Saturday, October 18, 2014
“The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements, or a disease that comes like the plague. Inflation is a policy.” - Ludwig von Mises, “Economic Policy”
The Federal Reserve has a publicly-stated goal of achieving a 2 percent inflation rate. However, the US is running an annual inflation rate of just 1.7 percent through the 12 months ended in August 2014.
Many economists and analysts expected soaring inflation when the Fed initiated its quantitative easing (QE) program. Creating all that excess money in the absence of an equal expansion of goods and services in the economy was supposed to trigger price inflation.
But continued weakness in the US economy has thwarted any prospects of the runaway inflation that was expected in coincidence with the nearly $4 trillion dollars created out of thin air by the Federal Reserve (the Fed’s balance sheet has expanded from about $850 billion to more than $4.4 trillion since the 2008 financial crisis).
To be sure, there has been inflation -- it just hasn’t been in the consumer price index (CPI). Instead it's been manifested in assets. All that money had to go somewhere, and it has flowed into -- and distorted -- the markets.
Look at the stunning rise of the stock markets, not to mention the housing market, since the lows of 2009. Each of the Fed’s three QE programs have caused the stock market to surge as more liquidity was pumped into the financial system.
Before the recent turmoil, the stock market had tripled in value since the bull run started in early-2009. That is not reflective of the weak US economy, diminished household incomes, or reduced consumer spending.
During the throes of the financial crisis and subsequent Great Recession, the stock markets reached stomach-churning lows.
In March of 2009, the Dow fell to a 12-year low of 6,547; the S&P slumped to a 13-year low 676; and the NASDAQ dropped to a seven-year low of 1,268.
Yet, even after this week's market upheaval, the Dow now stands at 16,380; the S&P at 1,887; and the NASDAQ at 4,258.
This surging bubble in U.S. stock markets was created by the Federal Reserve through its record low interest rates.
So, in reality there's been plenty of inflation — it's all been in asset prices and, in many markets, housing. Home prices have once again reached 2005 levels.
Ultra-low interest rates have discouraged saving and instead encouraged massive speculation in volatile asset markets.
As history has shown repeatedly, this never ends well.
Looking for the highest possible returns, investors have forgotten the recent crashes of 2000 & 2008. Shunning savings accounts, CDs, money market accounts and Treasuries, investors have instead piled into stocks and high-yeild bonds, which are historically volatile.
Since the start of 2009, funds invested in junk bonds have returned an average of 14 percent each year. That's been very alluring.
For comparison, the yield on the benchmark 10-year Treasury note recently fell below 2 percent for the first time in more than a year. Moreover, the yield on the 10-year Treasury note hasn't consistently traded above 4 percent since shortly before the financial crisis of 2008.
U.S. Treasuries are viewed as the safest of all investments. In other words, investors are spurning safety in favor of high-risk yields. The alarm bells are ringing!
Less than ten years after the dot-com bubble burst, there was a housing bubble that inevitably burst. Money that drained out of stock markets during the dot-com panic instead flowed into housing markets and the now infamous mortgage-backed securities.
One form of massive speculation was simply traded for another.
Yet, we now find ourselves in the midst of concurrent equity and bond bubbles throughout the world's financial markets.
Most incredibly, we are now faced with our third asset bubble in less than 15 years. Will investors never learn? This is like the film Groundhog Day. Yes, history repeats, but three times in 15 years? This is the height of recklessness and delusion.
Former Fed Chaairman Alan Greenspan famously referred to it as "irrational exuberance."
Somehow, it's returned, and it seems to be a sign of the times.
So, the next time you hear someone (particularly some talking head news pundit) say there's little or no inflation, ask yourself how they can so blindly miss the absolutely massive level of inflation in the asset markets.
Monday, August 18, 2014
As most people know, the engine that drives the US economy is consumption. In fact, consumers account for 70 percent of the nation's GDP.
So, in order for the economy to function properly, consumers must have adequate incomes to fund all that consumption. Therein lies the problem.
The US economy has continued to struggle since the Great Depression due to an affliction of stagnant wages. In fact, as I've illustrated previously, the US economy has been slowing for decades, largely for this reason.
Adjusted for inflation, wages have been stagnant since the 1970s, reports the Milken Institute. That is a stunning revelation. This stagnation, in conjunction with the widespread prevalence of low-wage jobs, is hindering the economy.
The number of employees working in low-wage jobs has been rising since 1979, according to John Schmitt, senior economist at the Center for Economic and Policy Research.
Though these disturbing trends have been decades in the making, the consequences are now being felt more than ever.
According to the Economic Policy Institute, “the vast majority of U.S. workers—including white-collar and blue-collar workers and those with and without a college degree—have endured more than a decade of wage stagnation.”
Predating the Great Recession (between 2000 and 2007), the median worker experienced slow wage growth of only about 2.6 percent per year, and from 2007- 2012 (during the recession and post-recession hangover) wages fell, which, in essence, means that wages have remained flat.
This has depressed demand and consumption, holding back the economy in the process.
It's no surprise that if Americans don't have adequate incomes, they can't spend the economy into robust growth.
Out of 34 industrialized countries, the U.S. had the highest share of employees doing low-wage work in 2009, according to OECD data.
In fact, one-in-four U.S. employees were low-wage workers in 2009, according to the OECD. That is 20 percent higher than in the number-two country, the United Kingdom. Low-wage work is defined as earning less than two-thirds of the country's median hourly wage.
To compensate for this, the US economy continues to be fueled by asset bubbles and escalating household debt.
However, as we all witnessed in the fall of 2008 when our nation's debt bubble finally burst, these responses result in some rather devastating outcomes. We're still living with the aftermath of the Great Recession.
Yet, while the typical American worker has fallen further and further behind through the years, the nation's top earners have thrived. The income of the top 1 percent nearly quadrupled from 1979 to 2007.
But no matter how rich they are, the top 1 percent cannot possibly buy enough stuff, or use enough services, to make up for the wage stagnation of the masses.
There has been a steady, long-term decline in the US economy over many decades.
The annual GDP growth rate in the United States averaged 3.25 percent from 1948 through 2014. However, since 2001, GDP has only reached at least 3 percent in two years: 2004 (3.8 percent) and 2005 (3.4 percent). In every other year, GDP failed to crack 3 percent.
In the 1950s and '60s, the average growth rate was above 4 percent. In the 1970s and '80s it dropped to around 3 percent. But in the last ten years, the average rate has been below 2 percent.
Our economic decline dovetails with the decline in wages through the years. There is no denying that four decades of stagnant wages have led to our continuing economic stagnation.
This is why we've become so reliant on household debt and the asset bubbles forged by the Federal Reserve to continue eking out marginal economic growth.
What's particularly perverse about this wage stagnation is that American workers have managed to be ever more productive. Though productivity grew 7.7 percent from 2007-2012, wages fell for the entire bottom 70 percent of the wage distribution.
The longer term trends are even more troubling.
The median worker saw a wage increase of just 5 percent between 1979 and 2012, despite productivity growth of 74.5 percent.
The last decade, however, was particularly bleak for American workers.
Between 2002 and 2012, wages were stagnant or declined for the entire bottom 70 percent of the wage distribution. In other words, notes the Economic Policy Institute, the vast majority of wage earners have already experienced a lost decade.
In reality, it's been more like lost decades.
This is the sad truth in the United States, the nation that most Americans like to believe is one of opportunity, promise and hope. However, the reality simply doesn't square with those lofty beliefs.
This nation cannot remain great when such vast numbers of its citizens are continually falling further behind — even the skilled and the educated.
The fact that so many workers are facing great financial struggles is particularly troubling when corporate profits are at historic highs.
The Economic Policy Institute describes the problem thusly:
"The weak wage growth since 1979 for all but those with the highest wages is the result of intentional policy decisions—including globalization, deregulation, weaker unions, and lower labor standards such as a weaker minimum wage—that have undercut job quality for low- and middle-wage workers."
Globalization notwithstanding, these are political problems manifested as economic problems. That is to say, monied, corporate interests have influenced lawmakers and gotten them to do their bidding.
It also means that these trends are reversible. However, that requires political will, integrity, and a determination to serve the citizenry, the masses, and the electorate.
Unfortunately, those qualities are in short supply in our nation's capital.
Sunday, July 20, 2014
The leaders of the BRICS nations – the emerging markets of Brazil, Russia, India, China and South Africa – announced in Brazil the launch of a $50 billion development bank this week. The move by the five nations is in response to the Western influence of the US-dominated World Bank.
Though it will be much smaller and less funded, the new bank is an attempt to counterbalance the hegemony of US and Western banking interests. In essence, it is an attempt to expand the financial relevance of the world's emerging economies.
The BRICS also set up a $100 billion currency reserves pool to help countries manage their short-term liquidity troubles during a currency crisis. The decision presents a small, but potentially growing, challenge to the International Monetary Fund (IMF), which is based in Washington, DC.
The World Bank finances development projects around the world, and the IMF is the lender of last resort to countries that don't have the dollars to pay their foreign debt.
Unable to exert more influence over the World Bank and IMF, the BRICS will now gain greater control over the funding decisions that directly affect them.
Though China is one of the world's two largest economies, it has less voting power in the IMF and World Bank than Belgium, the Netherlands and Luxembourg. Yet, China has 1.3 billion people, while those three European nations have less than 30 million people combined.
Belgium — a county with 11 million people and a $508 billion economy — has more IMF votes than Brazil — a nation of 199 million people and a $2.2 trillion economy.
Frustrated that their economic weight is not reflected in global financial institutions, the BRICS countries have now established one of their own.
In the process, they have suddenly carved out a larger role for themselves in international finance.
At the least, they have created some global competition for international lending.
Initially, the bank will have $50 billion in capital, divided equally among its five founders. The bank will start with just $10 billion in cash put in over seven years and $40 billion in guarantees, and it won't start lending until 2016. However, capital is planned to eventually grow to $100 billion.
To put this in perspective, subscribed capital in the World Bank is $223 billion.
The development bank, which will be based in Shanghai, intends to fund development and infrastructure projects in developing nations. India will lead operations for the first five years, followed by Brazil and then Russia.
The BRICS nations banded together in 2009 to press for a large role in the global financial system created by Western powers in the post-World War II Bretton Woods agreement.
Given that they account for almost half the world's population and about a fifth of global economic output, the BRICS' influence will likely continue to grow.
In fact, other nations, such as Indonesia, Mexico and Turkey, could ultimately join the development bank.
The bank is the biggest undertaking and the most significant achievement of the BRICS in their five-year partnership.
When the BRICS first announced their intention to form the bank in April of 2013, it was greeted with great skepticism in the West. But the emerging nations have shown their willingness to coordinate, cooperate and act.
Wary, and weary, of the terms and conditions applied by IMF and World Bank, the BRICS can now turn to one another for the financing of their development and infrastructure needs.
The US and, more broadly, the West may not have taken seriously this challenge to their supremacy in the world economy a year ago. But it's a good bet they're paying attention now.
Moreover, the creation of the development bank is not the end of the BRICS' ambitious plans.
These nations have previously called for an end to the dollar's singular role in international trade and the settlement of debts.
For example, since crude oil is bought and sold in dollars, the BRICS have publicly voiced their interest in collaborating in non-dollar oil payments. Their hope is to have an alternative payment system in place by 2018.
In 2012, the BRICS announced plans to extend credit to each other in their own currencies, with the goal of eventually replacing the dollar with their own currencies for trade amongst themselves.
That's a direct challenge to the dollar's role as the world's reserve currency.
So, the development bank may be just the beginning. It may take a few more years, but the BRICS are determined to increase their role and influence in international finance and credit, while simultaneously diminishing that of the US and the West.
Wednesday, July 09, 2014
The American Southwest is a vast, arid desert. Yet, it is home to some 40 million people and the cities of Las Vegas, Phoenix and Los Angeles. All of them are served by the dwindling water resources of the Colorado River and one of its primary reservoirs, Lake Mead.
A massive civil engineering project in the 1960s diverted part of the Colorado River to feed Phoenix and Tucson. Those cities could not exist in their current state without this unnatural influx of Rocky Mountain snowmelt.
A quarter of Arizona's water comes from the Colorado River, which has been drained to dangerously low levels. There's not enough water in the basin to keep Arizona's crucial Lake Mead reservoirs topped up. As of this week, the lake is about 39 percent full.
Lake Mead's surface is now about 1,080 feet above sea level, which is below the 1,082-foot level recorded in November 2010 and the 1,083-foot mark measured in April 1956 during another sustained drought.
If current trends continue, the level will drop to 1,000 feet by 2020, says the federal government. That's just six years from now.
Under present conditions, that would cut off most of Las Vegas’s water supply and much of Arizona’s. Phoenix gets about half its water from Lake Mead, and Tucson nearly all of its.
The problem is worsening quickly.
The federal Bureau of Reclamation forecasts that Lake Mead will fall this week to a level not seen since the lake was first filled in 1938. Again, Lake Mead is now about 39 percent of capacity and is dropping steadily.
Last month, officials at the Central Arizona Project (the state’s canal network) said they may have to cut water deliveries to Phoenix and Tucson, its two largest cities, due to the dire state of the dwindling Colorado River.
Despite Arizona's dwindling water resources, the state's population continues to swell. Here's a look at Arizona's population in recent decades:
1980: 2,718,215 (55.7% increase)
1990: 3,665,228 (34.8% increase)
2000: 5,130,632 (40% increase)
2010: 6,392,017 (24.6% increase)
2013 (est.): 6,626,624 (3.7% increase)
In essence, Arizona's population has nearly quadrupled since 1970. Yet, the desert state is getting ever drier.
Arizona is in the midst of the worst drought ever seen in the state's 110-year long observational record. The last two years were the driest in a century in the Southwest.
Consequently, the state will have to reduce water consumption rather quickly. Mandatory cuts could begin as early as 2019, according to an analysis by the state's water project.
Arizona does not presently have a plan to deal with water shortages as extreme as those being predicted by 2020, just six years from now. It's unconscionable that state officials have allowed the situation to come this far with no actual, valid plan.
The fact that a pending water shortage in Arizona's two biggest cities is just now being raised publicly is tough to comprehend. Denial, or withholding vital information from the public, are not solutions.
Arizona's groundwater levels have dropped by hundreds of feet over the last century. Yet, the state still grows cotton on its arid lands.
According to the Arizona Department of Water Resources, more than two-thirds of Arizona’s water is still used to irrigate fields, down from a peak of 90 percent last century.
However, roughly 42 percent of the land in Arizona is covered by desert. In fact, there are four different deserts in the state, making it a very difficult place to grow food, much less sufficiently feed its 6.6 million residents.
Of Arizona's total area, just 0.32% consists of water, which makes Arizona the state with the second lowest percentage of water area (New Mexico is the lowest at 0.19%).
Climate change will only make the drought situation worse, and the effects are continually occurring faster than scientists had predicted a few short years ago.
Most scientists believe global warming will make an already arid desert Southwest even drier in this century.
Research done at the University of California, Berkeley shows that the 20th Century was an abnormally wet era in the West and that a new mega-drought may be starting.
The U.S. Global Change Research Program projects 20 percent to 50 percent less water by the end of this century, with temperatures 5 to 10 degrees warmer (Fahrenheit).
With 6.6 million residents in Arizona, 4.3 million of whom live in the metropolitan Phoenix area, there are simply too many people vying for far too little water.
Given its limited water resources, the desert region was not meant to support a population that large. Yet, those limited water resources are rapidly dwindling.
However, Phoenix is not alone in facing this issue. Most of the Southwest is reliant on the same water source.
Seven southwestern U.S. states share the Colorado River's water supply under a 1928 allocation agreement that also provides shares of the river water to Native American tribes and Mexico.
“The Colorado is essentially a dying river. Ultimately, Las Vegas and our civilization in the American Southwest is going to disappear, like the Indians did before us,” said Rob Mrowka, a Las Vegas-based scientist at the Centre for Biological Diversity.
Las Vegas, which has more than 2 million residents and about 40 million tourists a year, is almost completely dependent on Lake Mead for drinking water. The city is presently grappling with a water crisis.
“The situation is as bad as you can imagine,” said Tim Barnett, a climate scientist at the Scripps Institution of Oceanography. “It’s just going to be screwed. And relatively quickly. Unless it can find a way to get more water from somewhere, Las Vegas is out of business. Yet they’re still building, which is stupid.”
Monday, June 30, 2014
The Great Recession was the worst economic downturn in the U.S. since the Great Depression. In fact, seven years after it's onset, the nation is still trying to crawl out from under the weight of the recession's burden.
Case in point: The U.S. economy contracted 2.9% in the first quarter, the worst performance since the first quarter of 2009.
Moreover, it was the first quarterly economic contraction in three years, and only the second since the Great Recession ended in mid-2009. The last negative quarter was in early 2011, when growth fell by 1.3%.
So, this contraction was a doozy.
In an effort to help the U.S. along the path to economic recovery, the Federal Reserve is nearly six years into an absolutely massive and unprecedented intervention.
The Fed's quantitative easing (QE) program, initiated in December 2008, has bloated its balance sheet to almost $4.4 trillion. Yet, it is still adding to that absolutely massive sum by buying $45 billion in assets each month.
But that isn't the only extraordinary Fed intervention.
In response to the financial crisis, the subsequent recession, and the collapse in lending/borrowing, the central bank also cut short-term interest rates to historically low levels.
Beginning in December 2008, the Federal Reserve set a target of 0.00 - 0.25% for the Federal Funds Rate, essentially an overnight lending rate for banks. The FFR is presently 0.10%, which allows banks to virtually borrow for free.
It has also allowed large corporations to borrow very, very cheaply.
Despite these unprecedented central bank interventions, the U.S. economy contracted nearly 3 percent in the first quarter, which was like a kick in the gut.
However, the economy's health has remained weak ever since the recession officially ended.
Since the economic recovery began in mid-2009, annual growth has hovered around 2%, well short of the nation’s historical average of 3.3%. In fact, the U.S. economy has not surpassed 3% annual growth since 2005.
This is rather stunning considering the absolutely massive Fed stimulus designed to re-inflate the economy. The central bank's drastic measures have barely made a difference.
Any hope that we'll reach 3% GDP growth this year has been eliminated.
The International Monetary Fund said the U.S. economy would only grow 2% this year, down from its earlier forecast of 2.8%.
And the World Bank has cut its projection for U.S. growth down to 2.1% from 2.8%.
The U.S. economy is driven by consumer spending, which accounts for more than 70% of GDP. Yet, consumers are in no position to be the engine that brings this economy roaring back to life.
Wages and incomes have been stagnant for many years. In fact, household income is roughly the same today, in inflation-adjusted terms, as it was back in 1990. That's why Americans came to rely so heavily on credit during the bubble years.
Credit card debt per indebted household was $17,630 at the end of the first quarter of 2010. However, it has dropped to $15,191 — though it is again on the rise. That four-year decline is substantial.
Meanwhile, overall consumer debt is now 9.1% below its 2008 peak of $12.68 trillion, according to the Federal Reserve.
So, despite all of the Fed's absolutely massive, historic and unprecedented efforts, the economy continues to limp along — now threatening to fall back into recession again — and consumer debt remains well below the level that tanked the economy in the first place.
And therein lies the problem: Ours is a debt-based economy, and without continually expanding debt at all levels — consumer, corporate and government — there can be no return to what was once thought of as "normal."
In short, there can be no growth without debt. However, in light of what happened to the U.S. economy in 2008, perhaps that is a good thing.
Debt is a double-edged sword.
If managed correctly — and kept at levels that allow investment, growth and practicable repayment — it is a useful tool.
If not, it is a financial burden that can tank an entire economy.
We've already seen how that story plays out.
The takeaway here is that the Federal Reserve has already taken massive, extraordinary, and rather drastic measures to get the economy out of recession and resume vigorous growth.
Yet, their nearly six-year efforts are now failing, and that is a frightening reality.
Tuesday, June 24, 2014
According to the US Federal Reserve, credit card debt currently stands at $854.2 billion, and the average consumer has $15,191 in debt.
Though those figures have declined since the onset of the Great Recession, American consumers are again driving themselves further into debt through the use of their credit cards.
Case in point: There was a whopping 12.3% annual increase in revolving credit card balances in April, according to the Federal Reserve.
CardHub projects a $41.9 billion net increase in credit card debt by the end of this year – 8 percent more than last year and 14 percent more than 2012.
The optimistic spin-meisters would have you believe this is a function of higher consumer confidence. But the evidence shows otherwise.
According to Gallup, weekly economic confidence has been flat-lined between minus 13 and minus 15 since the beginning of the year.
That's likely due to the fact that workers are plagued by stagnant wages.
Over the past year, average weekly earnings have risen 2.1% — about the same as the 2% increase in consumer prices. That has negated the marginal rise in earnings. We'll get back to that rise in consumer prices in a moment.
The median usual weekly earnings of full-time wage and salary workers, adjusted for inflation, have actually declined since the end of the recession, according to government data.
This has caused revolving credit to now become non-discretionary. In essence, Americans are using their credit cards just to afford the basics. It's the only way that many of them can bridge the gap between their stagnant incomes and rising food and gas prices.
Which brings me back to the 2% increase in consumer prices noted above. The problem with that figure is that the government doesn't include food and energy prices when calculating inflation.
Consequently, the official inflation rate is quite misleading.
Overall, food costs are more than two percent higher than in 2011. However, the consumer price index (CPI) for U.S. beef and veal is up almost 10 percent so far in 2014. Egg prices are also climbing — up 15 percent in April alone — and are expected to rise by 5 to 6 percent this year. And higher milk prices are feeding through to other products in the dairy case, particularly cheese. Additionally, fruits and veggies have jumped more than three percent.
"The ongoing drought in California could potentially have large and lasting effects on fruit, dairy and egg prices, and drought conditions in Texas and Oklahoma could drive beef prices up even further," says the U.S. Department of Agriculture.
The spot price of U.S. Foodstuffs — which is not driven by speculation as futures are — is up a whopping 19% this year, according to the Commodity Research Bureau index.
The reality is that food price inflation has been higher than overall price inflation for nearly a decade now.
But that's not all.
Gasoline prices have risen more than 10% since the beginning of the year, while natural gas and heating oil prices have spiked as well. Higher oil and gas prices ultimately lead to higher food prices.
Consumers are financing their food and energy purchases with credit cards. Of course, this just raises the costs of these purchases in the long run since they add to revolving card balances.
Because consumer spending comprises more than 70% of U.S. economic activity, some people will applaud any increase in spending, even if it is debt-based spending for essentials, like food and gas.
However, that's surely not something to celebrate, and it's certainly not the sign of a healthy economy or consumer base.
Tuesday, June 17, 2014
The U.S. housing market was at the heart of the financial crisis that led to the Great Recession. Yet, most of the hopes for our economic recovery have been pinned to a housing recovery.
While there has been some semblance of a recovery (home prices have increased 20 percent nationally over the past two years), it has been uneven, differing greatly from market to market.
The S&P/Case-Shiller 20-City Composite Home Price Index shows that in February prices were back around the same levels as in 2004, though still down from their peak in 2006.
Home prices nationwide, including distressed sales, increased 12.2 percent from February 2013 to February 2014, according to CoreLogic. This change represented 24 months of consecutive year-over-year increases in home prices nationally.
However, the housing recovery has been driven largely by investors, not typical buyers.
Sensing an opportunity, institutional buyers have accounted for a large percentage of home purchases, which has boosted prices. This is not a market driven by normal consumer demand.
All-cash purchases accounted for almost 43 percent of all sales of residential property in the first quarter of 2014, up from almost 38 percent in the previous quarter and 19 percent in the first quarter of 2013, according to data released in May by RealtyTrac.
These investors are eager to make a profit by buying low and renting these properties — or flipping them — which is driving up the number of all-cash deals. Wealthy Americans and downsizing empty nesters also account for some of these all-cash deals.
According to the National Association of Realtors' annual study of consumers, the 2014 Investment and Vacation Home Buyers Survey, investors accounted for 20 percent of market share in 2013, down from 24 percent in 2012.
As a result, the median price of a new home rose to $290,000 in March, the highest level on record, according to the Commerce Department.
This is pricing out many first-time and lower-income buyers. When you look at incomes, it's little wonder.
In April, for example, weekly wages for the average American worker were just 0.2 percent higher compared to a year earlier, adjusted for inflation. And real hourly wages were actually down 0.1 percent in the same one-year span.
In real dollar terms, the median annual income is 7.5 percent lower ($4,309) than its January 2008 high.
This makes the 20 percent increase in home prices over the past two years tough to reconcile. It's even more confounding when you look at the broader inflation rate.
The latest annual inflation rate for the United States is 2.1 percent through the 12 months ended May, as published by the US government on June 17, 2014.
So the rise in home prices is wildly out of line with general rise in prices throughout the economy.
As previously noted, this is hurting first-time buyers, many of whom tend to be younger.
The Millennial generation, in particular, is being squeezed out of the housing market. This group is not only contending with rising home prices, but also tighter lending standards, tight supplies and high student loan debts.
Some graduates end up paying off student loans well into their 30s and even 40s. As a result, many Millennials simply can't come up with hefty 20 percent down payments. Others don't have good enough credit to qualify for loans.
Consequently, just 36 percent of Americans under the age of 35 own a home, according to the Census Bureau. That's down from 42 percent in 2007 and it's the lowest level since 1982, when the agency began tracking homeownership by age.
Yet, it's not just Millennials. Home ownership, in general, is on the decline.
Just 74.4 million American households — less than 65 percent of the country — owned the homes they lived in during the first quarter of this year, according to a recent U.S. Census Bureau report.
That was the lowest level since 1995 and a big drop from 2006, when a peak of 76.5 million households, or 68.9 percent, were owner-occupied.
The price of homes, the lack of sufficient down payments, and stricter lending standards have killed any hope of ownership for millions of Americans. What was long considered the "American dream" is no longer the dream for a huge percentage of people.
According to a May poll by the National Endowment for Financial Education, only 13% of Americans considered home ownership as their “top long term financial goal,” down from 17% in 2011.
Lending standards should indeed remain strict. Lax standards helped to drive the housing bubble in the first place. But the stagnation in wages has thwarted the ability of millions of Americans to save for a down payment, or service a mortgage.
The rise in home prices is a two-sided coin. It's been great for owners that have been underwater, and for those seeking to sell their homes. But it's hurt millions of other would-be buyers.
The question is whether the increases in home prices can be sustained. It doesn't seem likely, since it is so out of line with precedents.
Historically, home prices have appreciated nationally at an average annual rate between 3 and 5 percent, according to Zillow, though different metro areas can appreciate at markedly different rates than the national average.
This historical average is important to consider as we look for signs of another housing bubble.
Again, home prices nationwide, including distressed sales, increased 12.2 percent in February 2014 compared to February 2013, according to CoreLogic.
So, price increases over the past year are anywhere from 244 percent to 406 percent above the historical national average.
Cause for concern? Perhaps. This certainly isn't normal appreciation.
Additionally, as interest rates have slowly risen, institutional investors — people or companies that have purchased at least 10 properties in a calendar year — have been gradually leaving the market.
Investors accounted for 5.6 percent of all U.S. residential sales in the first quarter, down from 6.8 percent in the fourth quarter of 2013 and 7 percent in the first quarter of 2013.
One way or anther, this market looks quite tenuous. Incomes don't match home prices, and mortgage rates will only tend to rise.
As it is, the housing market is already slowing down.
New-home construction fell 6.5 percent in May.
Meanwhile, existing home sales saw a 3.4 percent increase in March. However, that was the first gain in nine months. And in April, existing home sales increased just 0.4 percent.
The housing market was a drag on the economy in each of the last two quarters.
Housing cut economic growth in the first quarter, as it did in the fourth quarter of 2013, resulting in the sector’s first back-to-back subtraction since the first half of 2009.
That trend could continue into the second quarter, and beyond.
Clearly, this is something we should watch closely in the months ahead.