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ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Back in vogue. House flipping skyrockets to a ten-year high and that has some concern that the real estate market may be getting a tad hot.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Taxing plans? What Hillary Clinton and Donald Trump`s tax proposals would mean for your money.
MATHISEN: Energy strain. Why pressure is building in a once low- risk corner of the oil market.
All that and more tonight on NIGHTLY BUSINESS REPORT for a busy Thursday, March 3rd.
HERERA: Good evening, everybody. Welcome.
Housing has been hot. It`s one of the bright spots in our otherwise slow-growing economy. Home prices are near record levels. Mortgage rates are low and inventory is tight.
And those rising prices are bringing back things like bidding wars and house flippers, widely associated with the housing bubble. In fact, a new report today from RealtyTrac shows the number of active home flippers last year was the highest in nearly a decade.
And as Diana Olick reports, the number is growing, and that, to some, is concerning.
(BEGIN VIDEOTAPE)
SACHA MOISE, EVERS & CO. REAL ESTATE: This is where we are.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: House flipper, Sacha Moise, is doubling the size of this northeast D.C. home, hoping to double potential returns in a housing market where prices are heating up.
MOISE: I don`t know if they`re overinflated, but they`re really high. I don`t think I`ve seen them this high in quite a while.
This was the original house.
OLICK: Rising prices are luring flippers back in the door of a fast- paced renovation game that all but disappeared during the Great Recession. Active flippers are now at the highest levels since 2007, close to 180,000 single family homes and condos were flipped in 2015, according to RealtyTrac. That is, bought and sold in the same year.
Flips made up 5.5 percent of all sales last year, the first increase in four years.
MOISE: I think it`s incredibly saturated, honestly. There have been a lot of people who are getting into this business, because they have seen it as a safe place to put their money.
OLICK: And the profits are growing, as well. Homes flipped in 2015 yielded an average gross profit of $55,000, nationwide, the highest since 2005. Investors are seeing top returns in Pittsburgh, New Orleans, Philadelphia, Cincinnati and New Haven, Connecticut.
Nationally, returns are close to 46 percent, up from 35 percent in 2005, when flipping was at its peak.
House flipping today is nothing like it was during the last housing boom, when flippers were putting no money down and using easy credit. Today, even with investor loans, they have to have some skin in the game. That said, flipping can artificially inflate home prices.
And it can be a sign that prices are already too hot, because everyone wants to get in on the potential profits.
SAM KHATER, CORELOGIC: The market is becoming overvalued, but we`re not in a bubble. If we look at the differences between today and the mid 2000s, it was driven by speculative activity, lots of high leverage, and equity extraction. Most of those factors are not there today.
OLICK: The leverage may not be there, but the speculators are. Flippers are back, and buying.
For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.
(END VIDEOTAPE)
MATHISEN: Let`s turn now to Michelle Meyer for more discussion about the U.S. housing market in broad context, and then flipping in particular. She`s an economist with Bank of America (NYSE:BAC), Merrill Lynch.
Welcome. Good to have you with us, Michelle.
MICHELLE MEYER, BANK OF AMERICA MERRILL LYNCH ECONOMIST: Good to be here.
MATHISEN: What do you think of this flipping phenomenon? Are you seeing it? How worrisome is it? What?
MEYER: Well, I think it is a sign that home prices have recovered, and that housing has become an asset class again. So you have seen greater investor participation, and you have seen expectations start to shift around how people perceive housing.
But my impression, even though it`s at the highest in a decade, think about what the last decade has looked like. It was really recovering from a huge bubble. So, the fact that it`s the highest since 2007 makes sense, because we had a period of extreme weakness in the housing market.
So, by itself, I don`t think the numbers are that worrisome. But I think it is reflective of the fact that home prices have recovered, and that people are starting to think about housing differently.
HERERA: And how do they think of housing now? You said an asset class. We haven`t seen that in some time. And inventory is very tight.
MEYER: We haven`t. So I think there`s a number of factors that have supported housing. On the one hand, I think the fact that rates are so low for investors, it`s become that asset class, because of the push for more risk, the push to find more yields and home prices rising at a pretty healthy pace.
And the fundamental side, I think the fact that inventory is low and has remained fairly consistently low through the cycle has helped to support home prices, as well.
And finally, we`re in a very low interest rate environment, which is not only supporting those investors, but those are going to support potential homeowners. So, even though home prices have increased, the fact that interest rates remain low, it`s making it affordable.
MATHISEN: Let`s talk a little bit about -- I just implicit in what you just said is, I guess, a prediction that house prices are going to remain healthy and rising in most markets this year, where you have low inventory, low supply, and a pretty cheap cost of money.
MEYER: I think that`s right. I would expect some price appreciation to continue. That said, I think if you take a medium-term perspective, so look at the next five years or so, we`ll be entering an environment where home prices are overvalued relative to disposal income.
So, it will start to turn into a situation that if you don`t continue to have this abnormally low interest rates and/or you don`t have strong economic performance, home price appreciation may not be able to continue at its current pace. So, I think this year, yes, the backdrop still seems favorable for home prices but over the medium term, I would suggest more caution.
HERERA: And what about the Fed? If the Fed does raise interest rates one or more times this year, as they have said they would, that`s certainly in play. What difference does that make to housing?
MEYER: Well, I think the feds normalization process is so slow, and it`s so careful in the sense that they`re trying to avoid a scenario where you get this unruly increase in interest rates. And look at what happened after the hike in December right after the rate hike, the ten-year peak that has been falling essentially ever since in terms of rates.
So I think, yes, we do anticipate that the Fed will hike. But I think it`s going to be framed in a way where it still suggests a decent amount of accommodations, so I don`t expect a recent shock higher.
MATHISEN: Michelle, thank you very much. Michelle Meyer, a very nice economist with Bank of America (NYSE:BAC) Merrill Lynch. Good to be with you.
MEYER: Thank you.
MATHISEN: To read more about the resurgence in home flipping, head to our website, NBR.com.
HERERA: Orders to U.S. factories increased in January by the most in seven months. The Commerce Department reported a rise of more than 1.5 percent during the first month of the year. Within that report, a key category that tracks business investment plans rose by the largest amount in 19 months.
And separately, the U.S. economy services sector expanded in February, but the rate of expansion was slower than the previous month. The Institute for Supply Management reported a decline in employment for that sector for the first time in two years.
MATHISEN: The number of Americans filing for unemployment benefits unexpectedly rose just a bit last week. Initial claims for state unemployment benefits increased 6,000 to a seasonally adjusted 278,000. That is still, though, a level consistent with a strengthening labor market.
The jobless claims report comes one day before the government`s monthly employment report and expectations there are for nonfarm payrolls to rise 200,000 and unemployment at 4.9 percent and average hourly earnings are expected to increase fractionally.
HERERA: Stocks squeezed out gains, boasting a third straight day of gains, in fact, one day before the monthly employment report. Many investors likely reluctant to make big moves ahead of that release. However, gains, however small, helped the major averages close at their highest levels since early January. And by the close, the Dow Jones Industrial Average rose 44 points to 16,943, NASDAQ gained 4 and the S&P 500 added nearly 7.
As for oil, prices fell slightly to settle at $34.57 a barrel.
MATHISEN: Prices are higher in recent weeks, but still historically low and starting to pressure a part of the energy market once considered low-risk infrastructure companies. They were in theory less exposed to commodity price swings, and were insulated by long-term contracts.
But as Morgan Brennan reports, that may be about to change.
(BEGIN VIDEOTAPE)
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: As Morgan Brennan reports, as more exploration and production companies file for bankruptcy, it`s putting pressure on what had been considered a low risk corner of the energy sector, pipeline operators. Law firm Haynes and Boone estimates four dozen oil and gas producers filed for bankruptcy last year, and if low prices persist, more could follow suit.
That`s having ripple effects on so-called midstream companies that build and operate the infrastructure to gather and transport those producers` oil and gas. Midstream companies lock in long-term agreements that have, until now, been considered bankruptcy-proof. But that could change as soon as next week when several rulings potentially come down.
BUDDY CLARK, HAYNES AND BOONE, LLP: The gas-gathering contracts are unique in that the producer dedicates all of his future production from the subject leases to the gas, to the particular gas gather under the gas contract. And that dedication is the rub here in all these bankruptcies as to whether or not the dedication is merely a contractual obligation, a personal right, or if it creates a covenant runs with interest and land.
BRENNAN: Sabine Oil and Gas is requesting a bankruptcy court reject deals with two pipeline operators, including an affiliate of Cheniere Energy, which the judge has said show is inclined to do.
And tomorrow, a Delaware bankruptcy court hears arguments regarding Quicksilver Energy`s agreements with Crestwood Equity Partners. Quicksilver`s $245 million deal to sell its assets depends on avoiding those pipeline contracts. If the courts rule in the producer`s favor, that could set a precedent for other contracts to be voided -- though much would depend on each state and details on each agreement.
Still, analysts worry it could be especially troublesome if there are more bankruptcies. Not only triggering defaults on contracts that may ultimately get voided but throwing the entire midstream business model into question.
For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan.
(END VIDEOTAPE)
HERERA: Still ahead, a new analysis shows who would carry the cost of Hillary Clinton`s proposed tax plan.
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MATHISEN: Tech companies are uniting behind Apple (NASDAQ:AAPL), in its battle with FBI over access to the iPhone used by one of the San Bernardino shooters.
As of this afternoon, Internet companies, Twitter, eBay (NASDAQ:EBAY), LinkedIn (NYSE:LNKD), Airbnb, and 13 others have filed legal briefs in support of Apple (NASDAQ:AAPL). AT&T (NYSE:T) also filed a brief. Google (NASDAQ:GOOG) parent Alphabet, Facebook (NASDAQ:FB), Microsoft (NASDAQ:MSFT) and others are also expected to file similar briefs before today`s deadline.
HERERA: A new analysis of Hillary Clinton`s tax plan finds that most of the tax burden will fall on the country`s highest earners. That`s according to a bipartisan panel of reviewers at the Tax Policy Center. Clinton`s tax plan will raise taxes on the 1 percent by an average of $78,000, while leaving taxes for the rest of America largely unchanged.
But how does Clinton`s tax plan compare to Donald Trump`s? And what will it mean for you?
Here to talk more about the leading candidate`s tax plan is Howard Gleckman, senior fellow at the Tax Policy Center.
Welcome, Howard. Nice to have you here.
HOWARD GLECKMAN, TAX POLICY CENTER SR. FELLOW: Good to be here.
HERERA: Let`s start, first of all, with Ms. Clinton`s tax plan. It leaves a large swath of the population with an unchanged tax plan, but in terms of boosting federal revenues, how much would it bring in?
GLECKMAN: Well, raises revenues by about $1 trillion over ten years. And her goal is to help finance a number of social programs, kind of kitchen table social programs that she`s been promising, help with college education, help with health care, caring for aging parents, that sort of thing.
MATHISEN: Does her plan reduce the federal deficit?
GLECKMAN: It would. We think by about $1 trillion, over ten years.
Now, she has said she may have some additional tax cuts for low and middle income households. If she does, that will lead up some of that -- some of that deficit reducing potential.
HERERA: Now, in terms of Mr. Trump`s plan, how does it compare?
GLECKMAN: It`s almost the mirror image. Donald Trump is proposing $10 trillion in tax cuts over ten years. And the goal there is to reduce taxes on high-income people -- actually, on everybody, but mostly on high- income people -- to grow the economy.
So, it`s in some sense, Mrs. Clinton is proposing kind of a traditional Democratic plan. And Mr. Trump is proposing a traditional Republican plan, except his is much, much bigger than anything we have ever seen before.
MATHISEN: You say that the top -- Under Ms. Clinton, the top 1 percent of filers would pay three quarters of the extra tax. The top 1/10 of 1 percent would pay more than half of the tax increase under Clinton. Under Trump, who gets the biggest tax cuts?
GLECKMAN: The top 1 percent would get half the tax cut. So it`s, again, almost the mirror image. It`s skewed very heavily towards high- income people.
Now, with the Trump plan, everybody gets some tax cut. But for people at the bottom, middle income people, it`s a few hundred or maybe a few thousand dollars. For people at the very top, people in the top 1/10 of a percent, they get a tax cut of $1.3 million a year.
HERERA: So, the impact of Mr. Trump`s plan -- we asked you about Ms. Clinton -- Mr. Trump`s plan on the deficit?
GLECKMAN: It would be enormous. It would -- it would increase the deficit over ten years by almost $10 trillion. And that doesn`t even count the added interest expense that the government would have to pay to finance that extra debt.
MATHISEN: Very quickly --
GLECKMAN: It`s enormous tax cut.
MATHISEN: As you looked at Mr. Trump`s plan, did you use what is known as dynamic scoring to look at whether, as he would claim, the tax cut would reduce -- would result in much greater economic output and therefore offset some of that revenue loss?
GLECKMAN: We don`t do dynamic scoring at the Tax Policy Center. But it`s important to know that most economists would agree that if you raise the deficit by that much money, by $10 trillion, you`re likely to get much higher interest rates. And the interest rate effects would swap the incentives to save and invest and work that would come from the tax cuts.
So, unless Mr. Trump is going to tell us how it is he`s going to pay for these giant tax cuts, I think even a dynamic score would show that the whole proposal would either not affect the economy at all, or more likely, would actually hurt the economy in the long run.
HERERA: Yes, interesting. Very interesting study.
Thank you, Howard. Nice to have you with us.
GLECKMAN: Good to talk to you.
HERERA: Howard Gleckman with the Tax Center Policy.
MATHISEN: Mitt Romney took direct aim at Donald Trump`s business record today. His foreign policy plans and his economic ideas. In a speech designed to rally opposition to the Republican front runner, the GOP`s 2012 nominee said Trump`s proposals would cause a prolonged recession.
(BEGIN VIDEO CLIP)
MITT ROMNEY (R), FORMER PRESIDENTIAL NOMINEE: His proposed 35 percent tariff-like penalties would instigate a trade war, and that would raise prices for consumers, kill our export jobs, and lead entrepreneurs and businesses of all stripes to flee America. His tax plan in combination with his refusal to reform entitlements and to honestly address spending would balloon the deficit and the national debt.
(END VIDEO CLIP)
MATHISEN: Trump answered Romney`s indictment by calling him, quote, "a choke artist", among other things.
(BEGIN VIDEO CLIP)
DONALD TRUMP (R), PRESIDENTIAL CANDIDATE: He said about trade, we have to keep trade. Nobody knows more about trade than me. I mean, I made so much more money than mitt. You know, I have a store that`s worth more money than Mitt. It`s a store.
(END VIDEO CLIP)
MATHISEN: The back and forth comes ahead of a number of caucuses and primaries this Saturday in a debate tonight.
HERERA: The Super Bowl in February hurts Kroger`s sales. That is where we begin tonight`s "Market Focus".
The supermarket chain reported weaker than expected sales growth, blaming warmer weather and the Super Bowl being played in February. The company says the week leading up to the game is traditionally a strong one for sales, and Kroger`s quarter ended January 30th.
CEO Mike Schlotman said profits will be affected by one factor in particular.
(BEGIN VIDEO CLIP)
MIKE SCHLOTMAN, KROGER CFO: The low end of our guidance is slightly below our 8 to 11 percent long-term growth rate. That`s purely driven by where fuel may or may not go in 2016. If fuel migrates to a five-year kind of average of retail cents per gallon, we may at the low end. If it`s like it was the last couple years, we could be at the midpoint or high end of that.
(END VIDEO CLIP)
HERERA: Shares fell to $37.80.
Herbalife (NYSE:HLF), the maker and seller of nutritional supplements said it inaccurately stated its worldwide membership growth 28 times last year, attributing the inaccuracies to, quote, "database scripting errors". The company both overstated and understated new member numbers. Herbalife (NYSE:HLF) shares fell 7 percent to $52.42.
Ciena posted a narrower than expected quarterly loss, but shares still plummeted after the networking company missed revenue targets and lowered outlook for the year. The company attributed the downbeat forecast to global economic challenges. Ciena shares were off 18 percent to $16.99.
And Costco (NASDAQ:COST), the discount warehouse chain, said its profit dropped 9 percent, but comparable store sales rose for the first time in a year. The company also said it will increase its minimum wage by $1.50. This will be the company`s first wage increase in nine years. Costco (NASDAQ:COST) said that wage hike will lower earnings for the current and next three quarters.
Shares were off just a fraction to $151.60.
MATHISEN: Samsonite is reportedly close to reaching a deal to acquiring Tumi Holdings. "The Wall Street Journal" says the deal between the two luggage makers could be valued at $2 billion, and a carry-on that will fit under the seat in front of you. Shares of Tumi jumped 3p percent to $26.20.
Barnes and Noble (NYSE:NE) said same store sales for the quarter rose more than a percent, lifted by purchases of non-book merchandise. The bookstore chain said it plans to close eight stores this year but will open four new prototypes by April 2017. Barnes & Noble (NYSE:NE) (NYSE:BKS) shares were up about 7 percent to $10.94.
And Navistar shares surged today after the truck maker CEO suggested the company is open to potential deals. There`s been speculation the truck manufacturer could be in acquisition target or a partner with another company. Shares surged 17 percent on the day to $10.84.
And the mining equipment maker, Joy Global (NASDAQ:JOYG), reported a worse than expected loss for the quarter, but did not cut its outlook for the year. The company CEO said the company plans to sell off additional plants and machinery. Shares up 20 percent to $16.09.
HERERA: Well, winter is almost over, and Southern (NYSE:SO) California has seen little rain so far, despite forecasts that El Nino would usher in a wet winter season. So why were the forecasts so off? And what does another year of drought mean economically?
Jane Wells is on the case.
(BEGIN VIDEOTAPE)
JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is what Lake Oroville looked like a little over a year ago. Water levels very low.
Levels this week at the lake, which is one of California`s most important reservoirs, don`t look much different. El Nino has been el dud- o.
NASA climate scientist John Willis said had high hopes, like others at JPL, he was expecting what a colleague predicted would be the, quote, "Godzilla of El Ninos". Well, it kind of was -- everywhere in the world but California.
The rainy season here had a promising start. In just one 24-hour period in January, you could see the storm channels fill up in Los Angeles and up in the sierra, once dry ground was covered with an abundance of snow.
And then the rain stopped. February was the hottest on record. What went wrong?
JOHN WILLIS, NASA/JPL CLIMATE SCIENTIST: Yogi Berra said that predictions are hard to make, especially about the future.
WELLS: And predicting the weather is hard, especially hard with El Nino, since they only roll around once every 10 or 15 years.
WILLIS: So we have really only seen two big El Ninos since we have had our big observing systems that look really hard at what it does.
That means we have only had a few chances to get it wrong. And we need a few more before we start getting it right.
WELLS: Willis says this El Nino pushed warm water further north, which could mean as it fades, Southern (NYSE:SO) California could get more rain. In fact, a series of storms are expected there this weekend.
WILLIS: There`s still time. So, don`t put those galoshes into deep storage yet. We could still get some rain in March and April.
WELLS: Enough to end the drought? Well, given that the U.S. drought map of California looked like this a year ago, and looks about the same today, the Golden State may need 40 days and 40 nights of rain, and it`s been a very long time since anyone predicted that.
For NIGHTLY BUSINESS REPORT, Jane Wells, Los Angeles.
(END VIDEOTAPE)
MATHISEN: Beautiful country.
Still ahead, what Cadillac is doing to up its game in the highly competitive luxury auto market.
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HERERA: As auto sales climb to all-time highs, American consumers are setting records when it comes to how they`re paying for those new cars. According to Experian Automotive, leasing in the fourth quarter was higher than ever, with almost 30 percent of all vehicles bought in showrooms being financed through a lease. That compares to about 25 percent in the prior year quarter. Consumers are drawn to the lower monthly payment that comes with leasing when compared to a traditional auto loan.
MATHISEN: Cadillac is looking to reassert itself in the battle for luxury auto buyers after years of watching competitors rack up stronger sales because of a slew of SUVs and crossovers, Cadillac is now trying to up its game with a new model.
Phil LeBeau reports from Dana Point, California.
(BEGIN VIDEOTAPE)
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: For Cadillac, x marks the spot, as in the XT5.
The brand`s newest model designed to make luxury buyers think once again about buying a Caddy.
JOHAN DE NYSSCHEN, CADILLAC PRESIDENT: I`m proud to say that Cadillac brand today is absolutely resurgent. And we are on a mission to take this brand back to what I like to call the pinnacle of premium.
LEBEAU: This is the new Cadillac XT5, a midsize SUV. Why is this so important for General Motors (NYSE:GM) and for Cadillac? Mainly because Cadillac has not been very competitive when it comes to luxury SUVs.
From Lexus to BMW to Mercedes, SUVs now drive the luxury auto market. In fact, it`s one reason BMW and Mercedes have outsold Cadillac since the recession seven years ago.
MICHELLE KREBS, AUTOTRADER: The market for SUVs was really strong, it was growing. Everybody saw it. And they haven`t addressed it.
The SRX is way long in the tooth, way overdue for being replaced. They also have some voids. They need a smaller sport utility vehicle. So, they`ve got to start introducing a lot of new product and keep it very fresh.
