Archive for the ‘Economics’ Category
Monday, May 6th, 2013
Economists tell us that the reason the US is doing better than Europe is because of two things: our equity markets and our housing sector. And now comes the news that housing is posting its best numbers since 2006. The widely followed Case-Shiller indexes showed the price of single-family homes across 20 of the most important U.S. cities grew 9.3% in February, its fastest rate since May of 2006. Single family starts are expected to rise to 700,000 new homes (from 535,000 in 2012) and to 1 million in 2015.
All of this activity is, of course, being driven by all-cash investors looking for high returns (the Blackstone Group is reputedly spending $100 million a week buying homes). And homebuyers eager to lock in at record low interest rates who have very little to choose from. The reasons for short supply aren’t however related to the health of the market but because of the obverse. Home prices are still 29% to 30% off their mid-2006 peaks and monthly foreclosures are more than double what they were before the recession. Clearly, underwater homeowners and people who’ve seen some part of their equity vanish simply don’t want to take a loss so they’re waiting it out. As a result, we’re building more.
As housing price gains 23% per year in Phoenix; 17.6% in Las Vegas, and 16.5% in Atlanta, let us think carefully before we go on a building spree. We still have 1.1 million homes in some state of foreclosure and a shadow inventory that tops 2 million. It is important that we temper the current exuberance with a view to not flooding the market with excess inventory. The housing sector is critical to our recovery for two large reasons – the wealth effect which bolsters consumer spending and the fact that small to medium-sized businesses rely on home equity lines of credit to underwrite their businesses. True recovery can only happen with housing.
Tags: all-cash investors, Blackstone Group, Case Shiller Index, economic recovery, equity markets, homebuyers, housing sector, low interest rates, single family home prices
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Monday, April 22nd, 2013
For those who have stressed the need for austerity and deficit reduction, who think that fiscal cliffs and sequestration are a good corrective to reckless spending, it may be helpful to consider what the IMF is saying. Lowering the outlook for U.S. growth to 1.9% from 2%, IMF Economic Counselor Olivier Blanchard called the U.S. spending cuts, known as the sequester, “the wrong way to proceed.” The U.S., he said, should impose less belt-tightening now, when the economy is still gaining its footing, and more in the future.
Take a look at Europe where the 17 countries using the euro currency remain in recession. Many are cutting spending sharply and raising taxes to slash mountainous debt, but the austerity strategies are stifling growth. The UK is expected to grow 0.7% this year and by 1.5% in 2014 and that’s better than France or Germany. During a recent trip to Europe, U.S. Treasury Secretary Jacob Lew urged officials there to put more near-term emphasis on government spending to stimulate growth, as the U.S. did with its $800 billion stimulus from 2009 to 2011.
The IMF says next year will be better: 3% growth as the effects of the federal cutbacks fade and a housing rebound continues to bolster a strengthening private sector.
The IMF had been calling the global recovery “two-speed,” with emerging markets growing strongly and advanced economies weaker. Now, it says, it’s a three-speed recovery, with a growing divide between a strengthening U.S. and a still floundering Eurozone.
Tags: Euro currency, Eurozone, fiscal cliff, global recovery, IMF, sequester, three-speed recovery, Two-speed recovery, US fiscal growth
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Monday, April 8th, 2013
On the latest episode of The Alter Group Podcast on Real Estate, Charles Krawitz used his 25 years of experience in financing of thousands of transactions, and the sale of highly distressed loans and REO assets to give us an inside look at the recovery of the banking sector. Banks now hold 49% of all commercial real estate debt and mortgage originations for the sector spiked 24% last year.
According to Charles, larger and regional banks which were saddled with distressed assets after 2007 have worked through their backlog of delinquent loans and are winding down the special assets groups tasked with dealing with problem notes and REO assets. Now, banks are once again seeing prospects in multifamily, medical office and grocery-anchored retail.
He spells out the trends of lending with banks doing full-recourse 75% loan-to-values but with shorter terms – interim or bridge loans rolling into a 3-5 year mini-perm. On the other hand life insurance companies, which are doing more originations than before the recession, are doing 3-20 year loans with 60% LTVs. Conduits which topped $40 billion in 2012, are doing 10 year loans (albeit with a preference for institutional-grade assets, higher-credit borrowers, significant equity).
Beyond lending from their balance sheets, banks are also procuring capital on behalf of their clients from sources such as the GSA, life insurance and the CMBS. According to Charles, being a third-party solutions provider to clients is one of the new frontiers for regional and larger banks.
To hear Charles Krawitz on the Banking Bounceback, listen to the latest episode of the AlterNow Podcasts.
Tags: banking recovery, banking sector, Charles Krawitz, commercial real estate debt, Delinquent loans, distressed loans, distresses assets, Fifth Third Bank, mortgage originations, REO assets
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Wednesday, December 19th, 2012
You’ve heard of Kickstarter where budding entrepreneurs and artists reach out via the internet to regular folk to get them to fund their idea in return for swag or just a thank you? Well now, a group of Occupy Wall Street people are using that idea to get people out of debt. Strike Debt is the organization and their central front against financial ruin is called the Rolling Jubilee fund.
Here’s how their website describes it: “Banks sell debt for pennies on the dollar on a shadowy speculative market of debt buyers who then turn around and try to collect the full amount from debtors. The Rolling Jubilee intervenes by buying debt, keeping it out of the hands of collectors, and then abolishing it. We’re going into this market not to make a profit but to help each other out and highlight how the predatory debt system affects our families and communities. Think of it as a bailout of the 99% by the 99%.” The Rolling Jubilee Fund is a non-profit 501c4 (“an organization whose primary activity is the promotion of social welfare”), so it’s not a charity. So, contributions cannot be written off against taxes. This is a very fine use of social media and certainly American altruism at its most innovative. There’s been some carping that getting people to buy others out of debt exemplifies the whole concept of moral hazard (the situation where people make foolish financial plays knowing others will bail them out) but that really doesn’t apply here. Soaring debt isn’t a consequence of lavish spending; it’s largely because of medical debt (the cause of 60% of bankruptcies) or unemployment. And it’s not high rollers who are buried in bills but the middle class.
Here’s how newly elected Senator Elizabeth Warren put it in a 2004 interview:
“Seventy percent of American families last year said that they are carrying so much debt that it is making their family lives unhappy. Middle-class Americans, hardworking, play-by-the-rules Americans, Americans who lost a job, Americans who don’t have health insurance, Americans who are in the middle of a divorce, Americans who are trying to take care of elderly parents, … those are the Americans who are carrying enormous credit card debts. Those are the ones who are handing over every eighth paycheck just to make the interest payments on their outstanding credit card bills. That’s who’s paying the real price of a deregulated credit industry and unleashing a monster that says 9.9 percent interest for most of you guys, but once you’re in a little trouble … 29.9 percent.”
Tags: 501C4, bank debt, Elizabethe Warren, Kickstarter, Occupy Wall Street groups, Rolling Jubliee Fund, social media, Strike Debt
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Wednesday, December 12th, 2012
By 2030, no country—whether the US, China, or any other large country—will be a hegemonic power. So opens a new study, by the National Intelligence Council. The product of 4 years of research, the report offers a number of pronouncements: A return to pre-2008 growth rates and previous patterns of rapid globalization looks increasingly unlikely, at least for the next decade; China alone will probably have the largest economy, surpassing that of the United States a few years before 2030; the US, European, and Japanese share of global income is projected to fall from 56 percent today to well under half by 2030; today’s roughly 50-percent urban population will climb to nearly 60 percent, or 4.9 billion people, in 2030; and the worldwide middle class will continue to be bigger better educated and have wider access to health care and communications technologies like the Internet and smartphones. That may be the best news of all in the report. “The growth of the global middle class constitutes a tectonic shift. For the first time, a majority of the world’s population will not be impoverished, and the middle classes will be the most important social and economic sector in the vast majority of countries around the world.”
In reading the report, I was struck by how definitively it seemed to herald the close of the American century (not quite a hundred years if you consider WWII the dawn of American supremacy) and the peace it promised – the Pax Americana. The world today is infinitely more complex and power is not discrete and binary but multivalent and shifting. The report details for us the good, the bad and the ugly of geopolitcs. Developing nations will become especially important to the global economy, including Brazil, Colombia, India, Indonesia, Nigeria, South Africa and Turkey (the developing world already provides more than 50 percent of global economic growth , 40 percent of global investment and 70% of global investment growth). Aging countries will see a period of decline over the next two decades, including Europe, Japan, South Korea, Russia and Taiwan, which could slow their economies further. And at least 15 countries are described as being “at high risk of state failure” by 2030, among them Afghanistan and Pakistan, but also Burundi, Rwanda, Somalia, Uganda and Yemen. In terms of global hotspots, the widespread use of new communications technologies will become a double-edged sword for governance. On the one hand, social networking will enable citizens to coalesce and challenge governments, as we have already seen in Middle East; at the same time, better surveillance tools will allow closer monitoring of civilian populations.
Tags: 2030, developing nations, Global economy, global middle class, hegemonic power, National Intelligence Council, Pax Americana
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Monday, December 10th, 2012
Banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported income of $37.6 billion in the third quarter, a 6.6 percent improvement over third quarter, 2011. This is the 13th consecutive quarter that earnings have registered a year-over-year increase. The other big news – the decline in the number of banks on the FDIC’s “Problem List” from 732 to 694. This is the first time in three years that there have been fewer than 700 banks on the list
For the economy, this means more liquidity as loan balances posted their fifth quarterly increase in the last six quarters, rising by $64.8 billion . Loans to commercial and industrial borrowers increased by $31.8 billion (2.2 percent), while residential mortgages rose by $14.5 billion (0.8 percent) and auto loans grew by $7.4 billion (2.4 percent). The bad news? The nerves around the fiscal cliff may have caused home equity lines of credit to decline by $12.9 billion (2.2 percent), and real estate construction and development loans fell by $6.9 billion (3.2 percent). Remember that $2 billion of property construction and design would be eliminated if sequestration happens, cutting 66,500 jobs.
Still, the FDIC report is cause for optimism. Only 12 insured institutions failed during the third quarter. This is the smallest number of failures in a quarter since the fourth quarter of 2008, when there were also 12. An additional seven banks have failed so far in the fourth quarter, bringing the year-to-date total to 50. Through December 4, 2011, there had been 90 failures year-to-date.
“More than 55 percent of all banks reported loan growth,” Chairman Gruenberg noted. “Small banks are also increasing their lending, including their loans to small businesses.”
The complete Quarterly Banking Profile is available both here and at on the FDIC Web site.
Tags: banking interest rates, banks, FDIC, FDIC Problem List, Federal Deposit Insurance Corporation, fiscal cliff, home equity loans, mortgages
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Tuesday, December 4th, 2012
Black Friday holiday sales set a record in 2012 with 247 million shoppers visiting the malls or shopping online. That’s 21 million more people than in 2011. Total sales topped $59.1 billion. The typical holiday shopper spent $423 over the weekend, a $25 increase over the $398 recorded last year. The National Retail Federation (NRF) defines the “Black Friday weekend” as the Thursday, Friday, Saturday and Sunday after Thanksgiving. One of the big stories is that online spending alone soared past the $1 billion mark for the first time ever, according to comScore.
Cyber sales rose 26 percent compared with one year ago, when shoppers spent $816 million. This year, the average online shopper spent $172.42 over the Black Friday weekend, nearly 40.7 percent of their total purchases. Of online shoppers surveyed by NRF, 27 percent reported making purchases on Thanksgiving Day, while 47.5 percent shopped on Black Friday itself. Amazon.com was the most-visited retail website, followed by Wal-Mart, Best Buy, Target and Apple.
Retailers’ door-buster specials drew shoppers to the stores. “There’s no question that millions of people were drawn to retailers’ aggressive online promotions this weekend, making sure to research and compare prices days in advance to ensure they were getting the best deal they could,” said BIGinsight Consumer Insights Director Pam Goodfellow. “However, with shopper traffic increasing at department, discount, and clothing stores over the weekend, it’s clear that consumers still recognize Black Friday as one of the biggest in-store shopping days of the year, as they have for decades.”
The NRF had forecast that worries over the possibility of the fiscal cliff and the anemic jobs market might put a damper on holiday spending. Its guesstimate is that holiday spending will rise just 4.1 percent this year, compared with 5.6 percent in 2011. A survey by ShopperTrak found that 307.57 million Americans shopped in stores, a 3.5 percent increase over last year. Bill Martin, ShopperTrak’s founder, is more optimistic. He notes that store traffic hasn’t reached this level since 2006, possibly marking a return to pre-recession levels and could be a sign of recovery. “We’ve seen that consumers are willing to shop a few extra stores,” Martin noted. “This could translate into more impulse buying and stronger sales.”
Tags: Amazon.com, Apple, Best Buy, BIGinsight Consumer Insights, Black Friday, Door busters, fiscal cliff, National Retail Federation, ShopperTrak, Target, Thanksgiving, Wal-Mart
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Monday, November 26th, 2012
The October employment report won’t blow anyone out of the water, but showed a modest improvement that caused many to breathe a sigh of relief. According to the Department of Labor, 171,000 jobs were added in October – the highest number since February. Retailing (up 36,000); healthcare (up 31,000) and business services (up 51,000) showed the most significant gains. August and September employment numbers were also revised upwards by 84,000 jobs. The nation’s unemployment rate stood at 7.9 percent, a slight tick upwards from the 7.8 percent reported in September.
Possibly of greater significance is the fact that the workforce showed signs of growth, with the labor force participation rate rising to 63.8 percent. More than 500,000 Americans started job hunting in October. The current number includes 12.3 million people who have no jobs; 8.3 million who work part-time; and 2.4 million who have stopped looking for work. Compare this with October, 2009 – at the height of the Great Recession — when the unemployment rate was 10 percent. Prior to the recession, the unemployment rate averaged five percent or less. Even though it has declined from its peak, it is still approximately three percent less than what is considered to be full employment.
Writing in The New Yorker, John Cassidy says that “Over the past year, the total number of people employed has risen from 140.3 million to 143.4 million, according to the household survey. After allowing for population growth, the number of people unemployed has fallen by a million, and the number working part-time or no longer actively looking for work has dropped by about half a million. The number of people who have been out of work for more than six months – the hard-core unemployed – has fallen by more than 800,000, and it now stands at five million.”
Despite the upbeat news, Americans still are not seeing any improvement in their standard of living. In October, the average hourly wage for workers in the non-farm sector fell one penny to $23.58. Wages have risen a scant 1.6 percent in the last year, less than the inflation rate.
Tags: Bureau of Labor Statistics, Department of Labor, Full employment, Great Recession, Hard-core unemployed, Household Survey, October jobs report, standard of living, unemployment
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Tuesday, November 13th, 2012
If history repeats itself, QE3 will be good for commercial mortgage-backed securities (CMBS). The Fed’s third round of quantitative easing – which is purchasing $40 billion of residential mortgage-backed securities (RMBS) each month from Fannie Mae and Freddie Mac – will free up money for the commercial real estate market and lure investors away from other vehicles in their hunt for maximum yield. QE3 is expected to last at least until 2015.
“The primary difference between 2012 and 2010 is that commercial property prices in healthy markets are stronger than they were just two years ago. At its peak, CMBS constituted 40 percent of all commercial real estate loans,” said John O’Callahan of CoStar. O’Callahan notes that “Investment returns of 40 percent or more for riskier assets during QE1 were largely a result of a bounce-back from the lows caused by investor panic in late 2008 through early 2009. The overall impact of QE becomes clearer upon examining QE2. Prices of equities and high-yield bonds, including CMBS, gained a respectable 12 to 15 percent.”
Low interest rates mean that returns will narrow to as little as 150 basis points, forcing investors to look elsewhere for respectable yields. Currently, B-piece CMBS investors are achieving 20 percent and higher yields. By contrast, the Dow Jones Industrial Average’s yield has remained below three percent each of the last 20 years.
CMBS has “been a boon for us,” said Kenneth Cohen, head of CMBS at UBS Securities. “You’ve seen a fairly good size increase in loan pipelines. Our pipeline has increased probably 50 percent over the last six weeks.” Borrowers also are cashing in on the favorable loan terms. According to Fitch Ratings, loans in 2012 are averaging 95.7 percent of a stressed property’s estimated value; that’s up from 91.6 percent in 2011.
Despite the good news, industry experts don’t expect the resurgent CMBS market to resolve all financing woes. For example, the encouraging loan terms are of minimal help to commercial real estate owners who are under water, nor will new issuance be adequate to refinance the $54 billion in CMBS loans coming due this year. Additionally, some ratings firms warn that the credit quality of CMBS loans could increase risk for some investors. In response, Moody’s Investor Services’ now requires that senior bonds have expensive credit protection.
Tags: Ben Bernanke, CMBS, CoStar Group, debt markets, Dow Jones Industrial Average, European debt crisis, Fannie Mae, Federal Reserve, financial crisis, Fitch Ratings, Freddie Mac, Moody’s Investor Service, QE1, QE2, QE3, REITS, Residential mortgage-backed securities, Standard & Poor’s, stock market, UBS Securities, Wall Street
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Monday, October 29th, 2012
The nation’s unemployment rate fell to 7.8 percent in September, the lowest level reported since January of 2009. That is a 0.4 percent decline from the 8.1 percent reported for the previous month, yet represents a slight hiring slowdown after the Department of Labor revised the July and August numbers upwards by 86,000. A total of 114,000 jobs were added in September.
Despite the good news, the fact remains that the American work force is now down six million individuals from its 2007 levels. After adding those six million to the total, the unemployment rate rises to 11 percent. These individuals are also known as “underutilized workers”. Approximately one-third of that six million are actively looking for work; the rest have left the work force due to retirement, disability or another reason. All told, 161.79 million American are currently employed.
Most people don’t realize that the jobs report actually collects data from two separate surveys. In one, 140,000 employers report how many people are on their payrolls; in the second, 873,000 households report the number of members who have jobs. While the employer-generated statistic reported in September was expected by economists, the household survey results were a surprise. It reported the highest number of jobs filled since June of 1983. It is not uncommon for the surveys to deviate from each other. Here is how the household survey works is taken: an individual in the chosen household is asked if they own a business; do they work for pay; are they self-employed; do they work part time or full time.
Additionally, suggestions that the federal government had “cooked the books” are “nonsense”, according to New York Time s columnist and Nobel Price-winning economist Paul Krugman. “Job numbers are prepared by professional civil servants at an agency that currently has no political appointees,” Krugman wrote in a recent column. “Furthermore, the methods the bureau uses are public – and anyone familiar with the data understands that they are ‘noisy,’ that especially good (or bad) months will be reported now and then as a simple consequence of statistical randomness. And that, in turn, means that you shouldn’t put much weight on any one month’s report.”
Tags: Bureau of Labor Statistics, Department of Labor, Disability, Household Survey, jobs, Nobel Prize, Paul Krugman, retirement, Statistical randomness, Underutilized workers, unemployment rate, work force
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