Simply Unaffordable: These Cities Make USA Housing Look Dirt Cheap

As the late Robert Palmer crooned, housing is simply unaffordable in many cities. And most of those cities are outside the USA.

(Bloomberg) — As people around the world move into cities and look for housing, one thing is clear: Most will have a hard time paying for it.

Average monthly take-home pay won’t cover the cost of buying a 1,000-square-foot residence or renting a three-bedroom home in any of the 105 metropolitan areas ranked by the Bloomberg Global City Housing Affordability Index – based on a general rule of thumb among U.S. lenders that people should spend no more than 28 percent of net income on housing costs. Only 12 cities would be considered affordable if they spend 50 percent.


Residents face many obstacles, including urban land-use regulations, underdeveloped rental markets and difficulty getting financing, according to Enrique Martínez-García, a senior research economist at the Federal Reserve Bank of Dallas who studies housing prices. Policy solutions to these problems aren’t clear, he adds.

 “Not having access to credit is a challenge to develop a healthy housing market,” he said. “But opening it up too fast might be a problem as well; it might actually lead to a boom-bust episode.”

The Bloomberg index calculates the affordability of renting or buying in city centers and suburbs. Rankings are based on self-reported data, including net salary and mortgage interest rates, compiled by, an online database of city and country statistics.

Since 2012, 48 cities in the Bloomberg index have become less affordable, while affordability improved in 51. (Historical data aren’t available for all 105.) In nine of the bottom 10, average net income fell, while income in eight of the top 10 cities rose as rental and mortgage costs declined.

Emerging economies currently have the least-affordable housing, led by Caracas and Kiev in Ukraine. The remaining cities among the bottom 20 include seven in Asia and six in Latin America. London is the least-affordable major city in Western Europe, with average monthly rent and mortgage payments equaling 135 percent of monthly net income.

In Rio de Janeiro, Brazil’s second-largest city, average monthly take-home pay of $640 won’t unlock a rental even on the outskirts of town, let alone provide the means to buy a house or apartment in the city center, where monthly mortgage payments approach $2,000. This contributes to multiple-income households and also may explain why more than one in five Rio residents lived in informal shantytowns called favelas in 2010, the most recent data available. Six of the 10 cities with the greatest deterioration in the past five years are in Latin America.

Seven of the top 10 most-affordable cities are in North America: four in the U.S. and three in Canada.  The least-affordable metro area in the two countries is Vancouver, where an influx of foreign cash has caused a surge in home prices. New York ranked near the middle of the index.

Two of the cities with the greatest improvement are in China: Shenzhen and Guangzhou. Even so, housing demand across the country continues to outweigh supply, “despite rapid construction and the large-scale delivery of new homes” in cities including Shenzhen, according to Kate Everett-Allen, head of international residential research at real-estate consultant Knight Frank in London. That’s because of “mass urbanization” and relatively low wages, she said, adding that home prices in several cities grew at an annual rate of as much as 40 percent last year.

Four Chinese metro areas, including Hong Kong, were among the 20 least-affordable in the index. 

Yes, the USA, while more affordable that the rest of the world, is suffering from low wage growth while home price growth is more rapid. In fact, the FHFA home price index is growing YoY at over 2X average hourly wage growth YoY. 6.63% versus 2.54%.


Note that home price growth started to exceed hourly wage growth in 1998, the beginning of the dreaded housing bubble that blew sky high.

I guess Americans have been addicted to gov since the 1987 stock market crash.


Trump’s Fed Chair Problem (How Do We Awaken Dorothy From Her Monetary Oz?)

President Trump has a problem. And it is who to select as The Federal Reserve Chair by November 3rd. Of course, he can always keep mega-dove Janet Yellen. Or he choose someone new like National Economic Council Director Gary Cohn, Fed Board Governor Jerome Powell, former Fed Governor Kevin Warsh or Stanford University economist John Taylor.

I like the “Bay Area Brawl.” Berkeley’s Yellen versus Stanford’s Taylor. That is, if Taylor is actually going to follow his own Taylor Rule. And then it depends of who estimates the Taylor Rule.

For example, Glenn Rudebusch at the San Francisco Fed’s specification of the Taylor Rule says that the Fed Funds Target Rate should be 5.73% (compared to the actual rate of 1.25%).

Charles Evans of the Chicago Fed, on the other hand, has a Taylor Rule specification that indicates that the Fed Funds Target Rate should be 0.49%, BELOW the current target rate of 1.25%.

Yellen would be closer to dovish Evans while Taylor would be closer to Rubebusch.

But regardless of who Trump selects, it should be someone that actually follows a rule of some kind (whether Taylor’s rule or a complex rule) THAT IS PUBLICLY ACCESSIBLE.

In the following chart, I compare the baseline Taylor Rule (white line) with the actual Fed Funds Target Rate. Before January 2009, the actual Fed Funds Target Rate followed the baseline Taylor Rule (even though the actual target rate went from “too high” to “too low” during the 2000s. Then Chair Ben Bernanke looks like he was following a Taylor Rule UNTIL late 2008. Rather than allowing the Fed Funds Target Rate to go negaitve, he added the infamous quantitative easing (QE) in order to push down the 10 year Treasury yield. Thus, it was Bernanke that threw away the Taylor Rule (and Yellen after him). We are now in land of Monetary Oz (a dreamworld with Emerald Cities and flying monkeys), but no rule to speak of.

But what we do have in the US economy is asset bubbles.

Of course, slowly raising rates and unwinding the $4.4 trillion Fed Balance Sheet is likely the correct approach. There are no ruby slippers that the new Fed Chair can tap to return to monetary normality. But what prevents this same Monetary Oz fantasy from happening again?

Perhaps Trump should ask the candidates about what they would do as Fed Chair, while they are dancing.

Moody’s: Hartford Default Likely on Yearly Deficits Seen to 2036 (Connecticut Already Has 2nd Worst Public Pension Underfunding Requiring $22,745 Person To Fix)

As we watch the alleged Federal government shutdown by politicians who crave spending more and more of YOUR money (without cutting spending), we see the same in various states and cities like Chicago, Illinois. Now Hartford CT is in on the overspending act.

(Bloomberg) — Moody’s says the city of Hartford is likely to default on its debt as early as November without additional concessions from Connecticut.

Moody’s sees Hartford’s operating deficits of $60 million to $80 million through 2036
Hartford will look to bondholders to restructure roughly $604 million in general obligation and lease debt, Moody’s says.

Moody’s sees additional grant revenue or amount equal to PILOT payments cutting view of operating deficits by over half.

Yes, one of Hartford’s municipal bonds has dropped in price to $68.75 and a yield of 12.14%.


Moody’s says the city of Hartford is likely to default on its debt as early as November without additional concessions from Connecticut. From the second worst state in the nation in terms of public pensin underfunding (after my home state of New Jersey)? 

In New Jersey, the (public pension) funding gap represents nearly 42 percent of the Garden State’s Gross State Product – or more than $27,000 for every resident, according to S&P Global Ratings.

Other underfunded states include Connecticut ($22,700 per person), Hawaii ($15,700), Illinois ($15,900) and Alaska ($18,200).

2017.10.18 - Pension

Good luck with that Hartford. Citizens of Hartford will likely have to switch their beer consumption from Heineken to Pabst Blue Ribbon.


TIPS Auction Points to Inflation Below Fed Target for Decades

(Bloomberg) — As traders prepare to underwrite $5 billion of inflation-linked Treasuries on Thursday, they’re as confident as ever that the Federal Reserve’s predicted inflation rebound won’t materialize at any point in the next 30 years.

Low inflation, which Fed Chair Janet Yellen last weekend called “the biggest surprise in the U.S. economy this year,” has been a fact of life for years in the $1.29 trillion market for Treasury Inflation Protected Securities. The market-implied inflation expectation signaled by five-year TIPS has rarely been above the 2 percent mark since 2013.

There’s an even stronger signal that traders see little pickup in consumer prices for a generation to come, especially with the Fed intent on tightening monetary policy. The anticipated inflation rate implied by 30-year TIPS yields, at 1.91 percent, is a mere 18 basis points above that on five-year TIPS, among the narrowest gaps seen in the past two decades.


The bond market’s view shows the Fed has some convincing to do that the economy will reach and sustain officials’ inflation goal of 2 percent, expressed in terms of the deflator for personal consumption expenditures. TIPS reflect expectations for the consumer price index, which historically has exceeded the PCE deflator by about 40 basis points on average. So if the Fed were expected to meet its goal, the TIPS breakeven rate should be at least 2.40 percent.

The TIPS breakeven rate is only 1.76%. And has mostly been below 2% since early 2013.


And with the US Treasury 10 year Note yielding 0.64% in real terms, …


With almost 100 million people NOT in the labor force, that might have something to do with the puzzling lack of inflation.


yellenconfused (1)

Alarm! Hang Seng Index Plunges -1.92% (FTSE MIB [Italy] Down -1.24%)

The US stock market is boring, to say the least. It just keeps going up like a crazed Energizer bunny on steroids. Even The Hindenburg Omen, which predicted the crash in 2007-2008, has been flashing furiously since 2012. Yet the US stock market keeps banging its cymbals.

Which brings us to Hong Kong’s stock market, the Hang Seng index which fell -1.92% overnight.

The FTSE MIB (Milano Indice di Borsa), the Italian stock market index, fell -1.2% this morning.

Good morning from Janet Yellen, the Monetary Energizer Bunny!!!


China’s Yield Curve Inverts (Small Beans Relative to Venezuela’s Curve Inversion And 2,713% Inflation Rate)

Inverted sovereign yield curves are generally bad news. And China’s inverted yield curve is no different. The 5Y to 10Y segment of China’s sovereign curve has inverted … again.


But before anyone gets hysterical, the rest of China’s sovereign curve is upward sloping like the USA (blue for China, green for the USA).


For comparison sake, I am including the mac-daddy of curve inversion: Venezuela (red line). Their 3Y sovereign yield is a gut-wrenching 58% while their 20Y yield is lower at 22%. And their 2,712.88% annual inflation rate.

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US Housing Starts And Permits Plunge In September As Fed Raises Rates

The housing construction numbers for September were not great. 1-unit detached starts declined -4.60% while 5+ unit starts (multifamily) declined -6.23%.


Permits were off for 5+ unit (multifamily) at -17.43% while 1 unit permits rose 2.38% in September.

As a reminder, The Federal Reserve dropped their target rate as a result of the 2001 recession and 1-unit starts took off. Construction was so hot that The Fed had to raise their start rate to cool-off the construction bubble. Rather than cool-off the construction bubble, The Fed sent it into deep freeze.


Alas, there wasn’t a Fed Funds rate reaction during the housing bubble, but there appears to be a negative reaction to multifamily (5+ unit) starts since The Fed began jacking up their target rate.


And with an 84% implied probability of a December rate hike, we should watch starts and permits carefully over the next couple of months.


And here is the path of future rate hikes (forward curve). As Samuel L Jackson said in Jurassic Park, “Hold on to your butts.”


The International Bubble Team in action!