June 28, 2016
TheStreet.com quoted me in Odds of Negative Interest Rates in the U.S. Are Slim. It reads, in part,
The odds of the U.S. lowering interest rates to negative levels remain low, because other forms of monetary policy such as quantitative easing could be adopted first.
The odds of utilizing quantitative easing are “quite high” or policies such as the use of repurchase agreements and the term deposit facility, said Michael Kramer, a portfolio manager on Covestor, the online investing marketplace and founder of Mott Capital Management, a registered investment advisor in Garden City, NY.
Choosing a negative interest rate policy (NIRP) in the U.S. would also affect the stock markets immensely and hinder bank profits.
“Due to the size of treasury and money markets, it could have some very severe ramifications,” he said. “In my view, our treasury markets are the safest and most liquid in the world.”
Investors would seek a higher return on capital elsewhere such as higher paying bonds which carry more risk, Kramer said.
“This could become problematic for the US government which is dependent on issuing debt to fund the government operation,” he said.
Negative rates in the U.S. would result in too much risk and backlash and would only occur if all other attempts by the Fed failed.
“At this point, the Fed has a few other tools it can use before it has to use the tool of last resort,” Kramer said.
The use of negative rates remains divisive despite the growing adoption of them in the central banks of the Eurozone along with Denmark, Japan, Sweden and Switzerland. In countries such as Japan and Germany, investors are forced to pay a fee instead of earning interest.
Lowering current interest rates to negative ones “would not be a panacea,” said former Federal Reserve Chairman Ben Bernanke, now a distinguished fellow in residence at a meeting hosted by the Hutchins Center on Fiscal and Monetary Policy at Brookings last week. He also said the effect on consumers would be nominal.
During periods of low inflation, negative interest rates are now a more likely option to policymakers, but they have not proved to be a solution to boosting lackluster economies. The use of negative rates has not proven that they are an effective monetary tool, said Torsten Slok, chief international economist for Deutsche Bank, at the meeting.
Negative rates have produced anxiousness among investors who are seeking greater yield.
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The probability of U.S. banks paying consumers interest on their mortgages even though Danish banks are paying borrowers interest on them remains scant, said David Reiss, a law professor at the Brooklyn Law School. The interest rates of adjustable rate mortgages (ARM) are typically set for the first five or seven year and resets to a new rate. The new interest rate is the combination of an index and a spread with the index often being the London Inter Bank Offered Rate (LIBOR), which has flirted with 0%.
The majority of ARMs have a clause which limits the amount the interest rate can be changed annually, including ones offered by Fannie Mae.
June 27, 2016
The Joint Center for Housing Studies of Harvard University has released its excellent annual report, The State of the Nation’s Housing for 2016. It finds,
With household growth finally picking up, housing should help boost the economy. Although homeownership rates are still falling, the bottom may be in sight as the lingering effects of the housing crash continue to dissipate. Meanwhile, rental demand is driving the housing recovery, and tight markets have added to already pressing affordability challenges. Local governments are working to develop new revenue sources to expand the affordable housing supply, but without greater federal assistance, these efforts will fall far short of need. (1)
Its specific findings include,
- nominal home prices were back within 6 percent of their previous peak in early 2016, although still down nearly 20 percent in real terms. The uptick in nominal prices helped to reduce the number of homeowners underwater on their mortgages from 12.1 million at the end of 2011 to 4.3 million at the end of 2015. Delinquency rates also receded, with the share of loans entering foreclosure down sharply as well. (1)
- The US homeownership rate has tumbled to its lowest level in nearly a half-century. . . . But a closer look at the forces driving this trend suggests that the weakness in homeownership should moderate over the next few years. (2)
- The rental market continues to drive the housing recovery, with over 36 percent of US households opting to rent in 2015—the largest share since the late 1960s. Indeed, the number of renters increased by 9 million over the past decade, the largest 10-year gain on record. Rental demand has risen across all age groups, income levels, and household types, with large increases among older renters and families with children. (3)
There is a lot more of value in the report, but I will leave it to readers to locate what is relevant to their own interests in the housing industry.
I would be remiss, though, in not reiterating my criticism of this annual report: it fails to adequately disclose who funded it. The acknowledgments page says that principal funding for it comes from the Center’s Policy Advisory Board, but it does not list the members of the board.
Most such reports have greater transparency about funders, but the interested reader of this report would need to search the Center’s website for information about its funders. And there, the reader would see that the board is made up of many representatives of real estate companies including housing finance giants, Fannie Mae and Freddie Mac; national developers, like Hovnanian Enterprises and KB Homes; and major construction suppliers, such as Marvin Windows and Doors and Kohler. Nothing wrong with that, but disclosure of such ties is now to be expected from think tanks and academic centers. The Joint Center for Housing Studies should follow suit.
June 24, 2016
The union-affiliated Economic Policy Institute has released a report, Income Inequality in the U.S. by State, Metropolitan Area, and County. The report finds that
The rise in inequality in the United States, which began in the late 1970s, continues in the post–Great Recession era. This rising inequality is not just a story of those in the financial sector in the greater New York City metropolitan area reaping outsized rewards from speculation in financial markets. It affects every state, and extends to the nation’s metro areas and counties, many of which are more unequal than the country as a whole. In fact, the unequal income growth since the late 1970s has pushed the top 1 percent’s share of all income above 24 percent (the 1928 national peak share) in five states, 22 metro areas, and 75 counties. It is a problem when CEOs and financial-sector executives at the commanding heights of the private economy appropriate more than their fair share of the nation’s expanding economic pie. We can fix the problem with policies that return the economy to full employment and return bargaining power to U.S. workers.
The specific findings are very interesting. They include,
- Overall in the U.S. the top 1 percent took home 20.1 percent of all income in 2013. (4)
- To be in the top 1 percent nationally, a family needs an income of $389,436. Twelve states, 109 metro areas, and 339 counties have thresholds above that level. (2)
- Between 2009 and 2013, the top 1 percent captured 85.1 percent of total income growth in the United States. Over this period, the average income of the top 1 percent grew 17.4 percent, about 25 times as much as the average income of the bottom 99 percent, which grew 0.7 percent. (3)
- Between 1979 and 2013, the top 1 percent’s share of income doubled nationally, increasing from 10 percent to 20.1 percent. (4)
- The share of income held by the top 1 percent declined in every state but one between 1928 and 1979. (4)
- From 1979 to 2007 the share of income held by the top 1 percent increased in every state and the District of Columbia. (4)
- Nine states had gaps wider than the national gap. In the most unequal states—New York, Connecticut, and Wyoming—the top 1 percent earned average incomes more than 40 times those of the bottom 99 percent. (2)
- For states the highest thresholds are in Connecticut ($659,979), the District of Columbia ($554,719), New Jersey ($547,737), Massachusetts ($539,055), and New York ($517,557). Thresholds above $1 million can be found in four metro areas (Jackson, Wyoming-Idaho; Bridgeport-Stamford-Norwalk, Connecticut; Summit Park, Utah; and Williston, North Dakota) and 12 counties. (3)
The income threshold of the top 1% for individual counties is also interesting. For example, New York County (Manhattan) comes in second, at $1,424,582 (following Teton, WY at $2,216,883) and San Francisco County comes in 24th at $894,792. (18, Table 6)
Income inequality is a fact of life for big cities and affects so many aspects of American life — housing, healthcare, education, to name a few important ones. The Economic Policy Institute focuses on union-movement responses to income inequality, but urbanists could also consider how to respond systematically to income inequality in the design of urban systems like those for healthcare, transportation and education. If the federal government is not ready to do anything about income inequality itself, states and local governments can make some progress dealing with its consequences. That is a far better route than acting as if income inequality is just some kind unexpected aspect of modern urban life and then bemoaning its visible manifestations, such as homelessness.
June 21, 2016
WalletHub conducted its 2016 survey of American knowledge and opinions of credit scores and interviewed me about their findings:
What is your reaction to one-third of survey respondents believing that anyone can access their credit score/report, as if it is public information?
Given the complexity of the consumer finance industry, it is not surprising that many consumers operate in a fog of ignorance and misunderstanding about their rights and how the industry operates. Some people may be aware that many businesses can access their credit report and that many businesses contribute to their credit report, both without the clear consent of the consumer. This all leads to a sense that their financial profile is out of the consumer’s hands. And while that is not technically correct, there is a lot of truth to it. Decisions are being made about you — what interest rate will be offered to you, whether you will receive a loan, will a bank open a checking account that you applied for — and you only have a partial sense of the criteria upon which they are being made.
Why do you think 49% of people would not marry someone with bad credit?
People understand that bad credit can have a big impact on life choices — can we buy a house or a car? That can influence decisions about the suitability of a spouse as much as other financial concerns, like the job the potential spouse has. Credit scores are also being used for decisions other than whether to extend credit to someone — for instance, by landlords deciding whether to rent an apartment. These expansive uses of credit scores foster a sense that credit scores act as a broader judgment of the potential spouse, like a gauge of moral worth.
Why is money our leading societal stressor?
We live in a society that has become more divided between haves and have-nots over the last few generations. The gap shows up in the big difference between the number of people at the top (a small percentage) and the bottom (a large percentage) of the distribution of income and wealth. It also shows up in the difference in the amount of money that puts you at the top and bottom — the rich have gotten richer and the poor still have very little in terms of wealth and income. Money gets seen as being able to determine destiny and thus it stresses people out, particularly because the American safety net is not as tightly woven as those of other developed countries.
Why do you think people would prefer to be overweight, to have bad eyesight and to be going bald than to have bad credit?
Henry Kissinger has said that power is the ultimate aphrodisiac and Marilyn Monroe (in “Diamonds Are a Girl’s Best Friend”) has sung that “A kiss may be grand/But it won’t pay the rental.” Money is power, and in the age of Matthew Diamond’s “Evicted,” being able to pay the rental is a pretty attractive quality.
June 20, 2016
The Consumer Federation of America and VantageScore Solutions, LLC, released the findings from their sixth annual credit score survey. Their findings are mixed, showing that many consumers have a basic understanding of how a credit score operates, but that many consumers are missing out on a lot of how they work. They find that
a large majority of consumers (over 80%) know the basic facts about credit scores:
- Credit scores are used by mortgage lenders (88%) and credit card issuers (87%).
- Key factors used to calculate credit scores are missed payments (91%), personal bankruptcy (86%), and high credit card balances (85%).
- Ethnic origin is not used to calculate these scores (believed by only 12%).
- 700 is a good credit score (81%).
Yet, the national survey also revealed that many consumers do not understand credit score details with important cost implications:
- Most seriously, consumers greatly underestimate the cost of low credit scores. Only 22 percent know that a low score, compared to a high score, typically increases the cost of a $20,000, 60-month auto loan by more than $5,000.
- A significant minority do not know that credit scores are used by non-creditors. Only about half (53%) know that electric utilities may use credit scores (for example, in determining the initial required deposit), while only about two-thirds know that these scores may be used by home insurers (66%), cell phone companies (68%), and landlords (70%).
- Over two-fifths think that marital status (42%) and age (42%) are used in the calculation of credit scores. While these factors may influence the use of credit, how credit is used determines credit scores.
- Only about half of consumers (51%) know when lenders are required to inform borrowers of their use of credit scores – after a mortgage application, when a consumer does not receive the best terms on a consumer loan, and whenever a consumer is turned down for a loan.
Overall, I guess this is good news although it also seems consistent with what we know about financial literacy — people are still lacking when it comes to understanding how consumer finance works. That being said, it would be great if we could come up with strategies to improve financial literacy so that people can improve their financial decision-making. I am not yet hopeful, though, that we can.