The Mystery Of The "Missing Inflation" Solved, And Why The US Housing Crisis Is About To Get Much Worse
Over the past few months (not to mention last 7 years), the topic of America's "missing inflation" has gained major prominence, because while supposedly every other aspect of the economy is humming along (which really just means that record numbers of waiters, bartenders and temp workers are hired and collect minimum wage salaries), CPI remains so low it (together with China to a lesser extent) was used as justification by the Fed to not hike rates for 55th consecutive FOMC meeting, even though 75% of polled economists said, after 9 years of ZIRP, Fed lift off would take place last week.
One problem with the Fed's measures of inflation, as we have documented in the past, is that they are wrong, if not with malicious intent, then purely due to definitional purposes. Recall our July comparison between CPI and PCE and our warning that "With The Spread Between CPI And PCE Blowing Out The Most Since 2009, Is The Fed Making A Big Mistake" in which we warned that "with a rate hike, as small as [25 bps] the Fed can and will almost certainly start a chain of events that results in the "ghost of 1937" waking up. We don't know if, like during the first Great Depression, it leads to a 50% plunge in stocks, but for those long risk here, it hardly makes sense to stick around and find out."
The Fed did not hike.
But a bigger problem for the the Fed's measures of how the overall economy is doing (and/or overheating) is that the Fed telling the vast majority of Americans that inflation is negligible, leads to riotous laughter.
The reason for this is a simple, if dramatic, one: the U.S. transformation from a homeownership society, to one of renters.
We hinted at the key features of this unprecedented conversion in June, when we wrote the following:
... by now everyone knows that the artificially suppressed, "hedonically-modified" and seasonally-adjusted inflationary readings is what has permitted the Fed to not only grow its balance sheet to $4.5 trillion but to keep rates at 0% for 8 years. Because "how will the economy recover if there is no broad inflation", the Keynesian brains in the ivory tower scream, demanding more, more, more easing just to push inflation higher.
There is only one problem with this: it is all a lie - just ask any average American whose cost of living has soared in the past decade.
Still, with reality diverging so massively from the government's official data, reality just had to be wrong somehow.
Turns out reality was right all along, as revealed by the latest "State of the Nation's Housing" report released by the Center for Housing Studies at Harvard, which showed that while inflation among most products and services may indeed be roughly as the Fed and BLS represent it, when it comes to rent - that most fundamental of staple costs - things have never been worse.
According to the report, for American renters 2013 marked another year with a record-high number of cost burdened households - those paying more than 30 percent of income for housing. In the United States, 20.7 million renter households (49.0 percent) were cost burdened in 2013.
It gets worse: a whopping 11.2 million, or more than a quarter of all renter households, had "severe cost burdens, paying more than half of income for housing." The median US renter household earned $32,700 in 2013 and spent $900 per month on housing costs. Renter housing costs are gross rents, which include contract rents and utilities.
At this point we should perhaps remind readers that according to the latest census data, the US homeownership rate tumbled to 63.4%, the lowest reading since the first quarter of 1967: the lowest in 48 years!
Peeking behind the headline number, an even uglier truth is revealed: the only reason the homeownership rate is as "high" as it is, is due to homeowners in the 65 and over age group. For everyone else, homewonership rates are now the lowest in history!
And with housing increasingly unaffordable for most, or mortgage lending standards so stringer the vast majority simply do no qualify, it means that record number of households are forced to chose less capital-burdensome rent as a form of shelter.
And since there is an unprecedented demand for rental units across the US (as the "owning" alternative has become inaccessible), the median asking rent not only soared at an annual rate of over 6%, it has never been higher, with the Census Department recently reporting that the Median US asking just hit an all time high $803.
What is odd is that according to the BLS, rent inflation is far less: at just 3% in the most recent print. One wonders what seasonal adjustments American renters should use to make their monthly paycheck smaller, the way the BLS perceives it. Still, at 3.6% this is the highest annual rent inflation since 2008.
And herein lies the rub: because it is not so much what the real, honest inflation growth rate of rent is, it is what the offsetting income growth. Unfortunately, while the BLS can seasonally adjust rent payments to make them as low as a bunch of bureaucrats want, the bigger problem is that US household income is not only not keeping up with rent inflation, it is far below it. In fact, as reported last week, real income is now back at 1989 levels!
Which brings us to the latest, just released joint white paper by Harvard's Center for Housing Studies in conjunction with the Enterprise Resource Center, in which we read that the US rental crisis is about to get far worse. In fact, in an optimistic scenario in which rental inflation rises by 3% annually (it is currently far higher at 3.6%), while annual income growth is rising at a speed 2.0% (it is currently far lower in real terms) the number of severely cost burdened households - those who spend over half of their income on rent - will rise by over 25% over the next decade, from 11.8 million to a record 14.8 million households!
Which means that is using at least somewhat realistic assumptions, the real number of households who spend more than half of their income on rent will likely be in the upper teens if not 20s of millions by 2025.
From the report:
if current trends where rent gains outpace incomes continue, we find that for each 0.25 percentage point gain in rents relative to incomes, the number of severely cost-burdened renters will increase by about 400,000. Under the worst-case scenario of real rent gains of 1 percentage point higher than real income gains per year over the decade, the number of severely cost-burdened renters would reach 14.8 million by 2025, an increase of 25 percent above today’s levels.
More depressing details about the state of the US housing rental market:
At the time of the decennial census in 2000, one in five renters were severely cost burdened, paying more than half of their gross income for rent and utilities (Figure 2). Meanwhile, another 18 percent faced moderate cost burdens, spending between 30 and 50 percent of their income on housing costs, exceeding the widely accepted standard that housing should not command more than 30 percent of a household budget.3 This represented a slight improvement over the shares burdened in 1990 as income gains outpaced growth in rents.
And here is the punchline: "in the years following 2000, gains in typical monthly rental costs exceeded the overall inflation rate, while median income among renters fell further and further behind (Figure 3). As a result, the share of renter households facing severe cost burdens grew dramatically, reaching a new record high of 28 percent in 2011 before edging down to 26.5 percent in 2013. Adding in those with moderate burdens, just under half of all renters were cost burdened in 2013. These rates are substantially higher than a decade ago and roughly twice what they were in 1960."
Here the white paper confirms what, as a result of the above dynamics clear to everyone but the Fed, we already know.
At the same time that the share of renters facing cost burdens was rising, so too was the share of households opting to rent. Over the last decade, the share of renter households in the United States has increased significantly as homeownership rates have fallen from a high of 69.2 percent in the second quarter of 2004 to 63.4 percent in the second quarter of 2015, the lowest level since 1967. We are now seeing more renters than at any other time in U.S. history.
Furthermore, rent inflation isn't going anywhere - in fact, it will only get worse: "as of 2013, the median rent of a newly constructed unit of $1,290 was equal to about half the median renter’s monthly household income, underscoring the urgent need for policy makers to consider enhanced levels of support for rental housing particularly for lowest income households but across a range of income levels."
Even the pinnacle of status quo thought, Harvard itself, is now mocking the 'recovery' propaganda:
While reports on the state of the economy have become more optimistic in recent years, the number of renters with severe cost burdens is not expected to slow. Even if trends in incomes and rents turn more favorable, a variety of demographic forces will exert continued upward pressure on the number of rent-burdened households. Rapid growth of the minority population is one key factor, driven by past and predicted high levels of immigration. By 2050, the U.S. is expected to have a majority-minority population, meaning a greater share of the population will be non-white racial and ethnic minorities. The Hispanic population in particular is projected to continue its fast growth, reaching 106 million (or doubling) by 2050.
With that said, racial and ethnic minority households are disproportionately burdened by housing costs, regardless of tenure. According to the Center for Housing Policy’s Housing Landscape 2015, working households that are headed by non-white individuals have a significantly higher rate of severe housing cost burden than white-headed households. According to this analysis, one-quarter of both African-American and Hispanic households were severely housing-cost burdened in 2013, compared to less than 20 percent of white households.
Sorry Europe, the US has its own refugee, pardon immigrant, crisis and it is getting worse by the day.
Finally, tying it all together, here is the reason why the biggest US generation by number of participants - the Millennials, at 82 million strong - and the one generation that was supposed to be the dynamo that pushes the US out of its post-crisis funk is, simply said, crushed.
Millennials are also expected to continue experiencing rent burdens as they age. Having entered the labor market during and following the Great Recession, those in the millennial generation have received lower wages and experienced higher rates of unemployment and underemployment than their older counterparts at this point in their lives. As a result, millennials have less wealth accumulated, have delayed forming new households, and are less likely to become owners at the age that older generations had previously. In combination, we are likely to see additional household formation by millennials over the next decade and expect a relatively higher share to remain renters during that period.
Bottom line: far from confirming the "bullish thesis" that Millennials will eventually move out of their parents basement and buy (or rent) their own housing while starting new households, just the opposite is taking place:
In 2015, 15.1 percent of 25 to 34 year olds were living with their parents, a fourth straight annual increase, according to an analysis of new Census Bureau data by the Population Reference Bureau in Washington. The proportion is the highest since at least 1960, according to demographer Mark Mather, associate vice president with PRB. "The phenomenon of young adults, facing their own financial challenges, forced to squeeze in the homes of their parents. And new data show the trend is getting worse, not better."
As Bloomberg redundantly adds, "It takes young people longer these days to find jobs with decent wages," Mather said. "Young adults need to spend more time getting the necessary education and skills before they can become self-sufficient. The recession likely exacerbated this trend."
The latest Census data show just 3.1 percent of Americans from 25 to 29 relocated in the last year between states, just half the share of 2002. While moves between counties in the same state — less likely to be for jobs — have increased some, they too remain below pre-recession levels, according to PRB's analysis.
For some like Goldman, there is hope: "There is a silver lining to the trend. Presumably, all the adult children will one day leave their parents' basements, and that household formation will prove to be a huge boost to a subpar housing recovery. There is already evidence this is occurring to some degree."
Actually, no. And as the Harvard report suggests, Millennials are not only not leaving their "parents basements", but even if they were, their financial situation would be even worse! At least for the time being, their parents cover the rental costs. Should tens of millions of millennials suddenly see their "disposable" income be crushed once the real world presents itself, that will be the end of the upswing in US consumer spending.
In conclusion, nowhere is the mystery of the "missing" inflation more obvious than in the following interactive map showing that in virtually all major seaboard metro areas, including the major cities in California, New York, and Florida, the number of households with a cost burden is 50% or higher.
All of this could have been avoided if only the Fed has observed the "missing" and soaring rental inflation that was right in front of its nose all the time, and which it did everything in its power to ignore just so the 1% can keep their ZIRP (and soon NIRP)and QE, and become even wealthier on the back of the middle class and the 80 million of 25-34 year old Americans who have found out the hard way that not only is the American Dream of owning a home officially dead, it has been replaced with the American nightmare of completely unffordable renting.
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