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.

New Home Sales In April Tank -11.4% MoM As Median Price Declines -3% (The West Coast Suffers -26.32% Decline)

Another disappointing new home sales report.

New home sales tanked -11.4% MoM in April.

New home sales remain considerably below any level around the housing bubble. Despite the YUGE intervention by The Federal Reserve.

But while the level of new home sales is considerably below pre-2008 levels, the MEDIAN PRICE of hew home sales is considerably higher than at the peak of the housing bubble.

New home sales fell the most in The West (-26%) and The Midwest (aka, Kasich Kountry) at -13%. Bear in mind that new home sales in California are mega expensive and unless they start buildig more in Riverside and the Inland Empire, new home sales are likely to be weak.

Is this a bubble?

 

Commercial/Multifamily Borrowing Up 9 Percent from Last Year (Retail Originations Down 23%)

The retail sector can’t seem to buy a break these days. With 8,600 brick-and-mortar stores may close their doors in 2017, lending was expected to decline.

According to the Mortgage Bankers Association, commercial/multifamily originations rose 9% from Q1 2016.

That is the good news.

The bad news? 1) Retail originations fell 23% from Q1 2016.  2) CMBS/Conduit originations were down 17%. 3) Hotel originations were down 40%.

The good news? 1) Healthcare originations were up 22%. 2) Industrial originations were up 40%. 3) Multifamily originations were up 14%.

Notice that Fannie Mae/Freddie Mac multifamily origination programs were up 33% from Q1 2016.  At the same time, Life Insurance Companies saw 0% growth in commercial/multifamily originations.

Thanks to The Federal Reserve, short-term interest rates remain suppresed and have for the last ten years.

Office originations grew at a listless 2% from Q1 2016. On-line retailers like Amazon have helped shrinked the retail footprint. But will shared office space and the internet finally drive a spike through office space when employees can work remotely?

So, will this be the final countdown for office space?

5.5 Million Homes Still in Negative Equity Territory (But 13.7 Million Homes are “Equity Rich” (Limited For-sale Inventory And Fed Policy Error)

According to data vendor Attom, there remains 5.5 million homes that are seriously underwater (slightly less than 10%). On the other hand, there 13.7 million homes that are “equity rich” (around 24% of homes).

Equity rich is defined as the combined loan amount secured by the property is 50 percent or less than the estimated market value of the property. Seriously underwater is defined as the combined loan amount secured by the property was at least 25 percent higher than the property’s estimated market value.

One culprit is limited for-sale inventory. This chart is from Zillow:

The other culprit is The Federal Reserve, who have kept rate depressed for around 10 years.

Yes, limited for-sale housing inventory and Fed-depresssed interest rates for 10 years is helping some but not others.

Now, take a wild quess which states are “equity rich?” If you guessed California and New York, you were correct!!

 

Yes, housing is getting progressively more unaffordable to many households as limited for-sale inventory and insanely low monetary policy have effectively jailed (locked-out) many households from owning a home in California and New York.

“Please Chairman Yellen! Stop driving up home prices with your super-low interest rates when for-sale inventory is so low.”

Trump Optimism Effect Gone In The Treasury Yield Curve, But Not in 10y Treasury Yields and 30Y Mortgage Rates

There was a burst of enthusiasm in capital markets surrounding Donald Trump’s election as US President. It was a hope for economic growth, higher paying jobs and undoing President Obama’s regulatory overreach.

But alas, continued stonewalling in Congress by Democrats (and RINOS) as well as threats of impeachment over Russia have killed off enthusian in the US Treasury 10Y-2Y yield curve. As you can see, the 10Y-2Y Treasury curve slope is now lower than before the November 8th election.

But that optimism effect has not declined appreciably in the 10 year Treasury and 3o year mortgage rate. The optimism effect has gradually declined to Nov 14th level, several days after the election.

While there has been a downward drift in the 10 year Treasury yield, The Federal Reserve has been merrily raising their Fed Funds Target Rate twice since the election, helping to flatten the 10Y-2Y curve.

With another rate increase expected at the next FOMC meeting on June 14th (90% likelihood), we should be a further flattening of the 10Y-2Y Treasury curve (ceteris paribus) and a further decline in the Trump optimism effect.

And there is a 6% chance that we could see a rate CUT at the July FOMC meeting.

Janet Yellen: “I swear that I will not raise rates and spook investors more than once, unless Donald Trump is elected.”

Have Mortgage Applications Peaked For 2017? Purchase Applications Fall 2.75% WoW (Up 9% YoY), Refi Apps Fall 5.7%

 

Mortgage applications decreased 4.1 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending May 12, 2017.

The seasonally adjusted Purchase Index decreased 3 percent from one week earlier. The unadjusted Purchase Index decreased 3 percent compared with the previous week and was 9 percent higher than the same week one year ago.

Typically, applications for a purchase mortgage peak in May (sometimes in April, sometimes in June). So, last week’s mortgage purchase applications print may have been the high water mark for 2017.

The Refinance Index decreased 6 percent from the previous week.  But notice that while mortgage refinancing applications plummeted aroud MayJune rapid the rise in the Freddie Mac 30 year mortgage survey rate (thanks to Fed Chair Bernanke saying that The Fed might end their asset purchase programs), the recent rise in the 30 year mortgage rate has produced decline in refi application.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($424,100 or less) remained unchanged at 4.23 percent, with points increasing to 0.37 from 0.31 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

Mortgage originations have not recovered to previous levels due to the amazing disappearance of subprime (sub 620 credit score) lending,

So, we at (or near) the peak for 2017 in terms of mortgage purchase applications. Historically, it will be all down hill until January 2018. But a 9% increase in mortgage purchases applications YoY is pretty impressive!