Back in June, this website first "solved" the "mystery" behind America's missing inflation, when we showed that a record number of US renters are unable to afford housing, suggesting that record amounts of "disposable income" were being diverted for use as a shelter "tax" instead of being spent on true discretionary goods and services, leading (together with the Obamacare tax) to the broad and distressing decline in not only traditional retail sales and moribund consumer spending, and the "secular" economic slowdown observed over the past several years.
We followed this in September with another expose titled "The Mystery Of The "Missing Inflation" Solved, And Why The US Housing Crisis Is About To Get Much Worse" explaining why the Fed is about to make a historic mistake and unleash an even more acute housing crisis if it hikes into an economy where the only core inflationary "impulse" if that from rent inflation, at a time when median real household incomes have tumbled to levels last seen in 1989.
As we explained in July, one major problem is that the Fed's measures of inflation are wrong, if not with malicious intent, then purely due to definitional purposes. But a bigger problem for the the Fed's measures of how the overall economy is doing (and/or overheating) is that the Fed telling the vast majority of Americans that inflation is negligible, leads to riotous laughter.
The reason for this is a simple, if dramatic, one: the U.S. transformation from a homeownership society, to one of renters.
In fact, the only age group that has seen an increase in homeownership in the "New Normal" are those aged 65 and over!
Showcasing the plight of renters was the "State of the Nation's Housing" report from the Center for Housing Studies, according to which for American renters 2013 marked another year with a record-high number of cost burdened households - those paying more than 30 percent of income for housing. In the United States, 20.7 million renter households (49.0 percent) were cost burdened in 2013.
As more Americans are forced into a limited number of rental units, prices have exploded at a far greater pace than what is officially reported in the shelter or core CPI metric, for all - but especially for those in the lower income buckets: as seen in the lower right chart, the rental "cost burden" of households making under $30,000 is the higest ever, at well over 70%.
It gets worse: a whopping 11.2 million, or more than a quarter of all renter households, had "severe cost burdens, paying more than half of income for housing." The median US renter household earned $32,700 in 2013 and spent $900 per month on housing costs. Renter housing costs are gross rents, which include contract rents and utilities.
But the punchline is that, as noted above, all this was taking place in the years following 2000, when gains in typical monthly rental costs exceeded the overall inflation rate, while median income among renters fell further and further behind. As a result, the share of renter households facing severe cost burdens grew dramatically, reaching a new record high of 28 percent in 2011, and if adding in those with moderate burdens, just under half of all renters were cost burdened in 2013. These rates are substantially higher than a decade ago and roughly twice what they were in 1960.
As we explained three months ago, the implications for not just the US economy, but for US demographics and society as a result of this "stagflationary" rental environment are profound. They are also the reason why the biggest US generation by number of participants - the Millennials, at 82 million strong - and the one generation that was supposed to be the dynamo that pushes the US out of its post-crisis funk is, simply said, crushed.
Millennials are also expected to continue experiencing rent burdens as they age. Having entered the labor market during and following the Great Recession, those in the millennial generation have received lower wages and experienced higher rates of unemployment and underemployment than their older counterparts at this point in their lives. As a result, millennials have less wealth accumulated, have delayed forming new households, and are less likely to become owners at the age that older generations had previously. In combination, we are likely to see additional household formation by millennials over the next decade and expect a relatively higher share to remain renters during that period.
In fact, far from confirming the "bullish thesis" that Millennials will eventually move out of their parents basement and buy (or rent) their own housing while starting new households, just the opposite was found to be taking place:
In 2015, 15.1 percent of 25 to 34 year olds were living with their parents, a fourth straight annual increase, according to an analysis of new Census Bureau data by the Population Reference Bureau in Washington. The proportion is the highest since at least 1960, according to demographer Mark Mather, associate vice president with PRB. "The phenomenon of young adults, facing their own financial challenges, forced to squeeze in the homes of their parents. And new data show the trend is getting worse, not better."
As Bloomberg redundantly added, "It takes young people longer these days to find jobs with decent wages. Young adults need to spend more time getting the necessary education and skills before they can become self-sufficient. The recession likely exacerbated this trend."
Perhaps the best visual summary of the "mystery of the missing inflation" was the following interactive map showing that in virtually all major seaboard metro areas, including the major cities in California, New York, and Florida, the number of households with a cost burden is 50% or higher.
This is how we concluded in September:
All of this could have been avoided if only the Fed has observed the "missing" and soaring rental inflation that was right in front of its nose all the time, and which it did everything in its power to ignore just so the 1% can keep their ZIRP and QE, and become even wealthier on the back of the middle class and the 80 million of 25-34 year old Americans who have found out the hard way that not only is the American Dream of owning a home officially dead, it has been replaced with the American nightmare of completely unffordable renting.
So why do we bring up this very critical topic today? One reason: as Deutsche Bank's Dominic Konstam wrote out over the weekend, not only is it still "all about the rental inflation", but it is this "mystery" of missing inflation, which we exposed not once but twice over the past 6 months, that has so stumped and confused the Fed, it is now piling policy mistake upon policy mistake.
As a reminder, in the last CPI print before the Fed's rate hike announcement, even as headline inflation barely rose from the year ago period pushed lower by the ongoing collapse in energy prices, it was core inflation that printed at 2.0% and give the Fed the green light it had been so eagerly anticipating, to hike.
Only there is one problem.
Here is what Konstam said about the prospects for US benign inflation, why the German bank "remains strongly opposed to a view that inflation will shock to the upside", and how rental inflation is at the core of everything.
From a theoretical perspective we have a bigger problem with a bearish inflation outlook in that core inflation ex housing remains extremely weak on both a PCE and CPI basis. OER/rental inflation is therefore the main “culprit” for the Fed in achieving its inflation “target”.
Define irony: the one thing that is crushing millions of Americans and more than a quarter of all US renting households - those who can barely afford to rent even as their real median incomes continue to slide - is what the Fed interpreted as a green light to hike!
Konstam continues:
The trouble is that rents are running high not because house prices are booming and/or construction is sawing but because structurally new entrants to the housing market are renters not owners. This is reflected in the very low first time homebuyer rate, less than 30 percent.
Now, prepare to be amazed: remember how we said above core inflation rose 2.0% in November from a year ago. Well, if you strip out housing, core inflation was just barely above 1%. Worse, on a Core PCE basis, if one excludes housing inflation, one gets the lowest inflationary print since the financial crisis!
And here is absolute punchline which if one ignores everything we have said above, is a must read:
Rent is however a “tax”. In this instance it is not something that represents real growth or discretionary consumption. If OER was soaring on the back of house prices and housing construction that allowed for wealth extraction, i.e. prior to the crisis, the outlook would be very different. As we have highlighted before, the stagflation concept in housing is a negative for structural demand and therefore pricing power.
If only every economist would read these 68 short words, there would be no confusion why there is no economic recovery, why retail sales are foundering, why wage growth is non-existent, and why corporate CEOs are the most bearish they have been since 2012. In short: everyone would know why not only the Fed failed with its ZIRP policies, but why it is compounding this failure with another failure by hiking rates.
So what does all of this mean? Well, the US economy is now one where "taxes" define growth.
- On the one hand, there is the Supreme Court mandated "tax" that is Obamacare, which quarter after quarter is the biggest source of GDP growth as it forces US consumers to spend billions on (soaring) health insurance, in the process giving the impression of healthy Personal Consumption Expenditures and a growing US economy. Don't feel like paying this tax? Sorry - it's the law.
- On the other hand, there is the "tax" that is rent: a tax which has soared in recent years, vastly outpacing median incomes (which have been declining) as landlords can hike asking rents to whatever levels they choose: after all owning a new home has become virtually impossible for what little is left of the US middle class. Don't feel like paying this tax? Fine, just prepare to live under a bridge or in a tent.
Combined, these two taxes are draining hundreds of billions in disposable income from American households, and leading to the secular stagnation that so many supposedly intelligent economists are observing every day unfold before their very eyes, and yet which so very few can explain even though the reasoning is so simple a 10 year old without a formal economic education can understand that when one pays the bulk of one's disposable income on the two core essentials, housing and health - whose prices keep soaring with every passing day - there is virtually no money left for everything else.
No wonder then that the Fed will not grasp any of this before it is far too late.
And the biggest irony: for the Fed these two largest economic "taxes" which force "spending" and which push up "inflation" are precisely the catalysts that served as the basis for the Fed's decision to hike rates in a desperate attempt to give the impression that the US economy is recovering, when in reality the Fed has been looking at the economy's fundamental deterioration in the face, and reached the absolutely wrong conclusion, convincing itself it now has the "green light" to proceed with a rate hike!