Morning Report – The McMansion is back 2/26/15

Markets are flat this morning on no real news. Global bonds continue to rally, but Treasuries are not really participating.
Inflation remains largely muted, with the Consumer Price Index falling .7% in January. Ex-food and energy, it rose .2, a little higher than expectations. On a year over year basis, inflation ex food and energy increased 1.6%.
Durable Goods orders rose 2.8% in January, rebounding smartly after a very weak December. Capital Goods (a proxy for business capital expenditures) rose .6%.
Initial Jobless Claims rose to 313k last week from 282k the week before. The Bloomberg Consumer Comfort Index fell from 44.6 to 42.7 last week.
Home Prices rose .8% in December, according to the FHFA. Home Prices are now about 4% from peak levels. The report has been expanded to include all sorts of additional data. The growth continues to be on the West Coast, while the Northeast lags.
Delinquencies and foreclosure rates dropped in Q4, according to the MBA. For the most part, we are back at pre-2007 (or pre-crisis) levels. Judicial states still have 3x the foreclosure rate as non-judicial states.
The McMansion is back. The median square footage of new homes topped 2,400 square feet last year. Builders are chasing the affluent because the first time homebuyer is still largely out of the market. That said, some builders, like D.R. Horton, are introducing new brands that are in the first time homebuyer price points.

How much slack is there really in the labor market? Are wages rising because of a shortage of labor in some areas? If so, then that means (a) the speed limit of the economy is lower, because more people working = higher output, and (b) the Fed will have to move earlier than they may want to in order to quell inflation. If these discouraged workers return to the labor force, downward pressure on wages will continue, however in the long run, output will be higher. This issue was discussed in the June 2014 FOMC minutes, but it hasn’t been brought up since.

31 Responses

  1. Frist!

    (yes, I’ve been lurking)

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    • I missed this from a couple of weeks ago, but apparently Dood/Frank is definitely doing its job.

      This was Goldman CEO Lloyd Blankfein speaking in 2010:

      “We will be among the biggest beneficiaries of reform…we support measures that would require higher capital and liquidity levels, as well as the use of clearinghouses for standardized derivative transactions.”

      This was Blankfein 2 weeks ago, explaining Goldman’s competitive advantage at an investor conference:

      “More intense regulatory and technology requirements have raised the barriers to entry higher than at any other time in modern history. This is an expensive business to be in, if you don’t have the market share in scale. Consider the numerous business exits that have been announced by our peers as they reassessed their competitive positioning and relative returns.”

      How has this played out in practical terms:

      About 100 new banks entered the economy every year between 1990 and the financial crisis in 2008, according to a December study by two members of the Federal Reserve Board. From 2009 through 2013, only about seven new banks have been formed — total.

      Thank goodness Elizabeth Warren and her ilk, who champion these regulations, are looking out for the little guy.

      http://www.washingtonexaminer.com/goldman-and-jpmorgan-sit-safely-behind-the-walls-of-dodd-frank/article/2560179

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  2. D/F is driving the smaller mortgage bankers to merge with larger ones, and it is 100% due to compliance costs…. I think the government wants to turn wells fargo into the biggest residential lender in the US and then regulate it like a utility…

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    • Brent:

      I think the government wants to turn wells fargo into the biggest residential lender in the US and then regulate it like a utility

      And by “government” I assume what you mean is “regulators”. Which goes back to the same thing I am always harping on….we are no longer governed by elected representatives, but are instead governed by unelected bureaucrats. There is no way that a majority of those in the congress which passed D/F intended to effectively turn Wells into a utility. It is the regulators who have that intent, and they are accomplishing it via post-passage “rule” making, a process of governing that is notable primarily for its absence from any mention in the constitution.

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  3. Builders are chasing the affluent because the first time homebuyer is still largely out of the market.

    But wouldn’t the first time homebuyer be a bigger market than the affluent? I mean, even the affluent can own only so many houses. Or do you think that the “small” houses (<2400 sq ft) will eventually become starter homes?

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  4. Sure, the first time homebuyer is a much bigger market, but until they get their student loan debt down, they aren’t going to qualify for a mortgage…

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  5. I’m fascinated by people who are surprised at the results of Dodd/Frank.

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    • McWing:

      I’m fascinated by people who are surprised at the results of Dodd/Frank.

      My guess is that most of the pro-regulatory crowd are less surprised by the results than they are in denial of them.

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  6. until they get their student loan debt down, they aren’t going to qualify for a mortgage

    That’s a given! 🙂

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  7. One of the first lessons in B-school is that regulation is often about creating barriers to entry and reducing competition.

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  8. @Michigoose: “But wouldn’t the first time homebuyer be a bigger market than the affluent? I mean, even the affluent can own only so many houses. Or do you think that the “small” houses (<2400 sq ft) will eventually become starter homes?"

    I imagine most first time buyers are doing what we've always done, which is buy an older house. First one was 20 years old, second one was 5 years old when we bought it, 3rd one was 3 years old. By the time I'm 100, I'll be ready to buy new construction!

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  9. In a lot of ways new construction is cheaper here in Texas.

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    • Does anyone know under which law the FCC claims the authority to establish its new net neutrality “rules”? I’ve read several articles about it and have yet to find any reference to, much less the language of, the legislation which the FCC is ostensibly enforcing.

      One article refers to Congress trying to develop legislation that would “supersede the FCC’s regulation”, but surely that must be a mischaracterization. Since the FCC is part of the executive branch, it can only be enforcing an existing law. So congress must be trying to develop legislation that would repeal existing law, correct?

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  10. it’s right there in the FYTW clause.

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  11. @Scottc1: Title II of the Communications Act. And putting the Internet under Title II is essentially what they are doing. And they claim the authority, not unreasonably, because the Internet travels over wires and radio and is a form of communication.

    Quoting Title II from Wikipedia: “regulating interstate and foreign commerce in communication by wire and radio so as to make available, so far as possible, to all the people of the United States a rapid, efficient, nationwide, and worldwide wire and radio communication service with adequate facilities at reasonable charges, for the purpose of the national defense, and for the purpose of securing a more effective execution of this policy by centralizing authority theretofore granted by law to several agencies and by granting additional authority with respect to interstate and foreign commerce in wire and radio communication, there is hereby created a commission to be known as the ‘Federal Communications Commission’, which shall be constituted as hereinafter provided, and which shall execute and enforce the provisions of this Act.”

    Very broad. Congress may be trying to develop laws that supersede the FCC regulation by granting special exceptions to ISPs so that they aren’t hobbled by the FCC, maybe. Ultimately, the immediate goal (and why the FCC decided it gets to regulate the Internet) is to prevent ISPs, like Comcast, from throttling folks who compete with them in other areas, like Netflix or Hulu. Or developing a “pay for play” architecture where, if you don’t want to be throttled, you pay Comcast or whoever a huge amount of money. But there will of course be a lot more to it, and I expect legally requiring NSA or CIA encryption keys to be built into every encrypted protocol, so that all communication can potentially be decrypted by the government, will ultimately become part of that. In some form or fashion.

    But, yes, I’m expecting congress is working to pass legislation to either grant ISPs/the Internet complete explicit immunity from being regulated by the FCC under Title II or special carve outs for the major ISPs with the deepest pockets.

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    • Kevin:

      Thanks for that. But does, for example, a mobile device actually use “wire and radio” to access the internet? I mean, the service is actually called “wireless” for a reason, and I was under the impression that mobile phone service was an entirely new technology, not traditional “radio” signals that existed in the 1930s.

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  12. “Or developing a “pay for play” architecture where, if you don’t want to be throttled, you pay Comcast or whoever a huge amount of money.”

    i still haven’t heard a reason compelling reason on why this is bad. wer’e talking about an entertainment service.

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  13. Ultimately, I don’t know that net neutrality is necessary. Conglomerates that want to kill IP TV via throttling or money-losing (for the IP TV folks) “pay for play” arrangements are fighting a losing battle, like the musicians using fighting against recorded music because it would put working live musicians out of a job. The lacquered 78-rpm audio phonic disc is here to stay, gentlemen, and you’re not going to make it illegal!

    Seriously. They tried to make records illegal. The entertainment industry has always been a pip!

    However, this first stage of “net neutrality” will not be a bad thing. It’s that second stage we really have to worry about.

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  14. @novahockey: “i still haven’t heard a reason compelling reason on why this is bad. wer’e talking about an entertainment service.”

    Well, it’s bad (in the abstract) because it’s anticompetitive. It’s the entertainment/ISP conglomerates using their muscle to drive competitors in the entertainment side out of business (which they are doing on many more fronts than just bandwidth caps), a strategy that will, if history is any guide, ultimately fail spectacularly, and end up with NetflixHulu Corp. owning Comcast-Rogers in some future era. But when I say bad, I mean, it’s a waste of resources and energy better devoted to making a better mousetrap, instead of trying to constrain competitors with a superior product in order to protect your inferior product. Cable providers are in a position to compete on price and quality, and generally choose to do neither. That’s bad, though not uncommon.

    I think what’s missing is a compelling reason that the government needs to step in and fight Hulu and Netflix’s and cable customers battles for them. Of course, these are more than entertainment services, but ultimately I think the market can successfully deal with the anticompetitive garbage some of the major ISPs are pulling, as if Comcast throttles Netflix, AT&T can just start advertising: “Comcast throttles Netflix and Hulu. AT&T doesn’t.” Show a few Comcast customers getting errors while watching their Netflix and Hulu movies, and the job is done. Doesn’t require the FCC to start micromanaging ISPs.

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  15. there’s no worry about phase 2 if you defeat phase 1.

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  16. @McWing: “In a lot of ways new construction is cheaper here in Texas.”

    How? Things are built crappier or in areas with much cheaper real estate or expenses associated with existing houses?

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  17. ScottC: Yes. “wireless” is “radio”. One may refer to the radio when talking about the hardware that broadcasts the wireless signal or receives it in a phone. Again, the FCC charter is very (one might say: far too) broad.

    In truth, 1G analog phone service was traditional (non-commercial, obviously) radio in pretty much every sense. It was over-the-air 2-way radio with cell towers acting as relays. It was a slight change in implementation and not much more: you could buy radio scanners on listen in on cell phone discussions the way you might listen to CB communications. Otherwise it acted as a phone, and so was basically a “radio phone”, both encompassed by the FCCs charter. And once you go down that road . . . I mean, fiber optics, across which so much communication has travelled for decades, is technically communication via light, not radio or wire, but the FCC didn’t stop having purview over long distance telephony because of the shift to fiber optics.

    2G, 3G, 4G, LTE are all digital, and thus, like wireless IP, fundamentally different as to what is done over those radio waves. But then, so is HD radio, digital cable, etc., and the FCC still claims authority over those, though they still treat broadcast radio and TV different from exclusively wired TV or satellite radio, so we can assume the FCC isn’t going to start issuing fines for unwholesome internet content any time soon. Why? Because Title II is too frickin’ broad. Rather than specifically immunize the Internet, Title II needs to be radically amended to limit and specify the FCCs scope, but, whatever.

    Ultimately, WiFi and LTE and everything else are still just radio waves, and are still just methods of communication, and Title II is so broad and ambiguous they all easily fall under the description of radio and wired communications. FDRs legacy continues!

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  18. @novahockey: “there’s no worry about phase 2 if you defeat phase 1.”

    Which is what one hopes happens.

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  19. BTW, the FCCs ability to vote itself the supreme authority over the Internet goes back to your point of unelected bureaucrats creating their own regulatory state with very little accountability to anyone or anything.

    We need some legislators with the gonads to hamstring these regulatory bodies.

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    • KW:

      We need some legislators with the gonads to hamstring these regulatory bodies.

      Absolutely agree. But we could also use a judiciary which will call out Congress by invalidating legislation that is so broad/vague that it effectively delegates legislative power to the executive, something the congress is not constitutionally allowed to do.

      We also need some common sense and honesty in defending the constitution from being subverted by executive power grabs. No one can possibly believe that the original intent of the law was to encompass control of the internet, since the internet didn’t even exist. One might reasonably argue that the internet is similar enough to that which was the original aim of the law such that it too falls under it, but the key point is that such an argument is not without significant controversy. And within the context of the principles that animate our system of governance, that controversy is rightfully resolved by the congress via agreement with the executive. I don’t see how anyone can honestly believe that whether or not a new technology falls under a law written 60 years before the technology was even invented is a decisions that constitutionally belongs solely to an agency that is never even mentioned in the constitution.

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  20. Kevin, they’re beibg built in the suburbs of big cities where land is cheap. The freeway system in Texas is pretty good so the commutes aren’t bad and the school districts are generally better there than in the city. Finally, Lennar, Pulte et al are very generous to first time buyers and make $0 move in’s a real possibility.

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  21. I should move to Texas, I swear. Box o’ wine that cost me $20 at the liquor store here cost me $11 at Wal-Mart in Galveston. *sigh*

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  22. “I think what’s missing is a compelling reason that the government needs to step in and fight Hulu and Netflix’s and cable customers battles for them.”

    And of course Netflix must be portrayed as the plucky little guy vs the big bad cable providers. With Democrats it can never be a neutral dispute against various interests. It has to be a battle of good vs evil. Corporate Greed ™ vs looking out for the people.

    The thing that I’m always cognizant of is that if cable TV had been under the FCC to begin with, then it would have sucked just as bad content wise (with regards to nudity, profanity, and violence being censored) as network TV. The entire point of cable was to escape the then current regulatory structure as regards to content.

    Worth noting as well regarding how sides are chosen:

    http://www.washingtonpost.com/business/economy/as-obama-nears-close-of-his-tenure-commitment-to-silicon-valley-is-clear/2015/02/27/3bee8088-bc8e-11e4-bdfa-b8e8f594e6ee_story.html?hpid=z1

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  23. It’s called “Freedom”, baby! We bathe in it here in Texas.

    #BoxWineOrDie

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  24. “Worth noting as well regarding how sides are chosen:”

    Think Barrack or Michelle are going to get a lucrative VP position or consulting gig with Netflix, Hulu, or another Silicon valley goldmine?

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