by Calculated Risk on 12/15/2005 02:22:00 PM

From Professor Samwick at Vox Baby:

Along with Jeff Liebman of Harvard University and Maya MacGuineas of the New America Foundation, I am pleased to announce the "Nonpartisan Social Security Reform Plan."

My response was blunt:

Professor, I appreciate your efforts, but ...

The two most pressing fiscal challenges for the US are: 1) the health care system and 2) the General Fund Deficit (close to $600 Billion this year alone).

Social Security is irrelevant when compared to those two problems.

I suggest fixing the most serious problems FIRST, and then returning to Social Security.

Ranking the Challenges

Any good manager would 1) measure the problem and then 2) solve the largest problems first. With that approach, here are the three largest fiscal challenges facing the United States:


Click on graph for larger image.

This chart shows the relative sizes of the three major fiscal challenges over the next 75 years. The NPV for the General Fund deficit is based on deficits equal to 5% of GDP. Note: the fiscal 2006 general fund deficit will be close to 5%.

The estimates for Medicare and Social Security are from the GAO report (pdf): The Long Term Fiscal Challenge

From the GAO report:

"Health care is a bigger problem than Social Security. Participants acknowledged the need for Social Security reform but emphasized that Social Security is a relatively small part of the long-term fiscal challenge when compared to spending on health care. ... Several participants observed that few members of the public are aware of this. Rather, the general public impression is that solving Social Security would solve most of the longterm fiscal challenge, and this is not correct.

And on the General Fund deficit:

"Participants agreed that a key moral context is the impact federal budget deficits will have on future generations."

Conclusion

The debate should be focused on the two major issues: Health Care and the General Fund deficit. Without addressing those issues first, reforming Social Security is irrelevant.

by Calculated Risk on 12/15/2005 11:07:00 AM

The Orange Country Register sponsored a roundtable on real estate this week. The participants included "economists, real estate executives, consultants, a researcher and a broker" and the comments were unsurprisingly mostly positive.

This discussion of exotic loans was interesting:

... the panelists weighed in on risks and benefits of creative financing, prospects of widespread foreclosures, and solutions to the housing crunch.

The prevalence of easy money is a concern, and much of it originates in Orange County, according to Scott Simon, who heads the mortgage investment team at the Pimcobond firm in Newport Beach.

"This is the hub of creative credit in the world," Simon said.

Simon said some lenders have dramatically increased the amount of interest-only loans they make in recent years. The trend has helped increase the percentage of Americans who own homes, but has led to a number of buyers borrowing too much, he said.

A day of reckoning for some buyers could be in the offing, according to Simon and some other panelists.

Several panelists said homeowners most at risk of foreclosure are those who bought homes since 2003, have no equity, and have adjustable mortgages with very low rates. Most buyers before 2003 have built up a fat cushion of home equity to fall back on if mortgage rates rise, they said.

The number of homeowners at risk of foreclosure probably is in the range of 7,000 to 8,000, said Chris Cagan, director of research and analytics with First American Real Estate Solutions in Santa Ana. That total would represent 7 percent to 8 percent of local buyers over the past two years, he said.

Cagan said that if all of those at risk defaulted, it would add about two months' supply of homes for sale to the market, not enough to sink it.

I think there will be additional factors impacting the economy if housing prices flatten. Not only will some recent buyers be at risk of foreclosure, but there will be less employment in RE related industries and less equity extraction to fund consumer spending and home improvement projects.

by Calculated Risk on 12/14/2005 06:13:00 PM

The Economist is amazed by the American consumer:

FOR several years now, economists have been watching American consumers with the same mixture of astonishment and anticipation that wide-eyed fans bring to endurance sports: amazing that they’ve made it so far, but how much longer can they go on like this? Strong consumer spending has underpinned America’s robust economic expansion, even as most other industrialised countries have struggled to get their economies back on track. But consumers have been running down savings to sustain this level of spending; the personal savings rate has actually been negative since June. Booming house prices and low interest rates have enabled consumers to take on more debt without suffering much, but with interest rates now climbing, Americans have begun to feel the pinch. Data from the Federal Reserve show that the percentage of household disposable income devoted to servicing debt was a record 16.6% in the third quarter.

Yet the consumers soldier on.

A nice summary article.

by Calculated Risk on 12/14/2005 04:55:00 PM

The Orange County Business Journal quotes PIMCO's Bill Gross:

"Housing in the next month or two will display extreme weakness, and the Fed will stop,"

The short article adds:

Gross, Pimco's chief investment officer, predicts a rate cap of 4.5%, though others see at least two more hikes by the Federal Reserve.

Two predictions to check back on in a couple of months.


Click on graph for larger image.

According to Dr. Altig's calculations, the Fed Funds Futures shows at least two more rate hikes. This is a regular feature at Macroblog.

Right now I think hikes to 4.5% in January and 4.75% in March are likely. Although I agree with Gross that the end of the rate hikes is near.

by Calculated Risk on 12/14/2005 10:40:00 AM

The Mortgage Bankers Association (MBA) reports: Refinance Applications Continue To Decline

Market Composite Index — a measure of mortgage loan application volume was 619.3 -- a decrease of 5.7 percent on a seasonally adjusted basis from 656.7, one week earlier. On an unadjusted basis, the Index decreased 8.1 percent compared with the previous week and was down 11.0 percent compared with the same week one year earlier.

The seasonally-adjusted Purchase Index decreased by 3.5 percent to 477.9 from 495.1 the previous week whereas the Refinance Index decreased by 9.7 percent to 1441.8 from 1596.4 one week earlier.

Click on graph for larger image.

The graph shows overall and purchase activity since June. Overall activity has fallen significantly due to the drop in refis. Purchase activity is steady.

Mortgage rates decreased slightly last week:

The average contract interest rate for 30-year fixed-rate mortgages decreased to 6.28 percent from 6.32 percent on week earlier ...

The average contract interest rate for 15-year fixed-rate mortgages decreased to 5.83 percent from 5.84 percent ...

Overall this report shows purchase activity is steady at a very high level.