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.

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!


US Treasury 30Y-5Y Slope Flattens To Lowest Since Mid-Nov ’07 As M2 Velocity Hits All-time Low

The US Treasury curve slope (30Y-5Y) continues to flatten and has just hit the low point since mid-November 2007, nearly a year before The Fed’s annoucement of QE1 (their first round of asset purchases).


And as of Q2 2017, M2 Money Velocity has sunk to its all-time time low.

Here is photo of The Fed announcing their QE1 asset purchase program.

titanic-leaving-belfast (1)

And here is The Fed signalling a rate increase at their December FOMC meeting.


Inflation Friday: Despite Hurricane Hoopla, “Inflation” Remains Subdued (Real Wages YoY Decline)

Listening to CNBC and Bloomberg TV, you might have gotten the impression that Hurricanes Harvery and Irma created such extensive damage (they did) that there would be labor shortages and a big rise in real wages.

Actually, both real hourly earnings and real weekly earnings YoY fell to under 1%.


There was a small pick-up “inflation” with core inflation remaining the same as in August: 1.7% YoY.


Even with two destructive hurricanes, all we can generate is 1.7% YoY?


But  as expected, auto sales were elevated with households and businesses replacing their water-damaged vehicles.

Why did they name the hurricane Jose? Hurricane Janet would have been more appropriate.



September Jobs Report: Hurricanes And Largest Gain in Full-time Employment Since 1999 (Hourly Earnings YoY Highest Since 2009)

The hurricane-impacted jobs report is out for September.

The good news? Full-time employment rose by 935,000! The largest increase since 1999.


And then there is average hourly earnings YoY which just hit the highest growth rate since 2009.


Of course, the labor market was thrown a curveball with the hurricanes Harvey and Irma. The usual cry of labor shortages have begun appearing.

Here are the rest of the jobs numbers.


Most jobs lost? Leisure and hospitality.

jobs by category sept 2017



What will The Fed do now?


Fed’s Yellen Backs Off “Inflation Around the Corner,” Now Sings 2% Inflation Over The Next Few Years

(Bloomberg) — Fed Chair Janet Yellen said FOMC may have misjudged fundamental forces driving inflation and strength of labor market, and policy makers “stand ready to modify our views based on what we learn.”

“We will need to stay alert” and adjust monetary policy as information comes in, Yellen said in text of speech Tuesday in Cleveland during annual meeting of National Association for Business Economics  

“My colleagues and I must be ready to adjust our assessments of economic conditions and the outlook when new data warrant it”

Downward pressures on inflation “could prove to be unexpectedly persistent” 

Economic outlook is subject to “considerable uncertainty”

FOMC’s understanding of the forces driving inflation is “imperfect,” policy makers recognize “something more persistent” may be responsible for current undershooting of long-run objective

While inflation will most likely stabilize around 2% over the next few years, “odds that it could turn out to be noticeably different are considerable”

There’s also risk that inflation expectations “may not be as well anchored as they appear and perhaps are not consistent with our 2 percent goal”

Stabilizing inflation at around 2% “could prove to be more difficult than expected”  

Key assumptions underlying baseline outlook “could be wrong” in ways that imply inflation will remain low for longer than currently projected; for example, labor market conditions may not be as tight as they appear

Under certain conditions, “continuing to revise our assessments in response to incoming data would naturally result in a policy path that is somewhat easier than that now anticipated”

Significant uncertainties strengthen the case for gradual pace of tightening; however, Fed must also be wary of moving too gradually; “it would be imprudent to keep monetary policy on hold until inflation is back to 2 percent”

Actual value of long-run sustainable unemployment rate “could well be noticeably lower” than FOMC currently projects; can’t rule out possibility that some slack still remains in labor market

Unemployment rate is probably “correct” in signaling that labor- market conditions have returned to pre-crisis levels; however, that doesn’t necessarily mean that economy is now at full employment

Data suggest a generally healthy labor market, although can’t make “any definitive assessment”; policy makers “must remain open minded on this question” and its implications for reaching inflation goal  

NOTE: In Sept. 20 press conference, Yellen said fall in inflation this year was a bit of a “mystery”

“A more important issue from a policy standpoint is that some key assumptions underlying the baseline outlook could be wrong in ways that imply that inflation will remain low for longer than currently projected.”

Like excluding home price growth from inflation calculations?


Good guess that 2% inflation may be hard to find since Core CPI price growth YoY (yellow line) exceeded 2% only briefly in 2012 after The Great Recession.


And the market risks overheating if more rate hikes don’t occur.  Ahem.  Despite Atlanta Fed President Raphael Bostic saying “I actually don’t think that our policies are too easy in the sense of really facilitating some sort of asset bubble,” asset prices look increasingly frothy.


Here is Yellen singing “Inflation around the corner for us.”