(Un)Affordable Housing Alert! FHFA Purchase-Only Home Price Index Rises 6.3% YoY For July (4.5x Fed’s “Inflation” Rate and 2.73x Wage Growth)

The FHFA’s purchase-only home price index is out for July. It shows that home prices grew at a 6.3% YoY rate, but only 0.2% MoM. The largest home price increases were in Pacific and Mountain states.

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This means that housing, often the largest ticket item for American households, grew at 4.5 times the Fed’s inflation rate (core PCE price growth YoY). And 2.73x hourly wage growth.

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Yes, this is another alert for unaffordable housing.

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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.

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And purchasing a car.

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

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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.

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As I tell my students …

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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.

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

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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.

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

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There BIS. We found your missing inflation. 

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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.

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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.

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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.

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

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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.

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

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

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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.

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Here is Table A form BLS’s inflation report.

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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.

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

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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.

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Whip that inflation! 

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Real Median Household Income Rises To $59,345, Barely Beating 2002 and 2008 Levels (No Real Growth For Households)

According to Sentier Research, Median Household Income for May 2017 rose to $59,345.  This figure exceed the previous highs of 2002 and 2008.

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What is remarkable about these figures is that real median household income in the US has not risen since 2002.

Yet home prices rose dramatically in the 2000s only to collapse. Home prices are rising again (with the FHFA Purchase-only home price index now exceeding the 2007 bubble highs).

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No real median household income growth since 2002 yet home prices at rising at around 4% YoY in real terms.

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Central Banks And Housing Prices: A Tale Of Three Countries (US, Germany and Japan)

23 t4The US Federal Reserve, the European Central Bank (ECB) and Bank of Japan (BOJ) have all been hyper-active in recent decades. But the low-rate policies have not produced the same outcomes.

The US, after home prices declined in 2008 and 2009, took a while to recover. Only in 2012 did US home prices begin to rise again.

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Germany’s house prices also fell, but started rising again in 2010.

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Japan is a different story. Despite staggering increases in asset purchases by the BOJ (and negative lending rates), Japan has experienced a decline in housing prices.

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So, The Fed’s Yellen, ECB’s Draghi and BOJ’s Kuroda have had different easing experiences.

My Kuroda! 

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