How America's Housing Non-Recovery Led To Record Income Inequality

Tyler Durden's picture

With bond yields soaring over fears of a Fed tapering, and 30 Year fixed mortgages on the verge of crossing 5.00%, it is inevitable that any "speculative" investment property components, driven by cheap and abundant credit, to what continues to be incorrectly labeled a housing recovery, will crash and burn in the days and weeks ahead. This was already confirmed when looking at mortgage applications, which tumbled at the fastest pace in three years. However, as the following note from CLSA's Chris Wood explains, there is another angle when a housing recovery is not a housing recovery: a surging Gini coefficient. In fact as Wood observes that "the Gini coefficient had apparently reached in 2006 the previous high seen in 1929, prior to the Great Depression." In other words, the US now has greater income inequality than even during its worst economic episode in history.

This means, unfortunately, not that the problem has been avoided but that the ‘great reckoning’ has been deferred to another day as the speculative classes have continued to game the system by resort to carry trades actively encouraged by the Fed and other central bankers, which is why fixed income markets freak out when they see signs of an exit.

Precisely. It also means, even simpler, that the rich are getting richer, while the poor not only can't afford to buy homes, but are getting poorer by the day. For some colorful stories of what previous episodes of such unprecedented social divergence may ultimately leads to, just speak to France circa 1788.

From CLSA's Greed and Fear

If housing has staged an impressive pickup in activity, GREED & fear’s view remains that the recovery in American housing is different from a conventional recovery from a housing bust in that it has been jump started to a huge extent by massive investor demand in the context of the unusual circumstances provided by unconventional monetary policy, including the Fed’s buying of mortgage backed securities (MBS). The Fed’s holding of MBS totalled US$1.2tn at the end of June.

The degree to which yield-seeking investors, including specialised investment funds, have driven the housing recovery is best illustrated by the extent to which the new mortgage applications index has not recovered as much as say housing starts. Thus, the US new purchase mortgage application index has so far risen by 29% from its low reached in October 2011, while US housing starts are up 91% from their April 2009 low (see Figure 5). It is, therefore, necessary to continue to watch the new mortgage applications index closely for evidence that the baton in the housing recovery will be passed from investors to end buyers. In this respect, the obvious constraints on end buyers are a lack of income to service the mortgage and, more importantly, a lack of sufficient equity in terms of what is required by banks post-crisis to have a mortgage. Indeed there is a risk that investors, on account of still attractive rental yields compared to what is available in fixed income markets, keep pushing up prices so that houses become unaffordable again. Certainly, in GREED & fear’s view investors will be much less concerned by rising mortgage rates, courtesy of the recent Treasury bond sell-off, than would-be home owners.

The above thesis of an investment property boom, as opposed to a conventional housing recovery, raises another consequence of unconventional orthodoxy. This is that the practical way these policies work is to lead to ever more extreme wealth distribution, as reflected in America’s Gini coefficient which measures the degree of income inequality. The Gini coefficient has risen from 0.386 in 1968 to 0.47 in 2006 and was 0.477 in 2011, according to the US Census Bureau (see Figure 6). This is because the wealthy are geared into rising asset prices, particularly prices of financial assets, whereas ordinary people are geared into average hourly earnings growth. In this respect the Gini coefficient had apparently reached in 2006 the previous high seen in 1929, prior to the Great Depression. This is a reminder that capitalism’s natural way of dealing with excesses is via business failure and liquidation; which is why wealth distribution would have become much less extreme as a consequence of the 2008 crisis if losses had been imposed on creditors to bust financial  institutions, for example owners of bank bonds, in line with capitalist principles; as opposed to the favoured ‘bailout’ approach pursued for the most part by Washington.

This means, unfortunately, not that the problem has been avoided but that the ‘great reckoning’ has been deferred to another day as the speculative classes have continued to game the system by resort to carry trades actively encouraged by the Fed and other central bankers, which is why fixed income markets freak out when they see signs of an exit. But the point to remember is that the leverage taken on in such trades is highly risky because of the underlying deflationary trend.

* * *

Which is precisely why the Fed's pseudo-exit via hints of tapering is why the entire house of "housing recovery" cards is set to tumble any minute: because quite simply it was never a recovery to begin with, but merely the latest cheap credit-funded, hot potato flipping ploy conceived by the Fed to benefit its private bank backers. And, as always, it will be everyone else left to fund their bailout once this latest credit bubble pops and the TBTF card is used one more time...

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Spider's picture

We need to take back this country and the only way we can do it is through PM's - we are slaves to the banksters right now but we do have the means to free ourselves.

Together we can break the silver market and break the banksters - if you're interested check out the "Silver Pledge" and join us:

insanelysane's picture

Lobstas, caviar, and champagne on a yacht because being a public servant is tiring work.  I'm sure that was the same 4th of July the 99% had too.

James_Cole's picture

The income disparity thing gets muddied when you look at only the top 1% (avg income being $717 000). Doesn't seem bad really. But if you look specifically at the top 0.01% that's where things get interesting, their avg income (at least in filings) is $9.1m. 

Let's say that's 313K people making $9.1m (averaged), if you were to break that into chunks of $60k, that would be equivalent to 47 million Americans at middle class incomes ($60k). 

I know no one wants redistribution of wealth etc., but you gotta wonder how functional a financial system is when .01% are hauling in the equivalent of 47 million people making average salary. Meanwhile 47 million people are on foodstamps..

One of those things that makes you go hmmmm.

nbsharma's picture

Thank you for writing this up. Its a simple fact, but so profound. I definitely went, Hmmm.

Buckaroo Banzai's picture

Let's not forget an obvious fact that everyone seems to be overlooking. When 30 million dirt-poor people stream over your porous southern border, it tends to impact your income inequality statistics.

All Risk No Reward's picture

Remember, debt is money and money is debt, therefore, their retaiined income is society's unpayable debt, BY DEFINITION.

IOW, the rich can only get richer if they make everyone else poorer.

"The game is rigged, the table is tilted..." George Carlin

McMolotov's picture

Is this news? We all know people like Kerry are woefully out of touch with ordinary Americans. No need to beat a dead horseface...


EDIT: Although it sounds like fun.

LetThemEatRand's picture

John Kerry walks into a bar

MedicalQuack's picture

Sadly he covered his own back..Kerry says we have a right to be stupid in the US:)  I guess he does anyway:)

Obchelli's picture

This doesn't matter any more market will rally another 200 points when this Ultimatum will be "resolved".

All this Greece news actualy contributed 2000 Dow up points when every other day Greece was "saved".

Jumbotron's picture

State Department admits Kerry was on yacht day of Egypt coup


Who gives a fuck?

This is supposed to be worse than Hillary diddling herself while Benghazi burned and Americans died?

Fuck that Ketchup Heiress boy-toy.

Jumbotron's picture we go again...

Kerry:  "I was on the yacht before I was not on the yacht."


kito's picture

zerohead....not true!!!!...kerry was on a swiftboat that day.................................

ThunderingTurd's picture

Someone smarter than me please do a "Wealth Affect" analysis on the collapse of the bond market.  CNBC/The Bernank can't have their cake and eat it too!  Also, try to incorporate the phantom tax of $105.00 oil.  Thanks.

Everybodys All American's picture

I can tell you one thing the Fed lost a hell of a bunch of money today and it's only going to get worse.

Colonel Klink's picture

It's only fake 6 pointed clown bux anyways.

franzpick's picture

Today's 2 year high in bond yield moves is either the beginning of the fed-zirp-QE disaster, hiding in plain sight, or i need new glasses.

Earth to Tyler...


ThunderingTurd's picture

Yea, I find it interesting how The Bernank said it was "confusing" that rates continued to rise in the face of his $85 billion per month in purchases.  That comment was made at a 2.30% 10-year.  Is "confusing" now "panic"?

Dareconomics's picture

Cheap central bank money is welfare for the 1%.  Too bad the good times don't trickle down to the rest of us.

FreedomGuy's picture

Yes, it is the actual fallacy of Bernanke's monetary theories. Unloading bad debts and increasing artificially cheap bank reserves only helps the financial class. The money does not get out to John Q. Public. So, the financial class gets free and cheap money to screw around with and buy all our assets while we are reduced to part time jobs through the wonders of Obamacare and other government interventions. It becomes cheaper and less risky to play with money at ZIRP rates than to actually provide real goods and services. A company can do better more reliably by reducing costs and playing with capital than making more and better things.

This is one (of the many) great lies of government and central planners...that they can or even will equalize things for the "little guy".

Welfare for the bottom and the top, I would say.

Meat Hammer's picture

The Gini is out of the lamp.

q99x2's picture

Nice article. The manipulation of markets up and down will continue until the US achieves the economic status of Greece.

HowardBeale's picture

"The manipulation of the markets up and"--up...

MedicalQuack's picture

It's called modeling for inequality and until banks and corporations are held accountable for both their math and business models, nothing will change.  We still have some really "dumb" politicians that can't see the data mechanics on how this works.  Modeling for inequality with segmentation..good video from former DE Shaw quant.

Its all about the models and more like this on the Algo Duping site with videos done by people smarter than me that have lived and worked in that environment giving us warnings.  We are under "The Attack of the Killer Algorithms"..and it is not just limited to the financial markets, it's everywhere where a certain crowd of shareholders are found:)

Go Tribe's picture

When is this fucking market going to CRASH????

Catch-22's picture

It might be a while…


New purchase applications and housing starts are low since houses on the market currently are much cheaper than the cost of building new ones… If they continue inflating this bubble, once the price of existing homes reach the price of building new ones, the apps and starts will pick-up noticeably… IMHO.

Like all other markets… they can make it levitate longer than we can stay solvent. Position yourself accordingly!


involuntarilybirthed's picture

We should limit wealth to $10m.  Anything over must be given to an individual and not a unit/company/anything.  Once your kids get $10m they are the same.  Those with more than $10m now must give up any $$$ beyond the limit.  They can keep their current assets but not the excess money.

$10m is enough for anyone to enjoy live.  And they can keep making money just not keep more.  And no, i don't want their money but it would be good to spread it around to "citizens" according to their citizenship seniority.  The gov gets none until tax time. 

It is spoken, therefore, it won't happen. 

Everybodys All American's picture

I'm at a loss for words as to how this market is going higher on bond prices cratering.

Atlantis Consigliore's picture


Print steal, defraud, and hide all you can, as fast as you can, lay everyone off, cash.....

FreedomGuy's picture

Let's start a pool on what year we will hear the term "quadrillion".

kaiserhoff's picture

How about an over/under on whether the Euro lasts until Christmas?

Jim in MN's picture



It's like watching a rabbit after the snake bites it.

Jump, shiver, twitch....

Next is 'thump'.

Hohum's picture

The USA could return to its lower GINI coefficient days of the 1950s.  You know, when marginal federal tax rates were 90%+ and corporate income taxes raised 30% of revenue (unlike 6% or so today).

The late 1970s geniuses maintained that lowering taxes significantly would help everyone.  Didn't quite turn out that way, did it?  But I am sure radically lower taxes and spending will lower that GINI coefficient, right?  I know most ZHers are very concerned about the distribution of income.

FreedomGuy's picture

Yes. I have thought about it and decided you are right. Higher tax rates and the government spending my money on everything from farm subsidies to Solyndra to banker rescues is far better than me spending my money. In the spirit of this kind of thinking I am going to lobby my Congressman to raise marginal rates to 100% for all. If 90% was good, 100% must be great. Maybe we should just tax it all. Let's just take all corporate income, too since that works so well. I don't need a raise. Hell, we can just set minimum wage to $100/hr if necessary, anyway. Government has asserted the right to determine the value of my labor and I can get me and my coworkers to outvote my boss.

Yup, let's run these great ideas to their natural conclusion.

Hohum's picture

Of course higher taxes are not intrinsically good.  But people spending their money isn't so great, either.  We have a culture of consumption, not wealth building.  Why not examine your assumption that minimal taxes lead to maximum wealth?  Too much to ask?

starman's picture

yup the transformation of the citizen of America  begun in the eighties 

with credit cards !!! they became slaves to the credit system,no.longer able to save resorted to the life of paycheck to paycheck and month to month living!

the American dream soon will be a nightmere! 

22winmag's picture

That's a pretty solid summary. Mortgage backed securities are toilet paper at best.

Walt D.'s picture

The income inequality is a natural consequence of Government Policy - overspending, printing money, high taxes, Byzantine regulations, ObamaCare (actually ObamaDontGiveaRatsAss)

Who loses:

Small business.

People who work for small business.

New graduates.

People who jobs are exported offshore.

People who work in the private sector.

Who wins.


Big Banks

Multinational Corporations.

Federal Government Employees

Washington DC lobyists


CheapBastard's picture

Houses are still overpriced, propped up by zero down mortgages and ZIRP. Hard to believe some people deny these "zero down" loans  since they are advertised on the radio here all weekend long. problem is many are suckered into these 30-year debt situations by the false sense of zero down and then thinking only of what the monthly payment is instead of the total price over 30 years.  Few even think of the problems (and costs[~ 10% of the house price]) involved of selling this illiquid problem called a "house".