Higher interest rates for housing

Photo credit: ©istockphoto.com/PaulFleet

One of the best-kept secrets from casual observers is the remarkable reversal of Fannie Mae and Freddie Mac, the two government-backed guarantors for America’s multitrillion dollar mortgage market.

Although banks were pressured by the federal government to provide mortgage loans to almost anyone with an income, even below creditworthy standards, this unrestrained attitude has been reversed. Bank regulations affecting capital requirements and the constant reviews that no longer accept the previous “give-away” bank loans have stemmed the tide. Untold billions of dollars were lost and put the two New Deal-founded homebuilding lending approaches into their biggest deficit hole.

This indirectly triggered the Great Recession as banks, generally, were only too happy to issue irresponsible loans and sell mortgage-backed securities, knowing full well that the federal government was there to back them up.

Congress has been revving up legislation to put these two gigantic pseudo-government guarantors out of business. However, both Fannie Mae and Freddie Mac are not only returning funds back to the U.S. Treasury, they are starting to show decent profits. While the current restrained approach holds back support from mortgages that do not meet the current strict lending standards, it’s a certainty that the days are gone when easy-going attitudes practically mandated financial institutional mortgages to credit-unworthy home buyers.

While the switch to long-term leasing and renting has added to the reversal of the decades-long homeowning mentality, dating back to the post-World War II days, both Fannie Mae and Freddie Mac are salvaged. The projected population growth in the years to come may slow the homebuilding mania of the past, but also will solidify the financial support behind this important major segment of America’s future economy.


Costlier mortgages, housing starts

In the wake of four postrecession years, it is obvious that the long love affair with homeowning as the key asset of America’s middle class is over.

Unlike the automotive comeback, which has climbed back to prerecession levels, overall residential real estate activity seems to have sputtered without even reaching more than 50% of levels posted in the early first decade of the 21st century.

Financial institutions abetted the long run of 1 million-plus unit housing starts by making long-term loans available to many less-than creditworthy clients. The underlying disillusionment of homeowning as a lifetime central investment may have been solidified for the indefinite future, if not forever.

With mortgage forfeitures at record levels, although in a current slowing-down process, many single-unit and multistory apartment buildings are now abetted by U.S.-based and increasingly active overseas investment growth, buying into residential housing entities for long-term leasing or monthly rental purposes.

An analysis of rising home prices indicates the reduction of record inventories that existed at the end of the recession and the demand for higher-priced homes, especially in the Southeast, Southwest and West Coast areas. These regions enjoy a large seasonal influx, as well as increasing retirement populations and second-home vacation buyers.

Further holding back buying by the decreased population component still committed to homeowning are the combination of rising mortgage interest rates — from previous rock-bottom levels — and continued high unemployment. The latter imposes a particular lack of long-term housing commitment due to the increasing mobility of job opportunities, such as became available in various parts of the country.

The American population continues to expand and is expected to reach an all-time high of more than 400 million during this century. It likely will allow housing demand by the middle class and even some marginal buyers who may still adhere to the desire of lifetime homeowning.

But in projecting overall residential market construction, a reasonable estimate would focus on population increase as the essential factor of accelerated housing development increases (single and/or multiple units) in the years to come. Much of this likely will be in the Southeast, Southwest and Western growth regions and the middle- and large-size American cities’ suburbs.


Small-business formation in decline

So-called small businesses — which really are independent entrepreneurially driven companies owned and operated by indigenous management — no matter what their size, are rapidly declining, undercutting the unique ownership system unrivaled by any other of the world’s nations.

While this unfortunate downward trend traces back to President Jimmy Carter’s administration, it was temporarily interrupted by the two terms of President Ronald Reagan. Since then, the small-business decline has continued apace, according to the Brookings Institute. To make matters worse, a virtual freefall has taken place and, for the first time ever, this sector is experiencing more business failures.

Although the post-World War II period of small-business downturn coincided with the outbreak of the late-1960s inflationary spiral, it was accelerated by the low-cost manufacturing capabilities evinced by the Southeast Asian nations and others taking over manufacturing sectors.

However, the current small-business hostility of the U.S. Environmental Protection Agency, the Dodd-Frank financial regulations and the rapacious business-grabbing tactics of expanding conglomerates have overcome the temporary advantages for small businesses. These consist of low borrowing rates and emerging opportunities in the subsectors of distribution, construction and installation as the U.S. economy regains its shaky footing.

A Harvard Business School expert attributes the current trend of entrepreneurial attrition to a combination of big-firm dominance, backed by all-time high monetary fluidity to buy up small-sized corporations, plus the affordability of super-lobbiests, who are effectively managing Congressional legislation and White House executive initiatives.


Average wages below par

While the Obama administration calls for a minimum wage of $10.10 per hour to hype the income of entry-level workers, there is more to this administration priority than the American worker is led to believe. While the number of new hires since the end of the Great Recession may have netted out at nine million in the last three years, reliable sources indicate that those retired or terminated were generally substantially higher paid than those brought into the workforce during this time period.

A true picture of the current workforce compared to that which existed prior to the recession would indicate a net gain of six million hires since the end of 2012 through December 2013, with a per-hour income substantially lower than that which existed prior to 2009.

With an $800 billion slush fund voted by a Democrat Congress within a month of President Barack Obama’s first inauguration, this huge, one-time “pot of gold” could have duplicated the infrastructural steamroller unleashed by President Franklin D. Roosevelt’s New Deal to put millions to work. This greatly reduced unemployment of 25% in 1932 to one-half that total by the end of FDR’s first term in 1936.

And he did it without military spending, energy development and an agricultural sector that actually had to be constricted to keep already depressed pricing from getting worse.

The utter failure of President Obama’s back-to-work scheme has been verified as successful by the incumbent administration. It wants to follow up with an even more obtuse climate control scheme. At first blush, it looks like an even more grandiose scheme than the Environmental Protection Agency’s regulatory nightmare. It is already discouraging the hundreds of thousands of small businesses driven to the wall by a blizzard of paperwork and handcuffs never previously experienced.


Shopping mall construction declining

As nationally renowned J.C. Penney and Sears Holding Corp. are racing to close stores to stay marginally profitable, the heady post-World War II expansion of shopping centers and strip malls may fast be approaching the limbo of past history.

With half of the nation’s 1,050 indoor and open-air malls remaining, almost a quarter are rating sales below $300 per sq. ft. and vacancy rates above 20%, with few, if any, replacements to be found.

As has happened in an increasing segment of America’s consumer demand economy, the online emergence as the center of daily purchasing is becoming an overwhelming method of fulfilling such major aspects as clothing, medical and home supplies, etc. With Amazon and its founder, Jeff Bezos, becoming the protagonists of this epic trend, even bookstores and the proverbial mom-and-pop corner stores are viewing the end of the line.

Once considered impregnable, due to America’s multimillion dollar fascination with visiting shopping centers as a means of enjoyment, the practicality of mail-order seems to be rapidly gaining the upper hand.

Mall construction peaked in the 1980s, just ahead of the birth of the computer-dominated revolution. Only six new malls have been built since 2010, while the “dying swans,” those with vacancies of more than 40%, have nearly tripled since 2006, to 74 properties.

While the ultimate fate of the mall business could have severe repercussions on the U.S. economy’s retail sector with sales per sq ft. at the slowest pace since 2009, it’s reassuring to note that actual sales grew 8% during 2013 at the remaining regional malls.

It proves the point that even a lessening of the existing malls does not necessarily mean a reduction of total sales for those remaining.