Is the GOP-Centered Building Industry Stuck in the Past?

As I write this column today without loyalty to any political party, the federal government has finally began creaking back to life after being held hostage for 16 days by a Congress seemingly out of touch with the country’s unique role in the global economy.  Not surprisingly, this same Congress earned an approval rating of 11 percent from a poll taken immediately after the shutdown during the early days of October.

While the same poll showed Republicans with an approval rating of 28 percent (down 10 percentage points from the previous month), Democrats also took a four-point hit, with their approval rating edging down to 43 percent.  Poll respondents also showed 62 percent of them disapproving of Republicans, while Democrats split the country more evenly at 49 percent.  Recent figures on the economic damage from the temporary closure have been estimated at $24 billion, and fourth quarter GDP growth estimates have been cut from 3.0 to 2.4 percent.

I only mention these figures because I’ve always been interested in the long-standing connection between the building industry and GOP even when their policies – especially at the national level -- didn’t necessarily coincide with the best interests of the housing market. To be sure, at the local level it certainly makes sense for builders to support politicians who share their goal of making it easier to develop new communities for growing populations, but on the national political stage it’s a far different story.

In the 2012 campaigns, just over three-quarters of the NAHB’s BuildPac funds went to the GOP – far higher than the 55 percent from the National Association of Realtors or the 57 percent from the Mortgage Bankers Association.  Looking ahead to the 2014 elections, while the GOP money lead from BuildPac has shrunk to 67 percent, it’s still far higher than the 48 percent planned by the NAR.

So just what is our industry getting for all of this money?  It’s a fair question:  Remember the $787 billion stimulus package that President Obama wanted to pass shortly after his inauguration?  It passed without a single Republican vote in the House, and just three in the Senate.   Soon thereafter, a separate law to allow judges the freedom to modify mortgages on primary residences to prevent a cascade of foreclosures was also rejected by most Republican legislators.  Meanwhile, GOP candidate Mitt Romney’s plan for the housing market was both clear and simple:  let an unfettered free market sort everything out on its own, even though 83 percent of the sub-prime loans which tanked the housing market were made by mostly unscrupulous private firms.

But this concern isn’t just about money:  it’s just as much about demographics.  While the country continues to become increasingly diverse along racial, ethnic and religious lines, the management of building companies looks much like it has in the past:  white, middle-aged (with a median age of 54 in 2011 according to a NAHB membership survey), 93 percent male and, given the historic connection with the GOP, with what I assume are traditional values handed down from previous generations.

For the overall construction and extraction industries, however, it’s a different story: while over 97 percent of these jobs were still held by men, less than 10 percent of them were Caucasian alone, while nearly 16 percent were Hispanic, 5.7 percent were African American and 2.6 percent were Asian.  It’s an even larger contrast with the general U.S. population, which as of July 2012 was 77 percent Caucasian, 17 percent Hispanic, 13 percent African American, 5.1 percent Asian and 2.3 percent two or more races.

By 2043, the Census Bureau estimates that the country will no longer be a white-majority country, fueled today by significantly higher birth rates among multi-racial couples, Asians and Hispanic immigrants.  About 11 percent of the country’s counties are currently “majority-minority” across the southwest, southeast and northeast.  As soon as next year, a majority of children nationally under age five will be of non-Caucasian descent.

So why is this important?  Because the GOP has a substantial image problem among minority voters, with just 11 percent of non-white voters declaring allegiance to the Republican party as of mid-2012.  And when the NAHB’s primary PAC is still targeting two-thirds of its funds towards Republican candidates, it’s hard to ignore this huge political disconnect between supplier and buyer.

Sure, you could always hire consultants to tell you how to market to specific minority groups, but wouldn’t it be more practical for this industry to better mirror the general population?

Obama announces detailed housing rescue plan

This morning President Obama announced details of his plans to help 9 million homeowners avoid foreclosure. First, a summary from the L.A. Times:

• Remove restrictions on Fannie Mae and Freddie Mac that prohibit the institutions, both taken over by the government last year, from refinancing mortgages they own or have guaranteed when more is owed on a home than it is worth. The White House says this could reduce monthly payments for up to 5 million homeowners.

• Create incentives for lenders to modify subprime loans at risk of default or foreclosure. For lenders that agree to reduce rates to levels borrowers can afford, the government will make up part of the difference between the old monthly payment and the new payment. Participating lenders also will be required to cut payments to no more than 31 percent of a borrower's income. Up to 4 million homeowners could benefit.

• Keep mortgage rates low for millions of middle-class families seeking new mortgages. Using money already approved by Congress for this purpose, the Treasury Department and the Federal Reserve will continue to buy Fannie and Freddie mortgage-backed securities to maintain stability and liquidity in the marketplace. The department, through its existing authority, will provide up to $200 billion in capital for this purpose.

• Pursue reforms to help families avoid foreclosure. The administration will continue to support changing bankruptcy rules so judges can reduce mortgages on primary homes to their fair market value, as long as the borrower sticks to a court-ordered repayment plan. As part of the $787 billion stimulus package that Obama signed into law on Tuesday, the administration will award $2 billion in competitive grants to communities experimenting with innovative ways to prevent foreclosures.

If you missed the press conference, you can watch it below:

Is President Obama up to solving the economic crisis?

Given that the bi-partisan cooperation hoped for by President Obama lasted all of perhaps 10 minutes, economist Paul Krugman is voicing a concern that many others have echoed: is Obama up to the task? From Krugman's column in the New York Times:

Mr. Obama’s victory feels more than a bit like defeat. The stimulus bill looks helpful but inadequate, especially when combined with a disappointing plan for rescuing the banks. And the politics of the stimulus fight have made nonsense of Mr. Obama’s postpartisan dreams...

In both the House and the Senate, the vast majority of Republicans rallied behind the idea that the appropriate response to the abject failure of the Bush administration’s tax cuts is more Bush-style tax cuts. And the rhetorical response of conservatives to the stimulus plan — which will, it’s worth bearing in mind, cost substantially less than either the Bush administration’s $2 trillion in tax cuts or the $1 trillion and counting spent in Iraq — has bordered on the deranged...

And the ugliness of the political debate matters because it raises doubts about the Obama administration’s ability to come back for more if, as seems likely, the stimulus bill proves inadequate...

Officially, the administration insists that the plan is adequate to the economy’s need. But few economists agree. And it’s widely believed that political considerations led to a plan that was weaker and contains more tax cuts than it should have — that Mr. Obama compromised in advance in the hope of gaining broad bipartisan support. We’ve just seen how well that worked...

Over all, the effect was to kick the can down the road. And that’s not good enough. So far the Obama administration’s response to the economic crisis is all too reminiscent of Japan in the 1990s: a fiscal expansion large enough to avert the worst, but not enough to kick-start recovery; support for the banking system, but a reluctance to force banks to face up to their losses. It’s early days yet, but we’re falling behind the curve.

Should we be worried?

Click here for full article.

Who will benefit most from the stimulus package

The unemployed, first-time homebuyers and most tax payers will all benefit from the stimulus compromise package. From a summary in the L.A. Times:

For most Americans, aid would show up most directly in a simple tax credit.

Workers making less than $75,000 a year would get a $400 credit for 2009 and 2010. Couples making up to $150,000 would get $800.

Higher-income taxpayers would see smaller credits. Individuals making more than $100,000 a year and couples making more than $200,000 would not get the credit.

In addition, 24 million middle-income Americans would be spared from paying higher income taxes under the alternative minimum tax...

First-time home-buyers could qualify for an $8,000 tax credit.

The credit is slightly larger than the $7,500 credit in existing law, but it is substantially less than a proposal in the Senate bill that would have boosted the credit to $15,000 and broadened the eligibility.

In addition, the compromise bill waives a requirement that the tax credit be repaid. The credit applies only to homes bought between Jan. 1 and Aug. 31 of this year.

Homeowners who install new doors, windows or furnaces to make their home more energy efficient would be able to get as much as $1,500 back through new tax breaks...

Many people paying for college would get a $2,500 tax credit for tuition and other education-related expenses, such as books and computers...

Millions of Americans receiving unemployment benefits would see a $25 increase in their weekly checks, up from the average benefit of $200.

Unemployment benefits would last 46 weeks under the deal, up from 26 weeks. Some people in high-unemployment states, including California, could receive benefits for 59 weeks.

People who lose a job would receive help in retaining their employer-sponsored health insurance.

Under current COBRA law, jobless workers can keep their insurance if they pay the full cost of the premium, which can exceed $1,000 a month for a family.

Under the stimulus bill, the federal government would pay 60% of that premium for nine months. Individuals who earned more than $125,000 a year and couples with incomes greater than $250,000 would not be eligible.More indirectly, millions of the nation's poorest residents would get help as states use billions of dollars in new federal aid to maintain Medicaid, special education and Head Start programs.

State and local government employees, many of whom are facing layoffs as states slash budgets, may get to keep their jobs.

Doctors, nurses and hospitals that often wait months for the government to pick up the tab for Medicaid patients could see some relief.

The perils of only planning for best-case scenarios

According to Financial Times columnist Martin Wolf, Barack Obama may be facing serious consequences to his Presidency if his stimulus plan only plans for best-case scenarios. From the column:

Has Barack Obama’s presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times. They are times of great danger. Today, the new US administration can disown responsibility for its inheritance; tomorrow, it will own it. Today, it can offer solutions; tomorrow it will have become the problem. Today, it is in control of events; tomorrow, events will take control of it. Doing too little is now far riskier than doing too much. If he fails to act decisively, the president risks being overwhelmed, like his predecessor. The costs to the US and the world of another failed presidency do not bear contemplating.

What is needed? The answer is: focus and ferocity. If Mr Obama does not fix this crisis, all he hopes from his presidency will be lost. If he does, he can reshape the agenda. Hoping for the best is foolish. He should expect the worst and act accordingly.

Yet hoping for the best is what one sees in the stimulus programme and – so far as I can judge from Tuesday’s sketchy announcement by Tim Geithner, Treasury secretary – also in the new plans for fixing the banking system. I commented on the former last week. I would merely add that it is extraordinary that a popular new president, confronting a once-in-80-years’ economic crisis, has let Congress shape the outcome.

Ouch!

Read the rest of the column here.

Video: Economist Jon Haveman discusses impact of stimulus package to SF Bay Area

Jon Haveman, a co-founder of Beacon Economics in San Rafael and Los Angeles, discusses the stimulus package and the potential impact to the Bay Area on a local TV station.

Click here to watch video from CBS5.

"The Daily Bail" blog launches

Concerned about the mounting federal debt, the impact of pricey, pork-filled stimulus packages and what that could mean for your family and progeny? A new blog called The Daily Bail launched several weeks ago (I found it through Patrick.net) to provide regular updates and to assemble the masses to voice their concerns. From the site's About Us page:

The Daily Bail launched 3 weeks ago and we exist to fight the immoral transfer of trillions in debt from private banks onto the backs of future generations. If not stopped there will be $10 trillion of debt created by our government in the next five years, and most of it given to the banks. That amount is equal to our entire national debt for our first 232 years as a nation...

A special message to young people finding us through Twitter. This is your revolution and you need to help lead it. With respect, you need to wake the f up and understand that it is primarily your cash headed out the door and straight to the failed banks. And not to rub salt, but they just paid themselves over $18 billion in collective bonuses for their outstanding work in 2008, with your money.

We have a program building behind the scenes for letting Washington know what you think. But we have to achieve critical mass first. It's going to demand that a million of you, from teenagers to seniors call Congress and The White House on one day. It's one of the things we have in the works and we'll be announcing details soon in collaboration with partners...

My money (pun intended) is on eventually and deliberately inflating our way out of the debt because this country simply isn't ready for debt default, austerity measures, falling wages, chronic deflation and millions of foreclosed families. And what's been a decent hedge against inflation in the past (besides gold?): real estate. That is, after the current bust...

Congress fiddles as the world burns

Just when you thought we might actually be getting some real bi-partisan cooperation in Washington, D.C., apparently the Republicans are more concerned about scoring brownie points with a base still enamored of more tax cuts than coming up with a stimulus bill with the intent to avoid an economic meltdown. From an opinion piece by Nobel Prize winner Paul Krugman in the New York Times:

A not-so-funny thing happened on the way to economic recovery. Over the last two weeks, what should have been a deadly serious debate about how to save an economy in desperate straits turned, instead, into hackneyed political theater, with Republicans spouting all the old clichés about wasteful government spending and the wonders of tax cuts...

Somehow, Washington has lost any sense of what’s at stake — of the reality that we may well be falling into an economic abyss, and that if we do, it will be very hard to get out again.It’s hard to exaggerate how much economic trouble we’re in. The crisis began with housing, but the implosion of the Bush-era housing bubble has set economic dominoes falling not just in the United States, but around the world...

We’re already closer to outright deflation than at any point since the Great Depression. In particular, the private sector is experiencing widespread wage cuts for the first time since the 1930s, and there will be much more of that if the economy continues to weaken...

So what should Mr. Obama do? Count me among those who think that the president made a big mistake in his initial approach, that his attempts to transcend partisanship ended up empowering politicians who take their marching orders from Rush Limbaugh.

What matters now, however, is what he does next. It’s time for Mr. Obama to go on the offensive. Above all, he must not shy away from pointing out that those who stand in the way of his plan, in the name of a discredited economic philosophy, are putting the nation’s future at risk. The American economy is on the edge of catastrophe, and much of the Republican Party is trying to push it over that edge.

Yes, Rush Limbaugh (who, like Sean Hannity, dropped out of college before finding his calling in radio) can be very funny and his show is often quite entertaining. But for politicians to take their cues from an entertainer or celebrity (whether on the right or the liberal left) is the height of brain-dead irresponsibility.

Why the bump in jumbo loan amounts hasn't worked

When the conforming loan limits were raised to accommodate more jumbo loans, it was thought that it would spark home sales activity in higher-priced areas, but that hasn't quite done the trick. A CNNMoney.com story examines why:

When the housing crisis hit last summer, it became very hard for borrowers to land the jumbo loans they needed to buy homes in high-priced areas, like California and New York.

So as part of the Economic Stimulus Act, Congress tried to get funds for jumbo loans flowing again by temporarily raising the dollar limits for mortgages that Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) can buy. The two government-sponsored entities (GSE) had previously only been permitted to buy so-called conforming loans of up to $417,000, and then resell them on the secondary market.

The new limits raised that conforming loan cap to as much as $729,750 in some high-priced metro areas through December 31, in order to make home loans more readily available to help stabilize falling markets.

But the move hasn't juiced the market, and so the House Financial Services Committee is holding a hearing Thursday to examine why that is...

Despite the increased caps, these new 'conforming jumbo loans' - for anything between $417,000 and $729,750 - are still more expensive than the conforming loans below $417,000.

For months after the conforming jumbos were introduced, interest rates for them ranged between a point and a point and a half higher than on regular conforming loans. That made jumbo loan borrowing much more expensive; for a $600,000 mortgage, a borrower paid an extra $400 to $600 a month.

In the past, the spread between jumbo and conforming loans was much smaller, a quarter point or so...

The problem: The investors who buy mortgages on the secondary market still consider these new conforming jumbo loans riskier than the original conforming loans, and put a higher risk premium on them...

That reluctance comes despite the fact that buyers who use jumbo mortgages tend to be better credit risks and often put more money down, McDonald said.

Part of the problem is simply that fear is contagious...

ndeed, Fannie and Freddie don't actually package conforming jumbos for sale to investors in the same way they treat sub-$417,000 conforming loans. They are not what's called "TBA-eligible." These are "to-be-announced" transactions where the purchase price is settled at some future date.

The Securities Industry and Financial Markets Association decided back in February to exclude jumbo conforming loans from TBA-eligible pools. But the TBA market is well established and understood by investors, according to Jay Brinkman, an economist with the Mortgage Bankers Association (MBA).

"Buyers of securities feel very secure about this market," he said. "They're accustomed to the pricing and they know how the securities perform."

The exclusion of conforming jumbos from that market makes them a somewhat unknown security. "No one is sure what their performance will be, so no one is sure how to price them," said Keith Gumbinger, of HSH Associated, a publisher of mortgage market information.

The Mortgage Bankers Association (MBA) argued that the new conforming jumbos should be issued as TBA products, but there was resistance to this. Fannie and Freddie were hesitant to introduce any new element that might harm the conforming loan market...

Jumbo borrowers are more likely to pay off their loans early, which cuts off the revenue stream of their interest payments for investors, while those with $100,000 mortgages tend to keep making the same monthly payment year after year.

If jumbos were packaged with these in the same mortgage-backed securities, investors would require higher interest rates to purchase them. Borrowers of conforming loans would have to pony up the increased interest, in effect subsidizing more affluent, jumbo loan borrowers.

There are other risk factors that makes investors wary. Jumbos are, by definition, less diverse geographically; they're only available in about 70 metro areas - many of the most challenging markets in the nation...

In early May, Fannie made a change in the way these loans are handled; instead of packaging them for sale on the open market, they are keeping them in their portfolios. Fannie can set the price itself and is doing so as if the loans were TBA-eligible.

As a result, the pipeline for the loans has opened up during the last couple of weeks.

Weekly mortgage application statistics from the MBA reveal the change. In March, 2007, 12.1% of all mortgage loans requests were for jumbos. A year later, only 4.4% were. During the past couple of weeks, jumbos have accounted for 5.8% of all applications.

According to Freddie Mac Vice President Patricia Cook, interest rates for conforming jumbos are now a full point below regular jumbos and only two-tenths of a percentage point higher than conforming loans.

Gumbinger confirms that spreads between conforming and jumbo conforming have narrowed down to below half a point, good news for home buyers in high-priced areas.