Home Price Growth Gains Momentum, Over 2X Wage Growth (Seattle Fastest, Washington DC Slowest)

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 6.1% annual gain in August, up from 5.9% in the previous month. The 10-City Composite annual increase came in at 5.3%, up from 5.2% the previous month. The 20-City Composite posted a 5.9% year-over-year gain, up from 5.8% the previous month.

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Seattle, Las Vegas, and San Diego reported the highest year-over-year gains among the 20 cities. In August, Seattle led the way with a 13.2% year-over-year price increase, followed by Las Vegas with an 8.6% increase, and San Diego with a 7.8% increase. Nine cities reported greater price increases in the year ending August 2017 versus the year ending July 2017.

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And yes, Washington DC is once again the slowest growing metropolitan area in the USA in terms of home price growth.

Just like during the infamous housing bubble of the late 1990s and 2000s, home price growth (6.07% YoY) is over 2X wage growth (2.41% YoY).

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The rapid rise in home prices relative to wage growth followed a flurry of banking deregulation starting in 1992 and the Presidency of William Jefferson Clinton.

  • Housing and Community Development Act of 1992 (P.L. 102-550, 106 STAT. 3672).Established regulatory structure for government-sponsored enterprises (GSEs), combated money laundering, and provided regulatory relief to financial institutions.
  • RTC Completion Act (P.L. 103-204, 107 STAT. 2369).Required the RTC to adopt a series of management reforms and to implement provisions designed to improve the agency’s record in providing business opportunities to minorities and women when issuing RTC contracts or selling assets. Expands the existing affordable housing programs of the RTC and the FDIC by broadening the potential affordable housing stock of the two agencies.

    Increased the statute of limitations on RTC civil lawsuits from three years to five, or to the period provided in state law, whichever is longer. Provided final funding for the RTC and established a transition plan for transfer of RTC resources to the FDIC. The RTC’s sunset date is set at Dec. 31, 1995, at which time the FDIC assumed its conservatorship and receivership functions.

  • Riegle Community Development and Regulatory Improvement Act of 1994 (P.L. 103-325, 108 STAT. 2160).Established a Community Development Financial Institutions Fund, a wholly owned government corporation that would provide financial and technical assistance to CDFIs.

    Contains several provisions aimed at curbing the practice of “reverse redlining” in which non-bank lenders target low and moderate income homeowners, minorities and the elderly for home equity loans on abusive terms. Requires the Treasury Department to develop ways to substantially reduce the number of currency transactions filed by financial institutions. Contains provisions aimed at shoring up the National Flood Insurance Program.

  • Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (P.L. 103-328, 108 STAT. 2338).Permits adequately capitalized and managed bank holding companies to acquire banks in any state one year after enactment. Concentration limits apply and CRA evaluations by the Federal Reserve are required before acquisitions are approved. Beginning June 1, 1997, allowed interstate mergers between adequately capitalized and managed banks, subject to concentration limits, state laws and CRA evaluations. Extends the statute of limitations to permit the FDIC and RTC to revive lawsuits that had expired under state statutes of limitations.
  • Gramm-Leach-Bliley Act of 1999 (P.L. 106-102, 113 STAT 1338).
  • Repeals last vestiges of the Glass Steagall Act of 1933. Modifies portions of the Bank Holding Company Act to allow affiliations between banks and insurance underwriters. While preserving authority of states to regulate insurance, the Act prohibits state actions that have the effect of preventing bank-affiliated firms from selling insurance on an equal basis with other insurance agents. Law creates a new financial holding company under section 4 of the BHCA, authorized to engage in: underwriting and selling insurance and securities, conducting both commercial and merchant banking, investing in and developing real estate and other “complimentary activities.” There are limits on the kinds of non-financial activities these new entities may engage in.

 

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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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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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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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Case-Shiller Home Prices Rise 1% In May (5.6% YoY), Seattle Leads At 13.3% YoY

Home prices keep on rising. According to the S&P Case Shiller repeat sales index, home prices rose 1% in May and 5.6% YoY.

But the Case-Shiller home price index continues to grow at over twice that of inflation and wage growth.

The biggest winner? Seattle. The slowest growing? Cleveland, Chicago and Washington DC.

West coast home prices really took after after The Fed’s third round of quanitative easing (QE3).

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M2 Money Growth Declines To 20 Month Low (What Happens To Wage Growth?)

Real median household income, one measure of American household prosperity, peaked in 1999, fell slightly in 2000, then declined in the early 2000s only to hit decade-peak in 2007. RMINC continued to fall again until 2012 when it finally started to rise.

What is notable is that the rise in real median household income in the 1990s corresponded with a rapid rise in the M2 money supply.from 1995 to 1999. That represented a 33% in M2 money supply.

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The rapid increase in M2 Money Supply also corresponds to the high in M2 Money Velocity in 1997, as if Fed Chair Alan Greenspan expended all the M2 fuel in one massive attempt to stimulate the economy.  M2 velocity (GDP/Money Supply) has been falling ever since. Along with real median household income. EXCEPT FOR 2013 AND AFTER WHEN REAL MEDIAN HOUSEHOLD INCOME ROSE EVEN AS M2 MONEY VELOCITY WAS SINKING LIKE A ROCK.

One possible explanation lies with the redesign of the income question in 2013 and onwards.

Starting in 2013 with a partial phase-in, which was fully implemented in 2014, Census changed the questions and the methods in calculating household income.

For example, Census, starting in 2014, began to “collect the value of assets that generate income if the respondent is unsure of the income generated.”

Also, the government started to use “income ranges” as a follow-up for “don’t know” or “refused” answers on income-amount questions.

So, that is a partial explanation for the anomoly of rising real median household income with crashing M2 Money Velocity. THEY CHANGED THE HOUSEHOLD INCOME DEFINTION.

M2 Money growth has fallen to a 20 month low  while an alternative measure of money supply, the Austrian money supply, just fell to a 105 month low. 

The “Austrian” measure of the money supply differs from M2 in that it includes treasury deposits at the Fed (and excludes short time deposits, traveler’s checks, and retail money funds).

Well, M2 Money supply increases hasn’t done much for Average Hourly Earnings of Production and Nonsupervisory Employees, particularly since 2008.

Whether we are using the decline in M2 growth or Austrian money growth, neither one have benefitted the majority of Americans.