Carpe Diem

NAR: Housing Affordability is at 4-Year High

According to the National Association of Realtors (NAR), the Housing Affordability Index in late 2007 was at the highest level since 2004 (see graph above), due to falling single-family home prices, rising median family incomes, and declining mortgage rates (see post below).

To interpret the Housing Affordability Index (HAI), a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20% down payment.

For example, the composite HAI of 119.3 in November 2007 means a family earning the median family income ($59,833) has 119.3% of the income necessary to qualify for a conventional loan covering 80% of a median-priced existing single-family home ($208,700), financed at the effective rate on loans closed on existing homes of 6.41%. The increase in the HAI shown above in the graph means that the typical family is more able to afford the median priced home today than at any time since 2004.

Bottom Line: Falling home prices, increasing income levels, falling mortgage rates, and an increasing housing affordability should help offset some of the troubles in the mortgage and housing markets.
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30-Year Fixed Mortgage Rates Lowest in 28 Months

WASHINGTON Freddie Mac said 30-year home fixed-rate mortgages averaged 5.87% in the latest week — the lowest since September 2005. A week ago the average was 6.07%, and in the year-earlier period it was 6.21%. From the most recent peak of 6.73% in mid-July 2007, 30-year rates have fallen almost a full percentage point (see chart above).

Will falling mortgage rates help the real estate industry turn around? Well, they sure can’t hurt, and have to be a lot better for the real estate industry than rising rates! Example: payments on a $100,000 30-year mortgage at last July’s rate of 6.73% ($647.27 per month) are almost 9.5% higher than payments at today’s rate of 5.87% ($591.22 per month), suggesting at least some modest increase in affordability for home buyers.
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NAM: CAFTA, NAFTA, and Free Trade Are Working

From the National Association of Manufacturers (NAM):

It’s official. With the trade data recently released by the U.S. Department of Commerce, the U.S. trade balance in manufactured goods with CAFTA (Central American and Dominican Republic Free Trade Agreement), has registered a $2 billion trade surplus. This is a sharp reversal from the pre-CAFTA situation, where in the years before the passage of the CAFTA agreement we averaged an annual manufactured goods trade deficit of about -$1.5 billion (see chart above).

Now the facts are in, showing that logic once again prevails over mythology. Far from being a “job killer,” CAFTA has been a real plus for the United States – as has NAFTA, another free trade agreement. American manufacturing faces some real problems – but CAFTA and other free trade agreements are not among them.

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Larry, Curly, Moe and The Economy

A month ago, the Fed lowered rates by only a quarter of a percentage point instead of making the half-point cut that many were expecting. The Fed appears to have made a big mistake about oil and aggregate demand at the last rate-cut session — for several reasons.

First, the big drivers of added demand for oil are not really subject to Fed control. China, India and other developing nations are responsible for the bulk of increased demand. The Fed does not have the power to lower demand for oil in the developing nations, except in a very indirect way.

In other words, punishing the United States economy because oil prices are high is attacking the wrong culprit. It’s sort of like a Three Stooges movie in which the wrong person keeps getting hit on the head.

From the always entertaining and provocative Ben Stein, writing in today’s NY Times, arguing for continued Fed interest rate cuts.

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History of U.S. Bank Failures

The chart above shows annual bank failures from 1934-2007 using data from the FDIC. Several facts:

1. There have only been two years since 1934 when NO U.S. banks failed: 2005 and 2006.

2. Only 3 U.S. banks failed in 2007.

3. Besides the 2005-2007 period, there has never been another three-year period since 1934 when only 3 U.S. banks failed.

4. Even at the peak of the S&L banking crisis when more than 1,000 banks failed in 1988 and 1989, at a rate of more than 2 every business day for two consecutive years, the economy survived without going into a recession.

Bottom Line: The U.S. banking system is probably stronger and more stable today than at any time in U.S. history. A subprime crisis by itself will probably not be enough to pull the U.S. economy into a recession in 2008.

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Toyota Has 3 of the Top 10 American-Made Cars

What Are the Top American-Made Cars?’s 2007 American-Made Index rates vehicles built and bought in the U.S. (see the top 10 in the chart above, click to enlarge). Factors include sales, where the car’s parts are made and whether the car is assembled in the U.S. Models with a domestic-parts content rating below 75% are disqualified.

Note that Toyota has 3 out of the top 10 vehicle models, and the Camry ranks higher than the Chevy Silverado, which is one of the vehicles assembled at the Flint Truck Plant. The sign above is right across the street from the Flint Truck plant, in the parking lot of the UAW Local #659.

Just wondering, would it be OK to park a Toyota Camry with a higher domestic content than even the Silverado, in the parking lot, or would that still be considered a foreign-made auto?

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What a Country: The Number of Millionaire Households Has Almost Doubled In 5 Years

According to Phoenix Marketing International, the number of millionaire households in the U.S. has almost doubled over the last four years, from 3.3 million in 2003 to almost 6 million millionaire households in 2007 (see chart above, click to enlarge). Over the same period, the percentage of U.S. millionaire households has increased from 3.4% in 2003 to 5.25% in 2007. In other words, 1 out of every 19 American households are now millionaire households, compared to only 1 out of every 30 households in 2003. What a country!

Note: The Phoenix study defines a “millionaire household” as one having at least $1 million in liquid or investable assets, and these figures are not adjusted for inflation.

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N.J. Has Highest % of Millionaires, Michigan Is #14

The Phoenix Affluent Marketing Service announced today that New Jersey has become the state with the largest percent of millionaires to total households. Ranked second past two years, New Jersey vaulted past Hawaii, which fell to fourth in the 2007 rankings.

Phoenix’s annual market sizing analysis and aggregate wealth rankings shows that New Jersey’s ratio of millionaires to total households rose to 7.12%, up from 6.5% in 2006. Maryland is now in second place at 7.08%, up from 6.2% in 2006. Connecticut is third, with a ratio of 7.0%, up from 6.2% a year ago. Hawaii’s ratio of 6.7% was unchanged from a year ago. Phoenix defines a millionaire household as one with $1 million or more in investable or liquid assets.

To see the full list,
click here.

Comment: Isn’t it interesting that Michigan ranks #14 for millionaires (see chart above), ahead of New York, Florida, and Washington, D.C. In spite of an economic slowdown, a serious loss of manufacturing jobs, the nation’s highest unemployment rate (7.4%), there is still a lot of wealth in the state of Michigan, probably a legacy from the decades and generations of automotive-related wealth created here. Michigan also moved up four places from last year, when it ranked #18.

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Only 1 Tiny Bank Failed During Fall Subprime Crisis

The chart above is from the FDIC’s website. Notice that despite the “subprime crisis,” there was only 1 bank failure in the fourth quarter of 2007, out of almost 9,000 FDIC-insured institutions. It’s true that subprime troubles have fallen much harder on other sectors of the financial sector, but it’s also good to know that the commercial banking sector is healthy, and survived a year of credit trouble with almost no bank failures.

The only bank to fail in the fall of 2007 was the tiny Miami Valley Bank in Lakeview, Ohio, with just $87 million in assets, or 5% of the size of the average bank, which has $1.5 billion in assets. For the entire year, only 3 banks failed in 2007; and not a single bank failed in either 2005 or 2006, as I have previously documented.