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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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Nice thinking. But reality is a bitch.
Those who borrowed big already passed the buck to the Government.
So, it is all those people and their savings that will be used to pay up the debts. Or those who loaned out their savings is going to get a Haircut.
Which is why everyone with savings needs to convert ALL their liquid and semi-liquid assets to precious metals, and hide them safely and securely yourself (do not let ANY other individual or corporation hold them for you, because they WILL vanish).
Yes, it is probably reasonable for most folks to keep one checking account operational, but it should never contain more than you need to pay ~1 month of expenses (rent, utilities, etc). Best to keep currency required for shopping in cash in your possession, not in the checking account.
One of these days, banks accounts will vanish, either 100% or maybe only 90%.
Anyone who keeps savings in a bank at this point in history is certifiably insane.
Guess what. Any government deriving its income though taxes is socialist. Now where is this free market mecca you imply?
TAXATION == THEFT.
GOVERNMENT == FICTION.
HUMAN PREDATORS == REAL.
Understand?
Agree. of all the gov waste, the military and war are the worst. Money could be returned to its rightful owners.
Pop Quiz: which presidential candidates are calling for a 50% reduction in the military and for cutting gov spending?
Scooby was on homepath.com the other day looking for a new doghouse. I heard that Snoopy's doghouse got foreclosed on and I wanted to scoop it up.
Anyway, I noticed that the asking prices were ridiculous. Too damn high!
What, government wants me to buy a house at 2008 peak market prices while I'm getting half the pay that I was getting in 2008 and paying 3x more for a bag of kibbles and Scooby Snacks?
Are you serious?
Fuck it, my boys live in the master bedroom, wife and I in the 2nd smaller bedroom. $1,300 a mo. for 1,300 sq. ft. condo in cali. I pocket over $30k a year renting.
30+ years ago I bought a large parcel on a lake in the south incase I ever went poor. I'm less than 2 years from retirement. Next year it gets 3 rv plots with water, electric, septic and cable. Game on boys, slay the fucking dragon when Mom & Dad are gone, live off the cash we accrued & Gold. Wow, dad was the greatest Hunter/Priest Evar !
Love Dad
Gold Bitchez...I pick up pennies
Wait until you and wife go into the assisted living / nursing home. All those assets to the gov! Unless you've already deeded your property to your boys.
Ok..so the Fed hedonically plays around with prices...how about the Fed playing around with "hedonic wage growth" of American jobs. That could fix the problem of "missing inflation". Next problem.
Said to the woman who noted average packaged salami at $18 lb. Imagine what the price would be if we had inflation.
The Federal Government and Wall Street are to blame, two entities not required for human survival.
What kind of woman buys a whole salami anyway?
Re. QE and inflation. I watched this vid the other day, explaining that in 2009? the Fed started paying interest on 'excess deposits'. Some 25% of QE has wound up parked at the Fed as a result.
So, if the Banksters want inflation, why don't they or better yet, when will they revert to mean and stop paying interest on excess deposits?
Found the video - Fed Audit Shocker: They Come from Planet Klepto
Drive up prices by limiting supply and lending to lemmings with 1% down. There are large swaths of the country where entire county's are in some form of default or foreclosure. The problems from 2008 where never fixed. They just kicked the can further downtown the road. Now Fannie and Freddie offer those wonderful 'My City' modifications. Still can't afford that home you have been living in for free for 5 years, well We have a great deal for you.... How about we reduce you fucking mortgage 60%. We''ll give you a 2% rate, extend your term to 40 years and defer principal. Housing will be effected for decades to come!
I would like to hear just one presidential candidate promise to defund the CIA, get TSA to become humane or they are fired, quit funding that stupid F35, we can buy cheaper fighters from other countries if need be and modify them like Isreal does.
I have yet to hear one candidate promise to reduce income tax for all and to be able to submit a one page tax form per year that anyone can fill out and call it a day,
I would like to hear one presidential candidate promise to review all existing laws and regulations which conflict with the constitution or do not make sense and repeal the lot of them.
I would like to hear one presidential candidate promise and follow through with closing military bases in foreign lands, Gitmo and swear off torture.
I would like one president vow to protect our privacy, stay out of our bank accounts and let us live our lives without the government's big noses over our shoulders.
It ain't going to happen.
True True.
Maybe there is a President who would like to stay out of your accounts.
But there is not a Banker who would stay out. They live on OPM.
Damn. You're not drinking the Trump or Sanders koolaid.
You'll have to move to Russia to hear talk like that.
Zero inflation is a fairy tale. John Williams has been showing on shadowgovernmentstatistics for many years now that inflation in the US is high (7-8%) if measured with the formula used in the pre-Clinton period.
In next war, we just drop a laser-guided bomb to jap's welfare dept, building, they will surrender next day, LOL.
Alls we would have had to do is let everyone stay in their homes and let the banks fail and everything would be fine right now. Just think if everyone still had their home with no payment and these bankers were gone it would be a perfect world. Instead we bailed them out and they took most peoples homes... GREAT JOB DIP-SHIT AMERICA! KEEP LISTENING TO THESE A-HOLES AND SEE HOW HAPPY AND FULFILLED YOU BECOME. DIPSHITS! Instead we can look back and see all those rotting homes we left behind... What a discrace. Imagine if these bankers actually had to learn a lesson for a change? What a wonderful world this could be..... UNCLE SHAM IS LOYAL TO THE WRONG SIDE. I call it ASS-BACKWARDS
Ownership is not paying a mortgage. That's called voluntary slavery and you've been programmed to like it and believe it. Add on to that usurious property tax rates and you're a complete sucker for life.
Wonder how the gov will handle all the Boomers who will lose their 401k's and then not be able to sell their big homes because no one can afford to buy them?
The solution would be to let the bankers fail and let the boomer’s keep their homes because it was the bankers fault in the first place the whole thing collapsed not theirs. The boomer’s are just hard-workers that don’t pay too much attention to their government?? for some reason. Even if we had to make some of the banks creditors whole we wouldn’t be where we are now because of these dipshits. Its hard to argue that this wasn’t engineered. If we did that the last time we would still have families in homes and thats my idea of what a governments goal should be, for the betterment of the family and majority. NOT INDIVIDUALS OR CORPORATIONS.
Only in retrospect can we see that IRAs and 401Ks were for the bankers' benefit and not ours.
Inflation is currently being hidden in the price of crude oil. They give us cheap fuel so we don't advance ourselves too fast into total freedom, through green energy. Total boycott of crude oil will absolutely bankrupt the establishment.
Blackrock plus the Fed has infinite money created out of thin air to buy all real estate and rent it too our kids. Our kids cannot get that deal, but Blackrock can.
There have been a bunch of posts about property taxes. Many touching on city services cost increases and stuff like that always increasing.
WELL - I live in a town of about 5000 in NH. About twelve miles from the state capital. When I first moved here about 18 years ago or so, the property tax was reasonable. About 70% of it goes for the school district so one should expect modest increases.
There are "town water and sewage" services for only an extremely small portion of residents in central clusters as the town is rural with a lot of acreage. Probably 85% or more have their own artisian wells, sceptic tank, and leech field as I do. We have no waste removal services and have to take our own trash to the dump (actually a transfer station, requiring citizen-purchased special large plastic bags for proper recycling).
However, our town has a Taj Mahal-like public library built not that long ago. It is magnificent on an open plot of land with a $30K stone fireplace/hearth which must be seen to be believed. Of course, not that many people are ever to be found at that particular area at the back of the library.
We just had a palacial Fire Station constructed under a $3 million budget. It is so magnificent that I'm sure it could be on the cover of "Fire Department Monthly" if there is such a magazine. BTW, the residents were not presented with, say, a budget choice between a $3 million facility and a more austere $2 million budget. No, the media coverage correctly described coming up with the insane cost with the budget committee and selectman then having the challenge of "MARKETING IT TO THE VOTERS".
To give an idea about what takes place at town meetings regarding the budget, here is one example: At one such meeting a citizen rose to speak at the microphone in front of a large crowd. He brought up the topic of rather lavish spending. Someone in the audience yelled "If you don't like it, move away" to substantial clapping from a segment of the crowd.
" IF YOU DON'T LIKE IT, THEN MOVE AWAY ". That is symbolic of the split in my community between the 1%-type, with spouses both being professionals such as lawyers or doctors. The ones that drive brand new Lexus SUVs and the like. The other half barely can afford to exist either as renters or as over-burdened property tax payers. I'm in the second group and am preparing my house for sale. The controlling 1%-ers want to have the best of everything as a matter of community pride - just like they have to drive a Lexus SUV instead of a Honda Accord. The sad thing is, they've won.
Our selectmen talk a good game with soundbites about concern over the astonishing amount of "for sale" signs. But they do not actually address it despite promises. Keep in mind this is a rural NH community with restricted "city services" offerings that requires people to go to the dump on their own for trash removal. Outside of the school district, town services are bare-bone. I've learned that it is a town for the 1% - not me.
Sorry for the length - but it typifies income inequality and the 1% vs normal people dominating our society.
My property tax increased aprox 18% this year alone. My 21st year paying property tax....I live in a similar situation along the coast of Maine. Its pathetic when people are able to spend other peoples money, they just seem to have no limits. The people from away come in and take over with their fiat money and lame brain ideas. It is sad. At that rate it will double rather quickly? They tell me they want to make my life better, but they only make it harder? Great job!
The cost of submission to invasion is higher rents, you'd think renters would get a clue and vote Trump, not voting Trump means vote Trump landlord.
I think that if the rents are unafforadable for common people that the common people should burn the buildings down. It won't take many fires to get some reduction in the fucking common people are taking every day of their lives. People need to stand up to the capitalist thieves by action!
This is one of three main ways the western economy was destroyed.
1. debt and various banking mafia scams
2. off-shoring
3. mass immigration
Mass immigration puts downward pressure on wages but also if you don't build the extra housing in advance it leads to upward pressure on housing costs and that double squeeze on discretionary income creates a deflationary spiral.
If only a tiny number of people at the top have any money to spend then the economy deflates.
It's so simple yet the banking mafia are too blinded by greed to see it and as the banking mafia own the media and the lobbyists they used them to blind everyone else to something which is completely obvious.