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.

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This nice graphic shows the trend over time, with Los Angeles leading the way.

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And yes, The Federal Reserve’s super low rate policies have contributed to rent growth (but not wage growth).

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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.

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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.

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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.

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The M1 Money Multiplier and M2 Money Velocity have finally stabilized.

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Mortgages? Mortgage purchase applications have declined since the financial crisis and have been slowly recovering, hampered by Dodd-Frank and CFPB rules and regulations.

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New and existing home sales? Smokin’!

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Home prices? Their YoY growth rates are continuing to rise, despite being almost 3 times YoY earnings growth for most Americans.

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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.

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Both the 30Y-2Y and 10Y-2Y Treasury curve slopes have been flattening over the year.

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The 10 year Treasury volatility and term premium have both been declining over the year.

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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.

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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.

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

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

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

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Vol Repression: 10Y T-Note Volatility (TYVIX) Hits 2nd Lowest Point In History (Whip It Good, Janet!)

The CBOE CBOT 10 year U.S. Treasury Note Volatility Index (TYVIX) just hit its second lowest level in history today. The lowest was last Friday, 12/15/17.

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We know that the 10-year T-Note premium collapsed with The Fed’s QE. Let’s see if the 10-year T-Note Vol will increase will further balance sheet unwinding.

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Then again, GLOBAL QE is so outlandish that we have be in a permanent state of volatility repression.

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Does low bond vol matter? Ask Jefferies. Their YoY revenues from bond trading has dropped significantly as in -37% YoY.

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Whip that vol good, Janet!

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S&P 500 Dividend Yield FINALLY Above US Treasury 2Y Yield (10 Years Afer)

The last time that the S&P 500 dividend yield was above the US Treasury 2Y yield was in September 2008, just prior to The Federal Reserve launching their quantitative easing (mass purchases of Treasury Notes/Bonds and Agency MBS).

For the first time since 2008, the dividend yield on the S&P 500 Index and theyield on two-year Treasury notes are essentially the same. For years after the financial crisis, the gap between the income generated from holding equities relative to government securities bolstered the case for U.S. stock markets to climb to record highs. Now, with the Federal Reserve raising interest rates, the yield on short-term Treasuries is attracting investors like BlackRock Inc.

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But Ten Years After, massive monetary stimulus is finally going home. By helicopter.

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Fed Balance Sheet RISES By $13 Billion (Needs To Come A Little Bit Closer To Their Target)

So much for The Fed balance sheet unwind.

The SOMA report as of yesterday showed the balance had RISEN by $13 BILLION.

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This happens every quarter.

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The reason why? Agency MBS purchases rose faster than Treasury Note and Bond sales (which were small).

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But the balance sheet will likely get a little bit closer to shrinking by next week.

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Ben & Janet’s Famous Chili Recipe: Excess Reserves Still Around After 2008 And The Fed Is Paying MORE For Banks Not To Lend

In late 2008, The Federal Reserve did something that was not so widely noticed: It started to pay interest on excess reserves, effectively paying banks not to lend.

Excess reserves are cash funds held by banks over and above the Federal Reserve’s requirements. They have grown dramatically since the financial crisis. Holding excess reserves is now much more attractive to banks because the cost of doing so is lower now that the Federal Reserve pays interest on those reserves. The fact that banks are holding excess reserves in response to the risks and interest rates that they face suggests that the reserves are not likely to cause large, unexpected increases in bank loan portfolios. However, it is not clear what banks are likely to do in the future when the perceived conditions change.

In other words, The Fed is trying to control the price and quantity of risk.

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Excess reserves have actually declined slightly since 2015 when the article was written. But the question remains as to why financial institutions are continuing to park money at The Fed. And why The Fed is encouraging it.

Loan and lease growth YoY is slower following The Great Recession than at any time since 1975.

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Part of the reason of the desire of commercial banks to park money at The Fed rather than lend it out is 1) risk (and the price of risk) and 2) compliance costs. The Dodd-Frank legislation and Elizabeth Warren’s Consumer Financial Protection Bureau have greatly increased compliance costs leading some financial institutions to avoid said costs and collect interest from The Fed instead.

What happens if the economy booms? A simple answer would be for The Fed to take away the excess reserve punch bowl. But bank lending has become so regulated (CFPB, OCC, Fed, FDIC, SEC, etc) that financial instutions may decide to continue the escape valve from actual lending.

I call excess reserves and the interest paid by The Fed to FI’s that DON’T lend … Ben and Janet’s Famous Chili recipe. If the economy does boom, I am afraid of what will happen.

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