5 posts from May 2014

Don’t bet the farm

As fedgazette Roundup has documented before, farm values have been on an upsurge in recent years. The growth has been so steep that it has prompted discussions about whether farmland is overvalued. On the one hand, booming crop prices have increased the return on the land, reflected in higher rents. But memories of the 2007-09 financial crisis, with its origins in real estate, as well as the 1980s farm crisis, have stoked concerns of a farmland bubble.

But new data suggest a pivot, or at least a cooling period, in farmland prices, according to the Minneapolis Fed’s April survey of agricultural credit conditions for the first quarter of 2014. The survey found that prices for non-irrigated farmland fell an average of almost 2 percent across the Ninth District compared with a year earlier. While that would still leave prices well above the levels of just a few years ago, a broad-based fall in values is noteworthy.

Comparisons across the district reveal that the fall in values took place mostly in Minnesota (see map). In other district states, the price continued to increase, albeit at a slower pace than the double-digit growth typical of previous years. The survey indicated further that land rents (also shown on the map), which are more directly tied to the productive value of land, dropped by even more around the district and across a broader swath of territory.

Not every type of agricultural land has turned down either. The survey found that ranchland prices continued to climb and at a faster pace than cropland. This is especially noteworthy because the price of ranchland has typically grown more slowly than cropland during the run-up period. Livestock prices have climbed to historic highs, and a reduction in crop prices means dairy, cattle and hog producers are reaping fatter profit margins, so robust pastureland values might be expected.

Farmland prices -- 5-21-14

Minnesota trades union workers seeing wage growth

The Great Recession not only rocked the economy, it also stifled wages. However, compensation rates (wages and benefits per hour) for trades workers in the Minneapolis-St. Paul metro area have started to rebound (see Chart 1), according to data from the labor relations law firm Management Guidance LLP.

The recent increases are welcome news for union workers after two years of stagnation, but are still below the increases of the 1990s and early 2000s. Most of the increases were similar across construction occupations. Among licensed trades, electricians and plumbers have the highest compensation per hour (see Chart 2).

Trades Union wages -- 5-13-14

STEM: A growth industry

The U.S. workplace has become increasingly technically oriented, populated by workers with advanced skills in science and technology. The proof is in the rising share of jobs classified as STEM—those in occupations that typically require college degrees in science, technology, engineering or math. Nationally, a broad swath of industries saw gains over the past decade in the share of employment in STEM, according to government labor statistics (see chart).

In professional and technical services—the industry with the highest concentration of STEM jobs—the STEM share grew about 5½ percentage points between 2003 and 2013. More computer programmers, engineers and other STEM workers were needed in burgeoning tech industries such as mobile communications, data analytics, and shale oil and gas development. (The proportion of jobs in STEM increased by more than half in mining, and oil and gas extraction.)

But the STEM employment share also rose in nontech industries, including finance and insurance, management, and transportation and warehousing. Only retail trade saw a decline in the proportion of STEM jobs. The growing importance of technology in the economy has led employers in an array of industries to value the contributions of STEM workers to innovation and productivity.

Labor statistics don’t track STEM job share by industry at the state level, but it’s likely that district states have followed national trends. For more detailed discussion of STEM education and employment in the district, see the April fedgazette.

STEM -- 5-6-14

Senior Writer Phil Davies contributed to this post.

All fall down: Rising mortgage rates and the refi crunch of 2013

The mortgage refinance business headed into 2013 on the upswing, but the pendulum swung swiftly in the other direction by year’s end. And this reversal included borrowers across the credit-score spectrum.

According to figures from Black Knight Financial Services (BKFS), which typically represent 60 percent to 70 percent of the mortgage market, the number and dollar volume of refis in the United States and Ninth District trended up in the second half of 2012, reaching a two-year high in the fourth quarter of 2012. Activity remained high in January 2013, when BKFS reported over 7,800 new refis worth almost $1.4 billion in the Ninth District.

But then refi activity began a steep slide (see Figure 1). Between January 2013 and January 2014, activity reported by BKFS fell by almost 80 percent, to about 1,600 new Ninth District refis worth less than $285 million. Most of the decline occurred after May, when mortgage interest rates began moving up from about 3.5 percent to a range of 4.2 percent to 4.5 percent in the second half of the year. By January 2014, Ninth District refi activity was at its lowest level in the past 10 years of BKFS data, even weaker than during the refinance bust of 2008 at the height of the Great Recession.

Refi Figure 1

The sensitivity of refi activity to interest rates is easy to understand, since obtaining a lower rate is one of the main motives for refinancing. Big surges in refi activity have long tended to follow drops in mortgage rates, and just the reverse when mortgage rates rise.

However, grouping borrowers into low, medium and high credit score categories suggests that movements in housing prices have also influenced refi activity over the past 10 years (see Figure 2). For example, borrowers with low credit scores (below 660) have accounted for less than 10 percent of BKFS’s Ninth District refi dollar volume since the housing bust, but represented as much as a third of market volume during the housing boom (2004-06). Rising home prices at the time boosted borrowers’ home equity and made refinancing low-score borrowers seem safe to lenders and attractive to these borrowers, for whom cash-out refinancing (i.e., borrowing more than the former mortgage balance) was a cheap and accessible form of liquidity. When home prices fell and credit standards tightened after 2006, refi activity by low-credit-score borrowers crashed and has generally remained much lower.

Refi Figure 2

By contrast, borrowers with high credit scores (780 or more) appear to refinance mostly to obtain lower mortgage rates. Since 2009, refi activity by these borrowers has accounted for about one-third to one-half of the value of Ninth District refinancings, a marked increase compared to the group’s share during the housing boom (less than 16 percent ), when the rate on 30-year conventional mortgages was trending up. As mortgage rates trended down over the next six years, and especially when they dipped abruptly, high-score mortgagors took advantage of these opportunities to lower their financing costs by elevating their refi activity.

Borrowers in the middle, with credit scores between 660 and 779, dominate the refi market, accounting for half to two-thirds of the value of Ninth District refinancings reported by BKFS since 2009 (compared to 65 percent to 70 percent a decade ago). These borrowers seem to have been sensitive to both interest rates and home prices. Like the low-score borrowers, their refi activity was on average higher during the housing boom than afterward. But, like the high-score borrowers, middle-score borrowers have refinanced fairly aggressively in response to post-boom interest rate dips.

Despite their varying refinance motives over the past decade, Ninth District mortgagors in all three credit score categories cut back sharply on refinancing in 2013. By January of 2014, the dollar volume of refi activity was down from January 2013 by 68 percent among low-score borrowers, 77 percent among middle-score borrowers and 85 percent among high-score borrowers. For all three groups, this represents the steepest 12-month fall over the past decade. The large scale and relative uniformity of the decline across credit score categories suggests that last year’s big rise in mortgage interest rates was indeed the main factor behind the refi crunch of late 2013.

Personal income buys more in district states

Income earned in one part of the country goes further than in another based on differences in the cost of living. A job in New York City, or in the oilfield city of Williston, N.D., will have to pay more to purchase a similar value of housing, goods and services than a job in Missoula, Mont.

Last week the Bureau of Economic Analysis released data that adjust personal income across states and metropolitan areas to account for cost of living differences. Data on regional price parities (see chart) show state price levels relative to the U.S. average. South Dakota’s value of 88.2 means that the state’s price level is 11.8 percent lower than the U.S. average. Minnesota has the highest value among district states, but is still 2.5 percent lower than the national average. The data series also adjusts for U.S. inflation from 2008 to 2012.

Price parity -- 5--14

Since district states have lower price levels than the nation, once per capita income is adjusted for regional price differences, district states move up across the board in per capita income rankings (see table below). In 2012, North Dakota moved from the fifth to the second highest per capita income level after adjusting for price differences, behind the District of Columbia. Meanwhile, South Dakota jumped from 18th to sixth after a price level adjustment.

Price parity table