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.





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.



New Home Sales Surged 17.5% MoM In Nov To Highest Level Since 2017 (Biggest Gain In Inventory-strangled West)

New home sales for November surged 17.5% MoM in November to 733k units sold SAAR. The US finally made it back to 2007 levels.


As we know, existing home sales also shot up in November.


Much of the growth in new home sales was in The West (+31%).


Wait a minute. I thought Nobel Laureate economist Paul Krugman said that President Trump would drive the world into a severe recession.


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)


The Great Fed Unwind: It’s All About Treasury Note/Bond Sales, Not Agency MBS

The Federal Reserve was supposed to start shrinking their $4.4 TRILLION balance sheet back in October, but have only recently begun actually selling the assets on their balance sheet.

As you can see, the US Treasury 10-year Note yield was just above 4% when The Fed’s asset-buying began and after now resides at around 2.4%. And you can barely see the unwinding of the balance sheet since The Fed is moving at glacial speeds to unwind.

But we have only seen a slight uptick in the 10-year Treasury Note yield with the recent unwinding of the balance sheet (pink box).

Since The Fed’s asset purchases are primarily Treasury Notes/Bonds and agency Mortgage-backed Securities (Agency MBS), we can see that it is the T-Notes/Bonds that are being sold-off, not the Agency MBS. The Fed’s strategy is to let the Agency MBS run-off (gradually mature as mortgages prepay).

But as The Fed’s Balance unwinds and Treasury/Mortgage rates rise, mortgage prepayments are likely to slow, making The Fed’s plans less effective. This is called “extension risk.”

Let’s see what The Fed of New York does tomorrow!

America’s Disappearing Mortgage Tax Break Finds Few Defenders (Beware of Tax Carveouts And Shrinking Middle Class Incentives!)

Federal income taxation should be simple. Here is my FIT (Federal Income Tax) pecking order:

  • No Federal Income taxation. A consumption tax (or national sales tax) could be used to raise revenues.
  • Flat tax or fair tax. A simple tax rate for everyone (say, 12%) would greatly simplify matters. Or if you feel that households making less than, say, $20,000 should be exempted, so be it. Under either tax, we wouldn’t need to itemize tax deductions; hence, the mortgage interest deduction would be eradicated.
  • OR we can have our current system where special interest groups lobby for and get tax carveouts (essentially exempting them from or reducing their tax bill). For the carveout approach, see the Senate’s 479 page tax revision.
  • After all the special interest and corporate carveouts got their piece of the tax pie, the one group that is losing their carveout is American households with the dimishing mortgage interest rate deduction.

Which brings me to this nice piece by  Bloomberg reporters Joe Light and Prashant Gopal.

(Bloomberg) -By Joe Light and Prashant Gopal- One of America’s most popular tax breaks is about to be rendered nearly useless. And there are few economists rushing to defend it.

The $64 billion mortgage-interest deduction has long been touted as fuel for U.S. homeownership. Yet as the real estate industry fights the Republican tax plan that’s set to diminish its use, finding economic supporters of the perk is tough, even among affordable-housing advocates. John Weicher, a 79-year-old former official with the Department of Housing and Urban Development, says he’s one of the few who believes in the break.

“We’re about as common in the economics profession as Republicans are in the District of Columbia,” said Weicher, now director of the right-leaning Hudson Institute’s housing center in Washington, a city where only about 4 percent of voters chose President Donald Trump in last year’s election.

While Republican lawmakers aren’t directly killing the mortgage benefit, their tax plan would make it worthless for most homeowners by doubling the federal standard deduction, making it less likely that a typical person would itemize write-offs of any kind. Almost 38 million American households who would otherwise itemize would opt for the standard deduction under the new tax plan, according to Moody’s Analytics Inc.

The bill’s passage would be one of the greatest defeats for the National Association of Realtors, Washington’s second-most powerful lobbying group, which had for decades successfully fended off criticism of the benefit. Detractors argue that the tax perk inflates home prices for first-time buyers and favors families with bigger incomes and bigger mortgages (including for discretionary vacation-home purchases).

It’s “not an effective way to support homeownership,” Mark Zandi, chief economist for Moody’s Analytics, said of the mortgage-interest deduction, or MID. “I think my views on the MID are in the consensus.”

Opposition to the deduction has created strange bedfellows.

In February, Diane Yentel, chief executive officer of the National Low Income Housing Coalition, and Mark Calabria, then working at the libertarian Cato Institute, co-wrote a column in The Hill calling for Congress to kill or reform the deduction.

“No longer a political ‘third rail,’ experts from across the ideological spectrum are increasingly calling it what it really is: a wasteful use of federal resources,” they wrote.

“People were shocked,” Mickelson said. [Side note: people were shocked when they discovered that Regulatory Capture (pitting one group against another when the public is not best served) is alive and well?]

When the column ran, Sarah Mickelson, director of public policy for the NLIHC, said she got surprised emails from colleagues that her organization could find something to agree on with Calabria, who’s now the chief economist for Vice President Mike Pence.

The agreement only goes so far. While Mickelson’s group wants to reinvest the savings from limiting the mortgage-interest deduction into help for low-income renters, neither bill in Congress does that.

Standard Deduction
Both the Senate and House bills increase the standard deduction to $24,000 from $12,700 for a married couple filing jointly. The House plan also caps the home-loan write-off to mortgages up to $500,000 instead of the current $1 million limit. The plans have other elements that stand to disrupt the housing market, from shifts in capital-gains levies on home sales to limiting deductions on state, local and property taxes.

Taxed in Scarsdale: GOP Plan Daunts Metro New York Real Estate
While housing lobbyists’ furious opposition to the tax overhaul didn’t emerge until the last few months, the industry’s tax breaks have been vulnerable for much longer, said Isaac Boltansky, a policy analyst with Compass Point Research & Trading.

“The die was largely cast the minute the GOP swept the 2016 election,” said Boltansky, who said getting rid of or lessening the value of itemized deductions was always going to be a target of a tax bill in order to save money for broader cuts.

Denmark Study
Jon Gruber, an economics professor at the Massachusetts Institute of Technology, said he opposes the GOP tax plan because it adds to the deficit at the benefit of the wealthy, but that the mortgage-interest deduction isn’t something that should be saved. The perk would cost the government almost $80 billion by 2019, according to Congress’s nonpartisan Joint Committee on Taxation. The government could spend much less, for example, on a permanent tax credit for first-time buyers, Gruber said.

“If the goal is middle-class homeownership, you could just as well be throwing $100 billion in the ocean,” Gruber said. “At least then you’d have a landfill and you could build a house there.”

Gruber co-wrote a July working paper, “Do People Respond to the Mortgage Interest Deduction?,” using Denmark’s sharp cut in its mortgage deduction for top-rate earners in the late 1980s to make the case.

“The mortgage deduction has a precisely estimated zero effect on homeownership,” the paper concludes. “The largest effect of the mortgage deduction is on household financial decisions, inducing them to increase indebtedness.”

‘Simple Logic’
Lawrence Yun, chief economist of the National Association of Realtors, said he’s skeptical of studies that use very different mortgage systems in other countries to make conclusions about the U.S. Without the deduction, the homeownership rate would drop by one or two percentage points, he said.

It’s “simple logic” that the deduction is one of many factors that encourages purchases, Yun said. A study that his group commissioned said home prices in the short run could decline 10 percent with the elimination of the deduction, as potential buyers stop factoring it in to how much they can pay.

Weicher, the benefit’s backer, said economists who oppose the mortgage-interest deduction tend not to have studied it themselves and merely take that view because it’s what other economists they know believe.

The last time the deduction was under assault, a few years ago, he was popular with newspaper opinion pages. He said he wrote op-eds that appeared in a handful of publications as they got interested in having columns, both pro and con, running side by side.

“Nobody else has an MID op-ed that takes the pro side,” Weicher said.

This article points to a mostly negative view on the mortgage-interest deduction for homeownership.  I agree with Lawrence Yun simply comparing the US with other housing finance (and tax) systems can be misleading. But more than that, the 479 page tax bill coming from the US Senate points to the actual problem: the tax code is all about special interest/corporate carveouts and not about middle-class Americans.

To let middle-class Americans compete with special interest groups on the tax front, the mortgage interest deduction should be preserved, not erradicated or deleted.

So why are American home prices so high and affordability so low? You can thank 1) land use restrictions (either natural or man-made) that reduce the available construction of housing units, 2) The Federal Reserve and their zero interest rate policies.


The hysteria from Pelosi and even Larry Summers ring hollow considering that the Federal Tax Code has been filled with carveouts for decades they never complained until now. The 479 page tax bill is just a reshuffling of the deck chairs on the Titanic (or Tax-anic).

On a side note, House Minority Leader Nancy Pelosi and Senator Elizabeth Warren are whining the Republicans did not give them time to read the 479 pages. They seem to conveniently forget that the Democrats did the exact same thing with the disastrous Obamacare legislation. Remember Pelosi’s infamous “We Have to Pass the Bill So That You Can Find Out What Is In It.”?


So, unless Congress wants to move to a more simple tax code, they should leave the MID in place (except for vacation homes). Since The Fed mostly benefitted wealthier Americans, the middle class does demand some tax relief.

Particularly given that income inequality keeps getting worse and worse.


US New Home Sales Highest Since Oct ’07! (Back To 1995 Levels)

The sale of new homes in the USA just hit the highest level since October 2007. And back to 1995 levels when the housing bubble began.

Yes, it has taken 10 years of The Fed’s Zero Interest Rate Policy (ZIRP) just to get back to October 2017 levels of new home sales.


The median price for new home sales actually fell in October.


But the average price of new home sales just broke $400,000 for the first time in history!


The months supply of new homes fell in October.