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 which were 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 stores—retailers who thrive when homes are purchased—increased 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 payments—even 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 economy—construction jobs and suppliers as well as the financial sector—is, to be sure, a reason to look to housing as a stimulus but not, if as the numbers suggest, history may be repeating itself.
Hear Mark Lieberman every Friday on P.O.T.U.S. (Sirius-XM 124) at 6:20 am eastern time.
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