Notes From Underground: Is Housing a Cash For Clunkers Redux?

In today’s testimony to the Joint Economic Committee, Chair Yellen voiced concerns about the recent softness in the housing recovery. Her concern should be measured from two perspectives: One, the failure of wages to keep pace with returns on capital, or, as it is fashionable to say, R>G (the new rage inspired by Thoma Piketty). Financial markets have generated far more gains than GDP resulting in the middle-income groups not generating enough income to ignite home purchases. When Yellen worries about housing she is alluding to wage growth, especially as bank regulations have made it more difficult for buyers to secure loans. Two, last year the airwaves were filled with real estate agents raving about how the supply of homes was diminishing and therefore prices had to go higher. The problem with the rosy view from the Zillow crowd is that much of the demand was generated from foreign buyers with cash and large hedge funds and private equity groups buying large packages of distressed properties.

The aforementioned groups both acted to bid the market away from potential buyers and now that prices have climbed demand has dropped. This is another case of covert inflation hampering the buying power of the wage-impaired, middle-income crowd. It is the same problem with the issue of core-inflation impacting demand. When food and energy bills rise and wages remain low, the average person has less discretionary income. While the FED may want higher inflation to ease the burden of debtors, the economic impact in a low wage environment is LESS DEMAND. You do not have to be a Keynesian to know which way the wind blows. Yellen will seek ways to free the system from the SIN OF LOW WAGES. Zero interest rates? Carry on.

***Tomorrow comes news from the Bank of England and the European Central Bank. The consensus is for no change in rates from either entity. The BOE, under the guidance of Mark Carney, will hold rates at 0.5 percent with the rationale that the strong POUND is acting like tightening. Growth in the U.K. has been surprisingly strong, driving the currency to multi-year highs. Governor Carney continues to jawbone the currency lower so there will certainly be no rate hike (especially with inflation remaining so behaved). The ECB will follow 45-minutes later and will also announce no change in policy, leaving the overnight lending rate at 0.25 percent. President Draghi and other Europeans would like to get the EURO lower but will not initiate a negative rate policy yet. Mario Draghi has accomplished much with mere rhetoric and we Europe showing some recent positive signs there’s no reason to waste the monetary firepower. At 7:30 a.m. CST, President Draghi will hold his press conference and that is always worth a listen for the European press, especially the French and Italians, will press the ECB president on the problem of the overvalued euro. It is from this that market volatility will increase as Draghi attempts to talk the euro down while holding off any type of concrete action.

****More news about Europe. In a piece by Benn Steil and Dinah Walker 0n the EconoMonitor, they reveal that the French banks have a $50 billion exposure to the Russian economy.The Germans may be taking the heat for dragging their feet on sanctioning Russia except the quiet from the French is deafening. While some in the media continue to make the Ukraine a simple matter of a unified front by the West against Russia, the more that is known the murkier the situation becomes. The EU has great exposure to Russia in so many areas that the U.S. effort to squeeze the Russian financial system will prove more difficult than the White House anticipates.

Further complicating the issue was an article in the New York Times, “Why Germans Love Russia,” by Wergin Clemens. Both the right and the left in Germany find reasons to defend Russia even as it utilizes heavy-handed policies to affect change in its “near abroad.” As Clemens notes: “Twenty-five years after the end of the Cold War, German society may well be drifting away from the West again. In a poll last month by Infratest/Dimap, 49 percent of Germans said they wanted their country to take a middle position between the West and Russia in the Ukraine crisis, and only 45 percent wanted to be firmly in the Western camp.” The fissures between the various European Union members and the United States will make comforting Russian revanchism in its “near abroad” a very difficult task. The Ukranian crisis will provide instability for global markets for quite a while. There will be no summer doldrums.

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6 Responses to “Notes From Underground: Is Housing a Cash For Clunkers Redux?”

  1. kevinwaspi Says:

    Yra, Excellent points, as usual.
    On the issue of housing, prices, and purchase activity, let’s also consider taxes as a price component. I just received our property tax bill. The year over year 11.6% increase (on our luxurious 1280 square feet) means that we pay $527 per month for the right to live here. This monthly payment would fully amortize a 30-year, 4.125% fixed rate mortgage in the amount of $108,738. Thank the Lord above, I have no mortgage payment (other than this tax bill).

    Taken another way, that’s a lease rate of $4.94 per square foot, nearly the market lease rate for commercial property in Champaign county; property that could actually be used to produce an income, something my residence will not do. (See http://www.cityfeet.com/cont/il/champaign-county-commercial-real-estate#pgNum=3 )

    All of this is based on an equalized value of $66,470, and “fair market value” of $199,430 (See http://www.co.champaign.il.us/rewebapp/cctrinq.pgm?Houseno=704&Stret=Iowa+St for a 5-year history of taxes, and see
    http://www.zillow.com/homes/704-w-iowa-Urbana-IL_rb/ for the details of this 2-bedroom, 1-bath castle.)

    The 11.6% overall increase does not reveal the year over year increase in each taxing authority. Here I note, Unit 116 Schools now get almost 17% more than last year, and the Urbana Park District over 16% more. The conundrum for people like us who do not have kids in the schools (near zero probability of ever having kids in the schools), and don’t live in the parks, but do walk the crumbling sidewalks to work, is this:
    1) Do we move to a house outside the city limits and rent our luxurious 1280 square feet, or
    2) Do we find someone to buy it who rents it to some temporary tenant?
    Either seems to be a “Detroit in progress” potential, meaning at some point, municipal services delivered vs. taxes paid experience the crossover point where the most likely action is to abandon the property.
    Government operating costs (including debt service) add to the cost of housing too, something “Janet and the Jetts” never discuss.

  2. asherz Says:

    Anyone who believes that Russia will stop at the Crimea and eastern Ukraine is naive and ignorant of history. Baltic states and Poland have much to be afraid. Dispatching 550 soldiers to Poland has not sent shivers down Putin’s spine as he views the western European and US pusillanimous response. Their belief that economic ties to their eastern ursine neighbor trumps a Sudetenland situation can only encourage further moves to begin to reverse his belief “that the collapse of the Soviet Union was a major geopolitical disaster of the century.” The implications for the financial markets will not be insignificant.

  3. Alex Says:

    German industry + cheap Russian power. A marriage made in heaven.

    If both sides want to knock the US off their perch, that’s the formula.

  4. Shocked to Find Gambling Says:

    Yra- IMO, the FED’s ZIRP is holding back the economy.

    The FED does not seem to care that there are 2 sides to a loan. Responsible conservative savers (especially the elderly) are being hurt by ZIRP, and their disposable income has dropped due to ZIRP.

    The large banks are in large part not lending, and are earning 25 basis points on their balances at the FED. So effectively, ZIRP is a policy to transfer wealth on a massive and continuous basis from savers(who earn close to Zero on their banks accounts) to banks.

    As I recall, it was the subsidizing of lending that got us into the last crisis.

    Few seem to see what I see, but to me, it is obvious that the FED and other central banks are creating an extremely dangerous situation.

  5. Chicken Says:

    I only have so much wealth that can be stolen from me, so what happens once all the savings are consumed?

  6. Chicken Says:

    So at that point, why shouldn’t rates lift?

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