Robert J. Swartout, The Daily Record Newswire
In November of last year I authored an article titled, “Pushing on a String,” outlining how the massive monetary policy easing had not had much of an impact on two significant domestic economic issues that would be facing President Obama and his Republican challenger in the presidential election that was still one year away.
The latest round of quantitative easing from the Fed involves the direct purchase of $40 billion of mortgage-backed securities per month and is focused squarely at improving the U.S. housing market. Unemployment and a depressed housing market were significant issues back in November 2011, and unfortunately for the American people and our economy, they continue to be significant issues one year later in late October 2012.
For most Americans, our home is the largest single asset that we own. According to Zillow, 30.9 percent of U.S. homeowners with a mortgage are “underwater.” In other words, 30.9 percent of homeowners with a mortgage owe more on their home than their home is worth; 30.9 percent of the mortgage refinance market is therefore unable to take advantage of the latest round of quantitative easing and the lowest mortgage rates in history because they have negative equity in their homes and don’t qualify to refinance their mortgage.
On average, U.S. homeowners with negative equity owe over $75,000 more than their homes are worth. These large underwater values are more indicative of the boom and bust areas of the country such as Las Vegas and some areas of Florida that had rampant housing speculation. But even areas that did not have a significant housing bubble still have a significant number of homeowners that cannot take advantage of today’s low mortgage rates due to negative equity in their homes.
Unemployment statistics released on Oct. 5 by the Bureau of Labor Statistics provided a brief glimmer of hope that the American labor market is on the mend. Unemployment fell below 8 percent for the first time in the last 44 months to 7.8 percent. Although headed in the right direction, much like the housing market, the employment situation in the United States is troubling.
Although the unemployment rate fell to 7.8 percent, the labor force participation rate continues to be stubbornly low at 63.6 percent. The plight of the long-term unemployed, some 4.8 million people who have been out of work for six months or longer, has not improved and this segment of the population continues to put downward pressure on the housing market.
Specifically, the unemployed don’t qualify for the exceptionally low mortgage rates and thus cannot refinance their existing mortgage or provide any demand for new housing and may be adding to the inventory or home foreclosures that are pressuring existing home prices.
The massive monetary policy easing and fiscal policy stimulus that was intended to help the suffering middle class in our country has done little to improve unemployment, underemployment or improve the housing market. Ironically, some of the biggest beneficiaries of these policies have been the affluent, whose wealth is more concentrated in financial assets rather than real estate. As of Sept. 30, the S&P 500 was up over 24 percent on a year-over-year basis and wealthier Americans have had a banner year in the stock market.
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Robert J. Swartout is a vice president at Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, nonprofits and trustees. Offices are located at 183 Sully’s Trail, Pittsford, N.Y. 14534; (585) 586-4680.
