Core Inflation Rises 0.3% MoM In December, 1.8% YoY, Owners’ Equivalent Rent of Dwelling Rises 3.1% YoY (Fed Still Can’t Generate Inflation)

I remember when Federal Reserve Chair Janet Yellen said that inflation is just around the corner. It must be a really long street.

Consumer price indices for December are out and CPI MoM rose 0.1%, but Ex Food and Energy it rose 0.3%. CPI Ex Food and Energy YoY rose 1.8% from 1.7% in November.


Despite its wishes to generate inflation with zero interest rate policies and QE, inflation remains stubbornly low (below 2%). Core PCE Prices YoY is even worse at 1.50%.


Of course, home prices are growing at 6.6% YoY, over 4 times core inflation (PCE). 


Although imputed rent growth YoY is only 2x core inflation (PCE).


So, home prices and imputed rent of dwellings are both rising at multiples of the core inflation rate … and wages.

Hopefully Yellen’s replacement can do better in terms of slowing down bubbles. But I doubt it.



Are Shopping Malls In WORSE Shape Than Previously Thought? (70% of Malls Suffer Decline in Tennants)

It is no secret that store closings have increased, some caused by on-line shopping like  Amazon,

2018.01.08 - Mall 2

or the failed wage recovery after The Great Recession (aka, the WORSE wage recovery following a recession in recent history).


Now Green Street Advisory has a study on Mall Turnovers and it is grim.

Across the 950 malls studied, over two-thirds saw a net decrease in the number of national tenants. While ‘A’ malls performed relatively well, they have not fully escaped the closures due to some retailers shuttering all their locations regardless of mall quality. Furthermore, most top-quality centers already have more of the national retailers as tenants, limiting their ability to find other national tenants to replace those that leave. Conversely, many lower-quality centers are seeing significant changes in their ability to retain and attract national retailers despite already housing fewer national retailers on average than ‘A’ malls. This trend demonstrates the challenge that many malls are now facing as they fill vacancies with more local and regional tenants.

In conclusion, the key takeaway is that it’s hard to assess what real estate is worth in the retail sector today. In-line tenant activity can provide a window into individual mall health. The Advisory & Consulting group’s analysis concludes that ~70% of malls have suffered a recent decline in the number of national tenants. Understanding which malls are most at risk in a timely fashion is key to anticipating possible “death spirals,” where malls can lose as much as 90% of their value (much more than other property types).

And yes, even “A” space is seeing negative tenant change, so it is no longer just fringe malls in depressed areas that are having problems.

2018.01.08 - Mall 3.JPG

This will definitely put a dent into CMBS prices if the mall operators can’t replace the declining tennant rolls. That is, can mall operators repurpose vacant space (like having George Mason University offer classes in malls to eleviate their space constraint on Fairfax campus)?

Repurposing will likely be with local tenants and not national tenants.

2018.01.08 - Mall 1



Big Bubbles! House Price Bubbles and Financial Stress (The Do Ho Financial Market)

Yes, we live in a “Do Ho” economy where bubbles (and not tiny ones) are pervasive. 

Look at the YoY growth in the all-transactions index from FHFA for US house prices compared to the St Louis Fed Financial Stress Index.


When the financial stress index is low (less than zero), we see BIG home price bubbles.

Of course, home price bubbles occur when YoY changes in home prices outpace household earnings growth YoY.


If Don Ho were still alive, he could redo tiny bubbles as BIG bubbles.



Do The Double-up! As Rents Rise, More Renters Turn to Doubling Up (L.A. The Worst!)

Zillow has a fascinating, yet troubling study.  It says that rent consumes a growing share of household income in many cities, some people must relocate or find ways to offset rising prices. An increasingly popular way to cut costs is by adding a roommate. Nationally, 30 percent of working-age adults—aged 23 to 65—live in doubled-up households, up from a low of 21 percent in 2005 and 23 percent in 1990.

Doubing up is a close relative of young adults continuing to live with their parents. Even though U-6 unemployment is at 8%, wage growth continues to be considerably lower than before the financial crisis. This offers a partial explanation for the doubling-up phenomenon.

Of course, doubling-up is typical is high cost of living areas like Los Angeles, San Francisco, New York City, Chicago and Washington DC. Not surprising is the doubling-up trend in Mexican border cities like El Centro California, Tucson and Yuma Arizona and El Paso and Laredo Texas.


This nice graphic shows the trend over time, with Los Angeles leading the way.


And yes, The Federal Reserve’s super low rate policies have contributed to rent growth (but not wage growth).


So, let’s do the double-up with Archie Bell and the Drells from Houston Texas.

Even The Dude (aka, Jeffrey Lebowski) didn’t have to double-up with Donnie or Walter Sobchak in the film The Big Lebowski in 1998. Likely all three would have to live together if filmed in 2017.




$1.5 Trillion GOP Tax Bill Signed By Trump – Housing Largely Uneffected Thanks To Lower Marginal Tax Rates (Ham and Mayonnaise!)

President Trump on Friday signed the Republican $1.5 trillion tax overhaul that is expected to trigger tax cuts for most Americans next year. The GOP/Trump bill undoes some of the damage caused by the tax increases put in place on January 1, 2015 by the Obamacare legislation such as increasing the top bracket from 35% to 39.6%.

Although this is not related to housing per se, the corporate tax rate has been cut to 21%, putting the US in the middle of the G-7 nations instead of being the most heavily tax major nation on earth.


Remains deductible for those who itemize, but for new mortgages on first and second homes, only the interest on the first $750,000 borrowed is deductible. The interest on home equity loans will no longer be deductible.

Repealed for corporations. Remains for individuals, but exemption increased to $1 million for couples.

Student loan interest would continue to be deductible. The deferred tuition provided to graduate students who teach or the children of university employees would not be taxable.

Personal Exemptions ELIMINATED
Personal exemptions, which in 2017 reduce taxable income by $4,050 each for taxpayers, spouses and dependent children, are eliminated.

Standard Deduction RAISED
The standard deduction, from $12,700 this year to $24,000 next year for couples filing jointly. For individuals, the amount goes from $6,350 to $12,000. The additional standard deduction for the elderly and the blind is unchanged.

State and local tax deduction (SALT) CAPPED AT $10,000
New maximum of $10,000 for a combination of property and income taxes or property and sales taxes.

Obamacare Tax Penalty REPEALED
Starting in 2019, the Affordable Care Act mandate that people have insurance or face a fine imposed by the IRS would be repealed.

Tax brackets and rates TOP BRACKET LOWERED TO 37% FROM 39.6%
10% on the first $19,050 of income for couples and $9,525 for individuals
12% above $19,050 for couples and $9,525 for individuals
22% above $77,400 for couples and $38,700 for individuals
24% above $165,000 for couples and $82,500 for individuals
32% above $315,000 for couples and $157,500 for individuals
35% above $400,000 for couples and $200,000 for individuals
37% above $600,000 for couples and $500,000 for individuals

So, the bottom line is that for renters, the standard deduction has been almost doubled to $24,000.  This is only appropriate since the value of US aparments has over doubled since 2010 with The Fed’s extreme low rate policies.


Since mortgage interest and property taxes remain the largest deduction for many household that own a home, the tax changes are net beneficial below the $750,000 level on mortgage interest due to the decline in the marginal tax brackets. Of course, high home price areas like Seattle, San Francisco, Los Angeles, San Diego and New York City will feel a pinch if mortgage financing exceeds the cap.


In other words, most middle class Americans will be okay.

How will the changes in the tax code impact the renting/homeownership decision? Probably not a lot. In a partial equilibrium world, raising the standard deduction would seemingly encourage more households to rent than than own. But as I already mentioned, they almost doubled the standard deduction while apartment values have over doubled since 2010 (thanks in part to The Fed’s zero interest rate policies), so the incentive to rent remains the same. And if the household’s marginal tax bracket declines, there will be less incentive to own a home. In general equilibrium world, continued slow wage growth will result in more households renting. The cap in interest and property tax deductions will give greater momentum to renting in the high cost coastal areas.

Say, can we tax The Federal Reserve for helping drive up home and apartment prices making housing less affordable? US housing is simply unaffordable for many households.

But here is a video of the typical debate over the tax legislation in the New York Times, Washington Post, CNN and MSNBC. And by House Minority Leader Nancy Pelosi.





2017: A Review Of The Fed, Treasuries, Mortgages and Housing (Volatility and Velocity)

2017 has been an interesting year. Donald Trump was elected President and seated in January 2017. The Federal Reserve kept rates near zero with a massive balance sheet for almost all of Obama’s 8 years as President, then started to raise rates and unwind their massive balance sheet AFTER Trump was elected. Note the decline in M2 Money growth after Trump’s election.


Inflation? Both Core PCE Price growth and Core CPI growth have declined in 2017 (yet The Fed has raised their target rate 4 times since Trump’s election but only once during Obama’s term despite declining inflation.


The M1 Money Multiplier and M2 Money Velocity have finally stabilized.


Mortgages? Mortgage purchase applications have declined since the financial crisis and have been slowly recovering, hampered by Dodd-Frank and CFPB rules and regulations.


New and existing home sales? Smokin’!



Home prices? Their YoY growth rates are continuing to rise, despite being almost 3 times YoY earnings growth for most Americans.


How about 30 year mortgage rate and the 10 year Treasury yield? While the 10 year Treasury yield has increased over the year, the 30 year mortgage rate has declined. Although both have been increasing since early September.


Both the 30Y-2Y and 10Y-2Y Treasury curve slopes have been flattening over the year.


The 10 year Treasury volatility and term premium have both been declining over the year.


With 2018 just around the corner, let’s see how many times The Fed raises their target rate and continues to unwind their balance sheet.



Fire! Existing Home Sales Surge To 11-Year Highs As Median Price Over 2x Wage Growth (Low Inventory Continues)

Home price growth is on fire!

US Existing Home Sales rose to 5.81 M units SAAR in November, an increase of 5.6% MoM.


Existing home inventory has been declining since The Great Recession and keeps getting worse as median price of existing home sales keep rising.


Median price growth for existing home sales continues to be greater than twice that of wage growth.


The Fed song about home prices:

They don’t care for me
I don’-a care about that
They gotta new fool, ha!
They like it like that

They have only one burning desire
Let them stand next to your fire (of home prices)