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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The Great Fed Unwind: It’s All About Treasury Note/Bond Sales, Not Agency MBS

The Federal Reserve was supposed to start shrinking their $4.4 TRILLION balance sheet back in October, but have only recently begun actually selling the assets on their balance sheet.

As you can see, the US Treasury 10-year Note yield was just above 4% when The Fed’s asset-buying began and after now resides at around 2.4%. And you can barely see the unwinding of the balance sheet since The Fed is moving at glacial speeds to unwind.

But we have only seen a slight uptick in the 10-year Treasury Note yield with the recent unwinding of the balance sheet (pink box).

Since The Fed’s asset purchases are primarily Treasury Notes/Bonds and agency Mortgage-backed Securities (Agency MBS), we can see that it is the T-Notes/Bonds that are being sold-off, not the Agency MBS. The Fed’s strategy is to let the Agency MBS run-off (gradually mature as mortgages prepay).

But as The Fed’s Balance unwinds and Treasury/Mortgage rates rise, mortgage prepayments are likely to slow, making The Fed’s plans less effective. This is called “extension risk.”

Let’s see what The Fed of New York does tomorrow!

US New Home Sales Highest Since Oct ’07! (Back To 1995 Levels)

The sale of new homes in the USA just hit the highest level since October 2007. And back to 1995 levels when the housing bubble began.

Yes, it has taken 10 years of The Fed’s Zero Interest Rate Policy (ZIRP) just to get back to October 2017 levels of new home sales.

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The median price for new home sales actually fell in October.

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But the average price of new home sales just broke $400,000 for the first time in history!

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The months supply of new homes fell in October.

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Multifamily Starts Rise 37.4% In October, Largest Increase In 2017 (West Declines 3.70% As Lonzo Ball Forgets How To Shoot)

Housing starts rose 13.7% MoM in October to 1,290K units SAAR (or 1.29 million). However, the largest share of housing starts were in the 5+ unit (multifamily) category. Multifamily units grew at a rate of 37.4% MoM.

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October was the highest growth in 5+ unit starts in 2017.

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1-unit (detached) housing starts grew at 5.28% MoM, also the best month in 2017. You can clearly see the housing construction bubble that peaked in early 2006.

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The biggest gainer? The Northeast US at 42.16% MoM. The South grew at only 17.17% while the West actually declined at -3.70%.

This is the Lonzo Ball Effect. This is where your starting point guard goes 1 for 9 from the floor, 0 for 6 from the 3-point line for a dismal 2 points and the opponent doesn’t even bother the foul him.  A clear sign of stagnation in the West.

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Perhaps Lonzo Ball should consider changing the name of his basketball shoe company name from Big Baller to Small Baller.

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Is The US Housing Market In A Bubble? Hot, Hot, Hot or Not, Not, Not?

One of the more interesting questions is whether the US housing market is in a bubble or not. The answer is (drum roll) …. it depends.

Consider the S&P CoreLogic Case-Shiller 20 Metro Home price index as a ratio of US median  family income. As you can see, the US have reached a price-to-income ratio that is higher than the peak of the housing bubble around 2005. So, it looks like the US housing market is in a broad-based bubble.

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But in real terms (extracting inflation), the US housing market is below the housing bubble peak indicating that the US housing market is NOT in a bubble.

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While the San Francisco housing market is feeling hot, hot, hot, the Case-Shiller index for San Francisco home prices as a ratio of median household income is rising but well below the housing bubble peak. Credit the rising income to flourishing tech companies like Apple, Google, Nvidia and many others.

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Even Washington DC home prices (as a ratio of Arlington, Virginia has no evidence of a housing bubble.

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This is not to say that housing prices in San Francisco, Washington DC and other cities are “affordable.”  It is just that most indicators, when adjusted by median income for the area, don’t indicate a house price bubble.

So rising home prices in the US doesn’t mean that home prices are hot, hot, hot.  But it sure feels that way.

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