there really weren't any important economic releases this past week....the most widely covered report, on existing home sales from the National Association of Realtors (NAR), may be important to those involved in the real estate trade and to those financial institutions who are making the real estate loans, but they entail no new investment and few additional jobs compared to what's generated by construction and sales of new residential property...and other than that, there was just the Kansas City Fed regional manufacturing report for January, wherein the composite index came in at +5, up from -3 December, indicating mild expansion by manufacturing industries in the 10th District, and the Markit Manufacturing Flash PMI for January, an early read on next week's full release, which indicated a drop from December's 55.0 to three month low at 53.7, but similarly mildly expansionary nonetheless...there was, however, something of a hullabaloo in the academic econo-blogosphere over a new report on income mobility in the US by a handful of young hotshot economists, and since everybody and his brother latched onto it to prove what they already been preaching, we'll take a brief look at that study to see what all the commotion was about...
US Intergenerational Mobility Remains Below that of Most Rich Nations
the title of the paper in question is Where is the Land of Opportunity? the Geography of Intergenerational Mobility in the United States and it's a 94 page PDF, fairly heavy on math and computed tables, so i doubt if any of those commenting on it read it in its entirety, although there's a one page executive summary (pdf) that's fairly accessible...what the economists apparently did is examine tax records of more than 40 million US children and their parents from those born in 1971 to those born in 1993 to determine how much income mobility there was between one generation an the next....basically, both parents and their children were divided into quintiles by income, which is to say the top 20% of incomes by age group in the US, the next 20% by income, and so on till the bottom 20% of incomes, and then the change in income quintile from one generation to the next for each year was computed for each group...what they found was that recent intergenerational mobility has not changed much from the 70s; when there was an 8.4% chance of children whose parents were in the lowest bracket of incomes to make it to the top 20% when they were adults; similarly, there has been a 20% chance of children born into the middle income group to make it into the top fifth as adults, also largely unchanged over the last decade...comparing their results to earlier studies of a similar nature, they conclude that income mobility in the US hadn't changed much at all between the 50s and 90s…however, intergenerational mobility in the US still remains below that of Canada, Australia, and most of the rich European nations; as one of the lead authors notes in the New York Times, the odds of escaping poverty appear to be only about half as high in the United States as in the most mobile countries like Denmark..
a few caveats: obviously, this study, ending with those born in 1993, is hardly capturing the effect of the recent financial bubble and subsequent great recession over the lifespan of those now growing up in it...it simply can't tell us anything about the income mobility of those born in the last 20 years vis-a-vis their parents...furthermore, for those born in the years after 1986, college attainment has been used as a proxy for income for the ranking of those individuals within quintiles, since in earlier years college was a fair predictor of income...with all the recent anecdotes about college graduates trying to pay off their loans flipping burgers, it's hard to say if that remains true...also, by using the top quintile, or the top 20%, as its definition of wealthy, it ignores the sharp divisions that have occurred within that quintile, wherein the incomes or the top 1% have pulled away from the pack...one of the authors of this study, Emmanuel Saez, is the co-author of another recent study that showed that 95% of the incomes gains over the 2009 to 2012 period went to the top 1%, while the bottom 99% saw income growth of just 0.4%....in addition, we should also note that by focusing on incomes, it says nothing about inherited wealth, a divide between those born to wealth and those who've worked for it that's only going to get worse with the recent cuts & exemptions to estate taxes that came with last year's fiscal cliff deal...
the one aspect of this study that's most interesting is the very wide difference in upward mobility between children born in different regions of our own county...the map below is a picture of an interactive graphic from the New York Times which was developed from the report which shows the percentage chance that someone born into the lowest quintile might reach the top quintile by adulthood; in the darkest red shade, that chance is less than 4%, and includes several pockets in the South, including Atlanta at 4% and the Memphis environs at 2.6%; those born in the areas with lighter red shadings, including much of the South and Detroit at 5.1%, Cleveland at 5.2%, and Chicago at 6.1%, all have less than 10% chance of rising to the top fifth from the bottom...the yellow shading, including most of the rural areas and cities such as Salt Lake at 11.5% and San Francisco at 5.2%, all have upward mobility chances greater that 10%, while those born in green areas with a 20% chance of making it to the top include some smaller western plains cities such as Casper Wyoming at 19% and Yankton S. Dakota at 22.8%...and in a telling revelation not specifically noted in any of the literature but clearly obvious on the map, children born dirt poor in the western counties of North Dakota shown in blue as have had as much as a 35% chance of reaching the top quintile, with those born in the heart of the Bakken oil field in Williston North Dakota having a 33.1% chance of earning top bucks as adults despite being born into families at the bottom...
Contraction in Existing Home Sales Confirmed by December Data
as we mentioned, the one report this week that did get widespread coverage was on December Existing-Home Sales from the National Association of Realtors (NAR), which indicated home resales were at a seasonally adjusted annual rate of 4.87 million in December, 1.0% above November's revised level, but 0.6% below the level of December a year ago...as with any report from a trade group such as this, we have to get past the spin in the press release, which headlined that 2013 was the best year for home sales in seven years, and look at the hard data to determine what's really been going on recently...first we should note that November's sales were originally reported at a seasonally adjusted annual rate of 4.90 million, down from a 5.12 million rate in October, which itself was down 3.2% from the 5.29 million annual rate in September; which ultimately means December home sales were 8.0% lower than sales of three months ago, and down 9.7% from the 5.39 million manual rate hit in July and August, a sales downturn which is clearly visible on the FRED graph below, which tracks the annual rate of homes sold monthly over the past ten years...also clearly noticeable on that graph are the spikes in home sales in 2009 and 2010 that resulted from the first time home buyer tax credits of those years...
home prices have been moderating seasonally along with the decline in home sales...the median home sales price in December was $198,000, up $2,500 from the $195,500 median sales price in November, but not much change from the $197,500 median realized in October or the median sales price of $198,500 in September...those recent prices are down roughly 7.5% from the peak median sales price of $214,000 of June sales, a fairly typical price change from summer to winter....the average price realized for homes sold in December was $246,800, up from the $243,600 average of November and the highest average sales price since August, so we can assume there was a greater proportion of McMansion type homes sold in the mix in December than in the months preceding it...the pie graph to the right, which was taken from the Summary Statistics graphics for December from the NAR (pdf) shows the percentage of homes sold in each of several price ranges in December; the orange wedge at the top indicates that 2% of homes sold in December exchanged hands at over $1 million, while the teal blue wedge next to it indicates that another 2% sold for between $750,000 and $1 million...on the other end of the spectrum, the dark blue wedge in the upper right indicates 18% of homes sold were below $100,000, while the largest dark red wedge indicates that 44% of homes sold in December went for between $100,000 and $250,000 (click to enlarge)
the FRED graph below shows the track of the median, or middle sales price of previously occupied homes over the past ten years in blue, and the track of the average existing homes sales price over the same time span in red…the seasonal pattern of house prices is quite obvious, wherein home prices typically peak in the summer months, fall in the Fall, tick up in December, and then bottom out in February and March….the slowing of price increases in recent months suggests that lagging home price indexes, such as Case-Shiller (which last reported prices for August to October) should start to see more modest year over year increases going forward…
so it’s finally become apparent that the spike in interest rates that was precipitated by the Fed’s taper talk has had an impact on both sales and prices...average interest rates on 30 year fixed rate mortgages rose to 4.46% in December, from 4.26% in November, not much out of the 4.19% to 4.49% range they've held for the last half of 2013; over the first five months of 2013, before the June FOMC meeting when the eventual Fed withdrawal became obvious, interest rates on a 30 year fixed mortgage had averaged 3.50%...these higher rates may be part of what's reducing the percentage of first time home buyers, which fell to 27% of purchases in December, down from 28% in November and 30% a year ago...buyers classified as investors are picking up the slack; they accounted for 21% of December sales, up from 19% in November...and according to the NAR, 32% of all sales in December were all cash sales, unchanged from November but up from the 28% of all home sales that cash transactions accounted for a year earlier...this is in contrast to a report from RealtyTrac, which says all-cash purchases accounted for 42.1% of home sales in December, up from 38.1% in November, but in contrast to just 18.0% of sales that were all cash in December 2012...RealtyTrac also finds that more than 50% of homes in Florida, Wisconsin, Alabama, South Carolina, and Georgia were bought with cash only, with nearly 63% of home sold in Florida purchased on a cash only basis...
(the above is my weekly commentary that accompanied my sunday morning links emailing, which in turn was mostly selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me…)