Rental sector accelerates markedly as home ownership wallows

BY MORRIS R. BESCHLOSS
PVF & economic analyst emeritus

As previously reported in these columns since late last year, the switch from home ownership to rentals seems to have taken on a degree of permanence. Reflecting a strong reaction to massive foreclosures, a 40% decline in home pricing since 2007 and oppressive mortgages that have exceeded the value of the underlying homes, latest statistics indicate that rentals are becoming increasingly pervasive in most parts of the country.

This has not only reduced rental apartment vacancies, created spot shortages and instigated higher rental charges but has also severely cut into the revival of home construction, which has now lingered at the lowest level in decades, since reaching a peak in 2007. As would be expected, the national inventory of unsold homes has gotten stuck at a six- to eight-month backlog. Therefore, it's doubtful that any meaningful appreciation or inventory reduction will manifest itself for the rest of 2011.

When comparing rentals on a year-to-year basis, it should come as no surprise that the combination of limited availability and lack of additional space has forced rents up markedly. Even the conversion of previously-built condos to rental status in big city high- rise apartments has done little to assuage the accelerating torrent of those seeking living quarters on a relatively short-term basis.

According to Reis Inc., which tracks leasing data for 82 markets, second quarter 2011 rents rose in all but two of these markets. Vacancies fell in 72 of the 82 markets during the second quarter, to a decade-low 6%. The current percentage is a significant drop from the 7.8% pace of a year earlier.

As builders and developers rush to take advantage of this growing sea change of home ownership sentiment, only 8,700 new apartment units have opened during the second quarter, the second lowest quarter tally for new completions since Reis began collecting data in 1999. This volume will undoubtedly increase dramatically later this year as the ongoing trend gathers steam in the months ahead.
Despite the tax deduction advantage inherent in populist home ownership, current public sentiment is much more concerned with reducing debt and with not taking on additional commitments such as long term mortgages. There is little chance that this trend will be reversed in the foreseeable future.

Federal Minimum Wage Act inhibits unskilled workers’ hiring

With stagnating unemployment expected to expand in the foreseeable future, the federal and commensurate state minimum wage acts are increasingly inhibiting the work opportunity of tens of thousands of teenagers. Also affected are a large number of minority groups, who together comprise 25% of the most unemployed segment of job seekers among the nearly 30 million not fully employed.
The federal minimum wage was initiated during the depths of the Depression in 1938, at a $0.25 an hour rate; it had jumped to $7.25 an hour by July 24, 2009. With the late Senator Ted Kennedy (D-Mass.) leading the charge, it was increased to $5.15 in 1997 and then twice in one year, to $6.55 on July 24, 2008. The Obama administration chimed in shortly after he became president, with a dollar an hour increase one year later. This occurred despite the massive job hemorrhaging peaking at that time.
In a further act of irrationality, nine states, mostly dominated by Democratic legislatures, have upped the ante over the federal level in 2011, despite each of these states suffering various degrees of unemployment. By law, employers are required to meet the higher rates (federal or state) when filling job openings.

This obviously politically motivated approach may have made sense early in the decade, when job openings exceeded applicants, and the Labor Department’s unemployment rate stood at 4.5%. But today many thousands of small businesses, such as restaurants, independent grocery and hardware stores, etc., cannot afford these government-imposed rates in the current flaccid economic atmosphere.
With unions wielding unprecedented influence over the current administration, especially with the 2012 presidential campaign gaining increased traction, the government seems to be casting a blind eye to the huge number of potential workers that could find gainful employment if the minimum wage could be waived for low-level jobs, at least temporarily.

The disconnect between political expedience and the lack of steps taken to mitigate present unemployment have often been delineated in these columns. As the weeks and months come closer to the 2012 presidential election showdown, the focus will become even more political and less employment-oriented, unless the continuing polls prove that such ongoing negligence undermines those in power seeking re-election.

Record second quarter corporate profits at odds with economy’s weak recovery

While a fragile U.S. economic recovery chugs along at a minimal growth pace, beset by a policy standoff between the House, Senate and the presidency, corporate profits are reaching near record peaks in the latest rash of second quarter results posted by America’s leading stock exchange-listed companies.
Although this set of circumstances flies in the face of traditional links between economic viability and company performance, the current global climate has created unique circumstances that have enabled a substantial number of New York Stock and Nasdaq exchange-listed equities to leap forward in both per change earnings, as well as in cash flow, for the following reasons, not normally associated with the current lackluster economic performance:

1. Exports. A combination of a weaker dollar, unprecedented demand from China, India and other leading developing nations, (including agricultural products, industrial machinery, aircraft and armaments) and American brand name preference have vaulted U.S.-made exports to near highest levels, even by booming world economies.

2. The moribund residential construction sector is rapidly shifting from home ownership to rentals. This is serving as a saving grace to the former bedrock construction sector, holding out hope to builders, developers and contractors alike.

3. The unanticipated accumulation of money at companies’ (including banks’) balance sheets of more than $4 trillion. Add to that the consumer savings rate of 5.5%, from a previous 20-year deficit, and you can visualize an economy flush with cash.

4. A combination of drastic employee cutbacks and technological adaptations on both shop floor, warehouse and back office upgrades has engendered maximum productivity.

5. Rampant unemployment, which numbers 30 million not working full time out of a 150 million potential, still leaves 80% of able-bodied and fully-paid workers who have continued the nation’s $14.5 trillion gross domestic product sector at a 67% consumption rate, only slightly less than that of the Great Recession level. This has led to a stronger than anticipated retail demand factor and the survival of tens of thousands of small, medium, as well as large, businesses that depend on it.

6. The manufacturing sector, bolstered by exports and the “Back to America” phenomenon has been the surprising fillip to an otherwise dormant economic foundation for growth. So far this year, this has proved a strong underpinning for a sound future.

Taken together, these factors have created the fertile soil that has allowed an overwhelming number of American companies to produce financial results totally unexpected in an otherwise flaccid economic environment.

Current cyber revolution eclipses previous global communications breakthroughs

When Future Shock author Alvin Toffler prognosticated the major anticipated global economics leaps a short 30 years ago, it was beyond even his fertile imagination to predict the incredible communications breakthroughs that the world has undergone in such a brief time period.

It’s almost impossible to contemplate that, at the beginning of this abbreviated time period, even the computer age was still in its infancy. As a CEO of several industrial companies at that time, I remember that IBM’s computer breakthrough 360-30 necessitated a large air-conditioned office compartment to become operative. Fax machines, now increasingly obsolete, were in their experimental stages and took a full 10 minutes per page to send, even in the late seventies. Email was an idea whose operative usage was yet to come.

Wireless cell phones, which are rapidly making land lines as obsolete as the Model-T Ford, have more users today in populous China and India than the U.S. and typewriters, still in active use a generation ago, are no longer being manufactured.

Even more remarkable is that both the inventive process and the usage of the prolific devices emanating in unimaginable profusion have become the hallmark of the under-thirties generation.

Whereas Alexander Graham Bell’s mid-19th century telephone, Thomas Alva Edison’s electric lighting systems and the innovations of photography and moving pictures were generally the products of seasoned geniuses who reached their inventive peak in latter years, Apple’s Steven Jobs, Facebook’s Mark Zuckerberg and Microsoft’s Bill Gates, to name a few, took their inventive leaps forward while barely just college age.

Since the world is now in the eye of the storm of the current communications revolution, typified by Facebook’s 750 million subscribers (more than the total global population 150 years ago), the socio-economic and geopolitical impact of “flattening the world,” its seven billion strong population is just beginning to comprehend the enormity of these changes. Already, the rapidity and spontaneity with which everyone receives global happenings 24/7 is making itself felt in the previously low-communication areas of the Middle East and North Africa, now in increasingly unsettling ferment.

In 1982, when Syrian dictator Hafez al Assad murdered almost 30,000 rebellious residents of the city of Hama, the world was generally unaware of what was happening. Today, his son’s equally brutal repression is transmitted instantly by iPhone, iPads, etc., as these instant communicative devices are readily available.

It’s practically a given that future historians will view the current cyber revolution as one of history’s most rapid and dramatic global “game changers.”

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