Negative equity in homes improving, but not everywhere

Signs of housing and financial recovery are becoming more common, including recent data from CoreLogic showing that the percentage of homeowners with negative equity is slowly dropping in many states.

Despite modest improvements from fourth quarter 2011 to fourth quarter 2012, almost 22 percent of homeowners nationwide with a mortgage owed more on their loan than the domicile was worth (see chart). With the exception of Michigan, all district states have negative equity rates considerably below the national average.

District states also saw decent improvements over the prior year, including Minnesota, whose rate dropped by 2 percentage points. The lone exception was Wisconsin, whose rate rose by 0.8 percentage points and was one of relatively few states that saw rates tick up slightly.

So far, few employers cutting workers to part time in response to Affordable Care Act

Like it or not, the Affordable Care Act will offer an interesting economic experiment on incentives (or punishments, depending on your view) and subsequent business behavior.

Given its requirement that full-time employees receive health insurance, critics of the law, for example, believe many employers will shift to more part-time workers. So far, that appears not to be the case, according to a recent Minneapolis Fed ad hoc poll of more than 200 contacts from around the district (see methodology below).

The survey asked: Has your company or organization shifted to more part-time workers in response to the Affordable Care Act (federal health insurance requirements)?

Only 4 percent said they had shifted to more part-time workers, while another 7 percent said they planned to do so. But 89 percent said they had not made, nor were planning, such a move.

Based on the comments received with the poll, the relatively low change rate could be based on three factors. First, many responding organizations employ fewer than 50 people and are exempt from some provisions of the act. Second, some commented that it is too early to know the effects of the law’s detailed regulations. “We’re just beginning to figure out the impact of the Affordable Health Care Act,” commented a Minnesota respondent. “Once we understand that, we’ll adjust accordingly.” Finally, some businesses do not function well with part-time workers.

Methodology: On March 12, 2013, the Minneapolis Fed invited, via email, about 1,000 Beige Book contacts from around the Ninth District to answer the special question in a web-based survey. By March 13, 205 contacts had filled out the survey. The respondents come from a variety of industries (see table).

Wisconsin public pensions: Retirees gasping, taxpayers exhaling

When the Wisconsin Retirement System released its annual annuity adjustment for pensioners earlier this month, members groaned while taxpayers breathed a sigh of relief.

The WRS is the ninth largest pension fund in the country. It is also among the country’s best funded plans in terms of long-term assets and liabilities; since 2004, its funding ratio has been near 100 percent. Yet starting May 1, certain WRS retirees will see their monthly checks fall by almost 10 percent—unheard of among the millions of public sector pensioners. In fact, it’s the fourth consecutive year of annuity cuts for some retirees. There are several sources behind this seeming financial contradiction. But the most important is that WRS retirees assume the large majority of investment return risk.

Along with worker and employer contributions, pension funds depend heavily on investment returns on their assets. Pension plans assume a certain rate of return—7.2 percent for the WRS, while many others hover around 8 percent—to project member annuities upon retirement. Most pension plans also average returns over five years to “smooth” volatility. But two of the past five years’ returns have fallen well short of the WRS benchmark, including 2008, when two WRS pension funds lost roughly 30 percent of their combined value (see charts).

When investment returns fall short of this benchmark, all other things equal, unfunded liabilities accrue. For most plans, this gap typically requires additional contributions from government employers (via taxpayers) and often existing workers; by and large, retirees are financially exempt.

In sharp contrast, WRS retirees bear the majority of investment risk and therefore reap both more benefits and more hardship. Unlike many public pension plans, the WRS plan offers no automatic cost-of-living adjustment. Instead, it uses investment returns to pad monthly pension checks on a compound basis. Such a policy worked well for retirees during the 1990s, when heady investment returns led to annual pension adjustments (called dividends) averaging almost 7 percent.

But when investment returns go south—which they did during the 2001 and (especially) 2008 recessions—those dividends can be clawed back to ensure the plan’s long-term financial solvency. But a retiree’s annuity can never go lower than the original amount established at retirement. The investment drop in 2008 was so severe—and compounded by a weak 2011—that the WRS has been forced to take back dividends from its Core Fund (which funds roughly 90 percent of annuities) for four consecutive years. (The smaller Variable Fund has no such annuity floor, and investment gains and losses are fully recognized each year.)

The amount of annuity decrease for a retiree depends on the dividends previously earned. Given three previous years of negative adjustments, the Wisconsin Department of Employee Trust Funds anticipates that close to half of all WRS retirees will see no downward adjustment this year because they have no dividends left to take and are back at their original retirement annuity. This year’s clawback also was larger on a percentage basis because of the shrinking pool of retirees with dividends remaining. After this year’s adjustments, virtually anyone who has been retired since 2000 will be back to his or her original annuity level, according to WRS's latest actuarial report.

The good news for retirees is that this is the last year that 2008 returns will be averaged into investment returns for the Core Fund. Barring another market downturn, retirees should see a little more on their monthly checks next year.

Mortgage defaults: District fares better than nation

When times are tough, some people cannot afford to pay on their mortgage. This was especially true during the Great Recession when nearly 9 percent of mortgage loans in the United States were at least 90 days past due or in foreclosure. But today, more people are paying their mortgage, particularly in Ninth District states.

In January 2013, the mortgage delinquency rate dropped to 6.5 percent nationwide, while district states fared better—considerably so in many cases (see chart). The lowest state delinquency rate in the nation goes to booming North Dakota. The fourth lowest is South Dakota, followed by Montana (5th) and Minnesota (6th). Wisconsin is something of an outlier among district states at 27th. The highest seriously delinquent rate goes to Florida, where nearly 15 percent of loans are at least 90 days past due or in foreclosure.

District houses flying off the market

The low inventory of houses is selling at a faster pace.

Every month, Campbell/Inside Mortgage Finance surveys thousands of real estate agents across the country. Its recent January survey revealed that houses are staying on the market for less time and sellers are getting closer to the asking price in Ninth District states (see table). Comments from respondents indicated that the lower end of the market has shifted from the buyer’s advantage of a few years ago to the seller’s advantage today—for example, more offers to buy.

Several real estate agents said they are seeing more people interested in buying a home, and one Minnesota respondent commented that multiple offers occur for most homes listed under $130,000. Agents are hoping this increased demand will bring more homes to the market. It also may be driving the increase in new home construction (see previous blog).

Dusting off the construction hammers

It’s been a long road, but signs of the housing recovery continue to build.

The U.S. Census recently released annual housing data showing that last year saw significant housing growth across the Ninth District and the country (see Chart 1). While growth is good news, the data context is critical. The preceding year was one of the poorest on record. Still, five Ninth District states saw total permits rise at least 20 percent; all but Wisconsin saw permits increase more than 30 percent. Growth occurred in both single-family and multifamily categories; booming North Dakota was the only state to see a bigger increase in single-family permits.

But the show stopper was multifamily permit growth in Minnesota last year, which rose more than 200 percent over 2011. While the state’s outlier growth comes in part from a poor 2011, the 6,700 multifamily permits were the most since 2005. A dearth of new multifamily units since then has led to steadily tighter rental vacancy rates in the Twin Cities and across the state (see Chart 2), and is likely a major factor in the state’s hyper multifamily growth last year.

For more discussion about rental markets in Minnesota and the rest of the Ninth District, see the July 2012 fedgazette.

An economic development idea worth patenting?

What helps economies grow? That question vexes economists, economic development professionals, policymakers and local government officials looking for something to generate faster growth in local and state economies.

Innovation is widely believed to be important for local economies because the invention and introduction of new ideas can create long-lasting effects for business. But getting your hands around that notion and turning it into pursuable policy might be another matter.

Some equate innovation with patents. A recent Brookings Institution argued that “inventions, embodied in patents, are a major driver of long-term regional economic performance.” The study mapped patents nationwide and found that U.S. patent levels have been increasing in recent decades, and an increasing concentration of patents is coming from the top 20 metropolitan statistical areas (MSAs).

But do high patent levels lead to measurably better economies? The Brookings report did not answer that question definitively, and there are enough struggling metros in the top 20—Detroit, Philadelphia, Phoenix—to suggest that it’s not a perfect correlation. California has four of the top eight MSAs in patent production, yet all of them have high unemployment rates; San Francisco took the top patent spot, but its average unemployment rate from 1990 to 2011 ranked 161st of almost 360 MSAs analyzed.

Among 24 MSAs in Ninth District states (including 10 in Wisconsin that are located outside Ninth District boundaries), there was a wide range of patents per thousand workers (see Chart 1). Rochester, Minn., lapped much of the competition several times over—it ranked third best nationwide in patents on a population basis, thanks mostly to being home to an IBM campus. Wisconsin MSAs, many of them manufacturing hubs, also tended to rank high. But patent levels at a majority of MSAs in district states were less than one per thousand workers; only one in three regional MSAs was above the national average of 0.6 patents per thousand workers.

Not surprisingly, the top ranking MSAs tended to have a larger share of technology jobs as a share of all employment, as well as a higher proportion of workers with degrees in science, technology, engineering and math (so-called “STEM” degrees; see Charts 2 and 3. In the four scatter graphs, the MSAs from Chart 1 are rank-ordered, so low-ranking Great Falls = 1, high-ranking Rochester = 24).

However, patents themselves are not a particularly good predictor of economic growth over time. As Charts 4 and 5 demonstrate, there is virtually no relationship between recent patent trends and either growth rates per worker or unemployment rates.

None of this means that patents and other innovations are not valuable to local economies. It only means that local economic activity is a complex recipe, and patents are likely only one ingredient for faster growth.

Send me your poor: Uncompensated care in Minnesota hospitals

While the nation debates and awaits the implementation of the federal Affordable Care Act, hospitals are busy going about the business of taking care of the sick and infirm. Every year Minnesota hospitals provide service to thousands of poor patients and other people who cannot pay their medical bills, forgoing hundreds of millions in revenue.

The value of this so-called uncompensated care—the sum of both charity care and bad or uncollectible debt—is a source of pride for many hospitals, but also a matter of definition, according to the most recent figures from two statewide health organizations.

Earlier this month, the Minnesota Hospital Association noted that uncompensated care topped $500 million for the first time in 2011. However, adjusted for inflation, these costs have hardly risen since 2007 (see chart, at bottom). What’s more, Minnesota Department of Health figures suggest that uncompensated care costs are about 40 percent lower than MHA figures, but increasing at a slightly faster pace.

The discrepancy comes from the charges applied to these medical services. When reporting uncompensated care, health care organizations typically apply full retail prices. However, very few patients pay retail rates; service prices for patients with public and private insurance come with negotiated discounts, and even patients paying cash can negotiate discounts.

The state Department of Health, on the other hand, adjusts uncompensated care to a cost basis that better reflects the actual cost of care that is incurred by the provider, acknowledging that the adjustment “is only an estimate,” but is similarly used by the American Hospital Association. For a more detailed discussion on health care pricing, see the fedgazette article, “The semantics of health care prices.”

Poorly endowed: Higher ed suffering from inconsistent markets

In a time of tightening budgets, higher tuition and rising student debt, many large universities are looking to their foundations to provide resources to pad institution budgets and offer some financial help to students. But volatile markets have meant many are unable to do more than they could before the recession, based on annual endowment figures from the National Association of College and University Business Officers (NACUBO) and the Commonfund Institute.

Ninth District states, including the Upper Peninsula of Michigan, are home to more than 40 higher education endowments with over $5 million in assets, and 18 with over $100 million in assets in 2012 (and the subject of this post). The two largest endowments—by far—are those attached to the University of Minnesota and the University of Wisconsin, with $2.4 billion and $1.8 billion in assets, respectively. But a small majority of all endowments—including among this subset of larger endowments—lie with private colleges and universities.

Like anyone else invested in equity markets, the large majority of these 18 larger endowments at Ninth District higher education institutions have had a rough go of late. Among the group, two-thirds saw asset levels decrease in 2012 (see table, first data column); of the six that increased, only two saw a rise of more than 2 percent.

However, there might be more than immediately meets the eye here, because changes in endowment assets are the result of more than investment returns (which were not reported by NACUBO). Endowments are not static accounts; they regularly seek contributions from alumni and others, and are typically required to distribute up to 5 percent of their assets annually (and neither variable is reported by NACUBO).

Suffice to say that endowments are not in the business of getting smaller, and investment gains plus contributions have not been high enough to offset annual distributions at many higher education endowments. In fact, more than half of the endowments have lower asset values now than in 2007 (see second data column in table; asset values for three endowments in 2007 were not available). And it can happen to the best. Even Harvard University’s endowment—easily the nation’s largest at $30.4 billion—has struggled. Last year the fund’s assets shrank by 4 percent and stood well below the fund’s 2008 peak of $36.5 billion.

But endowment performance since 2007 among the 18 large endowments has varied wildly—from a 16 percent loss for Lawrence University, a small liberal arts college in Appleton, Wis., to a 33 percent gain for the University of South Dakota Foundation, whose success must lie outside of its investment prowess. While investment returns for the USD Foundation have consistently outperformed market benchmarks, according to foundation records, neither are they high enough to explain its outlier performance.

More evidence that businesses expect to grow, increase hiring

Signs are upbeat that the Ninth District economy will continue to grow, according to a recent poll of more than 300 business contacts from across the district (see methodology below).

For starters, 40 percent plan to increase employment at their firms, and nearly three-quarters of these firms cited expected high sales growth as the most important factor. Only 7 percent plan to decrease employment. In the same survey a year ago, 38 percent planned to increase employment and 10 percent planned to cut jobs.

Other important factors cited for new hiring were overworked staff, improved financial condition of firms and the need for additional skills. The majority of respondents plan to use word of mouth and advertising to get new employees. Twenty-eight percent plan to use a recruiting firm, and surprisingly few (9 percent) plan to raise starting pay.

For those respondents not planning to hire additional people this year, most expected low growth sales and a desire to keep operating costs low. Many reported difficulty finding skilled candidates. Though fiscal policy developments were not a factor for most respondents, 35 percent said they had a detrimental effect on hiring and 4 percent said they would increase hiring plans.

The survey also asked about wages and benefits; 36 percent expected wage growth of 2.5 percent or more, and a similar amount expected positive wage growth of less than 2.5 percent (see Chart 1). Respondents generally believed benefit increases would be larger than those for wages (see Chart 2).

 

Methodology: On Jan. 15, the Minneapolis Fed invited, via email, about 1,000 Beige Book contacts from across the Ninth District to answer the special question in a web-based survey. By Jan. 31, 303 contacts had filled out the survey. The respondents come from a variety of industries (see table below).