by Mark Lieberman, Five Star Institute Economist
In the spring and early summer, more lenders, as surveyed by
the Federal Reserve, said they were easing standards for mortgage loans than
were tightening.
In the spring and earlier summer, the median price of an
existing-single family home was increasing by an average of 1.8 percent per
month as sales increased about 0.5 percent per month. Personal income,
according to the Bureau of Economic Analysis, was increasing at about 0.5 percent
per month.
In the spring and early summer, the Case-Shiller Home Price
Index was increasing by an average of 1.5 percent per month
In the spring and earlier summer, the nation added about
230,000 jobs per month, about one quarter to one half of them retail and
leisure and hospitality them retail and leisure and hospitality, the two lowest
wage industry sectors tracked by the Bureau of Labor Statistics.
That was 2005, the year before the housing bubble burst
brought the economy down with it.
In 2013, numbers look eerily similar:
According to the latest Federal Reserve
Senior Loan Officer Survey, an average of 4.6 percent of lenders
surveyed acknowledged easing lending standards for prime residential loans and
16 percent of lenders surveyed reported an increase in demand for loans to
subprime borrowers.
So far this year, the median price of an existing-home has
increased an average of 2.5 percent per month and sales are increasing an
average of 1.4 percent per month.
The Case-Shiller index has increased an average 1.3 percent
per month.
Of the average monthly increase of 192,000 jobs per month,
retail and leisure and hospitality jobs have accounted for nearly one-third.
While some of the 2013 numbers look better than 2005, other
coincidental indicators are reason for concern. In 2005, sales at furniture
stores and building and garden supply storesundefinedretailers who thrive when homes
are purchasedundefinedincreased an average of 0.3 percent and 0.4 percent respectively.
In 2013, those stores experienced average monthly increases of 0.2 percent and
0.4 percent. Sales at appliance stores went from an average monthly growth of
0.8 percent to an average monthly contraction of 0.1 percent.
The falloff at furniture and appliance stores suggests
homeowners may be stretched to make monthly mortgage paymentsundefinedeven in an era,
until recently, of low mortgage rates, rates that will only increase when the
Federal Open Market Committee begins to tighten monetary policy.
And, according to a newly published paper, monthly payments
are critical in forecasting defaults.
While economists Andreas Fuster of the Federal Reserve Bank
of New York and Paul S. Willen of the Federal Reserve Bank of Boston studied
the effect of payment size versus reducing principal in loan modifications,
their conclusions are equally applicable to new mortgages. “Little is known
about the importance of mortgage payment size for default,” they wrote.
In their study of workouts, they said “interest rate
reductions dramatically affect repayment behavior, even for borrowers who are
significantly underwater on their mortgages, adding “our estimates imply that
cutting a borrower’s payment in half reduces his hazard of becoming delinquent
by about 55 percent.”
Fuster and Willen didn’t directly study new loans, but the
parallel approach to determine what borrowers have left over for discretionary
purchases, which offers a reason for concern as the housing sector struggles to
recover.
The impact of housing on the rest of the
economyundefinedconstruction jobs and suppliers as well as the financial sectorundefinedis, to
be sure, a reason to look to housing as a stimulus but not, if as the numbers
suggest, history may be repeating itself.