Category: zerohedge

While the Fed has long been focusing on the revenue part of the household income statement (which unfortunately has not been rising nearly fast enough to stimulate benign inflation in the form of nominal wages rising at the Fed’s preferred clip of 3.5% or higher), one largely ignored aspect of said balance sheet has been the expense side: after all, for any money to be left over and saved, expenses have to surpass income. However, according to a striking new Pew study while household spending has returned to pre-recession levels (the average household spent $36,800 in 2014) incomes have not. 

Specifically, while the median income had fallen by 13% from 2004 levels over the next decade, expenditures had increased by nearly 14%. But nobody was more impacted than the one-third of households which the study defines as “low-income.” Pew finds that while all households had less slack in their budgets in 2014 than in 2004, lower-income households went into the red by over $2,300.

In other words, approximately one third of American households were no longer able to cover the core necessities – food, housing and transportation – with average income. 

According to Pew, households spent more in 2014 than they did in 1996, after adjusting for inflation; this holds whether the figures are based on averages (means) or medians. The typical household saw its expenditures grow by more than 25 percent, from $29,400 in 1996 to $36,800 in 2014. Mean expenditures grew 27 percent since 1996, rising from $43,200 to $54,800.

The problem is that incomes have not kept up: from 2004 to 2008, median household income grew by only 1.5 percent, while median expenditures increased by about 11 percent. During that period, the expenditure-to-income ratio (the percentage of a household’s budget used for spending) jumped by 9 percent. As the recovery began, median household expenditures returned to pre-crisis levels, but median household income continued to contract. By 2014, median income had fallen by 13 percent from 2004 levels, while expenditures had increased by nearly 14 percent. This change in the expenditure-to-income ratio in the years following the financial crisis is a clear indication of why and how households feel financially strained.  

 

Worse, as the chart below shows, in 2004, typical households at the bottom had $1,500 of income left over after expenses. By 2014, this figure had decreased by $3,800, putting them $2,300 in the red. As Pew notes, “the lack of financial flexibility threatens low-income households’ financial security in the short term and their economic mobility in the long term”, and as we would add, this makes them effective wards of the state to be manipulated by demagogue politicians with promises of free handouts.  

But perhaps worst of all is that typical U.S. households in the center of the income distribution range, aka America’s true middle class, have seen their income after meeting all expenses (aka leftover savings) plunge from $17,000 in real terms a decade ago to a paltry $6,000 as of 2014, a plunge of 65%!

 

What was the reason for this big drop in residual income and jump in expenses? According to Erin Currier, project director at Pew Charitable Trusts, “over time, [lower-income groups] consistently spend more on transportation and considerably more on housing.”

However, the biggest culprit by far, are soaring rental costs: “Lower income renters are spending nearly half their income on rent, while upper-income groups spend about 15% on rent. The disparity really shows that lower income families don’t have much slack in their budgets for mobility-enhancing investments like savings and wealth building.”

 

What is particularly notable is the substantial jump in median expenditures in just 2014. This was mostly due to an odd spike in rents:

For a typical family of four (two earners and two children), while median household income increased by about $10,000 between 1996 and 2014, annual expenditures also increased by about the same amount, driven largely by higher spending for core needs: housing, food, and transportation. Although the absolute change in income and expenditures was similar, this family had less slack in its budget in 2014 than in 1996, as its expenditure-to-income ratio grew from 71 percent to 75 percent.

The reason for record high asking rents has been extensively covered here before; here is Pew’s take:

Since the start of the housing crisis in 2007, homeownership rates have declined among households in the middle- and upper-income tiers. These decreases have affected the rental market, as former owners became renters, leading to rental vacancy rates at historical lows below 7 percent. The diminished supply of rental properties increased the cost of rental housing dramatically; in 2014, renters at each rung of the income ladder spent a higher share of their income on housing than they had in any year since 2004. Although both renters and homeowners spent more for housing in 2014, notable differences in the proportion of household resources going to shelter were evident across income groups, with lower-income renter households spending close to half of their pretax income on rent.

This, together with our previous report that increasingly more US households are unable to afford to purchase a home, should put to rest any speculation whether those who point out the chronic deterioration of the economy for everyone, not just the 1% who truly are doing better than ever, are “peddling fiction.” 

Pew’s conclusion confirms just that.

The amount of slack that families had in their budgets declined for all income groups between 2004 and 2014. This means households had less income to devote to wealth-building investments, such as short- and long-term savings, education, and life insurance. In 2004, the typical household in the lower third had a little less than $1,500 left over after accounting for annual outlays. Just 10 years later, this amount had fallen to negative $2,300, a $3,800 decline. These households may have had to use savings, get help from family and friends, or use credit to meet regular annual household expenditures. The typical household in the middle third saw its slack drop from $17,000 in 2004 to $6,000 in 2014. Of note, because income is measured before taxes, some families will have had even less slack in their budgets than this figure implies.

One final note: in the paragraph above replace “slack” with “savings” for an accurate description of what is going on.

Source: Pew Trusts

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Submitted by Bill Bonner of Bonner & Partners (annotated by Acting-Man.com's Pater Tenebrarum),

A Salutary Effect

“Ike and Dick Sure to Click” was an exciting election slogan. Their Democratic opponents, Adlai Stevenson and Estes Kefauver, had their snazzy campaign jingle, too: “Adlai and Estes… They’re the Bestes.”

Surely, the men behind these slogans had their private hungers and perversions. But they kept them to themselves. The 1956 presidential election campaign was a dull affair.

Google “Adlai Stevenson’s wife,” and you will get only the barest biographical information. But Google “Melania Trump” or “Heidi Cruz”… oh la la! Just be sure there are no children around.

 

Mirror, mirror on the wall, who’s the fairest of them all? The reality TV election is here!

 

It’s all out in the open now. This is the most entertaining election in U.S. history… and the first episode of Reality Democracy, in which the only apparent goal – or effect – is to get the ratings up.

When we were in grammar school, the teacher told us that “anybody in this classroom could grow up to be president.” We looked around the room with dread and foreboding. But now it looks as though she was right.

But this election ought to have a very salutary effect on the public: No one will ever take an election seriously again.

 

Silver-Haired Crooks

On Easter Sunday, we met a smart man who confessed to having voted for Donald Trump in the Florida primary. Of course, we wanted to know: What was he thinking? More on that in a moment…

A headline in yesterday’s paper jolted us away from the election. “Japan’s hard-up retirees turn to crime,” begins the headline in the Financial Times.

 

A gang of elderly recidivists in a Japanese jail. We apologize for using a kind of tinny word here.

 

After years of QE (quantitative easing), ZIRP (zero-interest-rate policy), NIRP (negative-interest-rate policy), and Abenomics (Japanese prime minister Shinz? Abe’s stimulus-focused economic policies) – which is to say, all the standard deviations of modern central banking – older Japanese people must now break the law… to get “free board and lodging behind bars.”

Is this what is coming to the U.S.? “Yes,” is the safe answer. Japan has been ahead of us on this entire trip. Its stock market crashed in 1989. That led to a Great Recession, which the authorities fought like the Imperial Army defending Okinawa. Japanese policymakers invented QE… and for 26 years, they’ve held interest rates near zero.

 

Japanese interest rates and the Nikkei – the former are now at or below zero, the latter remains about 60% below its all time high made more than 26 years ago – click to enlarge.

 

Shinz? Abe became prime minister specifically to end Japan’s quarter-century-long slump. He failed. The “three arrows” of his Abenomics platform – fiscal stimulus, monetary easing, and structural reform – seem to have driven the defenders even further to ground.

 

Hard Choices

It should, by now, be obvious to everyone that William McChesney Martin was right. As the ninth chairman of the Board of Governors of the Federal Reserve, he was the man on duty during the election cycle of 1956.

And he was the man responsible for “normalizing” interest rates, after the Fed’s war-time deal with the Treasury to help fund the deficit with ultra-low rates. Some feared this would trigger economic calamity. But Martin saw clearly what his homologues of the 21st century would rather go blind than see:

“Under the hard choices left to us in wartime, we had to dictate even some of the smallest details of our economic life, but that strait jacketing of the economy is wholly inconsistent with democratic institutions and a private enterprise system…

 

In a Free Market, rates can go down as well as up and thus perform their proper function in the price mechanism. Dictated money rates breed dictated prices all across the board.”

He then described the consequences of what would become the Bernanke-Yellen Money Dictatorship:

[W]e would have no reliable safeguard against the erosion of our savings, our pensions, our life insurance policies – the capital upon which the institutions of private enterprise rest…

 

William McChesney Martin, old school central banker (this species is reportedly extinct).

Photo credit: Bettmann / Corbis

 

So far, Mr. Bernanke and Ms. Yellen seem to have the matter under control. We see no erosion of the value of our financial assets. Instead, stocks and bonds have gone up in price.

But the companies behind them are now encrusted with crony barnacles like an old boat. The boat slows… and rides lower and lower in the water. Real capital formation declines… productivity sinks… wages stagnate…

And then, you have people who get poorer, not richer… and silver-haired crooks… desperate to be behind bars, where they find warm beds and old friends. Mr. Martin, who lived to be 91 years old and died in 1998, would have understood it.

 

The Genius of Trump

But let’s return to our intelligent friend, casting his vote in the primaries for Donald J. Trump:

“I know him well. He’s a friend of mine,” he began.

“A lot of the things he says you can’t take literally,” he replied under cross examination.

“Like that wall. He’s not going to build a wall. The Mexicans aren’t going to pay for it. But it’s a great image. It’s one that sticks in your mind.

 

Pardon us for sticking images into your mind…

“You get lost when you talk about trade policies and export account deficits. People don’t know what you are talking about. And they take you for another Hillary Clinton or some other Beltway Insider. Blah, blah, blah… more of the same.

“But the wall is a strong image. It announces that Trump is different. And he’s going to protect the American people. That’s all it’s meant to do. It’s not meant to be taken literally.

“That’s why Donald Trump is a genius. He’s able to communicate in a different way. The wall image tells people what they really want to know, without getting lost in details.

“He’ll do things differently. And that’s why the cronies and the Deep State are so afraid of him.”

via Zero Hedge http://ift.tt/232eUp0 Tyler Durden

We’ve spent quite a lot of time documenting the inexorable rise in housing prices across some of the world’s red hot markets.

Take Vancouver, for instance, where according to National Bank, one third of all homes sold in 2015 went to Chinese buyers whose voracious demand has driven prices into the stratosphere in both British Columbia and Ontario. Here’s what $2.5 million will get you in Point Grey:

Or how about London, where things are so out of control that it will cost you £500 to live under someone’s stairs:

Then there’s San Francisco, where the median home price is now well over $1 million. Indeed, as we noted just yesterday, San Francisco home prices rose 10.5% in January and, along with properties in Seattle and Portland, have now surpassed their housing bubble highs:

And when last we checked in on Silicon Valley, a tent in someone’s backyard goes for $46 a night (you get an extension cord, one shower a day, and wi-fi).

But if you aren’t the camping type, there’s another option: you can always build yourself a wooden box and put it in someone’s living room. “The median rent for a one bedroom apartment in San Francisco is a stunning $3,670 a month, and a bedroom in a shared apartment will set you back at least $1,500 for a decent location on the peninsula,” Gizmodo writes, on the way to recounting the story of Peter Berkowitz, a 25-year-old illustrator who devised an innovative way to save on rent in the Bay Area’s lunatic market. Here’s more:

Peter Berkowitz is my new favorite guy. The 25-year-old illustrator recently moved to San Francisco and instead of settling for some landlord’s price-gouging, he found some other cool kids who let him build a box in their living room. Peter’s rent is just $400 a month.

 

This box-in-the-living room idea, now that’s something I can get behind. You’re lucky to have any space at all to yourself in San Francisco’s housing shortage, but it’s damn near impossible to find such a cozy little sleep pod like this. Peter built the thing with his bare hands for only $1,300 and even included a little window and some fairy lights so that it feels less like coffin and more like a magical escape from the dystopia that is the city by the bay. It’s eight feet by 3.5 feet (a little longer and wider than a coffin). The real perk though is that it’s 4.5 feet tall (much taller than a coffin). And look, there’s a cute little shelf for his MacBook.

 

 

One time I lived in a closet in London for £250 a month, roughly the same as what Peter’s paying for his box. I was able to stand up straight in my closet, but I was not able to stretch my arms out in both directions. It was no problem, though, because I was broke as hell and got to use the living room from time-to-time. I even had a girlfriend for a little while.

 

In all seriousness, it’s absurd that Frisco living has come to this. It’s bad for everyone who’s not some overpaid Facebook employee, and it’s bad for America. The housing crisis also isn’t entirely the tech companies’ fault, although they could be doing a lot more to fix it. Take a hint from Peter. He seems like a real get-up-and-go guy. Well, more like get-up-slightly-hunched-over-and-crawl-out-of-your-box-and-into-a-living-room kind of guy. I like this guy.

It may be cliché, but this is one time where you really can blame China and if Beijing really does intend to liberalize the capital account while simultaneously orchestrating a far deeper devaluation of the RMB, you can bet things are going to get even crazier in the world’s hottest housing markets. 

Trade idea: long prefab living room cubicles.

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Via Dana Lyons' Tumblr,

A key index of housing stocks is hitting several layers of overhead resistance.

We’ve noted over the past few weeks that the post-February stock rally has brought many of the major indices into areas of significant resistance on their charts. The same goes for some of the sector averages. Included among them, in our view, is the PHLX Housing Index, or HGX. The impressive list of factors posing as potential resistance nearby on the HGX chart includes:

1. The broken post-2011 Up trendline
2. The 200-Day Simple Moving Average
3. The 61.8% Fibonacci Retracement of the August-February decline
4. The breakdown gap emanating from the December 31, 2015 close

 

 

Here is a close-up shot at the multiple resistance layers:

 

We will say the pace of the recovery in the HGX has been impressive, up some 25% from its February basement levels. However, the move has produced a very overbought status in the index in the short-term, just as it has reached this critical confluence of resistance levels. That should make for tough sledding in the near-term, regardless of the fate of the index in the longer-term.

That said, thanks to another central bank kick-save, this time from Fed Chair Janet Yellen, a host of indices including the HGX made a late-day run at hurdling key resistance today. The jury is still out on which, if any, were successful in overcoming their potential resistance. Furthermore, they will have to sustain their position above such levels in order to claim victory. However, after having been temporarily halted precisely at suspected resistance over the past week, and appearing vulnerable to further weakness, today’s move certainly brightens the picture a bit.

In the case of the HGX, despite today’s move, a clear-cut breakout above resistance is far from a done deal. In other words, this one is still listed as contingent as the housing sector still has work to do before it gets its “clear to close”.

*  *  *

More from Dana Lyons, JLFMI and My401kPro.

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The ink on the Iran nuclear deal wasn’t even dry yet when Tehran tested a next generation, surface-to-surface ballistic missile with the range to hit archrival Israel.

The Emad, as the new weapon is called, expands upon Iran’s already impressive arsenal of missiles which the IRGC insists are paramount to securing the country against regional threats. The country’s missile program, Tehran says, is purely defensive in nature.

Be that as it may, October’s Emad launch ruffled more than a few feathers in Washington and Jerusalem. As we wrote at the time, it violated the spirit of the nuclear accord if not the letter and subsequently, there were questions as to whether the new missile also ran afoul of a UN Security Council resolution governing the test-firing of missiles capable of delivering nuclear warheads.

Fast forward to March and Iran once again moved to show off its fire power, this time by test-firing a handful of medium-range Qiam-1s from silos across the country.

(an image from the March 9 exercises)

The missiles hit targets some 700 km away. “Our main enemies are imposing new sanctions on Iran to weaken our missile capabilities,” Brigadier General Amir Ali Hajizadeh, commander of the IRGC’s aerospace arm said, in a statement. “But they should know that the children of the Iranian nation in the Revolutionary Guards and other armed forces refuse to bow to their excessive demands,” he added, for emphasis.

Washington has run into problems when it comes to applying new sanctions to the Iranian government in connection with the missiles program. “The U.S. Treasury Department blacklisted [last week] two Iranian companies, cutting them off from international finance over their connection to the missile program,” Reuters writes, before reminding us that “Washington imposed similar sanctions on 11 businesses and individuals in January over” last October’s Emad launch. 

Hajizadeh was ready with more bombast: “Even if they build a wall around Iran, our missile program will not stop. They are trying to frighten our officials with sanctions and invasion. This fear is our biggest threat.” 

Meanwhile, Russia is set to block any further efforts to impose UN sanctions on Tehran in connection with the missile program. “The White House insists it has all the unilateral authorities it needs to slap new sanctions on Iran for defying the spirit — if perhaps not the letter — of the UN Security Council resolution implementing the nuclear deal which ‘called upon’ Iran ‘not to undertake any activity related to ballistic missiles designed to be capable of delivering nuclear weapons,'” Al-Monitor writes. “Russia insists that language is not a legal prohibition, in effect ruling out more missile-related UN sanctions.”

“You may like it or not that Iran launches ballistic missiles – but that is a different story,” said Mikhail Ulyanov, head of the Russian ministry’s department for non-proliferation and arms control. “The truth is that in the 2231 resolution there are no such bans.”

And it wouldn’t matter if there were, because as the Ayatollah made abundantly clear on Wednesday, any moderate Iranian politicians who believe that Iran’s future will rely more on diplomacy and less on “defensive” weapons are sorely mistaken. 

In an apparent response to former President Akbar Hashemi Rafsanjani who last week tweeted that Iran’s “future is in dialogue, not missiles,” Khamenei said the following today: “Those who say the future is in negotiations, not in missiles, are either ignorant or traitors. If the Islamic Republic seeks negotiations but has no defensive power, it would have to back down against threats from any weak country.”

Islamic Republic must use all means. I support political talks in global issues, but not with everyone. Today is era of both missile & talk.

— Khamenei.ir (@khamenei_ir) March 30, 2016

Clear enough Mr. Rafsanjani? You are either stupid or hell bent on treason and either way, the Ayatollah doesn’t have any patience for it.

All humor aside, it’s hard to blame Khamenei and the IRGC for their hard line stance on Tehran’s missile program. Yes, the Ayatollah takes great pleasure in trolling Washington and he very often uses his own special brand of absurd hyperbole to intentionally whip the masses into an anti-American frenzy. But when it comes to Iran’s right as a sovereign country to defend itself, it’s not at all clear why Tehran should be held to a different standard than the Israelis or the Saudis -both states that are heavily armed and pose a very real threat to Iran and its people. 

Indeed, Israel and Saudi Arabia have proven time and again that they aren’t interested in having any kind of honest “dialogue” with Iran whatsoever and there are plenty of people on Capitol Hill who take the same approach. Given that, it seems entirely reasonable for Khamenei to suggest that as long as the current geopolitical dynamic persists, Iran’s future will indeed be tied more closely to missiles than to negotiations.

via Zero Hedge http://ift.tt/1pKYbIj Tyler Durden

Following two disappointing auctions earlier this week when first the 2Y and then the 5Y auctions either demonstrated a substantial drop off in bid-side interest or priced wildly through the when issued, we said to await today’s 7Y auction for the true picture of demand for primary paper, as the first auction took place when Europe was out for Easter vacation, and the second one took place just as Yellen speaking at the Economic Club yesterday.

And indeed, if the 7Y is an indication, the demand for US paper remains quite solid, especially at the belly of the curve where moments ago the US Treasury sold $28 billion in Cusip Q29, at a yield of 1.606%, stopped inside the 1.61% When Issued.

The internals were also solid, with the Bid to Cover of 2.51, rebounding from last month’s 2.46, and also above the 12TTM average 2.45. The Indirect bid also picked up, with foreign official entities taking down 57.8% vs 53.48% last and also above the 12 month average of 55.5%, while Direct bidders ended up with 15.5% of the final allotment, the highest since August 2014. This means Dealers ended up with just 26.7% of the auction, down from the 32.3% in February and also below the 12 month average, confirming perhaps that any weakness seen in the past few days’ auctions was merely a fluke.

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Well, that escalated quickly…

Gold is clinging to unch, bonds are down, and now crude has crashed back into the red post-Yellen…

 

Only stocks remain positive – which makes perfect sense given Yellen's implied downgrade of every positive economic indicator (and the 22.5x GAAP P/E).

via Zero Hedge http://ift.tt/1UUNvUz Tyler Durden

For those wondering why Trump rallies tend to devolve to pugilistic matches, where even belligerent 15-year-old protesting (or perhaps “provocative” is a better word) girls end up getting pepper sprayed much to the media’s fascination, the answer is Craig’s List ads such as the one below, in which allegedly “I’m feelin’ the Bern“-affiliated organizers provide paid positions for protesters at Trump rallies, and which provide not only shuttle buses, parking, and signs (as well as time cards) but also hand out $15/hour for said protest activity “due to the economic inequality.“

Well that’s one way to cover the “minimum wage.”

This particular ad has since been removed by CraigsList, although as the Daily Caller recently pointed out, this is a recurring pattern as anti-Trump protesters openly admit answering Craigslist ads and getting paid to protest at Trump rallies. This is what the DC said previously:

The Establishment on both the left and the right, who want to disenfranchise the millions of Republican voters who support Donald Trump, have blamed the staged riots near Trump rallies on Trump or on Bernie Sanders. That’s like blaming the Russians for the Reichstag Fire. Bernie has little to do with these manufactured protests. This is a Clinton operation, a faux protest.

 

False flag operations have long been common in politics, but these riots are poisonous to the electorate, intentionally designed to turn violent and stifle free speech.

 

This free speech-busting goon squad operation is directed by supporters of Hillary Clinton. It is paid for mostly by George Soros and MoveOn.org and pushed by David Brock at Media Matters for America. It’s also funded by reclusive billionaire Jonathan Lewis, who was identified by the Miami New Times as a “mystery man.” He inherited roughly a billion dollars from his father Peter Lewis (founder of Progressive Insurance Company).

 

A march and demonstration against Trump at Trump Tower essentially fizzled Saturday when only 500 “protesters” of the promised 5000 showed up. Infiltrating the crowd, I learned most were from MoveOn or the Occupy movement. Soap was definitely in short supply in this crowd. Several admitted answering a Craig’s list ad paying $16.00 an hour for protesters.

 

Hillary understands that Trump would lose the votes of certain establishment Republicans if he were the nominee. On the other hand, it doesn’t matter, because of his crossover outreach. In Michigan, Democrats and independents who have lost their jobs because of disastrous globalist trade deals like NAFTA are lining up to vote for Donald.

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With Wisconsin becoming make-or-break for the avoidance of a contested convention, it appears, based on PredictIt's odds, that someone suddenly knows something about the result and has bet heavily on Cruz to win…

Trump's odds have collapsed in the last hour (on yuuge volume)…

 

As "someone" is suddenly betting heavily on Cruz to win…

 

Is this self-fulfilling – spend some dollars to give impression of Cruz success? Or is this "insider" trading? Or did the public just decide now was the time to go all-in on Cruz?

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There has been an odd shift when it comes to US sentiment toward home ownership: while in the past, the higher home prices rose the greater the demand was for housing (leading ultimately to the housing debt bubble of 2006), this time around we are getting increasingly more frequent indications of just the opposite.

Some have started to notice: as we noted one week ago, in its traditionally cheerful assessment of the US housing market, the NAR’s Larry Yun snuck in an unexpected warning:

“Home prices ascending near or above double-digit appreciation aren’t healthy – especially considering the fact that household income and wages are barely rising.”

He did it again just a few days later:

“The overall demand for buying is still solid entering the busy spring season, but home prices and rents outpacing wages and anxiety about the health of the economy are holding back a segment of would-be buyers.”

This is about as close to a warning that the US housing market is back into bubble territory as one can hope to get from the NAR. To be sure, we noted this surprising development one week ago in “For The Average American, Owning A Home Is Increasingly Unaffordable.”

Recently MarketWatch came to the same conclusion noting that “there’s a paradox in Monday’s existing-home-sales data. Sales slid 7.1% to the lowest pace since November, the National Association of Realtors said. NAR has warned for many months that low levels of supply, which are pushing prices ever higher, will eventually cripple the market.”

February’s decline may be a sign that the Realtors’ fears are coming true, although it may still turn out to be a temporary blip caused by weather, new closing regulations, and the difficulties of adjusting data to account for all those anomalies. Still, as NAR Chief Economist Lawrence Yun said in a statement, “the main issue continues to be a supply and affordability problem. Finding the right property at an affordable price is burdening many potential buyers.”

 

That may sound obvious: if you can’t afford the few limited options available on the market, you’d probably give up too. It also tracks with a survey NAR published last week, which found that the share of current renters who say now is a good time to buy fell in the most recent quarter.

 

But it’s worth remembering, as Yun pointed out in a press conference Monday morning, that it wasn’t too long ago that higher prices drew more buyers in, rather than shutting them out.

It goes on to observe that this phenomenon was documented by Robert Shiller. In a 2007 paper, Shiller described the bubble mentality as “a feedback mechanism operating through public observations of price increases and public expectations of future price increases. The feedback can also be described as a social epidemic, where certain public conceptions and ideas lead to emotional speculative interest in the markets and, therefore, to prices increase.” A few paragraphs later, Shiller wrote, “That the recent speculative boom has generated high expectations for future home price increases is indisputable.”

In other words, a buying scramble driven by manic euphoria to jump on the latest rising-price bandwagon.

But that is no longer the case: “In the February Fannie Mae Home Purchase Sentiment Index, survey respondents said they expect home prices to rise 1.7%. One year ago, respondents forecast prices would rise 2.5%. In the 12 months to February, the actual price gain was 4.4%, NAR said Monday, but in recent months the yearly increase has been as high as 8.2%.”

Additionally, homeowners have become less confident about the value of the equity they have in their homes. That means they’re no longer cashing out to finance other spending, as they did in the bubble years. It also means they may not understand how much their homes could command on the market, making them less likely to list and worsening the supply problem.

* * *

But ultimately it all come down to what is the fair value of housing. And according to a Bank of America research report, the recent trends in which ordinary Americans are left behind from the “American Dream” will persist for one simple reason: “home prices are currently overvalued by 14% on the national level.”

This is what BofA’s chief economist Michelle Meyer says:

In order to gauge the ‘fair value” of home prices, we typically compare prices to the trend in income. The logic is simple – the more income one earns, the more housing he/she can access. However, prices will occasionally diverge from income, as we are experiencing now and clearly did during the early 2000s. As we have been arguing, home prices are currently overvalued – by our estimates 14% on a national level.

 

It is useful to explore the reasons for overvaluation to understand the likelihood of a correction. During the early 2000s, the strong appreciation in home prices reflected the combination of greater availability of credit and unanchored expectations for future home prices. Today, the gain seems to be more a function of the price of credit – in other words, the level of rates. It is not an environment of high leverage in the mortgage market.

 

According to IMF research, this is an important distinction. In recent research under the Global Housing Watch umbrella, IMF economists argue that a distinguishing feature of real estate busts is the “coincidence between the housing boom and the rapid increase in leverage and exposure of households and financial intermediaries.” During this past crisis, of the 23 countries with “twin booms” in real estate and credit, they found that 21 of those countries had a severe downturn in housing and the economy. The 7 countries that just had a housing boom without excess leverage, only 2 went through a systemic crisis.

 

The US is not alone in returning to a housing market where prices appear overvalued. The IMF identifies a number of other major economies with prices in excess of income (Chart 5). The worst offender is New Zealand followed by Germany. Indeed, over the past year, 33 out of the 51 countries in their global housing price index showed an increase in home prices. The IMF’s aggregate for global home prices shows that prices are up 1.7% yoy as of 3Q15, assuming equal weights for countries (Chart 6).

 

Bottom line: lessons have been learned regarding household leverage. However, there has still been an impressive recovery in home prices in many countries.

There is another, simpler explanation: perhaps it is not concerns about future home appreciation, perhaps American incomes are simply not growing anywhere as fast to give them comfort that there will be other greater fools to whom the newly purchased house can be flipped. Couple with the ongoing lack of easy credit for most Americans to fill the purchase price gap, and it becomes very clear why the US housing market continues to be driven higher mostly by all-cash foreign buyers spluring on ultraluxury properties in hopes of parking cash indefinitely now that the Swiss banking model is defunct.

The good news, if only for the Fed, rent inflation will continue to soar in the coming months and years as the best households can hope for is to pay month to month for a roof above their heads, which is troubling because as we noted back in January, “Rental Rates Have Reached Apocalyptic Levels.” With the Fed’s ongoing easy money policies, rents will only keep rising and soaking up even more of US disposable income. And then the Fed’s economists will wonder why spending on non-core items continues to decling with every passing year.

 

 

via Zero Hedge http://ift.tt/1ZL27p7 Tyler Durden