In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses unemployment insurance claims.

• Initial claims for unemployment insurance for the week ending July 21 fell to 353 thousand after a volatile spurt the prior week, based on data released by the Department of Labor.  The 4-week moving average, which is less volatile, has been declining over the last 3 weeks after a worrying increase in the second quarter.

• Judging by data since 2004, if claims continue to hover at around the upper 300 thousand, jobs generated will be a shy of 200 thousand and the unemployment rate will continue to hover at around 8 percent. Although still higher than the historical rate, the economy is certainly moving forward although modestly.  Job security will remain a major concern for homebuyers, although other mitigating factors such as the continued downtrend in interest rates encourage home-buying.
• In related news, the Census Bureau reported today that new orders for durable goods rose 1.6 percent from May to June. What is interesting is that transportation equipment rose at 8 percent.  An increase in consumer durables demand for transportation indicates that consumers are also better positioned to move into other long-term spending such as real estate.

• In summary, today’s data show the economy is in no danger of falling into a fresh recession.  But the growth rate is slow.  However, incremental net job gains will continue to add to the pool of future homebuyers.

The Great Recession is over, but we are still short on jobs.  In responding to the Realtors® Confidence Index NAR members indicate that credit standards continue to be unreasonably tight.  The level of home sales appears to be held back by artificially tight credit standards.  The data suggest that we could have up to an additional 850,000 home sales per year  if credit standards were at the level used in the 2005/06 time frame—a prudent level of risk and mortgage availability.  That would translate to an additional 425,000 jobs—a simple, no-cost fix that would help the economy.

What does this mean for Realtors®?  Many financial institutions still have excessively high credit requirements for getting a mortgage—apparently as a result of the Great Recession and weakened loan portfolios.  Being turned down for a loan may simply mean that the client applied to the wrong bank—one with a weak loan portfolio.  In the current credit environment, persistence in looking for a loan as well as broadening the search to include credit unions and local and regional banks may yield results.

Mortgage Credit Requirements Have Been Too Tight

The Federal Reserve’s April 2012 Senior Loan Officer Opinion Survey on Bank Lending Practices provided a comparison of current lending policies with those that prevailed in 2006—a time of normal credit markets before the housing crisis.  Responses indicated that credit is tighter for lower FICO score individuals.

In addition, the Office of the Comptroller of the Currency’s yearly Survey of Credit Underwriting Practices reports on lending standards and credit risk.  The 2012 Survey reports that 65 percent of the banks reported unchanged residential real estate underwriting standards; however, 25 percent tightened credit in the 12 months ending February 2012 in comparison to 10 percent who eased credit requirements—on top of already tightened standards.

How Do We Know that Banks are Still Too Risk Averse?

In 2005 approximately 43 percent of Fannie Mae’s and Freddie Mac’s loans went to applicants with credit scores above 740.   Current Relators® Confidence Index data shows that 55 percent of residential real estate loans have FICO scores above 740.  According to the RCI report, approximately 70 percent of residential buyers obtain a loan, and the market in recent months has been in the neighborhood of 4,500,000 homes per year, resulting in a yearly rate of   3,150,000 mortgages.  If the 55 percent of mortgages above FICO 740 were reduced to 43 percent, a back-of-the envelope calculation suggests approximately 850,000 additional homes  per year could be sold if credit markets were more normal.

The Conclusion:  Ease Credit Standards, Increase Home Sales, More Jobs

If banks adopted the credit standards of 2005/06 in making loans, we could expect to see additional home sales of up to 850,000 per year, along with the creation of an additional 425,000 jobs—for home sales generate jobs.  For this to happen, bank regulators would need to convince lending officers that lending portfolios would be evaluated based on normal credit conditions—not the risk averse underwriting practices resulting from the Great Recession.

In the meantime, obtaining a mortgages may continue to be challenging for people with less than perfect (but still well able to pay) credit.  Although mortgage credit requirements have eased slightly in recent months, persistence in finding a mortgage continues to be key for many clients.

Which country will take home the most medals?  That is an easy call because medal count and economic power go hand-in-hand.  China is ascending while Russia is slipping.  Despite sluggish economic growth, the United State maintains an indisputable top economic position.  Therefore, the medal count winners will be, in order

1. United States
2. China
3. Germany

The Soviet Union rivaled the U.S. for top slot in the medal count for many decades as the two economies slugged it out during the Cold War.  Soviet communism failed to produce meaningful economic growth from the 1917 Revolution to the beginning of the Second World War.  Then, after the war, economic growth took off and Russians and satellite countries began to win many Olympic medals.  The first person to orbit the earth was a Russian in 1961.  Economic growth under communism should not have occurred but it did and can largely be explained by the tremendous amount of goodwill and gratitude Russians felt toward their government after defeating Nazi Germany.  But the cost came at an unimaginable high price: the deaths of 20 to 25 million Soviet citizens – an average of more than 100,000 deaths each week.  Such a high death rate explains for a vast number of Russians today never having met one of their grandfathers.  Arbitrary arrests, midnight knocks on the door, and gulags scared the daylights out of people, but many still believed and were proud of their country in defeating Germany.  Russians were willing to work hard for little personal gain in this egalitarian country because emotions and memories ran high.  Workers were doing it for the motherland.  But the inevitable slow decay of the government-run economy began to make its mark over time.  Government involvement naturally leads to massive endemic corruption which saps the life out of innovative ways of doing things.  Slow decay then suddenly turned into a complete collapse of an 80 year experiment in government-controlled collective ownership.

After the disintegration of the Soviet Union, many former Olympic stars and trainers pushed their children into new sports where real riches could be a possibility.  Young girls in particular were given a tennis racket.  As a result, outside of the Williams sisters, East Europeans have come to dominate the top rankings in professional tennis.  Traditional Olympic sports that garner little monetary return have therefore become less attractive in the former Soviet countries.  Therefore, Russia and East European countries will be out of the top medal count in the 2012 Olympics.

While the Soviet Union was undergoing an ascent followed by a descent, China was nowhere to be seen in the medal count.  Chairman Mao had economically ruined and starved the country with his brand of communism.  After the death of Mao, however, Chinese government started to permit small private land ownership.  Private property rights, as have been proven again and again in history, led people to desire to produce a bit more than before.  A farmer produced more than can be consumed on his private plot and sold the surplus in exchange for a bicycle.  A bicycle manufacturer now needed to expand the production facility and hire more people.  In addition, foreign companies were invited into Chinese special economic zones with very low taxes.  The rest is history and China is now the second largest economy in the world, though currently at only half the size of the U.S.  That means in regards to the Olympics, the U.S. will get more medals with China coming in at second.

Japan and Germany are the third and the fourth largest economies, respectively.  The Japanese economy has been stuck in neutral for two decades, quite dispiriting, while Germany has been advancing forward.  So the momentum and edge goes to Germany for the third place medal count.

In future years watch out for Brazil.  Brazilian real estate organizations (SECOVI and COFECI) and NAR have been working together intensively to help develop the Brazilian real estate market.  Brazilians are very much interested in the workings of multiple listing services and statistical data reporting.  There is nothing as motivating as owning real property and then being able to trade-up later in life.  Therefore, the long-term economic growth rates will be quite robust in Brazil.  In this year’s Olympics, Brazil will crack the top 20 for medals.  By 2020, expect Brazil to be in the top 3.