 18.2% in August
Posted Under: Data Watch • Durable Goods

Implications: What goes up must come down,…at least when it’s orders for durable goods. Orders for durables skyrocketed in July, both literally and figuratively, with a massive increase in Boeing plane orders that generated the largest gain on record for durables going back to 1958. A spike in Boeing orders is obviously not going to happen every month and so a return to a normal level of plane orders in August meant overall durable orders had to fall back to earth as well. This kind of monthly volatility is why it’s important to look at the trend, which is clearly upward. Orders for durables are up 8.9% from a year ago and up 7.3% excluding the transportation sector, a new record high for non-transportation. Meanwhile, shipments of “core” capital goods, which exclude defense and aircraft – a good proxy for business equipment investment – rose 0.1% in August and were upwardly revised in July. These "core" shipments are up 6.6% versus a year ago, up an annualized 10.3% in the past six months and 12.7% rate in the past three months - a clear sign of acceleration. As a result, it now looks like business investment in equipment is growing at about a 14% annual rate in Q3 and real GDP grew at roughly a 3% rate. The Richmond Fed index, a measure of mid-Atlantic manufacturing sentiment, increased to 14 in September from 12 in August, which backs up the national data. In other news this morning, new claims for unemployment insurance increased 12,000 last week to a still low 293,000. Continuing claims rose 7,000 to 2.44 million. Plugging these figures into our payroll models suggests a gain of about 220,000 in September, both nonfarm and private. This is better than the consensus forecast, which, spooked by last month’s tepid report, is around 200,000.

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Posted on Thursday, September 25, 2014 @ 1:30 PM • Post Link Share: 
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  New Single-Family Home Sales Boomed 18.0% in August
Posted Under: Data Watch • Home Sales • Housing

Implications: Looks like we may be seeing a thaw in mortgage lending. New single-family home sales surged 18% in August, coming in 33% higher than a year ago and at the highest level in more than six years. This comes on the heels of Monday's report, which showed a big gain in existing home sales that included financing (as opposed to all-cash deals). Nonetheless, new home sales still remain at depressed levels relative to where they should be by now in the recovery and we believe there are a few key reasons for this. First, the homeownership rate remains depressed as a larger share of the population is deciding to rent rather than own. Second, buyers have shifted slightly from single-family homes, which are counted in the new home sales data, to multi-family homes (think condos in cities), which are not counted in the report. Third, although we may be seeing a thaw, financing is still more difficult than it has been in the past. The inventory of new homes rose 2,000 in August, but still remains very low as the chart to the right shows, and most of the inventory gains are for homes not started, instead of homes completed. As a result, homebuilders still have plenty of room to increase both construction and inventories. On the pricing front, the median sales price for a new home is up 8% versus a year ago. In other recent news on home prices, the FHFA index, which measures prices for homes financed with conforming mortgages, increased 0.1% in July, and is up 4.4% from a year ago. We expect price gains to continue in the year ahead, but at a slower pace than the past year.

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Posted on Wednesday, September 24, 2014 @ 11:58 AM • Post Link Share: 
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  Existing Home Sales Declined 1.8% in August
Posted Under: Data Watch • Home Starts • Housing

Implications: After increasing four consecutive months, existing home sales declined 1.8% in August, falling to a 5.05 million annual rate. Home sales have been a microcosm of the Plow Horse economy. They have not boomed by any measure, but have certainly bounced off the bottom. Why haven’t we seen more robust improvement? One big reason is tight credit. Despite being loaded with excess reserves from the Federal Reserve, banks are still reluctant to lend to home buyers. This is in direct contrast to the auto market, where non-bank lenders have loosened standards substantially since 2008-09 and auto sales have fully recovered. Another reason for the tepid recovery in existing home sales is a lack of inventory. After rising for seven consecutive months, inventories declined 1.7% in August. Still, inventories are 4.5% higher today than they were a year ago and more inventory should eventually help spur sales as buyers have more choices. The median price of an existing home sold is up 4.8% from a year ago and inventories are up 4.5%. In other words, recovering prices are getting more potential sellers into the market, which should lead to higher sales. An encouraging sign of continued healing in the housing market is that distressed homes (foreclosures and short sales) accounted for only 8% of August sales, down from 12% a year ago, and the lowest level since NAR started tracking distressed sales in October 2008. All-cash buyers, which averaged about 10% of total sales before the housing bust and around 30% of sales over the past few years, fell to 23% in August, the lowest level since December 2009. This means non-cash sales rose in August and may be an early sign that lenders are finally easing mortgage credit. If so, home sales could accelerate over the next year. Either way, whether existing home sales are up or down, these data should not change anyone’s impression about the overall economy. Remember, existing home sales contribute almost zero to GDP. Look for better sales in the months ahead. But, unless lenders dramatically loosen standards, the increases in sales will remain tame by historical standards.

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Posted on Monday, September 22, 2014 @ 12:30 PM • Post Link Share: 
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  Two Sides to Every Coin
Posted Under: Government • Markets • Monday Morning Outlook
Every coin, like every historical (or even not so historical) event, has two sides. You can choose which side to focus on – the positive or the negative.

For example, some choose to view the Initial Public Offering (IPO) of Alibaba – a Chinese company described as eBay, Amazon and PayPal, combined, which serves more than a quarter billion customers – as a negative.

Yes, it’s a Chinese company, which means that foreigners are not allowed direct ownership. Shareholders in the IPO own a Cayman Islands-based holding company that gets the profits from Alibaba operations, not the company itself. Yes, China has issues with transparency. It’s not democratic. Even so, some very sophisticated investors bought the stock.

But that’s not what the bears worried about. They argued the large size of the IPO, or its 38% surge on the first day of trading, was a sign of a market top. Others say that investors had to sell other assets to “make room” to buy IPO shares.

But these bearish analysts have it all backward. No new tech company is perfect, they all must compete and will face challenges. But their products and services add to the net worth of society. They make life, business, and all activity more productive and efficient.

It’s not a fixed pie, it’s a growing pie. New ideas, like Manna from Heaven, create something out of nothing. No one needs to move aside, sell, or “make room” to absorb them. They create “more,” they don’t just move around the wealth.

Alibaba did not “crowd out” other investment. It created something from nothing. This is what so many investors have missed in the past five years. Rampant pessimism, left-over from the 2008 crash, and a short-term trader-type mindset have led many investors to look at the “wrong side of the coin.” They view positive events as “speculative” and negative events as a “realistic understanding of the market.”

Take high oil prices. Yes, they are a “cost” to energy users, but they are clearly “revenue” to others. No one is forced to buy particular energy products; there are many alternatives, including using less energy. But, by motivating producers, gasoline users, who have been willing to pay higher prices in the past decade, help drive the fracking boom. The long-term benefits of abundant energy will swamp any of the costs we are absorbing today. One side of the coin says consumers are hurt by high gasoline costs. The other says the long-term benefits are massive.

As long as markets drive the process, it’s the positive side of the coin that wins. But when government drives the process, the negative side often wins. Resources redistributed by government from profitable, productive ventures toward non-productive areas of the economy are a net loss to society.

The good news is that in the past five years, even though government redistribution has grown significantly, new technology has boosted productivity, efficiency and profits. We are not saying Alibaba is a good investment, but the success of the IPO is a sign of the value this new technology is creating.

Initial Public Offerings are a sign of progress, a sign of the ability of markets to create new things, not rampant speculation. The fact that more IPOs are happening is a positive, not a negative. If you view the world as a fixed pie, you miss this side of the coin altogether.

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Posted on Monday, September 22, 2014 @ 9:54 AM • Post Link Share: 
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  Housing Starts Declined 14.4% in August
Posted Under: Data Watch • Home Starts • Housing

Implications: Forget about home building for a minute. The most important economic news today was new claims for unemployment insurance dropping 36,000 last week to 280,000, the lowest level in two months and the second lowest reading since 2000. Continuing unemployment claims fell 63,000 to 2.43 million. As a result, First Trust’s payroll models, which are rated the best in the business by Bloomberg, are tracking another solid month for job growth in September, with an increase of 216,000 nonfarm and 219,000 for the private sector. On the housing front, despite the decline in housing starts in August, don’t let anyone tell you the recovery in home building is over. The 14.4% drop in August comes on the back of a 22.9% gain in July. Starts are volatile from month to month, so to find the underlying trend we look at the 12-month moving average, which now stands at the highest level since October 2008. The total number of homes under construction, (started, but not yet finished) increased 0.6% in August and are up 21.6% versus a year ago. No wonder residential construction jobs are up 123,000 in the past year. Multi-family construction is taking the clear lead in the housing recovery. Single-family starts have been in a tight range for the past two years, while the trend in multi-family units has been up (although volatile). In the past year, 36% of all housing starts have been for multi-unit buildings, the most since the mid-1980s, when the last wave of Baby Boomers was leaving college. From a direct GDP perspective, the construction of multi-family homes adds less, per unit, to the economy than single-family homes. However, home building is still a positive for real GDP growth and we expect that trend to continue. Based on population growth and “scrappage,” housing starts will rise to about 1.5 million units per year over the next couple of years.

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Posted on Thursday, September 18, 2014 @ 10:23 AM • Post Link Share: 
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  Rate Hikes Approaching
Posted Under: Government • Research Reports • Fed Reserve • Interest Rates

We count five major takeaways from today’s activity at the Federal Reserve.

First, quantitative easing (QE) still looks on track for winding down at the end of October. As expected, the Fed announced it would cut its purchases of Treasury securities and mortgage-backed securities to $15 billion in October and expects to announce an end to QE at the next meeting, which is October 29th.

Second, the median view among Fed officials is for a slightly faster increase in short-term rates. Back in June, the consensus was for the top of the federal funds target range to be 1.25% at the end of 2015; now it’s 1.5%. Previously the consensus was around 2.5% for the end of 2016, now it’s 3%. As a result, it now looks like the Fed will start raising rates by April 2015, perhaps even as early as the first quarter. To confirm this, look for the Fed to dump the “considerable time” language later this year.

Third, once it starts raising rates, the Fed will try to control the federal funds rate by using the interest it pays banks for holding excess reserves. It will also use reverse repos to help control the funds rate, but only as much and as long as needed. The Fed says it won’t use reverse repos for other purposes.

Fourth, the Fed isn’t going to outright sell securities from its portfolio to unwind its bloated balance sheet. After starting to raise the funds rate, the Fed will eventually allow its balance sheet to shrink in a passive way, by letting securities gradually mature without full reinvestment. The Fed is particularly reluctant to sell mortgage-backed securities (MBS), but may eventually do so several years down the road to clean up some long-dated securities on its books that won’t mature anytime soon. Long-term, the Fed intends to go back to holding almost all Treasury securities, not a large portfolio of MBS.

Last, where there’s smoke, there’s fire. Two Fed officials dissented from the statement, both Philadelphia Fed Bank President Charles Plosser and Dallas Bank President Richard Fisher. More importantly, both dissents were from hawks, which suggests that if the Fed makes any changes in policy or projections at the next couple of meetings, it’s more likely to get more hawkish than more dovish.

The Fed also made some minor changes to the language in its statement, noting that the unemployment rate is little changed since the last meeting and the economy is expanding moderately after the downside surprise in Q1 and sharp rebound in Q2.

The bottom line is that the Fed has been and will remain behind the curve. Nominal GDP – real GDP growth plus inflation – is up 4.2% in the past year and up at a 3.7% annual rate in the past two years. A federal funds target rate of nearly zero is too low given this growth. It’s also too low given well-tailored policy tools like the Taylor Rule.

Hyperinflation is not in the cards; the Fed will keep paying banks enough to keep the money multiplier depressed. But, given loose policy, we expect gradually faster growth in nominal GDP for the next couple of years. In turn, the bull market in equities will continue to prevail and the bond market is due for a fall.

Brian S. Wesbury, Chief Economist
Robert Stein, Dep. Chief Economist

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Posted on Wednesday, September 17, 2014 @ 3:44 PM • Post Link Share: 
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These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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