Tuesday, February 21, 2017

Wages and household income vs. housing: which leads which?


 -  by New Deal democrat

Sometimes I look into a relationship that doesn't quite pan out, but it's still useful to flesh out the process. That's the story of real wage growth vs. housing.

In the last few months I 've pointed out that real wage growth has been slowing. In January, it went negative YoY.  Since, all else being equal, having less money to save for a downpayment, or to pay the montly mortgage ought to lead to fewer new housees being built, So has that been the case historically?

Well, first of all, here are real wages (blue, left scale) vs. housing permits (red, right scale): 


It's hard to see any consistent relationship.  If anything, it might be that housing permits turn before real wages.  So leet's look at the YoY relationship, below:


Since the series started in the 1960s through the mid 1980s, permits appear to have led real wages.


But since the mid-1980s, the relationship if any is less clear, with coincident turns until 2001, and then if anything wages appearing to lead permits.

But a better measure might be real median household income, since as we know women entered the workforce in large numbers in the 1970s through the 1990s. Since household income is only measured annually, I've used that unit of comparison below:
   

Again, if anything, permits seem to lead household income by about 2 years.

Finally, it occured to me that normalizing for labor force participatioin might give me a more granular look.  So below is a comparison of median household income (red) vs. real wages normalized by labor force participation, both series set to a value of 100 in 1993:
    

The 1980s do not appear to correlate at all.  Since 1990, there is a broad correaltion, but with income ahead of wages by a year or two.

Just to fl esh this out, let's take a look at wages adjusted by labor force participation vs. housing:
  

Here is the same relatinship YoY:

  

This at last does seem to give us a reasonably consistent relationship whereby the YoY change in real wages adjusted by partication either are coincident with or slightly lag housing, with the exception of ths housing bubble and bust.  If this is true, then we should expect the recent slowdown in YoY growth in the housing market to give rise to  a stagnation at least of participation as well as real wage growth.

Monday, February 20, 2017

Rents are still too d@*# high! (but may be abating a little)


 - by New Deal democrat

[This is a post that got sidetracked for a few weeks. Sorry!]

Three years ago HUD warned of "the worst rental affordability crisis ever," citing statistics that
About half of renters spend more than 30 percent of their income on rent, up from 18 percent a decade ago, according to newly released research by Harvard’s Joint Center for Housing Studies. Twenty-seven  percent of renters are paying more than half of their income on rent. 
This is a serious real-world issue, and big increases in rent may have completely eaten up the savings from gas prices among lower-income Americans. I have been tracking rental vacancies, construction, and rents ever since.  The Q4 2016 report on vacancies and rents was released several weeks ago, so let's take an updated look.

Rent increases continue to outpace overall inflation, while there is some evidence that they may have peaked as a share of wages.  Median asking rent rose from $842 to $864 in the last quarter of 2016, but is only up $14 from $850 YoY, an increase of 1.6%.  At the same time, he entire year of 2016 averaged a 5.3% increase from all of 2015. 

Below is the graph of nominal median asking rents by the Census Bureau.  As you can see, after a big spike in 2015, in the last 3 quarters of 2016 rents stabilized: 


Here is an updated look at real. inflation adjusted median asking rents, which similarly show that after setting an all-time record in Q1 2016, rent pressures on household budgets have abated just a bit:

Year Median
Asking Rent
Usual weekly
earnings 
Rent as %
of earnings

198833038286
199240143792
199342245088
200047856884
200254560790
2004 59962995
200968073992
201271776893
2013 73477894
2014  76279196
2015813809100
2016  Q1870823106
2016 Q2847828102
2016 Q3842835101
2016 Q$864843102

The bad news is that vacancies remain extremely tight.  The good news is that the vacancy rate appears to have been bottoming over the last two years, meaning that while there is still stress, the level of stress isn't increasing:


Despite the big increase in rents in the last several years, the building of multi-unit housing has not realy risen to the demand (at least not yet). When the large Boomer generation hit adulthood 50 years ago, note how multi-unit construction quickly shot up to 1,000,000 a year, and remained above 400,000 almost continuously for 20 years thereafter, until the last Boomer hit adulthood:


Now here is the comparable look for the similarly large Millennial generation:

The increase has only been to the 400,000 level, and has been stuck in that neighborhood for going on 3 years. I expected the "apartment boom" to continue, with increased building of multi-family units.  That didn't happen.

Meanwhile the CPI for owner's equivalent rent has continued to accelerate, and is now just over 3.5% YoY, one of the highest rates in two decades:



Renters are typically from the lowest 2 quintiles of the income distribution.  As of the end of 2015, these two quintiles have had the poorest record of income changes since the recession as measured by real median household income (h/t Doug Short):



 and that hasn't changed as of the latest update from the Consumer Expenditure Survey released several months ago:



Rent increases probably sucked up much of the windfall lower income consumers got from declining gas prices.  Now that gas prices are increasing again, I expect the consumer to start showing signs of distress.

There are two other median measures in addition to median asking rent from the HVS:   the American Community Survey and the Consumer Expenditure Survey.  Unfortunately both are only current through 2015.  The below table shows their YoY increases, compared with median asking rent:

SURVEY: ACS        CES      HVS
2009 --------  (817)    -------     ------  (708)
2010  +2.9%  (841)   +1.4%   +2.6% (698)
2011  +3.6% (871)    +4.4%   -0.6%  (694)
2012  +2.1% (889)    +5.2%  +3.3% (717)
2013. +1.7% (904)    +4.3%  +2.4% (734)
2014  +1.8% (920)    +9.2%  +3.8% (762) 
2015  +0.9% (928)    +4.3%* +6.7% (813)
*June 2014-June 2015 all shelter

HUD recently premiered a Rental Affordability Index, using the ACS data.  Similar to my chart above, it compares renter income with median rent.  Here are the premiere graphs:


Like the median household income data, this shows renters' income bottoming out in 2011-12, and rising since relative to rents as calculated by the ACS. That gives us the "renatl affordability index" shown below:
.
 

I'm not sold on HUD's method, mainly because it relies upon annual data released with a lag. In other words, the entire last year plus is calculated via extrapolation.  I suspect we could get much more timely estimates using Sentier's monthly median household income series, compared with the monthly rental index calculated by Zumper.

But regardless of which method we use, it certainly appears that apartment rents as a share of renter income are quite high -- but the crisis probably has abated at least a little.

Saturday, February 18, 2017

Weekly Indicators for Februrary 13 - 17 at XE.com


 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

Tax withholding is having a rocky February so far.

Friday, February 17, 2017

The shallow industrial recession is fading in the rear view mirror


 - by New Deal democrat

A year ago the "shallow industrial recession" induced by the strong US$ and imploding oil patch was bottoming.  At that time I described the historical pattern:
Typically new orders turn positive first (red, left scale in the graph below), followed by sales (green, right scale), and finally inventories (blue, right scale):

At that time I concluded:

If this is an incipient recession, then I would expect inventories to follow sales, which means that ISM new orders are giving a false signal.  On the other hand, if this is simply a slowdown, like 1998 (far left in the first graph), then sales should turn positive, and like 1998 inventories will not decline, in which case it is elevated inventories that are giving the false signal.
Since then, ISM has withdrawn permission for the St. Louis FRED to republish its data. Fortunately, the overall ISM index tends to follow the new orders component with a slight lag, and Doug Short keeps track of that:



And Doug's 3 month trailing average of the regional Fed indexes shows the same thing:



So, what has happened with total business sales (including manufacturer, wholesaler, and retailer) and inventories?  Here's the graph:



Exactly like 1998, sales have taken off again, while inventories did not decline. Since one year ago, they have risen, but slightly.

As a matter of course, the total business and wholesaler inventory to sales ratios have declined.  (I include the latter because it has been less influenced by secular "just in time" inventory issues):




The model worked just as I expected. The shallow industrial recession is fading in the rear view mirror.