Monday, May 21, 2018

Real retail sales update for April 2018

 - by New Deal democrat

It's a slow start of the week, so let's catch up on one of my favorite indicators, real retail sales, which were reported last week.

First of all, adjusted for population, real retail sales have peaked a year or more in advance of each of the last two recessions.  That hasn't happened yet, as the long term rising trend is intact, even if sales have backed off their wintertime highs

If they go longer than 6 months without making a new high, then it would be a signal for caution. But we're not there yet.

Also, in the short term consumption leads hiring, so let's update that comparison (these are YoY% changes):

This suggests that there should not be any significant weakness in the job market in the next few months.

Finally, since I've recently noted that the YoY change in the Fed funds rate has a good track record of forecasting the YoY% change in jobs 12-24 months out, let's add that (green) into the mix:

I don't think we'll see a significant downturn in jobs until real retail sales growth decelerates to about half its current YoY rate.

Saturday, May 19, 2018

Weekly Indicators for May 14 - 18 at

 - by New Deal democrat

My Weekly Indicators post is up at

The very last thing I do, only after I tabulate all the data, is to decide on the title.  This week it is "The long term forecast deteriorates further."

Friday, May 18, 2018

The percentage of employees who don't get wage raises; is the Taboo undergoing an "extinction burst"?

 - by New Deal democrat

I came across the below graph yesterday from the Kansas City Fed. It's pretty shocking:

It represents "wage rigidity." In english, that means the percentage of employees who don't get any annual wage increases.

It speaks for itself. Nine years into the economic expansion, with an unemployment rate under 4%, and un underemployment rate of 7.8% (only 1% above its all time low), more workers still aren't getting any raises than at any time during the 2001 recession or at any time during the expansion thereafter.

And it isn't simply slack in the labor force.  Here's the employment-population ratio for prime age workers:

This is only 2.7% below its all time peak in 2000, and equivalent to where it was in 2005. But in 2005, about 12.5% of workers weren't getting annual raises. Even now the rate is about 14.5% -- and rising over the past year.

This is the Taboo against raising wages in action. This is, in psychological terms, a learned behavior.

Even after the advent of "behavioral economics," the failure of economists to employ explanations of macro level behavior based on the concepts of learning and unlearning remains one of economics' glaring blind spots.

To refresh, a behavior that is rewarded will be learned over time, and repeated over and over thereafter, even if the rewards become sporadic. And it will even continue for awhile after the rewards are no longer there at all. Not infrequently, before the behavior is given up on, there will be an "extinction burst."

What is an "extinction burst"? It is the type of wailing, frustrated, foot-stomping, angry outburst that is characteristic of toddler temper tantrums.  If you ever watched the show "Supernanny," you've seen it: 

The caterwauling of employers that they simply can't find qualified candidates (unspoken: for the wages they want to pay them) has all of the earmarks of just such a temper tantrum.

For all but a few years in the last 15, many employers became accustomed to having multiple applicants for any job they offered, who had already learned the skills (and presumably been "downsized" or laid off by a previous employer). To put it simply: this was Marx's "reserve army of the unemployed." Employers were rewarded even if they did not offer any raises. They became accustomed to the success of this practice. In other words, they *learned* the behavior.

Now the behavior is no longer being rewarded. At the wages previously offered, candidates already skilled at the position are no longer available or applying. Instead, the "quits" rate of employees leaving their jobs for other, better-paying jobs, is near an all-time high.

So what does psychology tell us to expect? An extinction burst.

And that may be just what we are seeing in the soaring number of "job openings" compared with actual hires. Employers who don't want to raise wages are furiously repeating their learned behavior, trying one last time to make it work. 

Thursday, May 17, 2018

Interest rate and gas price watch

 - by New Deal democrat

For nearly a decade, this "little expansion that could" has dodged a lot of bullets. But I suspect that the recent trend of rising interest rates and gas prices - if they continue - may finally be the cause of its ultimate demise (not now, but maybe in 18 or 24 months).  

Initial points to watch are 5% on mortgage rates and $3/gallon on gas prices.

So let's take a look. First, here are mortgage rates through yesterday (from Mortgage News Daily):

In 2016, these were as low as about 3.4%. Even after the US Presidential election, last year they hovered at about 4%. As of yesterday, they were 4.78%. Compared with mid-2016, about $375/month has been added on to the monthly payment for a new $300,000 mortgage.

Still, we're not quite at the 5% level yet (to reiterate: my best guess is that it will take 5.25% rates for at least 6 months to overcome the demographic tailwind in the housing market).

Next, here are gas prices through yesterday (from GasBuddy):

These have risen to $2.92/gallon. I suspect we will see $3/gallon shortly.

I've seen commentary that it will probably take $5/gallon for consumers to cut back on spending generally. This comes generally from the work done by Prof. James Hamilton in which he posits that consumers aren't "shocked" by a mere return to formerly high price levels. But I suspect that, as time goes on, consumers get more and more used to lower prices, so it might not take that much.

As an example, I give you the 1980s. Gas prices had risen from $.40/gallon to $.80/gallon in the 1974 Arab embargo, and then to roughly $1.35/gallon in the second shock in 80. In the early 1980s, they hovered near that mark before falling abruptly at mid-decade. They started rising again by 1989, and spiked to about $1.35/gallon during Saddam Hussein's invasion of Kuwait (red line below):

YoY real GDP started to fade in 1989, and rolled over in 1991 coincident with that invasion.

While it's noisy, when we compare real retail sales with gas prices, generally we see a 1:1 substitution in consumer spending into 1989, and then that fades as well until the shock in 1990:

In 1990, gas prices were less than 10% above their 1980 peak by this measure. In other measures, they didn't even quite reach that peak. In today's terms that would mean about $4.50 (compared with 2008's $4.23).

At $3/gallon, we will reach a point comparable with 1989. So my suspicion is that consumers will simply re-allocate spending from luxuries like entertainment at first. That will still cause $$$ to flow out of the US to petrosheikhdoms. If we get above $4/gallon towards, $4.50, that will probably be enough for consumer retrenchment.

Mind you, I'm not saying that we *will* reach these interest rate and gas price levels. But it's time to start watching.

Wednesday, May 16, 2018

And now, time for a little shameless self-congratulation

 - by New Deal democrat

The Intelligent Economist has come out with its list of the Top 100 Economics Blogs for 2018:
The 2018 list highlights many newcomers and covers a wide range of economic topics. Blogs are included in categories ranging from general economics to specific topics such as finance, healthcare economics, and environmental economics. There are microeconomic blogs, macroeconomic blogs, and blogs which focus on specific geographic regions.. . . .   Candidates were chosen based on quality, not popularity or mainstream appeal.
And there on the list, along with all the traditional Big Boyz (and Angry Bear, where most of my stuff is cross-published), you will find this:

So, thank you to the Intelligent Economist, and you, Dear Reader, should consider yourself part of a small but elite group.  :-)

April housing tantalizingly ambiguous; industrial production whipsawed but positive

 - by New Deal democrat

This morning April housing permits and starts, as well as industrial production, were released.

The housing data was tantalizingly capable of several interpretations.  Below are the single family permits, which I favor because they are the least volatile measure, and multi-unit permits:

Not shown, for this expansion the number of total permits issued was lower than only  January and March.

The first takeaway is that the increasing trend in single family permits since 2011 is intact. Hurray!

The second takeaway is that in the last two months, single family permits have declined from their recent high, while multi-unit permits have increased. This *may* mean that increased interest rates have finally bitten enough that some prospective buyers are being forced to back off from buying a single family home, and either buying a condo or renting an apartment instead. This "substitution effect" has happened late on earlier housing cycles, so it is possible it is starting to happen now. If that is true, then we should regard the big surge in permits during the winter as a "buyer's panic," where, fearful of even higher rates in the near future, potential buyers locked in *relatively* lower rates earlier. Time will tell. Like I said, tantalizingly ambiguous.

Here's a look at the more volatile housing starts, both monthly (blue), and quarterly through March (red):

The three month moving average of starts, which I use to cut down on the noise, backed off only slightly from its expansion high one month ago.  Since (not shown) there remain an increased number of units that have been permitted but not started, I expect this metric to continue to increase for at least a few more months.

Industrial production, meanwhile, whipsawed.  There was a big increase in April, but almost as big a downward revision for March. The net result is that production only rose +0.1% from the previous estimate for March. Regardless, the last two months together show a rise of over 1% from February:

So the positive trend in this king of coincident economic indicators is intact.

Tuesday, May 15, 2018

R.I.P. bond bull market, 1981-2016

 - by New Deal democrat

On September 30, 1981, the 10 year US Treasury bond yielded 15.84%. It has not been that high since.  On July 8, 2016, it fetched only 1.37%.  It is unlikely to see that low rate again for a very, very long time.  Those two dates likely mark the birth and death dates for perhaps the biggest bond bull market in history.

Here (from CNBC) is the relevant graph:

Today the 10 year closed at 3.067%, having hit an intraday high of 3.09%.  In the 1990s it twice made 3 year highs.  In 2006 it made a 4 year high. By contrast, the last time it was as high as it closed at today was 7 years ago in 2011.

The immediate cause of death for the bond bull market was likely the ill-conceived multi-$Trillion GOP tax giveaway to the wealthy enacted in December, in the midst of an economy operating near full capacity.

Perhaps of more immediate importance, CNBC also reported  (via Mortgage News Daily) that 30 year mortgage rates had risen to 4.875% today. That is also a 7 year high. Mortgage rates had been as low as 3.30% in 2013 and 2016.

A few months ago I estimated that it would take a minimum of a Treasury yield of 3.25% and a mortgage rate of 5%, for at least 6 months, to overcome the demographic tailwind underpinning the housing market.  We are now close to both of those rates. And refinancing debt at lower rates, which did so much to help keep the middle and working classes afloat during the last 30+ years, is now dead.

In the longer term, I believe we have now entered an interest rate period similar to the late 1950s-1980, where each economic expansion saw higher and higher interest rates. 

Meanwhile, the time to rebuild our worn-out infrastructure at ultra-low interest rates has been completely wasted. I can see the future, and it makes me sick to my stomach.

On the Cusp

 - by New Deal democrat

About half of all of the long leading indicators are, if their current trajectories continue, on the cusp of turning negative by next winter sometime.

This post is up at

Monday, May 14, 2018

Real wage growth adjusted for gas prices

 - by New Deal democrat

One of the things I note from time to time in my discussions of wage growth is how much its fluctuation in real terms has been affected by gas prices. For example, in the middle of the worst recession in nearly 70 years, real wages actually went up! Why? Because gas prices fell from $4.25/gallon to $1.50/gallon in just a few months.

So, what would a long term view of real wages look like if I took out the whipsawing effect of gas prices? 

In the 25 years from 1970 to 1995, what you mainly find is that the huge increase in the new supply of potential workers (women) acted to depress wages, so the below graphs start in 1995. In the first, I've normed the level of both real wages in total (red) and real wages ex-gas prices (energy) (blue) to 100:

You can see how much the secular rise in gas prices from $0.80/gallon in 1998 to $4.25/gallon in 2008 depressed real wage growth; and similarly how the collapse from nearly $4/gallon to $1.70/gallon in 2014-16 helped it.

More importantly, notice that real wages adjusting for gas prices rose at a fairly steady clip from 1995 through 2010.  Since then, the increase has been quite slight.

Looking at the same data as YoY% changes is helpful in seeing the change in trend:

With some exceptions, real wages rose about 1.5% a year on average between 1995 and 2010. But since then, they have averaged no better than about half of that, +0.7% a year.

During the entire last 7 year period, real wages leaving aside gas prices have only gone up about +1.4%.

Further, so far it doesn't appear to be a matter of a labor market that isn't tight. In the below graph I have overlaid the U6 broad underemployment rate onto real wage growth adjusted for gas prices. 

In both the late 1990s and the beginning of 2005, when real wage growth started to accelerate, U6 was roughly at 9.3%. We arrived at that benchmark in November 2016, without any noticeable acceleration in wage growth in the 18 months since.

Saturday, May 12, 2018

Weekly Indicators for May 7 - 11 at

 - by New Deal democrat

My Weekly Indicators post is up at The general situation with regard to interest rates continues to deteriorate ever so slightly towards being negative.

Friday, May 11, 2018

Real wages and unemployment update: April 2018

 - by New Deal democrat

Now that we have the inflation numbers for April, let's update the wage situation for ordinary Americans.

Real wages YoY are only up +0.2%:

More significantly, they are still down -0.3% from their most recent high 9 months ago:

They are also only up +0.2% for the entire last 2 years and 2 months.

Increased consumption by ordinary Americans isn't up because they are making more in real terms. Rather, it is because they are working slightly (on average about +0.1) more hours; saving less of their paycheck (down from 3.9% to 3.1% in the last 12 months); and because more people are employed (discussed below).

Real *aggregate* wages tell us how much more in total average Americans are earning. This is up +24.9% since its post-recession bottom in October 2009:

Here's how that compares with other economic expansions over the last half century:

Aggregate wages in this expansion have risen for 102 months so far. At a total of +24.9%, this expansion is behind only the 1960s and 1990s. But on average aggregate wages have only grown .24% per month, still in second to last place just ahead of the 2000s expansion and slightly behind the 1980s.

I expect aggregate wage growth to decelerate sharply before the onset of the next recession. It hasn't happened yet:

Turning from wages to unemployment, weekly initial jobless claims tend to lead the unemployment rate by several months. Just to change things up a little bit, the below graph shows this comparison with the U6 underemployment rate:

Initial jobless claims have been making new 45+ year lows several times in the last 6 weeks, so the decline in the unemployment rate to a new multi-decade low last month was not a surprise, as shown in this close-up of the last 8 years: 

The decline in the unemployment rate in the April jobs report has been criticized as being due solely to a decline in the number of people in the labor force. It's worth noting that if that decline had only been about 30,000 less, the unemployment rate still would have declined, albeit only by -0.1% rather than -0.2%.

Generally speaking, at the moment the economic condition of the American working and middle class is better than it has been in nearly 20 years. But this is mainly due to the low unemployment rate and paltry rate of layoffs, and the steep decline in gas prices between 2014-16 which resulted in "real" wage growth, rather than any significant wage gains.

Thursday, May 10, 2018

Gimme credit: two long leading indicators trend in opposing directions

 - by New Deal democrat

The Senior Loan Officer Survey for Q1 was reported on Tuesday.

Meanwhile, this morning's April CPI allows us to update real M1.

This post is up at

Wednesday, May 9, 2018

Two real economic consequences of the Trump presidency

 - by New Deal democrat

Next week we will be 1/3 of the way through Trump's Presidential term. Last year I used to point out that it was really still Obama's economy, as the GOP had failed to pass, nor Trump commence, any economic policy of consequence.

That is no longer the case.

In late December the GOP Congress passed and Trump signed their huge giveaway for the wealthy. Yesterday, Trump pulled out of the Iran nuclear deal. Both of these are going to have significant consequences for average Americans.

First, Trump's election caused interest rates to spike. Wall Street guessed that there would be lots more business spending, meaning a stronger economy with higher inflation. As nothing much happened in 2017, interest rates settled back down somewhat.  But then in late December the tax bill was passed, and shortly thereafter interest rates spiked to five year highs:

As I write this, 10 year Treasury yields are back over 3%. More importantly, mortgage rates are also at 5 year highs:

This is about 1.2% higher than just before the Presidential election. On at $300,000 house, that translates to $3600 a year in additional interest.

Second, as I write this Oil prices are over $71/barrel. This is a 3 year high:

Oil prices have recovered about half of their steep 2014 decline.

Prices for gas at the pump are following:

Nationwide gas prices are averaging about $2.80 a gallon at the moment. Since it takes several weeks for oil prices to feed through into gas prices, prices at the pump are likely to exceed $3 a gallon shortly.  That is the sort of thing that consumers notice.

Certainly much of the increase in oil and gas prices is part of the typical commodity cycle, in which "the remedy for low (high) gas prices, is low (high) gas prices." But the recent increase is at  least partly a reaction to the likely consequences of further destabilization in the middle east.

So, Trump's Presidency is beginning to have real consequences for ordinary Americans. The markets believe that the effects are stagflationary, i.e., leading to both increased inflation and decreased demand.

Tuesday, May 8, 2018

March JOLTS report: powerful further evidence of a taboo against rasing wages

 - by New Deal democrat

The March JOLTS report this morning is powerful further evidence that raising wages (or training new workers) has become a taboo.

Just about everyone thinks that, faced with a worker shortage, "rational" employers will offer higher wages to fill the empty skilled positions. This in turn will draw more marginal potential workers into open unskilled positions.

That's the theory, anyway.

What is really happening -- as so breathtakingly shown this morning -- is that by and large employers will refuse to raise wages, and then complain about their unfilled job openings.

As Exhibit "A," I give you job openings (blue) vs. actual hires (red) in this morning's report:

As a refresher, unlike the jobs report, which tabulates the net gain or loss of hiring over firing, the JOLTS report breaks the labor market down into openings, hirings, firings, quits, and total separations.

Not only has hiring been flat for the last 10 months, but it was higher than today's level in November 2015, January 2016, and January 2017. Meanwhile job openings have skyrocketed by 20% since January 2017, and 25% since the end of 2015!

This can only be considered a "skills mismatch" for the wages you want to pay, and if you refuse to train workers without existing matching skills.

Incidentally, Paul Krugman may be ready to embrace the idea of a taboo against raising wages, although for now he is plumping for the "employers are afraid of getting stuck with a highly paid workforce when the next recession comes" hypothesis. The problem with that particular hypothesis, though, is that such skittish employers -- a lot of them anyway -- won't bother to post new job openings, since they know they would need to raise wages to fill them. The big spike in openings in this morning's report suggests instead that employers are refusing to get the message.

Turning to other noteworthy items in the report, as a general rule, historically hiring leads firing.  While the one big shortcoming of this report is that it has only covered one full business cycle, during that time hires have peaked and troughed before separations. This is manifest when we compare hiring (red) and total separations (blue) on a quarterly basis as it existed through the end of the third quarter of 2017:

Here is the monthly data through this morning's report for the last several years:

The updated graph shows hiring last making a peak in October 2017.  Meanwhile separations actually peaked before then, in July of last year, with a clear downtrend since, another significant revision since last month. *if* both have made their expansion highs, needless to say that would be important.

Further, in the previous cycle, after hires stagnated, shortly thereafter involuntary separations began to rise, even as quits continued to rise for a short period of time as well:

[Note: above graph show quarterly data to smooth out noise]

Here are voluntary quits vs. layoffs and discharges on a monthly basis for the last 2 years:

If hiring and total separations have indeed peaked for this cycle, based on the last cycle I would expect quits to continue to improve for a short while -- and they have -- before also beginning to decline. As a counterpoint to that, separations have approached their bottom, a very good sign.

And indeed, I don't even see a yellow flag until hires and separations go negative YoY, as they did before well before the last recession, which they haven't yet:

Two months from now when the YoY comparisons get much harder, if we haven't established any new highs in hires and total separations, and they are at or below zero -- which is a real possibility -- then we may have confirmation of a late-cycle trend.

Monday, May 7, 2018

The simple jobs and interest rates model generates a yellow flag

 - by New Deal democrat

Several months ago, I started toying with a simple model of interest rates and job growth.* Based on the historical evidence, I suggested that:

1. a YoY increase in the Fed funds rate equal to the YoY% change in job growth has in the past almost infallibly been correlated with a recession within roughly 12 months.

2. the YoY change in the Fed funds rate (inverted in the graph below) also does a very good job forecasting the *rate* of YoY change in payrolls 12 to 24 months out.

One shortfall of that model is that there are two "false negatives" in the low interest rate environment of the 1950s, during which the YoY increases in interest rates by the Fed were relatively modest, and did not exceed the YoY change in payrolls until after the recessions had already begun.

A variation on the model is that, since the 1950s, the simple rise in the Fed funds rate from its low near the beginning of an expansion, has always exceed the YoY% change in job growth *before* the onset of all of the subsequent recessions. This variation has limited value as a "yellow flag," strongly cautioning that there is a heightened probability of a recession is within 18 months, with the "red flag" suggesting the near certainty of a recession within 12 months only if/when the YoY increase in interest rates exceeds the (decelerating) YoY% growth in jobs.

With YoY employment growth at 1.6%, and the YoY change in the Fed funds rate of 0.75%, there is no "red flag" warning:

But because the total increase in the Fed funds rate during this expansion has been 1.7%, the "yellow flag" has been activated:

Further, because the Fed funds rate has been hiked by 0.75% in the last year, that suggests that a further YoY% decline in payrolls growth is already "baked in the cake" over the next 12-24 months, to a level of roughly +0.8% YoY:

That suggests that if the Fed makes 3 more 0.25% interest rate hikes in the next year, the "red flag" will be triggered at some point in that 12-24 month window.


*N.B. This is only one of a number of forecasting metrics I use. The most important is the long/short leading indicator method based on the work of Prof. Geoffrey Moore and Prof. Edward Leamer. This is supplemented by the much more timely but volatile "Weekly Indicators" method. I also have a fundamentals-based forecast based on consumer behavior, and a less-organized corporate model as well.

Saturday, May 5, 2018

Weekly Indicators for April 30 - May 4 at

- by New Deal democrat

My Weekly Indicators post is up at

Oil prices have risen to the point where, when they filter through to gas prices at the pump, are likely to be noticed by consumers.

Friday, May 4, 2018

April jobs report: excellent in almost all respects

- by New Deal democrat

  • +164,000 jobs added
  • U3 unemployment rate fell -0.2% from 4.1% to 3.9%
  • U6 underemployment rate fell -0.2.% from 8.0% to 7.8%
Here are the headlines on wages and the chronic heightened underemployment:

Wages and participation rates
  • Not in Labor Force, but Want a Job Now:  up +19,000 from 5.096 million to 5.115 million   
  • Part time for economic reasons: down -34,000 from 5.019 million to 4.985 million
  • Employment/population ratio ages 25-54:  unchanged at 79.2%
  • Average Weekly Earnings for Production and Nonsupervisory Personnel: rose $.05 from  $22.46 to $22.51, up +2.6% YoY.  (Note: you may be reading different information about wages elsewhere. They are citing average wages for all private workers. I use wages for nonsupervisory personnel, to come closer to the situation for ordinary workers.)      
Holding Trump accountable on manufacturing and mining jobs

 Trump specifically campaigned on bringing back manufacturing and mining jobs.  Is he keeping this promise?  
  • Manufacturing jobs up +24,000 for an average of 12,000/month in the past year vs. the last seven years of Obama's presidency in which an average of 10,300 manufacturing jobs were added each month.   
  • Coal mining jobs up +700 for an average of 100/month vs. the last seven years of Obama's presidency in which an average of -300 jobs were lost each month
February was revised downward by -2,000. March was revised upward by +32,000, for a net change of +30,000.   

The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were positive.
  • the average manufacturing workweek rose +0.2 hours from 40.9 hours to 41.1 hours.  This is one of the 10 components of the LEI.
  • construction jobs increased by +17,000. YoY construction jobs are up +257,000.  
  • temporary jobs increased by +10,300. 
  • the number of people unemployed for 5 weeks or less decreased by -172,000 from 2,287,000 to 2,115,000.  The post-recession low was set over two years ago at 2,095,000.
Other important coincident indicators help  us paint a more complete picture of the present:
  • Overtime rose +0.1 hours from 3.6 hours to 3.7 hours.
  • Professional and business employment (generally higher-paying jobs) rose by +54,000 and  is up +518,000 YoY.

  • the index of aggregate hours worked in the economy rose by 0.5%.
  •  the index of aggregate payrolls rose by 1.1%.     
Other news included:            
  • the  alternate jobs number contained  in the more volatile household survey increased by  +3,000 (!)  jobs.  This represents an increase of 2,020,000 jobs YoY vs. 2,280,000 in the establishment survey.      
  • Government jobs fell by -4,000.       
  • the overall employment to population ratio for all ages 16 and up declined -0.1% to 60.3  m/m  and is up +0.1% YoY.          
  • The labor force participation rate declined -0.1% to 62.8  m/m and is down -0.1% YoY  

All of the good news I expected in last month's employment report (but was probably negated by  the weather) showed up in this month's report. In particular, both the unemployment and underemployment rates declined to new expansion lows. Aggregate hours and payrolls also improved strongly, and hourly wages for nonsupervisory workers tied their expansion high at +2.6% YoY. Involuntary part time employment also fell further, while employment in all significant services and industries rose.

About the only flies in the ointment were the pathetically weak +3,000 improvement in the very volatile household number, the declines in both the employment-population ratio and the labor force participation rate, and the slight decline in YoY payroll growth (consistent with my expectation that this will restart its late cycle slow fade).

But, all in all, an excellent report.

Thursday, May 3, 2018

Gimme shelter Q1 2018 update: rents and house prices all at or near new extremes

 - by New Deal democrat

This post is a comprehensive update as to the cost of new and existing homes vs. renting, all measured compared with median household income. As such it is epistolary in length. So here is the TL:DR version:
  • as a multiple of median household income, new home prices are at an extreme beyond even the peak of the housing bubble, while existing home prices are about 5% under theirs
  • but unlike then, when apartment vacancies were high and rents cheap, now rents are *also* at an extreme as compared with median household income
  • even with their recent increase, interest rates are still lower now than during the housing bubble, so the median monthly mortgage payment adjusted for median household income is even still about 10% less than it was at the peak of the housing bubble
  • if the trends of rising prices and interest rates continue, at some point they will overcome the demographic tailwind of the large Millennial generation having reached typical home-buying age. At that point there may be another deflationary bust

Half a year ago I wrote a long post discussing "the real cost of shelter," by which I meant not just the downpayment on a house, but the monthly carrying cost for a mortgage, and comparing both of those with median rent. 

That comparison showed that, while the "real" cost of a house downpayment was at a new high, the "real" cost of median asking rent was even higher. By contrast, the monthly carrying cost of a mortgage was quite moderate. This meant that, if a buyer could find a way to put together a downpayment, home-owning was a bargain compared to renting.

As I'll show below, six months of price and interest rate increases later, there is even more stress on both homebuyers and renters.

By way of a quick recap, I wrote six months ago that I had never seen a discussion of the relationship between the relative cost of homeownership vs. renting, particularly as a function of the household budget. The choice (or ability) to live in the residence one desires isn't a matter of its cost by itself, but also the relative cost of the type of residence.  What is the cost of a house compared with the cost of an apartment? How expensive are each of them compared with a household's income?  If both are too expensive, maybe the choice is made to live with mom and dad as an extended family.

So, here are the three relationships I'll look at again in this post

1. the "real cost" of a downpayment on a house.
2. the "real cost of renting
3. the "real monthly carrying cost" of a mortgage

The best metric for calculating these "real" costs on a household is median household income

1. The "real cost" of a downpayment on a house

In order to generate the "real cost" of buying a house, the best way is to compare the median household income with the median house price. 

One drawback is that the Census Bureau only publishes median household income annually in September -- so there is as much as a 21 month lag. Here's what the most recent data -- through 2016! -- looks like:

The good news is that Sentier Research published monthly estimates based on the Household Survey into 2017. The bad news is that they discontinued this service a year ago.

The renewed good news is that the website Political Calculations has picked up the mantle and continued to estimate the monthly change in median household income. Here's what that looks like as of their most recent update through February:

After I engaged in some correspondence with them, last week they updated their metric on "real" house prices making use of their monthly median household income estimates (NOTE: here nominal values are used for both median income and median prices):

While they use new home sales for their median house prices, we get the same result if we use the FHFA house price index:

Meanwhile, the median price for an existing home, which peaked at $230,000 in summer 2005, has continued to appreciate at nearly 6% a year this year:

If that pace continues, by this summer the median price will be about $280,000, 22% above the bubble peak. Since nominal median household income has increased about 25% over that same period of time, they will be only aabout $7500, or about 3% below their "real" bubble peak.

In short, no matter how you measure, in real terms house prices are at or near their most expensive ever, even including the peak of the housing bubble.

So, why haven't home sales rolled over? Part of the reason is the demographic tailwind I discussed last week. Because Millennials of peak first-home-buying age now number about 15% more than the Gen Xers of 2005, a build-up that has grown year after year for the last decade, it presumably takes even more financial stress to overcome that tailwind.

But there are two other reasons why home sales haven't turned negative yet: the relative (un)attactiveness of renting, and the monthly carrying cost of mortgage payments. Let's look at each of them in turn.

2. The "real cost" of renting

Here is the median asking monthly rent for an apartment in the US since 1995 (note: the series goes back to 1988):

In 1988 the median rent averged $343 per month. In the first quarter of this year it was $954.

Now, here is what it looks like in comparison with median household income:

If house prices have risen to new highs several times since the turn of the Millennium, so have apartment rents -- almost relentlessly. 

In percentage terms, in 1988, the median rent for an apartment was 14.5% of median household income. That rose to slightly over 16% in the mid 1990s before falling to the series' low of 13.7% in 2000. It had risen to a record 18.4% of median household income in the 2nd quarter of 2017, the last available data when I first published this piece.

Since then, the situation has only gotten worse. In Q3 median asking rent was 18.7% of median household income. In Q4 it was 18.6%. And in the first quarter of 2018 it rose to 19.3%!

Note, by the way, that even if we make use of the metric of "rent of primary residence" from the monthly CPI report, which I think has been underestimating rent increases (because both Zumper and Rent Cafe, two private measures, are much more in accord with the surge in "median asking rent"), we see that rent increases have outpaced median household income, which over the same period of time has risen about 220% nominally:

So one very big difference between the present situation and that at the peak of the housing bubble is that renting was a *much* more attractive option 12 years ago than it is at present.

3. The "real monthly carrying cost" of a mortgage

A second big difference between the present and the housing bubble is that mortgage interest rates generally ranged between 5.5% and 7% then, but quickly fell below 5% in this expansion, all the way to a low of 3.3% in 2013:

Recently they have risen significantly.

With that in mind, let's take a look at the monthly cost of living in a house. The below graph shows the median monthly mortgage payment for a house  (blue) compared with median household income (red). Median monthly mortgage payment is calculated by using the median house price and the 30 year mortgage rate for each quarter, and consulting an amortization table using those values. This is done by showing the percentage of median monthly income (1/12 of the annual) that one month's mortgage payment consituted (note: I am assuming a 10% down payment, with 90% mortgaged to be consistent. Using a different down payment does not change the shape of the comparison at all, only the nominal values)::

Last year, when I first posted this metric, the monthly payment for the median house wasn't extreme at all, but rather very moderate in terms of the long term range. 
  • Going back to 1988, the median mortgage payment was slightly over 40% of median monthly household income. 
  • This fell back under 28% at the end of 1998 before rising to 32% in 2000. 
  • After falling briefly, at the peak of the housing bubble in 2005 it had risen to 31.4%, and actually reached a secondary peak in Q2 of 2006 of just over 35% of median monthly income.
  • At the bottom of the bust at the end of 2011 it made a new low of 23%.
  • As of Q2 of last year, the median monthly mortgage payment was still less than 24% of median household income.
  • BUT, with the increase in both house prices of over 5% YoY, and the increase in mortgage interest rates to 4.28% as of Q1 2018, that has now risen to 29.5%

Mortgage payments for new buyers in 2018 and not nearly so moderate as they had been earlier in this expansion.  But they are not yet at the extremes they were in 2005 and 2006.

4. Comparing rent  and mortgage payments

In our final comparative graph, let's see how median monthly rent compares with median monthly mortgage payment:

The overall trend in the last 30 years has been that monthly mortgage payments have fallen from over 3 times median rent to about 1.5 time median rent now. Put another way, even at the peak of the housing bubble, the monthly carrying cost of a house was about 2.3 times the median cost of renting an apartment. At the bottom of the bust, that fell to 1.4 times the cost to rent. For the last five years, monthly mortgage payments have hovered near 1.5 times the median asking rent.

What is particularly noteworthy is that *even with* the recent big increase in mortgage payments, rents have also increased so much so that the 1.5 ratio still holds.


By comparing the "real" cost of housing to renting, both in terms of down payments and monthly mortgage payments, we can make sense of some of the biggest trends in the market for shelter.

Record down payments are keeping an increasing number of prospective buyers, especially first time buyers, shut out of the market for buying a house. An enormous number are living in apartments instead. This explains both the multi-decade lows in the homeownership rate as well as the recent 30 year lows in the apartment vacancy rates, as a disproportionate number of adults are forced out of home ownership and into apartment dwelling.

But even with the recent increase in mortgage payments, in relative terms they are still lower than they were at the peak of the housing bubble, and a relative bargain compared with their historical multiple of rental payments. In short, if one can get past the down payment, home ownership still looks like the better choice. 

Along with the demographic tailwind, the *relative* inexpensiveness of monthly mortgage payments vs. rental payments goes a long way towards explaining why single family home construction has continued to increase in the face of higher mortgage rates. 

That being said, with increasing financial stress showing up across the board in the costs of both buying and renting, we can only expect to see even more involuntary extended family households and involuntary unrelated housemates. Further, *if* interest rates and housing costs increase much further -- most importantly, if home builders continue to focus on only the most expensive segment of the market --  at some point they will overwhelm the increased numbers of home-buying age Millennials who have been buoying up the market. Sales will turn down, followed by home values, leading to another deflationary bust. 

[Special thanks to Mike KImel for preparing the customized comparative graphs used in this article.]