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 Numbeo.com, 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%.

wagegrhop

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.

Advertisements

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%.

consept17

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.

1unitfed

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.

5unitsept17

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

wirp101817

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

exppath

The International Bubble Team in action!

MW-FT115_yellen_MG_20170825154134

Student Debt Delays Homebuying (32% Defaulted On or Forebore Their Student Debt)

The Student Loan Debt and Housing Report 2017 by the National Association of Realtors and the nonprofit group American Student Assistance shows that student debt delays household formation, home buying, and saving.

When 51% have student debt greater than $50,000, it will delay buying a home.

student-debt-2017-study1

And purchasing a car.

student-debt-2017-study2

Any wonder why real estate lending is trending downwards along with credit card and automotive loan growth?

loansyoy

Here some predictable information from the report. Thirty-two percent of student loan borrowers surveyed had defaulted or forbore on their student loan debt while two-fifths of borrowers who had personal incomes of less than $25,000 in 2016 had defaulted or forbore on their student loan debt in the past.

Of course, Federal government policies and The Fed’s low interest rate policies have help create a monstrous growth in student loans … and tuitions.

fedstde

As I tell my students …

you

BIS Hunts for ‘Missing’ Global Debt, Inflation (Try Including Housing!)

Just like global central banks, the Bank for International Settlements can’t seem to find inflation and $114 trillion in off-balance sheet FX derivatives.

ZURICH – Nonfinancial companies and other institutions outside of the U.S., excluding banks, may be sitting on as much as $14 trillion in “missing debt” held off their balance sheets through foreign-exchange derivatives, according to research published Sunday by the Bank for International Settlements.

These transactions, which resemble debt but for accounting purposes aren’t classified that way, aren’t new. Rather, researchers from the BIS — a consortium of central banks based in Basel, Switzerland — used global banking data and surveys to estimate the size of this debt for the first time.

The implications for financial stability are unclear because FX swaps are backed by cash collateral and can be used to hedge exposure to currency swings, thus promoting stability. Still, the debt “has to be repaid when due and this can raise risk,” the authors wrote.

According to the paper, published with the BIS’s quarterly update on global financial conditions, non-banks outside the U.S. owed roughly $13 trillion to 14 trillion through foreign-exchange swaps and forwards. That exceeds the nearly $10.7 trillion in dollar debt held on their balance sheets at the end of the first quarter

“Non-banks” include nonfinancial companies, households, governments, and certain financial institutions that aren’t classified as banks and international organizations.

Globally, there are $58 trillion in FX swaps and related exposures, BIS said, which equals about three-quarters of global gross domestic product.

The authors explained that “in an FX swap, two parties exchange two currencies spot and commit to reverse the exchange at some pre-agreed future date and price.” In a forward contract, parties agree to swap currencies at a future date and price. “Accounting conventions leave it mostly off-balance sheet, as a derivative, even though it is in effect a secured loan with principal to be repaid in full at maturity,” the paper noted.

This short-term funding is backed by cash and it carries little credit risk. “Even so, strains can arise,” the authors wrote, citing the funding squeeze experienced by European banks during the global financial crisis.

The BIS’s quarterly review didn’t just examine missing debt, it also examined what it called “missing inflation” in the global economy, which has helped spur risk taking and drove up financial asset values in recent months.

The implications are big for stock and bond markets that have moved largely in tandem, with bond yields staying super low while equity markets reached record highs. Whereas faster growth typically implies higher inflation and central bank rate increases, the prospect of significantly tighter monetary policy in the U.S. and other big economies has receded.

“This puts a premium on understanding the ‘missing inflation’, because inflation is the lodestar for central banks,” said BIS chief economist Claudio Borio.

Annual inflation in the U.S., measured by the price index for personal-consumption expenditures, was 1.4% in July. Annual eurozone inflation was 1.5% in August. Both are well below the 2% rate that most big central banks consider optimal. Economists typically cite sluggish wage growth, heightened global competition, low oil prices and the effects of technological changes as explanations for subdued price pressures.

“Despite subdued inflation in advanced economies, the global macro outlook was upbeat. Market commentators label such an environment the Goldilocks scenario — where the economy is ‘not too hot, not too cold, but just right,'” BIS said.

Still, there are risks if bond yields eventually start to rise on the back of firmer global growth, given the sensitivity of the private and public sectors to debt.

Thus, the absence of inflation “is the trillion dollar question that will define the global economy’s path in the years ahead and determine, in all probability, the future of current policy frameworks,” said Mr. Borio.

Dear Federal Reserve and BIS. Try including house prices which are growing at fantastic rates of growth.

globalhousepriceindex

Tell folks in New Zealand and Australia that there is “no inflation.”

indexglobal

The US almost looks tame in terms of housing pirces compared to Britain and its former colonies where housing prices are growing over twice as fast as wage growth for the majority of the population.

houresarnyoy

New Zealand takes the cake for crazy housing prices, particularly in Auckland, their largest city.

Auckland-average-dwelling-price

There BIS. We found your missing inflation. 

324145186a0d6bd3c71c69fd5ece7d4b

Hurricane Equifax II: Even Wells Fargo Says To Consider A Credit Freeze

How bad is the Equifax data breach? Where 143 MILLION consumers potentially had their Social Security numbers, credit card numbers and birthdates revealed? It is so bad that a major US bank, Wells Fargo, suggested that customers consider placing a freeze on their credit.

That is fine for those who don’t use credit on a regular basis, but what about those people who still wish to borrow funds to purchase a home or automobile? By NOT freezing your credit, you are at risk of loans being (fraudulently) taken out in your name.

Although Equifax was the primary recipient of market wrath, the other major credit monitoring companies Transunion and the UK’s Experian have experienced declined in their equity values as well.

And with real estate, automobile and credit card lending already in a decline YoY, imagine what a credit freeze will do?

Here is the Federal Trade Commission’s FAQ on freezing your credit.

Now the Wells Fargo wagon is suggesting freezing your credit which means no more loans.

Where’s The Unwind? Fed Actually Adds $15 Billion To Balance Sheet (As “Inflation” Remains Low And Home Prices Soar)

The Federal Reserve has been jawboning their intent to unwind their almost $4.5 trillion balance sheet, nearly all of which is either Treasurys or mortgage-backed securities.

The Fed’s Balance Sheet has pretty much been on hold (treading water) since 2014 and the end of QE3, their third round of asset purchases.

somarec

But the System Open Market Account (SOMA) report from 9/13/2017 shows that The Fed actually added around $15 billion to its balance sheet.

soma091317So, no balance sheet unwind yet.

unwind

Remember, The Fed’s notion of inflation (US Personal Consumption Expenditure Core Price Index YoY) remains under their target rate of 2% at 1.40% YoY.

corepceyoylt

And core CPI growth YoY is at 1.7%, also under the 2% target.

corecpiqug171

And with asset prices such as for housing exceeding wage growth by over 2x, The Fed has quite a bit to consider before pulling the handle on the balance sheet unwind.

houresarnyoy

The US Treasury 10Y-2Y curve slope has declined from around 280 basis points in 2010-2011 to under 82 basis points today.

yc103fed

Here is inflation that is hiding that The Fed doesn’t want to consider.

it2

August CPI: Shelter Inflation Fastest Since 2015 And The Home Price Bubble

While Venezuela has an inflation rate of over 2,000%, the US has an inflation rate of 0.4% for August 2017 (and 1.9% YoY).

According to the Bureau of Labor Statistics (BLS), Energy led the US inflation in August with gasoline at 6.1% MoM growth (and 10.4% YoY growth).

Core inflation (less food and energy) fell to 1.7% YoY, the 5th straight month of below 2% core inflation.

corecpiqug17

Here is Table A form BLS’s inflation report.

cpiaug17

But among the non-energy items, shelter leads the way with an increase of 0.5% MoM (and 3.3% YoY).  The fastest growth rate in shelter since 2005 and the house price bubble.

And if we just look at the change in the index, August’s change was the biggest since 1992.

gimmeshelter

But on a YoY basis, CPI – Shelter only increased to 3.3%.

cpishelteryoy.png

Rent of primary residence rose 0.4% MoM while Owners’ equivalent rent of residences rose 0.3% MoM.

Actually, motor vehicle insurance was the greatest gainer in August.

cpimr.png

Whip that inflation! 

yellenwhipit