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%.

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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.

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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%.

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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.

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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.

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

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

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The International Bubble Team in action!

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Trump’s Tax Proposal And Housing: Did The Middle Class Just Get Jammed? (Largest Plunge in Renter Occupied Housing YoY Since 2003)

The Trump/Republican tax proposal sketch is out. 360061522-Republican-Tax-Plan

While the hope is that lowering marginal tax rates will stimulate the economy (creating more jobs and tax revenue for Uncle Sam), the impact on housing and the mortgage market is ambiguous at best.

Let’s run through the numbers, that we know about.

Currently, the standard deduction for an individual is $6,350 and $12,700 for a couple. So, the first $12,700 of mortgage interest and property taxes is essentially thrown away. On top of the standard  deduction, however, a of four can also claim personal exemptions of $4,050 per person for a total of $16,200. That puts that break point at $28,700 for a family of four. Below that point, the family of four would prefer to rent since they would literally be throwing away their mortgage interest and property tax deductions (assuming that the mortgage interest deduction is $8,000 and the property tax deduction is $4,000 for illustrative purposes). So, $12,000 in mortgage interest and property tax deductions is below the standard deduction for a couple for $12,700.

Under the proposed tax reform plan, the standard deduction would be raised to $12,000 for individuals and $24,000 for a couple. At the same time personal exemptions and property tax deductions would be eliminated. This will lead to more households renting rather than owning, holding all else constant.

But President Trump’s tax reform framework calls for collapsing the current seven tax brackets into three, with marginal tax rates of 12 percent, 25 percent and 35 percent. A decline in the marginal tax bracket lowers the value of the mortgage interest deduction resulting in fewer households having an incentive to buy home.

Depending on how the marginal tax brackets are finally decided, renters (generally in the lowest marginal tax bracket) could actually see a lower tax bill (say, tax savings of $500). It becomes muddled for the middle class since the loss of itemized deductions (other than mortgage interest deductions) could actually overwhelm the lowest marginal tax rate resulting in HIGHER taxes for the middle class (say, +$500-$1,000).

There are lots of moving parts on the mortgage side, including future interest rate hikes and housing finance reform. So I hope that Congress carefully weights its options in determing the slashing of deductions in exchange for low marginal tax brackets.

Remember, the US homeownership rate has fallen back to level where it began with President Clinton’s National Homeownership Strategy from 1995.

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But here is some food for thought. The inventory of renter occupied housing units as of Q2 2017 experienced the largest YoY plunge since the mid-2000s while owner-occupied inventory experienced the largest YoY gain since the mid-2000s.

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I am just hoping that the passable version of tax reform doesn’t result in a Jeremy Jamm moment for middle-class homeowners and taxpayers.

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Goin’ Down! UK Banks Suffer Credit Collapse (Similar to USA)

As New Jersey rocker Bruce Springsteen crooned, we’re Goin’ Down.

According to the Bank of England, household unsecured credit availabilty sank to its lowest level in 10 years.

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While household secured credit availability was also in negative territory, it was not as bad a unsecured credit availabilty. The reason? Consumer lending curb to slowdown a hot market.

The US bank credit market is slowing as well.

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The USA does have some similarities with the UK other than clocks.

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(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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