Thursday, March 16, 2017

February 2017 Inflation

It looks like last month may have been a noise event.  This month, shelter inflation tracks back up and non-shelter inflation tracks back down.  Although, there is still a chance this is the beginning of an uptrend.  The three month average non-shelter inflation rate is above 2%.

Year-over-year CPI less food, energy, and shelter, remains 1.3%.

In real estate, I see some reports of positive activity, but bank lending has flat-lined.  On the other hand, quarterly numbers for 2016 4Q flow of funds show mortgage lending continuing to accelerate.  Is this because more lending is coming from non-bank sources, or is this because the flow of funds data is older, and it will show a slowdown in the first quarter?

The Federal Reserve report on Mortgage Debt Outstanding does appear to show a transition beginning from mortgages held at banks to mortgages originated through Fannie & Freddie.  This is to be expected when short term rates are rising and the yield curve is flattening.

So, I suppose one question will be, can the GSEs create enough mortgage growth to overcome the decline in bank lending?  It does appear that since mid-2016, there has been a loosening up of lending standards among conventional mortgages, so that there have been more mortgages with low down payments and more sales of existing homes at the low end of the market.  This is a positive development.  I suspect a good amount of healing, recovery, and price appreciation in those markets will need to happen before that leads to an increase in new housing starts in those markets.  I suppose that means that the first result of any loosening will be healing of middle class balance sheets, and increases in the real housing stock which might reduce rent inflation would come later.

Maybe we will see a bottom in the dropping homeownership rate, too, if Fannie & Freddie become more active.  Here are the year-over-year and quarterly change in mortgages outstanding for 1-4 unit homes, for each conduit.

If Fannie and Freddie allow themselves to grow, it appears that they could counter the decline in bank lending.

PS. Notice in the YoY graph how the feds knocked the wind out of the GSEs when they took them over in 2008.  Fortunately, GNMA took on some mortgage growth.  In the end, I lay most of the defaults at the feet of federal management of the GSEs.  They pulled the rug out from under the lower tier housing market after September 2008, and most of those defaults happened in 2009-2012.  Maybe, finally, the GSEs will start to support that market again.  Of course, the Fed is pulling against bank lending at the same time.  Goodness help us if we ever manage to get all four cylinders running at the same time in the housing market.  I suppose if that happened, I would recommend a long position in the laundry business.  Somebody will need to clean all the bubble mongers' messed underpants.

16 comments:

  1. Four cylinders? Hey I can remember when a V8 ruled the roads.

    Shelter costs driving inflation? Seems like it.

    The intellectual right-wing has the megaphones out on free trade. They go mute on property zoning.

    The left-wing is worse.



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  2. Four cylinders? Hey I can remember when a V8 ruled the roads.

    Shelter costs driving inflation? Seems like it.

    The intellectual right-wing has the megaphones out on free trade. They go mute on property zoning.

    The left-wing is worse.



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  3. Kevin:

    Okay, overseas profits. What if the profits are not repatriated?

    Apple says they really made all their money in Ireland. I do not know if they bank their money there or not. People say Apple is not repatriating profits.

    There is $30 trillion in offshore, Cayman Island-type bank accounts.

    So, if a US enterprise make $100 million in offshore operations, but then banks it in the Cayman Islands, what does that mean?

    Something is not jelling here.

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    1. What's not jelling? The foreign subsidiary buys some treasuries. Apple makes high foreign profits and their foreign subsidiary makes a small return on near cash assets. Isn't that basically a description of Apple's balance sheet?
      BTW note that if firms are shading profits to foreign subsidiaries that means that US GDP has been systematically understated.

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  4. https://www.forbes.com/sites/timworstall/2013/05/07/why-have-corporate-profits-been-rising-as-a-percentage-of-gdp-globalisation/#3d0a97ae2a6e

    "A Wall Street Journal analysis of 60 big U.S. companies found that, together, they parked a total of $166 billion offshore last year. That shielded more than 40% of their annual profits from U.S. taxes, though it left the money off-limits for paying dividends, buying back shares or making investments in the U.S. The 60 companies were chosen for the analysis because each of them had held at least $5 billion offshore in 2011."

    ---30---

    Well, okay, not jelling for me.

    So an "American" company makes phones in China, sells them in Europe or USA, and then banks the money offshore. Do they buy US treasuries or JGBs, or Irish bonds?

    Huge amounts of money pour out of USA into China for labor and transportation, management etc., or into Apple coffers in the Cayman Islands or Ireland.

    This is supposed to actually be improving the US trade balance? Resulting in more money circulating in the US economy? Other than the excellent phone or computer (I love Apple computers) how do I benefit? Seems like a one-way ticket for money out of the US economy.

    Now, the Fed could offset by printing more money….

    The whole idea that multi-nationals are based in any particular country is probably antique.

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    1. It's not a good thing. It's just not US consumers going into debt to overconsuming imports. It would be better to stop taxing foreign US corporate profits. But even if we solve that, there would probably be a persistent trade deficit.

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  5. US consumers are not going into debt to buy things…we are selling assets to buy things.

    Now, if we could make enough assets---build more houses---then fine.

    If we shipped mobile homes out of the country fine…but the house are not mobile and sit on scarce land (land made scarce by zoning).

    The limited supply of assets results in demand-pull inflation of housing prices. The Fed study I repeatedly cite says as much.

    To be sure, the cardinal sin is property zoning. But as surely, property zoning embraced and accepted by all.

    So we have to make monetary and trade policy with the facts as they are, not as we want them to be.

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    1. Those home prices are only sustainably high because they limit access to sources of income. Otherwise, high prices would trigger more out migration until prices moderated. If you want to look at it as being intertwined with foreign capital, you could say we are selling assets to fund our own foreign investments, and those investments perform so well they fund our imports.

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  6. https://www.aei.org/wp-content/uploads/2017/03/graph02-1.png

    Okay, so foreigners owned almost no US assets in 1980, and now own about 30% of total US assets, or about $35 trillion.

    Man, I find this topic not so easy, and reminds me of blind men describing an elephant.

    I can't say your observation about huge foreign profits by US companies is compelling. So how did foreigners end up owning one-third of the US? I realize there might not be fair makers globally, but why are US firms so profitable overseas? No competition?

    And other than legal niceties, are US firms really US firms, or multi-nationals that source and sell globally and bank offshore?

    With $30 trillion in Cayman Island bank accounts, what do capital flows even mean?

    Apple banks profits in Ireland.

    House prices explode in every nation that runs large trade deficits, including Spain, where house prices cooled off as soon they got back to trade balance.

    BTW, I am not saying real estate prices in just limited access cities are higher due to foreign capital. Real estate is probably more-expensive in general, and exacerbated in limited access cities.

    Zoning is everywhere. Can you plop down a steel container in suburban Connecticut on a 300-square-foot plot and call it home?

    Confusing issues. I look forward to more posts.

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    1. Foreign assets owned abroad have generally risen along with foreign assets held in the US. They are currently slightly lower than US assets held by foreigners, as measured. But, that's not really realistic since US assets owned abroad earn more income every year, by a long shot, than US assets owned by foreigners. Obviously, the market price of US assets abroad would have to be higher.

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  7. Why would foreigners repeatedly buy US assets that yield less than assets they could buy in their home countries or other nations? What about EMT and all that?

    Do you believe the numbers?

    Are American companies better managed?

    I wonder if international trade stats are believable.

    You know what a financial asset or money in the bank is? A blip on a computer chip somewhere.

    There are blips on computer chips that give you the right to pay taxes or lay a claim on output.

    So "US" companies claims to generate these blips offshore where they are not taxed?

    They import 100 million smartphones, but say all the profits were generated in Ireland?

    Something is screwy here.

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    Replies
    1. I think this goes back a long way. Some of it is simply Americans taking more risks. We own more direct investment and equity while foreigners prefer low risk debt. It's not that much of a mystery, any more than it's a mystery that American stockholders earn more than bondholders.

      Here's a paper on it.
      http://www.cid.harvard.edu/cidpublications/darkmatter_051130.pdf

      The thing I would add to their paper is that this has exploded in the past 20 years in a way that seems to correlate with housing bubbles. I reverse the causation though. I think it is high incomes, which are partly economic rents from limited access, going to workers and firms in cities that contain dense networks of highly skilled information workers. They capture many of those economic rents from global consumers. So, places with Closed Access problems have large (funded) trade deficits.

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  8. Well, this is possible scenario also:

    1. US companies after WWII are large, become global. But basically US companies, affinity for US.

    2. Establish overseas operations to import into world's largest market, US.

    3. Hire Big Eight, then Big Four accounting firms. Develop global perspectives. Some international selling.

    4. US-based companies discover if they "offshore profits," they do not have to pay taxes. Fiduciary responsibilities to shareholders, incentivized management trump patriotism.

    5. "U.S" companies increasingly report profits in lowest-tax districts, but increasingly offshore. Apple really makes its money selling phones in US, but reports profits in Ireland.

    ……

    I think it is true what you say, there are dense networks of professionals in a few US cities, and I guess Silicon Valley is the best example of that. Maybe Manhattan-NYC for finance (now called fin-tech?)

    L.A. for entertainment?

    How to explain the Spain housing bubble, which perfectly correlates with their trade deficits?

    So a dense networks of skilled professionals clump together in Boston, NY, SF, and also tolerate or even profit by property zoning. They exploit their talents on the global stage, suck up so much money…that foreigners start buying large amounts of property in those cities?

    This jigsaw puzzle is not coming together….






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    1. The fact that foreigners own some of that real estate is a red herring. Is it a mystery that foreigners own Apple stock? Is it a mystery that foreign firms drill for oil in OPEC countries? The high prices on those houses are not due to foreign buyers. Their high prices are due to high rents and those rents are high because living there gets you access to high wages.
      There are a lot of sources that treat home prices as untethered to cash flows (rents) by assumption. This is one of the viruses in the public conversation that throws us off track. Home prices aren't high because some group of buyers has pushed prices up with no regard for rent. They are high because their intrinsic values are high through local political repression.

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  9. I certainly agree on local political repression such as property zoning.

    Still, the Fed study I tirelessly cite ( actually I am tiring of it) said trade deficits=house price booms.

    I traded emails with the author Andrea Ferrero, a guy, prominent rising economist. Nice guy. I asked him why not mention property zoning and he answered "we treated supply of property as fixed in our models."

    I guess roughly true over the time period he studied.

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  10. I certainly agree on local political repression such as property zoning.

    Still, the Fed study I tirelessly cite ( actually I am tiring of it) said trade deficits=house price booms.

    I traded emails with the author Andrea Ferrero, a guy, prominent rising economist. Nice guy. I asked him why not mention property zoning and he answered "we treated supply of property as fixed in our models."

    I guess roughly true over the time period he studied.

    ReplyDelete