The Fed surprised markets on Wednesday with their taper head fake. Was it because the economy is booming? No. Was it because household incomes were growing? Not exactly. Was it because inflation is non-existent? Not if we look at rents or medical care. In fact, going through the Fed’s statement it is largely holding back on the taper because of fear of budget negotiations in Congress. That is, we are hitting our debt ceiling yet again and the Fed wants some leverage here. Yet the larger signs all pointed to a taper if we consider that rents are rising at nearly twice the rate of the overall CPI. Also, the Census figures for 2012 were released and household income adjusting for inflation is now back to levels last seen in 1989. Lost decade? Try a lost generation. Also, recent data highlighted that the wealthiest in our country are capturing most of the income gains and given this trend and the Fed’s taper-less September, the feudalism trade is fully on.
The Fed is the housing market. Investors are dominating the market and this is their number one client. It is no surprise that a moderate rise in rates has essentially clobbered the “normal” home buyers out in the market. Regular buyers need every piece of help buying a home because household incomes have done this:
The above chart shows a full lost decade (24 years of weak income growth). Even in real terms, household income has plunged since the recovery started in 2009:
The Fed is largely playing the market and ironically, these moves are likely to continue the wealth disparity in the US further as investors once again plow into the real estate market to chase yields. For regular households, more income is going to go to housing on the rental front:
Keep in mind that rising rents with falling incomes is not exactly a good combination. Rents are rising at nearly twice the pace of the overall inflation rate. This divergence has accelerated since 2012. The Fed has made a one way bet here. The Fed is operating under a QE forever scenario. Take a look at the Fed balance sheet and tell me if you think a taper is in serious consideration:
The Fed is largely playing one big confidence game. The too big to fail are even larger today. Real estate investors are virtually half the market in 2013. Even in expensive California nearly one-third of all home sales are going to investors (in Las Vegas it is closer to 60 percent).
Reconcile all the facts coming out this month:
-Household incomes adjusting for inflation are back to levels last seen in 1989 (24 years ago – a lost generation)
-50 percent of income generated in 2012 is going to the top 10 percent of earners (highest ever since the early 1900s)
-Rents are rising much faster than overall CPI
-Investors are gobbling up an incredibly large share of all real estate purchases
There has been a serious disconnect going on since the recovery hit and these kind of divergent data points suggest we are in a mania like mode. Investors are largely chasing yield even on many deals that simply do make sense (i.e., cap rates are simply not panning out in many markets). The Fed taper is merely a magician’s trick. The Fed can’t taper to any large degree. It is an end-game in the mortgage market. The Fed is the housing market. The Fed is largely focused on helping member banks so it is no surprise that banks are doing exceptionally well and many financial institutions are the largest real estate buyers in the current market. For now, the investor trade will continue to play out even if people with common sense realize this is simply one giant shell game and the Fed is on its way to a $4 trillion balance sheet. Doesn’t seen so farfetched that we are entering a modern age of feudalism.
Dr. Housing Bubble