by Calculated Risk on 12/08/2011 04:38:00 PM

On Sunday I posted Comments on the Employment-Population Ratio with a follow up yesterday: Labor Force Participation Rate by Age Group

Some people have wondered why the participation rate has been declining for the younger age groups.

First below is a repeat of the graph from yesterday showing the trends by age group since 1990.

Note: The participation rate is the percentage of the working age population in the labor force.

Click on graph for larger image.

Some of the recent decline in the participation rate for the '20 to 24' age group is probably related to the recession.

But probably the main reason for the decline in the participation rate for the younger age groups is that more people are pursuing higher education. (ht Rick Nevin) Nevin writes:

The decline in age-16-19 and age-20-24 labor force participation is the mirror image of the increase in school enrollment rates for those age groups. This trend is exactly what was anticipated by (promised by) research that supported the phase-out of lead in gasoline from the early-1970s through the mid-1980s, and subsequent lead paint hazard reduction requirements, including my 1999 Economic Analysis of HUD lead hazard reduction requirements.

Note: I do not know Rick Nevin, but I have read some research about the link between lead and crime (and IQ). As an example, from Professor Jessica Wolpaw Reyes: Environmental Policy as Social Policy? The Impact of Childhood Lead Exposure on Crime makes a strong argument that removing lead from gasoline from 1975 to 1985 led to lower crime rates.

More from Nevin:

The decline in labor force participation for ages 16-24 might be partly due to a short term “bad news” story about discouraged workers, but it is mainly due to a longer term “great news” story about ongoing gains in school enrollment and academic attainment.

This graph uses data from the BLS on participation rate, and the National Center for Education Statistics (NCES) on enrollment rates.

This graph shows the participation and enrollment rates for the 18 to 19 year old age group. These two lines are a "mirror image".

Note: I added the participation rate for men and women too. One of the key labor stories in the 2nd half of the 1900s was the surge in participation by women.

The third graph shows the participation and enrollment rates for the 20 to 24 year old age group.

Once again the participation rate is declining as the enrollment rate is increasing. The participation rate (all) was rising in the '70s and early '80s because of the increase in women entering the labor force.

In the long run, more education is a positive for the economy (although I am concerned about the surge in student loans). This increase in education enrollment suggests we should look at the prime working age (25 to 54) for changes in the participation rate and employment-population ratio due to the recent recession.

But mostly it suggests that the kids are alright!

by Calculated Risk on 12/08/2011 12:01:00 PM

The Federal Reserve released the Q3 2011 Flow of Funds report today: Flow of Funds.

The Fed estimated that household net worth declined $2.4 trillion in Q3. Household net worth peaked at $66.8 trillion in Q2 2007, and then net worth fell to $50.4 trillion in Q1 2009 (a loss of $16.4 trillion). Household net worth was at $57.4 trillion in Q3 2011 (up $7.0 trillion from the trough, but down $2.4 trillion in Q3).

The Fed estimated that the value of household real estate fell $98 billion to $16.1 trillion in Q3 2011. The value of household real estate has fallen $6.6 trillion from the peak - and is still falling in 2011.

Click on graph for larger image.

This is the Households and Nonprofit net worth as a percent of GDP.

This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations.

This ratio was relatively stable for almost 50 years, and then we saw the stock market and housing bubbles.

This graph shows homeowner percent equity since 1952.

Household percent equity (as measured by the Fed) collapsed when house prices fell sharply in 2007 and 2008.

In Q3 2011, household percent equity (of household real estate) was at 38.7% - about the same as in Q2.

Note: about 30.3% of owner occupied households have no mortgage debt as of April 2010. So the approximately 52+ million households with mortgages have far less than 38.7% equity - and, according to CoreLogic, about 10.7 million households have negative equity.

The third graph shows household real estate assets and mortgage debt as a percent of GDP.

Mortgage debt declined by $54 billion in Q3. Mortgage debt has now declined by $730 billion from the peak. Studies suggest most of the decline in debt has been because of foreclosures (or short sales), but some of the decline is from homeowners paying down debt (sometimes so they can refinance at better rates).

Assets prices, as a percent of GDP, have fallen significantly and are only slightly above historical levels. However household mortgage debt, as a percent of GDP, is still historically very high, suggesting more deleveraging ahead for households.

by Calculated Risk on 12/08/2011 10:05:00 AM

From Mario Draghi, President of the ECB: Introductory statement to the press conference

Based on its regular economic and monetary analyses, the Governing Council decided to lower the key ECB interest rates by 25 basis points, following the 25 basis point decrease on 3 November 2011. [this lowers the rate to 1.0%]
...
In its continued efforts to support the liquidity situation of euro area banks, and following the coordinated central bank action on 30 November 2011 to provide liquidity to the global financial system, the Governing Council today also decided to adopt further non-standard measures. These measures should ensure enhanced access of the banking sector to liquidity and facilitate the functioning of the euro area money market. They are expected to support the provision of credit to households and non-financial corporations. In this context, the Governing Council decided:

First, to conduct two longer-term refinancing operations (LTROs) with a maturity of 36 months and the option of early repayment after one year. The operations will be conducted as fixed rate tender procedures with full allotment. The rate in these operations will be fixed at the average rate of the main refinancing operations over the life of the respective operation. Interest will be paid when the respective operation matures. The first operation will be allotted on 21 December 2011 and will replace the 12-month LTRO announced on 6 October 2011.

Second, to increase collateral availability by reducing the rating threshold for certain asset-backed securities (ABS). In addition to the ABS that are already eligible for Eurosystem operations, ABS having a second best rating of at least “single A” in the Eurosystem harmonised credit scale at issuance, and at all times subsequently, and the underlying assets of which comprise residential mortgages and loans to small and medium-sized enterprises, will be eligible for use as collateral in Eurosystem credit operations. Moreover, national central banks will be allowed, as a temporary solution, to accept as collateral additional performing credit claims (namely bank loans) that satisfy specific eligibility criteria. The responsibility entailed in the acceptance of such credit claims will be borne by the national central bank authorising their use. These measures will take effect as soon as the relevant legal acts have been published.

Third, to reduce the reserve ratio, which is currently 2%, to 1%. This will free up collateral and support money market activity. As a consequence of the full allotment policy applied in the ECB’s main refinancing operations and the way banks are using this option, the system of reserve requirements is not needed to the same extent as under normal circumstances to steer money market conditions. This measure will take effect as of the maintenance period starting on 18 January 2012.

Fourth, to discontinue for the time being, as of the maintenance period starting on 14 December 2011, the fine-tuning operations carried out on the last day of each maintenance period. This is a technical measure to support money market activity.

From the Financial Times: ECB launches new support for banks

From the WSJ: Draghi Announces New ECB Crisis Moves

Also from the WSJ: EU Nearing IMF Loan Deal

The European Union is nearing a deal to lend €200 billion ($268.26 billion) to the International Monetary Fund—including €150 billion coming from the 17-nation euro zone—that the IMF could then use to shore up the troubled euro-zone sovereign debt market, euro-zone officials said Thursday.

Bond yields for Italy and Spain increased this morning. The Italian 2 year yield is up sharply to 5.98%, and the 10 year yield is up to 6.31%.

The Spanish 2 year yield is up to 4.62%, and the 10 year yield is up to 5.67%.

by Calculated Risk on 12/08/2011 08:30:00 AM

The DOL reports:

In the week ending December 3, the advance figure for seasonally adjusted initial claims was 381,000, a decrease of 23,000 from the previous week's revised figure of 404,000. The 4-week moving average was 393,250, a decrease of 3,000 from the previous week's revised average of 396,250.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased this week to 393,250.

This is the fourth week in a row with the 4-week average below 400,000, and this is the lowest level for claims since February.

And here is a long term graph of weekly claims:





All current Employment Graphs

by Calculated Risk on 12/07/2011 06:09:00 PM

A few excerpts from a Financial Times editorial: We cannot afford another half-baked solution (ht Pat)

... there are but hours to save the euro ... The world cannot afford another half-baked solution. ... What [Merkel and Sarkozy] laid out was little more than a stability plan on steroids, based on a misdiagnosis of the crisis that divides the eurozone into nations that are fiscally virtuous and those deemed to be profligate “sinners”.

A politically sustainable plan needs ... the hope of rebalancing within the eurozone, not just an endless vista of austerity.

In the short run, some fiscal agreements combined with ECB intervention will help. And it looks like the ECB will take more action tomorrow, from Bloomberg: ECB to Consider More Measures to Stimulate Bank Lending

The European Central Bank may announce a range of measures tomorrow to stimulate bank lending ...

Options on the table include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans to grease the flow of credit to the economy ... an interest rate cut is likely ...

But that isn't enough. Some time soon, private investors will have to be enticed to buy sovereign bonds - and somehow the eurozone has to be rebalanced. "An endless vista of austerity" will not survive the polling booths for long.

by Calculated Risk on 12/07/2011 02:26:00 PM

As the economy slowly recovers, an important question is: What will happen to the participation rate over the next few years?

On Sunday I pointed out that demographers expected the participation rate to start declining even before the great recession started. The expected gradual decline was due to the aging of the overall population.

Note: The participation rate is the percentage of the working age population in the labor force.

One difficultly in projecting the participation rate is that the age group participation rates change over time. The participation rate for the '16 to 19' age group has been declining for some time, and the participation rate has been increasing for older age groups - perhaps because of necessity, perhaps because of fewer "back breaking" jobs.

Here is a graph showing the trends by age group since 1990.

Click on graph for larger image.

The participation rate is low for those in the '16 to 19' age group. The rate increases sharply for those in the '20 to 24' age group, and the rate is at its peak from 25 to 49 - and drops off a little for the '50 to 54' age group.

After 55 workers start leaving the labor force, and the participation rate falls off with age.

The participation rate has been declining for the younger age groups, although some of the recent decline for the '20 to 24' age group is probably related to the recession (perhaps more people staying in school).

Even though the participation rate is rising for the older age groups, the increase doesn't offset the aging of the population. As an example, when the current '55 to 59' age group moves into the '60 to 64' bracket, the participation rate for that cohort will decline from 73% to 55% or so. And with a fairly large cohort moving into the older age brackets, the overall participation rate will probably decline.

Forecasting the participation rate is important (along with population growth and other factors) in projecting how many jobs are needed to bring the economy back to full employment. So I'll be writing more about this ...

by Calculated Risk on 12/07/2011 11:28:00 AM

Not much news yet ... although the ECB is expected to cut interest rates ...

From the Financial Times: Germany insists on new treaty for Europe

Germany has thrown down the gauntlet to its European partners, insisting that they must agree on treaty change for the whole European Union, or at the least a binding new eurozone treaty, to bring lasting stability to the common currency, and reassure the financial markets.
Excerpt with permission

From the WSJ: Crisis Live Blog: Sarkozy, Merkel Issue Treaty Proposal

In an open letter to European Council President Herman Van Rompuy, Mr. Sarkozy and Ms. Merkel issued an ultimatum to the 27 EU governments, saying they must decide whether they will accept greater central control over their national budgets.

Should some countries decide not to participate, the 17 countries in the euro zone will press ahead with a more integrated union by signing a new agreement outside EU treaties, they said.

The Italian 2 year yield is up slightly to 5.6%, and the 10 year yield is up to 6.02%. Both were above 7% not long ago.

The Spanish 2 year yield is up sharply to 4.4%, and the 10 year yield is up to 5.44%. The ten year was at 6.7% on November 24th.

by Calculated Risk on 12/07/2011 08:52:00 AM

From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey

The Refinance Index increased 15.3 percent from the previous week. The seasonally adjusted Purchase Index increased 8.3 percent from one week earlier to its highest level since August 5, 2011.
...
"Coming out of the Thanksgiving holiday, applications increased significantly as mortgage rates dropped to their lowest levels in about two months," said Michael Fratantoni, MBA's Vice President of Research and Economics. "In particular, refinance applications increased sharply, with some lenders seeing refinance volume double. Despite this surge, aggregate refinance activity is still below levels reported two weeks ago. Some lenders indicated they are beginning to see an increase in HARP loans, but that increase is still a small portion of the move this week."
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 4.18 percent, the lowest rate since September 30, 2011 ...

The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500)decreased to 4.52 percent, the lowest rate since September 30, 2011 ...

The following graph shows the MBA Purchase Index and four week moving average since 1990.

Click on graph for larger image.

Although the purchase index increased, the index has mostly been sideways for the last 2 years - and at about the same level as in 1997.

All current Existing Home Graphs

by Calculated Risk on 12/06/2011 09:47:00 PM

From Alejandro Lazo at the LA Times: California and Nevada join forces in mortgage probe

An alliance by California and Nevada to jointly investigate misconduct and fraud in the mortgage business further divides efforts by the nation's attorneys general to bring the home-lending industry to account for improper foreclosure practices.
...
The agreement to work together, announced in Los Angeles on Tuesday by California Atty. Gen. Kamala D. Harris and Nevada Atty Gen. Catherine Cortez Masto, comes a week after Massachusetts said it was suing the nation's five largest mortgage servicers over alleged foreclosure illegalities. The moves escalate pressure on the nation's biggest financial institutions already in high-level negotiations with a coalition of state attorneys general over their alleged abuses.

It is appearing less and less likely that there will be a settlement any time soon ...

by Calculated Risk on 12/06/2011 05:49:00 PM

CR Note: The following is a long discussion by Tom Lawler of the recent Fed paper looking at the role of real estate "investors" (really speculators) during the housing bubble. Lawler cautions about drawing quick conclusions from the graphs.

First, a quote from Lawler in 2005:

“The investor share of the purchase market has increased dramatically, to levels not seen since at least the late 1980’s. The investor share increase has been concentrated in MSAs with exceptionally rapid home price growth”

“(C)onditions in many parts of the country mirror past conditions that preceded regional housing ‘busts’.”
Tom Lawler, NAHB Spring Construction Conference, May 25, 2005

People were warned! (In April 2005, I wrote Housing: Speculation is the Key)

From economist Tom Lawler:

In a relatively recent Federal Reserve Bank of New York “Staff Report” entitled “Real Estate Investors, the Leverage Cycle, and the Housing Crisis,” FRB of NY economists Andrew Haughwout, Donghoon Lee, Joseph Tracy, and Wilbert van der Klaauw utilize data from the FRBNY’s Consumer Credit Panel (CCP) data set of US individuals with credit files to attempt to document the role of mortgage-financed purchases of real estate by “investors” in last decade’s housing boom and bust. Here is a summary. Here is the abstract:

“We explore a mostly undocumented but important dimension of the housing market crisis: the role played by real estate investors. Using unique credit-report data, we document large increases in the share of purchases, and subsequently delinquencies, by real estate investors. In states that experienced the largest housing booms and busts, at the peak of the market almost half of purchase mortgage originations were associated with investors. In part by apparently misreporting their intentions to occupy the property, investors took on more leverage, contributing to higher rates of default. Our findings have important implications for policies designed to address the consequences and recurrence of housing market bubbles.”

In re the data, here’s an excerpt from the report.

“We can use this information (in the datset) to separate mortgage borrowers based on how many distinct first-lien mortgage accounts appear on their credit reports. Since each property can secure at most a single first-lien mortgage, the number of such mortgages on a borrower’s credit report is a reliable, non-self reported, indicator of the minimum number of properties a given individual has borrowed against.24 This kind of information about individual borrowers is not available in loan-level data sets and thus the FRBNY CCP data provide a unique perspective into important questions about who is originating new mortgages at any point in time, as well as their subsequent behavior.”

Folks who read the paper should read it carefully, as a “quick read” can lead to a bit of confusion on what some of the data and charts mean. E.g., there are charts on investor shares of new purchase mortgage borrowing that a “quick” reader might conclude represent estimates of the shares of mortgage-financed purchases FOR investment by non-owners as opposed to estimates of the share of mortgage-financed purchases BY folks who own more than one property with a mortgage (i.e., BY investors), even if the a GIVEN purchase by an “investor” happens to be for his/her primary residence. (By and For mean very different things!)

Similarly, there are charts showing the share of first-lien mortgages outstanding owed BY “investors,” which the casual reader might incorrectly conclude represent the share of mortgages outstanding on non-owner-occupied properties owned FOR investment, as opposed to the share of first-lien mortgages owed by folks who happen to own more than one mortgage-financed property, one of which is likely to the be the real estate investor’s primary residence! (Many real-estate “investors” actually live in a home with a mortgage!

E.g., here is a chart from the report showing the “investor share” of new purchase-mortgage borrowing.

Click on graph for larger image.

(Shares are, I believe, shares of purchases by folks with “x” number of first-lien mortgages on their credit reports)

A casual reader might look at this chart and say, “holy crap,” in 2006 the share of mortgage-financed purchases FOR investment (or vacation homes) was almost 35%!

That would be an incorrect interpretation. Rather, the above chart represents an estimate of the share of mortgage-financed purchases BY individuals who had a mortgage on more than one property. That is a non-trivial distinction.

E.g., if a person who had a mortgage on his/her primary residence AND who had a mortgage on a different property (such as a vacation home) used a mortgage to finance the purchase of his/her new primary residence, that transaction would count as an “investor purchase” by the authors’ definition (a purchase BY an investor, not necessarily FOR investment).

Ah! Now inquiring minds probably want to know how the authors deal with folks who moved, but either (1) who moved before selling their previous primary residence and who carried two mortgages for a period of time; or (2) who, because of “reporting delays” on credit reports, were “shown” as carrying two mortgages when in fact they were not. Here’s how the authors attempt to deal with that.

“We observe borrowers’ credit reports on the final day of each quarter. Because there can be delays in credit reporting such that a mortgage that has been paid off may stay on the credit report for a period of time, we use the data’s panel structure to correct for these delays. Throughout this section of our analysis investor status is determined based on the maximum number of first mortgages that appear in both of the two most recent quarters. Thus we can be more confident that each first-lien we consider is in fact associated with a unique property.”

I did confirm with the authors that if I financed the purchase of our current residence in July 2007, but did not sell my previous residence until a year later (and if it had a mortgage), that I would have been classified as a “2 first mortgages” holder for the intervening period. Similarly, if I had a mortgage on our beach house as well, for a brief period I would have been classified as a “3 first mortgages” holder, and after the sale of our previous primary residence I’d be back down to a “2 first mortgages” holder. (In real life I don’t have any mortgages).

Similarly, consider another chart from the report.

Investor share of number of first mortgages outstanding

Again, a “casual” reader might look at this chart and conclude that in the first quarter of 2008 the “share” of non-owner-occupied first mortgages outstanding was almost 25%. That would be incorrect.

The authors, by the way, are not meaning to confuse. One just needs to read the report carefully.

E.g., in the above chart it seems reasonable to conclude that for most borrowers with 2 first mortgages, one is a mortgage on their primary residence. The same is probably true for the 3- and 4+- holders. That would lead one to conclude (Q&D) that in the first quarter of 2008 the % of non-owner-occupied first mortgages outstanding was more like half what is shown above¹.

¹ Hope Now estimates that non-owner-occupied share of residential first-lien mortgages outstanding at the end of September was 9.4%, but that figure is likely understated.

A final chart I’m going to show from the paper is one that estimates the “investor” share of seriously-delinquent mortgages.

Investor share of 90% DPD first mortgage balances

One of the intriguing and important issues raised in the “conclusions” section of the paper relates to a question many folks, including myself, would like answered: what % of properties backing seriously delinquent loans are actually occupied by the owner of the property? The authors believe that the CCP data suggest that the % may be significantly greater than many folks believe, though, as noted above, the data aren’t “conclusive.” E.g., Hope Now estimates that at the end of September the % of residential first-lien loans 60+ days delinquent that were non-owner-occupied properties was 11.5%,, though its 60+ numbers don’t include loans in the foreclosure process. Unfortunately, I can’t for sure tell from the above chart what the RIGHT % is – but it makes a difference both in terms of how effective mod programs targeted at owner-occupied homes will be in terms of addressing the TOTAL delinquency/foreclosure issue, AND in terms of the wisdom of foreclosure moratoria/delays/etc. E.g., for vacant properties with delinquent loans, or properties with delinquent loans that are being rented out but not adequately maintained, it probably makes sense from a policy perspective to ACCELERATE the foreclosure process!

All in all, the paper is quite interesting and does shed some new light about the role real estate “investors” played in the housing boom/bust, and it is worth reading. The paper also shows some “investor” shares for “bubble” states that are quite illuminating.

Amusingly, the paper cites the amazingly bad paper by the clueless economists Himelberg, Mayer, and Sinai from 2005 (FRBNY Staff Report) entitled “Assessing High Home Prices: Bubbles, Fundamentals, and Misperceptions,” where the authors not only displayed a complete lack of knowledge of mortgage data sources, but who also DID NOT MENTION subprime, alt-A, low/no documentation mortgages, real-estate investor behavior. In a shocking but refreshing “mea culpa” piece on the FRBNY’s blog site entitled “Failure to Forecast the Great Recession,” Simon Potter not only documents the poor performance of the FRBNY’s economic projections, but also notes that FRBNY research (1) “misunderstood” the housing boom (citing the embarrassing HMS paper, as well as the silly 2004 McCarthy and Peach paper), and (2) there was “a lack of analysis of the rapid growth of new mortgage finance.” (See The Failure to Forecast the Great Recession)

While it now appears that “occupancy fraud” was distressingly common during the real-estate boom (one wonders, by the way, why mortgage originators didn’t check credit reports to see if a buyer claiming that he/she was going to purchase a home for his/her primary residence had more than one first mortgage outstanding!), there was still evidence that the non-owner-occupied share of mortgage-financed purchases was rising during the housing boom based on “accurately” reported occupancy purposes. E.g., here are some data from HMDA.

[This data was] taken from various annual articles from the Federal Reserve Bulletin on the HMDA data. I don’t know for sure what the 2000 and beyond data were “revised.”

Data from the old LoanPerformance “prime conventional conforming” database, which was not loan level but which had aggregate stats for PCC loans, also showed rising investor shares, especially in “bubble” markets. [The next] chart [is] from a presentation I made at the NAHB Fall Construction Forecast Conference in October, 2007.

“Second” refers to second homes such as vacation homes, while “investor” refers to investment (rental income) properties.

At the NAHB Spring Construction Conference on May 25th, 2005 I noted (using this data source) to support my statement that “(t)he investor share of the purchase market has increased dramatically, to levels not seen since at least the late 1980’s. The investor share increase has been concentrated in MSAs with exceptionally rapid home price growth.”

The National Association of Realtors “Investment and Vacation Home Buyers also suggested a big increase in buying of properties “for investment” in the middle of last decade. Unfortunately I only have data back to 2003, and I should note that I’ve never been able to “reconcile” this data to either the NAR’s Profile of Home Buyers and Sellers (which is based almost but not completely on a survey of principal-residence buyers) or to other sources).

According to this survey, 68% of buyers of “investment” properties used a mortgage to finance the purchase in 2006, compared to just 39% in 2010. While I can’t find the shares for earlier years, the NAR’s “Profile of Second Home Owners” published in 2006 suggested that about 76% of folks who purchased an investment property from 2003 to 2005 used a mortgage to finance the purchase.

This is all a long-winded way of saying that despite what appears to have been a decent amount of “lying” on mortgage applications on a borrower’s intended use of his/her home purchase, there was still a significant amount of evidence available DURING the housing bubble that the share of mortgage-financed purchases by investors was rising SIGNIFICANTLY, and was rising exceptionally rapidly in the “most bubbly” of areas.

There was also, of course, LOTS of data on the rise in the subprime share of the mortgage market, the rise in the low/no doc share of the mortgage market, the rise in piggyback financing and low/no down payment purchases, the rise in interest-only/pay-option mortgages, etc.

CR Note: This was from economist Tom Lawler.