Fear! Selling Conditions for Housing Highest Since 2007 (University of Michigan Survey of Consumers)

The Universtity of Michigan has released their latest Survey of Consumers. They find that consumers think that the conditions for selling a home is the highest since 2007.

What are the reasons that consumers feel this way? It is likely the scant inventory of for-sale dwelling coupled with rising home prices.

And/or it could be the fear that The Fed will raise interest rates.

Yes, fear of rate hikes and possible declines in home prices stalk consumers. 


Q1 US GDP Growth Rises To 1.2% QoQ in the Second Estimate (Personal Consumption Growth “Upgraded,” But Still Worst Since Q4 2009)

Today, the Bureau of Economic Analysys releaseed their  “second” estimate for the first quarter US gross domestic product (GDP), based on more complete data that the preliminary Q1 GDP estimate 0f 0.7% QoQ. The general expectation is for an increase in Q1 GDP to 0.9% QoQ.

This exceeds the Atlanta Fed’s Q1 GDP Forecast as of the end of Q1 2017 of 0.9%.

One reason is that Q1 Personal Consumption Expenditures were “upgraded” from 0.3% QoQ to 0.6% QoQ. However, it is the lowest reading on Personal Consumption Expenditure growth since Q4 2009.

The breakdown of Q1 Personal Consumption Expenditures.

Nonresidential structures enjoyed a 28.4% QoQ boost in Q1, the highest growth since 2012. Residential structures also saw the largest growth since 2012 at 13.8%.

Federal government consumption expenditures and gross investment fell 2% QoQ in Q1. Mostly due to a decline in National Defense spending of  -3.9% QoQ.

That should make Parks and Recreation’s Ron Swanson happy and Leslie Knope furious.

But The Fed and Janet Yellen should be “happy” given that the updated Q1 GDP growth was an upgrade.

The implied probability of a Fed rate hike at the June 14th FOMC meeting is 100%!

But there is a 9% chance of a rate cut by the July 26 FOMC meeting.

A likely CNBC or Fox Business guest: Economists say there is a 50/50 chance of future rate hikes, but only a 10% chance of that.


Million Dollar Dump! Encinatas Calif “Modest” 1-BDR, 1-Bath Home Valued at $1 Million (No Housing Bubble?)

Encinatas California is located on the Pacific Ocean wedged between San Diego to the south and Marine Corps base Camp Pendleton to  the north.  And this is where a “modest” home is valued at around $1 million.

According to Zillow, “This 520 square foot single family home has 1 bedrooms and 1.0 bathrooms. It is located at 237 La Mesa Ave Encinitas, California.” Its Zestimate®? $973,152!!

This charming abode last sold in 2012 (as The Fed ramped up its last major round of Treasury and Agency MBS purchases (known as QE3) for $260,000.

Rediin has a slightly better photo of the microscopic home which they value at “only” $828,586. Interesting fence and opening design (as if it was an afterthough).

And it does have a large backyard, although rather “primitive.”

The house is not for sale at the moment. I would be interested in seeing how many offers they would actually get.

Likely, this home’s “value” is driven by investors seeking to tear down the existing house and constructing a “mansion near the sea.”  Or else this is actually for occupation by someone who wants to squeeze into a 1 bedroom/1 bath house.

Bear in mind that The Fed’s ambitious zero interest rate policies and quantitative easing has driven down lending rates for shorter-term lending like construction loans, creating a virtual bubble in home replacements in hot markets like the California shoreline. Or are some bailing on the over-inflated stock market and bidding up the price of California coastal dumps?

With San Francisco home prices turning down for tthe first time since 2011, will San Diego follow?

I wonder what actress Bette Davis would have said about this house in Encinatas?

Pension Paralysis: 11 of 15 Counties That Are The WORST Funded Public Pensions Are In California (But Illinois Is The Most Underfunded)

It has been been almost nine years since The Federal Reserve launched their massive intervention in capital markets. Since late 2008, stocks, bonds, home prices, commercial real estate have skyrocketed.

Yet numerous public pension funds have not even been able to generate returns that meet or exceed their assumed actuarial rates. This is forcing numerous funds to lower their assumed actuarial rates which leads to higher required contributions to their broken pension funds.

Joshua Rauh at Stanford University has compiled his latest update of “Hidden Debt, Hidden Deficits: 2017 Edition: HOW PENSION PROMISES ARE CONSUMING STATE AND LOCAL BUDGETS.”

One of the most interesting (or depressing) charts is Figure 14: : County Contributions: Actual vs. Required to Prevent Rise in Unfunded Liability. According to Rauh, 11 of the 15 worst counties in terms of unfunded pension liabilities reside in the State of California (with Fresno leading the nation). Cook County (Chicago) is third. Unfortunately, Fairfax County in Virginia (where I reside) ranks 12th. 


But Rauh also includes a more simple measure of pension plan underfunding: The Funding Ratio (Total Assets / Total Liability) as well as unfunded liabilities. Under this more simplistic metric, Wayne County Michigan (home of fiscal failure Detroit) is number one followed by Cook County IL (Chicago) and Allegheny County PA (Pittsburgh). Fairfax County VA is ranked 14th on this list of troubled pension systems.

Rauh also slices and dices that pension data, but it does not change the story: many county pension funds are woefully underfunded and will eventually need to be bailed-out by their States and/or the bailout specialist, the US Federal government.

At the state level, to no one’s surprise, Illinois is the most underfunded pension.

In terms of State contributions required to prevent a rise in unfunded liabilities, Illinois leads again with California in third place.

So, depending on what you think is relevant, either Fresno County CA or Wayne County MI (home of Detroit) are going to require a combination of tax increases or cuts in pension benefits in order to make ends meet. Chicago is currently relying on property taxes to bailout out their overly generous teachers’ pension benefits.

Maybe these woefully underfunded counties and state hired Park and Recreation’s Tom Haverford and his ludicrous money making ventures instead of simply diverisifying across passive indices from different asset classes (which would be far less costly).


Notes on Unfunded Market Value Liability (from  Rauh pgs 2-3):

A rediscounting of the liabilities at the point on the Treasury yield curve that matches the reporting date and duration of each plan results in a liability-weighted average rate of 2.77 percent and unfunded liabilities of $4.967 trillion. Since not all of these liabilities are accrued, we apply a correction on a plan-by-plan basis (based on Novy-Marx and Rauh 2011a, 2011b) that results in unfunded accumulated benefits of $3.846 trillion under Treasury yield discounting. These are the unfunded debts that would be owed even if all  plans froze their benefits at today’s promised levels. I refer to this measure as the unfunded market value liability, or UMVL.

The market value of unfunded pension liabilities is analogous to government debt, owed to current and former public employees as opposed to capital markets. This debt can grow and shrink as assets and liabilities evolve. From an ex ante perspective, the economic cost of the pension system to the sponsor is the present value of the increase in pension promises (service cost) plus the cost incurred because existing liabilities come due a year sooner (interest cost). Under lower discount rates, the service cost is higher but the interest cost is lower.


Existing-Home Sales Drop 2.3 Percent in April As Inventory For Sale Remain Missing

Yet another month of missing for-sale existing home inventory and rising median prices for existing home sales.

WASHINGTON (May 24, 2017) — Stubbornly low supply levels held down existing-home sales in April and also pushed the median number of days a home was on the market to a new low of 29 days, according to the National Association of Realtors®.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, dipped 2.3 percent to a seasonally adjusted annual rate of 5.57 million in April from a downwardly revised 5.70 million in March. Despite last month’s decline, sales are still 1.6 percent above a year ago and at the fourth highest pace over the past year.

For-sale inventory of existing homes remains in the doldrums as the median price of existing homes continues to rise rapidly.

We see the same limited inventory effect in existing home sales MONTHS SUPPLY.  As the months supply collapses, median prices for existing home sales increases rapidly.

I wonder if The Fed was wise to keep The Fed Funds Target Rate at near zero and engage in a third round of quantitative easing (QE3)? Particularly when housing inventory was declining (meaning that low-rate funding was chasing scarce housing)?

As Verbal Kint said in The Usual Suspects, “And like that, (the for-sale inventory) was gone.”

Real Median Household Income Highest Since February 2002 (But M2 Money Velocity Continues To Tank)

According to Sentier Research, in April, real median household income reached $59,361, according to the latest report from Sentier Research. That’s up 2% since January, and is as high as it’s been since February 2002 (or 15 years). Expressed as an index, median household income was 100.9 in April, which is the first time this index has topped 100 since December 2008.

Now, if the central planners in DC can just get money velocity (GDP/Money Stock) to stop diving!

Boola, boola, boola! 

The Fed’s Dual Mandate (And The Phillips Milk Of Magnesia Curve) — Why Wage Inflation Isn’t Happening

The Federal Reserve has a dual mandate to 1) promote maximum employment and to 2) keep prices stable.  The Fed has a target rate of core inflation that is 2%; however, it has been unable to achieve this target since the end of The Great Recession even though unemployment has declined.

Yes, the Dallas Fed’s trimmed mean Personal Consumption Expenditures Inflation Rate did exceed 2% back in January 2012, but generally it has been below 2% since June 2009.

But why is inflation so low even when unemployment is so low (as in 4.4% as of April 2017)?

A partial answer lies in the dismal earnings recovery after The Great Recession. Notice in the chart below that the U-3 unemployment rate (blue line) has declined below the natural rate of unemployment (red line) as economic recovery strengthens after each recession. Except for after The Great Recession. Once again, the U-3 unemployment rate has finally dipped below the natural rate of unemployment … yet no wage inflation.

The green line represents the inverse of YoY hourly earnings growth for the majority of the population (Production and Nonsupervisory Employees). You will notice that wage growth accelerates as unemployment declines, particularly when the underemployment rate is below the natural rate of unemployment. Except for the current “recovery.”

Bloomberg has a nice piece of several reasons why the current wage recovery is so low.  Another explanation that Bloomberg did not mention is that the US saw an unprecedented wave of regulations (Affordable Care Act, Dodd-Frank, EPA, the Consumer Financial Protection Bureau, etc.) most of which did nothing to help wage growth for mere mortals. Not to mention increase capital-labor substitution (robots replacing workers). But an easy answer is that the Phillips Curve is seemingly dead (decreased unemployment correlates with higher rates of inflation).

But WHY is the Phillips Curve dead? It makes intuitive sense that wages will rise as labor slack vanishes.  But what are some other explanations for the failure of the Phillips Curve to kick in? Or maybe it is about to kick in?

Clearly, outsourcing of higher-paying jobs overseas is a factor. Or could it also be the poor quality of American education that makes students uncompetitive in the modern economy? Or are US firms not investing in plants and equipment anymore?

But with commercial and industrial lending YoY slowing and the decline in real gross domestic investment (nonresidential equipment), wage growth may still be some time away.

The Fed’s zero interest rate policies (ZIRP) and quantitative easing (QE) ..

have certainly helped pumped up asset prices (like housing and the stock market).

But not wage growth (worst post-recession wage recovery in history … or at least since 1965). In other words, The Fed has not really benefitted wage growth, only asset price growth.

Suffice it to say that have full employment AND increased wage growth would be a blessing to the economy and housing market. I hope so. I am tired of reading research papers that claim that a HUGE Millennial wage of home purchases is going to kick in any quarter. At least I hope their predictions work better than the Phillips curve.