Is the real estate market really recovering

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Griffin James

Dr. Ksssens

June 23 2013

The article I read was focused around the question, Is the real estate market really recovering?  In the article David Lazarus of Marketplace.org interviewed Glen Kelmen who is the C.E.O. of Redfin, which is a real estate technology company.  Mr. Kelmen discusses why he believes that the housing market has recovered.     Although not all markets are doing well the prices of homes is up around 10 percent year after year.  Some markets that he notes, which are doing particularly well, are Arizona and California.  In those areas there is very strong demand to buy homes and less then a month of supply.  They discuss how one of the issues that was holding the recovery back was foreclosures were clogging housing inventory.  The process for a bank to foreclose on a house is very costly to them.  It takes roughly 2 and a half years for a bank to kick someone out of their home which can cost them 50 cents on the dollar.  Banks are very hesitant to loose that much money so we have seen banks approving more short sales as well as modifying more loans.  By banks doing this it allows people to sell their home without being kicked out.  Interest rates are still at extremely low rates which is very attractive to people looking to buy a home.  Kelsman believes that it is the low interest rates, which is driving the strong demand in the housing market.  The article closes by displaying 3 charts which, Redfin created to analyze the market.  The price per square foot has increased at a very strong rate nationwide at a national average of 11.3 percent with Phoenix Arizona leading the way at 28.8 percent.  Housing Inventory has also increased at a steady rate with a nationwide average of 33 percent.  In my opinion, there are several reasons which support the idea of the market is recovering.  When the market collapsed in 2008 we saw a large increase in housing inventory nationwide.  As a result we saw a significant drop in new home construction.  As the economy continues to get stronger we have seen the demand to buy houses increase. Interest rates and mortgages are also at historically low levels, which makes the idea of buying a home more enticing.  As income levels nationwide also increase combined with the low interest rates, it’s beginning to make more sense for people to buy as opposed to renting.  In 2010, we saw a large increase in people renting a home instead of buying.  As our population continues to grow at a steady rate and more and more people are looking for homes.  Inventory has continued to decrease nationwide as more and more people are buying homes.  As the demand for homes increase the price will also increase.  We have seen the supply of homes on the market decrease close to 33% over the past year.  I think this is a very telling statistic because it shows more people are continuing to buy homes.  Although I believe the market is recovering I do not think the recovery is fully complete.  I believe the market is headed in the right direction but I think there is still a little ways to go.  I think we will see the prices of homes continue to increase due to strong demand and low interest rates.  I think the market will continue to head in the right direction and we will see the housing market return to pre recession levels. 

Work Cited

David, L. (2013, January 25). Is the real estate market really recovering. Retrieved from http://www.marketplace.org/topics/economy/real-estate-market-really-recovering

Unemployment Rates

Matt Hetherington

6/23/13

Dr. Kassens

          Midwest, Southern States Register Lowest Unemployment

As of only one month ago half of the nations states registered declines in their unemployment rates.  Out of the states which recorded lower unemployment rates, the lowest were seen in the Midwest and southern regions (Sarah P 2013).  There are many reasons for unemployment rates to rise and fall.  The most common have to do with Frictional Unemployment, Structural Unemployment, and Voluntary Unemployment.  Making sense of the unemployment rate falling one can interpret that many have decided to get up and find jobs rather then sit around and take time off.  This would fall under the category of frictional unemployment.  Another can interpret that the demand for skilled positions have increased resulting in people who are out of work finding jobs in their skilled area.  This all falls under the idea of Structural employment.  People can think that when there is more of a demand in skilled areas that employment rates would decline due to the amount of people looking for jobs but when I think about it I would like to think it could go either way.  

In May, the states which recorded the lowest unemployment rates were Nebraska and the Dakotas.  The numbers of the states were at or even under 4% (Sarah P 2013).  Nevada, Illinois and Mississippi had the highest rates, all about 9% (Sarah P 2013).  With numerous states seeing a decline in unemployment rates there are also states which saw an increase, 17 to be exact (Sarah P).  If you think about it, there are also many other factors that determine employment/unemployment rates.  If a company is losing money, there is going to be less money to give out to its employers which is going to result in layoffs.  Looking at the numbers declining in unemployment we can interpret that the economy must be running pretty smoothly.  Besides looking at unemployment rates the report also covered changes to payrolls in each state (Sarah P 2013).  The state which saw the most increased payroll was Ohio.  On top of having its payroll being increased, they saw a gain of 32,000 jobs (Sarah P 2013).  The biggest declines were in Pennsylvania which lost 9,200 positions (Sarah P 2013).  When looking at the exact percentage of unemployment, the rate increased exactly .1 from the previous month.  The rate in April was 7.5 and in May increased to 7.6.  This is not necessarily a bad thing as long as it stays steady.  Unemployment is always going to fluctuate, its just the amount it does each time that counts.  If the rate went up to 8 in May, one can interpret that our economy had a terrible month.  

Citation-By Portlock, Sarah. Midwest, Southern States Register Lowest Unemployment at WSJ.com. The Wall Street Journal - Breaking News, Business, Financial and Economic News, World News & Video - Wall Street Journal - Wsj.com. Retrieved June 23, 2013, from http://blogs.wsj.com/economics/2013/06/21/midwest-southern-states-register-lowest-unemployment/

Is handing cash to the poor beneficial?

           The idea of handing cash to the poor could be considerably controversial. As a poor college student, I would jump on the idea. However, those who are wealthy and wouldn't be receiving the "free" cash probably wouldn't be quite so happy about the situation. In this article, titled “Ending Poverty by Giving the Poor Money”, Annie Lowrey briefly describes the research of three young men who studied a program in which the Ugandan government gave a large sum of money to young people who met a few requirements, including simply applying for the money. According to the article, the program had profound effects on the economy.

While reading the article, I first thought that this would be a horrible idea. The reason is because I immediately thought about the Keynesian model, in which people would just blow a large percent of the money they were given and that would be the end of it. However, as I kept reading, I saw how big of a deal this really was. The government was giving young people with a basic education the opportunity to branch out and begin new careers and businesses. They wouldn’t have this opportunity without the large sum of money they could receive, which was sometimes close to a years’ worth of wages. Handing cash out worked really well for the most part because the young Ugandans were smart and hard working. Most of them just had a basic education and they put the money to good use by either starting businesses or spending the money on a higher education.

All of the new businesses created a boost in the economy that was worth the risk. According to what we have learned in Macroeconomics, this makes sense. If you look at it from Milton Friedman’s consumption perspective, this cash “give out” could be considered an increase in the lifetime average income instead of a transitory form of income because in the long run, the cash that the young people received did make their lifetime average income greater. Of course, this is because they decided to make good investment decisions instead of blowing the money on wasteful things such as lottery tickets or extravagant vacations. So, because their decisions resulted in an increase of lifetime average income, there was also an increase in consumption. As we have learned, consumption has a direct impact on GDP, which is what drives every economy.  An increase in consumption results in an increase of GDP. This is made clear in the article where it says “[a]ll in all, the annualized return on the “investment” of the cash transfer worked out to a whopping 40 percent.” That is a fairly substantial return and I would consider the move by the government to be pretty rewarding.

Why Taper?

Matt Kessler

            The Federal Reserve recently came forward in a press conference saying that it would have as a goal the tapering of purchases by the Fed. This means that the Fed will slow down the buying of bonds and therefore increase in the money supply. This seems relatively straightforward, except people are wondering why exactly now was chosen to enact this policy. This action of tapering purchases would traditionally be considered more contractionary than the policy currently in effect. The reason people are questioning is that they have a hard time believing we are out of the recent recession a sufficient amount to cut back the expansionary policy. In fact, the Fed wants to continue the slowing of purchasing bonds as the year continues.

            The Fed has to try its best to anticipate actions and act accordingly, or it will always be hopelessly far behind. The problem is that nobody is exactly sure why it is the Fed has decided to cut back on its policy. The employment figures are essentially unchanged. The plan that was in place to help the economy recover from the recession is behind schedule, so it could be that those at the Fed are thinking that they will try to continue with the plan despite not seeing the indicators that would influence them to do so. There is some thought that the Fed has discerned a new trend in payroll. This is the idea that the payrolls of businesses are stabilizing. With greater stability, it could be assumed that the markets will grow and help the economy. Will it be enough to warrant the tapering ideas of the Fed? Many do not think so.

            It is fairly well established that the Fed has been taking actions to help the economy by pumping money into through the sale of assets, usually bonds. By choosing to slow the amount of bonds purchased, they are not enacting a purely constricting policy, but they are scaling down an expansionary policy. This process would indicate a recession or depression that has begun to bottom out and is now initiating recovery. It remains to be seen if the United States economy has reached that point. The numbers for the recession are getting slightly better, but by and large the expected improvement has not come to fruition. If the Fed thinks that there is some reason that would suggest the economy is sufficiently on its way to recovery that is justifies the slowdown of expansionary policy, it should by all means take this course of action. The issue is what this information is that is making such an impact. Even if payroll records are stabilizing and the economy is doing a better job dealing with taxes, the recession is still having an effect on the economy. The Fed will need to make clearer its course of action to ensure that other understand that it is the right path for America.

"Monetary Policy Bernanke: Mission Accomplished." The Economist. N.p., n.d. Web. 20 June 2013.

http://www.economist.com/blogs/freeexchange/2013/06/monetary-policy-1 

Higher Interest Rates

In the article “In A Shift, Interest Rates Are Rising” written by Nathaniel Popper and Peter Eavis for the New York Times, it is voiced that the low interest rates that are present within the economy will no longer exist.  The article states that banks and other lenders are recently demanding higher payments on the loans and bond which are driving interest rates up.  With the indication of higher interest rates, people who have borrowed money to invest are now selling the investments in fear that they cannot afford the higher interest rates including people who invested in foreign stocks and bonds.  These investors are pulling out causing markets around the world to be disrupted.  American’s also worry that higher bond yields will cause the Federal Reserve to halt its efforts to pump money into the economy.    When Ben Bernanke declared that there would most likely be a decline in the Federal Reserve’s actions to keep interest rates low to stimulate the economy; many were skeptical on how this would be possible since the economy has not made a drastic incline.  Not only will individual American’s be hurt by the potential of rising interest rates but the U.S. government will certainly be affected when they borrow money.  Higher interest rates for many governments could be devastational when most are already struggling with debt.  Some economists have conflicting opinions when it comes to whether the housing market will be affected by the rising interest rates.  Some say that being able to afford current mortgage rates is a problem, increased rates would create a bigger one (Popper & Eavis, 2013). 

  If the Federal Reserve decides to stop its efforts towards an expansionary policy when the economy has not proven itself to be well on its way to a full recovery, RGDP will definitely fall.  Expansionary policy is a monetary policy used by the Federal Reserve to increase the economy’s money supply .  America’s RGDP is the size of output from America that has been measured with a consistent price.  If the Fed stops the expansion, money supply will decline which causes interest rates to rise which negatively effects investments by lowering them.  This cause and effect sequence is called the Monetary Transmission Mechanism.  Investments are a positive factor in an economy that needs recovery.  Money that is invested becomes another person’s salary.  A higher rate of investments gives the people confidence in the future outlook for the economy, lower investing causes uncertainty which causes people to pull out of stocks and bonds which lowers money supply.  In conclusion, if rates do rise, I believe America will be taking steps backward instead of forward in regards to the recession.

Works Cited

Popper, N., & Eavis, P. (2013, June 11). In A Shift, Interest Rates Are Rising. Retrieved June 23, 2013, from NYTimes.com: http://dealbook.nytimes.com/2013/06/11/in-a-shift-interest-rates-are-rising/

http://dealbook.nytimes.com/2013/06/11/in-a-shift-interest-rates-are-rising/

Natural Resources

6/23/13

Mercer Knott

Macroeconomics

“How to Conquer Angst and Spur the Economy”

            Earlier this afternoon at 4:03 pm ET, executive business editor of the Wall Street Journal John Bussey wrote, “the vibe is still decidedly belt and suspenders” (Bussey, 2013). This was in response to United States’ economic growth of 2%. Knowing the ideal growth rate for an economy is 2-3% no less and no more. If you were to see growth rate higher than 3% you could assume that there may be a bubble in formation. For example, in the most recent occurrence we witnessed a housing bubble break, which was one of the main causes of the recession in 2008.

“A belt and suspenders” approach to a recovery is when lenders become very cautious with their loans and they make sure that all of the rules and guidelines in their contracts are very strictly followed. In order to protect themselves from making poor lending decisions banks have been increasing their repo-rates showing little tolerance for those who fail to fulfill their end of the bargain. As we learned in class, the main source of revenue for commercial banks is the interest customers pay on loans they withdraw. So if interest rates are high then you will see a reduction in loans, but, if interest rates are reduce yet, loans are very closely monitored then you would see an increase in investment among businesses. This being said, that is not a very realistic approach and as of last week that is not the angle that CFO’s of the WSJ global CFO Network wanted the attack this growth problem by anyway.

Last week the CFO’s of this network met in Washington, D.C. During the meeting they discussed the growth rates of global economy around the world. We are projected to meet the expected growth rate of 2% each year for the next 3 years. Meanwhile, Europe will be see a flat rate of 0% and China will be experience growth of 6-7% each year. What are we doing wrong? Those CFO’s that attended the meeting in Washington discussed when “Asked about the piles of cash they’ve built up in the past five years” (Bussey, 2013), Almost half of the members said they have added onto those piles, 30% said they have not seen any change.

After thorough discussion the CFO’s suggested their final proposal. A proposal that they believe will increase GDP growth rate, “diminish risk” (Bussey, 2013), “increase investment” (Bussey, 2013). In order to fulfill all of these desires they suggest we tap into our natural gas. At first this may seem like a good idea, a spike in GDP would surely come but at what expense? I believe this would be good for our economy, it would pump money into investment, by increasing the supply for natural gas we would open our economy up to a whole entire new source of revenue. Instead of importing natural gas from neighboring and foreign countries we would be a major supplier, opening up a new market for natural gas that would domestically supply a significant number of jobs. This decision would surely increase investment resulting in economic expansion, bringing a lower unemployment rate and reduced interest rates. All of outcomes are great for our economy’s recovery and growth but is the cost of destroying our environment, polluting our planet and depleting our natural resources worth the benefits. 

Citation- 

BUSSEY, J. (n.d.). At WSJ CFO Network, How to Conquer Angst and Spur the Economy - WSJ.com. The Wall Street Journal - Breaking News, Business, Financial and Economic News, World News & Video - Wall Street Journal - Wsj.com. Retrieved June 23, 2013, from

http://online.wsj.com/article/SB10001424127887323495604578539240821896764.html?mod=WSJ_hps_sections_management

Econ 122 Blog Assignment, China Credit Crunch

Nick Fainlight Econ 122 Blog Assignment

            China has been struggling this past month to meet its usual growth rate and the economy has struggled overall due to a necessary credit crunch lately in the country.  The problem has been building for a long time as the government typically responds to economics downturns with high interbank lending to keep the interest rates low so investment can still occur in the economy.  This investment is what drives most of the Chinese economy because the liquidity has been so high lately in China to meet the usual money demand in the market, but with this credit crunch comes a tough time.  The government has put pressure on the banks to keep their lending down and to try and get most of the loaned funds back so the money market can stabilize before the country goes back to its lending ways.  Or, the crunch could lead to an adaptation of a different economic ideal in China based around less lending but keeping investment high, which is a difficult thing to do.  China could fo this by using a fiscal stimulus, but only is that money is reinvested safely this time rather than without care.  This is very similar to the U.S. subprime mortgage problem that started in 2008, as the U.S. banks began lending to bad sources, leading these accounts to default and the loss of too much money for the economy to handle.  The U.S. situation that we are still coming out of is something that the Chinese policymakers can learn from, as they have turned their focus from the usual economic stimulus to stabilizing the economy and keeping the growth rate constant at its current level of roughly 7%.  Although this is a good short-term plan to stabilize the economy’s markets, Barboza is weary of the outlook, “The situation remains volatile. Another benchmark rate for bank-to-bank borrowing costs, the seven-day repurchase rate, opened Friday at 8.1 percent, briefly soared as high as 25 percent and closed at 5.5 percent” (Barboza, 2013).  The rapid change in the interbank lending rates shows that there is still some bad lending going on under the table in the way of wealth management products and shadow bank lending. 

            Wealth management products are bonds, stocks or other financial instruments sold to investors through trust funds in a way that does not show up on companies’ balance sheets, so this is free money that may be paid back but it is truly just a free amount of money for that company to work with.  Interbank lending would usually be used to cover up this type of investment, but with the lack of liquidity between banks brings about the necessary end of the shifty lending or else the country will find itself in a more severe bind moneywise.  The shadowbank lending part of the problem comes from the lack of control over the investments being made by the various banks that are a part of this sector.  These shadowbank investments are sneaking under the table, along with the wealth management products, to create a false safety in the economy as the country’s growth will continue with the investments still being made but the money is not being put back into the economy in the form of more investment and is instead going into the companies directly.  This is good for the individual growth of the companies benefitting from this revenue, but the overall outlook of the Chinese economy remains bleak, as the interbank lending crunch will leave the Chinese government in a tough place policy wise to change their ideas to a more stable plan for the future.

         Barboza, D. (2013, June 21). China's credit squeeze relaxes as interest rate drops. New York Times. Retrieved from http://www.nytimes.com/2013/06/22/business/global/chinas-bank-lending-crunch-eases.html?ref=economy&_r=0