Mission Impossible! Fed Cannot Generate Core Inflation (Stagnant Wage Growth Is The Culprit)

In the TV show Mission Impossible, Mr. Phelps is assigned a difficult mission on a weekly basis.

For the Federal Reserve, their mission was to achieve a target rate of core inflation of 2%. Unfortunately, this was Mission Impossible!

If we look back to the summer of 2012, core inflaton had actually more than doubled since January 2011 when core inflation was under 1% to March 2012 when core inflation hit 2.1%.
But core inflation started to plunge after March 2012.

Enter QE3, The Fed’s 3rd attempt at quantitative easing. Despite the growth in The Fed’s balance sheet, core inflation kept falling to today where it stands at 1.235%.


In other words, The Fed seems incapable of generating core inflation.

Why? Simply put, the employment to population ratio is lower than it was in 2007 as are real median household income and average wage growth YoY. It is difficult to generate core inflation under these conditions.


“As always, should you or any of your Fed Board of Governors fail in your mission to create core inflation of 2%, the Treasury Secretary will disavow any knowledge of your actions. This tape will self-destruct in 5 seconds.”


Undone: US Homeownership Falls To 50 Year Low (Despite Mortgage Purchase Apps Up 25 Percent YoY)

The U.S. Census Bureau recently released the U.S. homeownership rate figure. It has fallen to 63.4%, a 50 year low.


Mortgage purchase applications are up 25% YoY (orange line) even as the homeownership rate continues to decline. And homeownership continues to decline despite a Fed Funds Target rate of 0.25% (which likely will be raised soon).


A new 50 year low signals that US housing policy for homeownership has become undone.

Fannie Mae’s HomeReady Affordable Mortgage – Will It Be A Success?

Fannie Mae has announced their new affordable mortgage product called the HomeReady Mortgage.

Under the new guidelines, borrowers will have to complete an online education course which will prepare them for the home buying process and for sustaining their home after purchase. Additionally, income from a non-borrower household member can be used to decide the debt-to-income ratio for the loan, a development which will help multi-generational and extended households obtain affordable mortgages.

Further innovations are that income from non-occupant borrowers will be allowed to increase a borrower’s qualifying income, and first-time and repeat homebuyers can use HomeReady to buy a home with a down payment as low as 3 percent.

Who qualifies for a HomeReady Mortgage? HomeReady will be available to borrowers at any income level for properties in designated low-income census tracts, and to borrowers at or below 100% of area median income (AMI) for properties in high-minority census tracts or designated natural disaster areas. For properties in remaining census tracts, HomeReady borrowers must have an income at or below 80% of AMI. Approximately half of census tracts will be subject to the 100% AMI limit or have no income limit.

But will HomeReady be a success?

According to Zillow, mortgage availability is approaching the pre-housing bubble level (2003).


The problem is not the supply of credit, it is the lack of demand. Since 2007, real median household income and average wage growth have dropped. And the regulation of the mortgage market has made certain types of mortgage more difficult to obtain. Mortgage purchase applications, while up this year, remain at 2013 levels.


Homeownership keeps declining despite The Fed’s zero interest rate policy.


So, it is really a lack of demand problem rather than a mortgage availability.

Fannie’s HomeReady mortgage product may be a success, if enough borrowers show up to lenders. Even with someone else helping to make the mortgage payment, there may still be insufficient interest. But Fannie has lowered the hurdles for potential borrowers.

Near zero deposit rates and lackluster mortgage demand is a recipe for …

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Single Family Mortgage Growth FINALLY In Positive Territory As Fed Contemplates A Rate Hike

The Federal Reserve hasn’t raised its Fed Funds target rate since the latter half of 2006. Even with near zero Fed Funds effective rates, US 1-4 family mortgages outstanding (red line) have only just turned positive in YoY growth.


Here is a chart of 1-4 family mortgages outstanding and The Fed Funds Effective Rate. Zero rate policies haven’t really helped the 1-4 family residential mortgage market (partly because a number of the mortgage products during the last decade have been curtailed such as pay option ARMs and NINJA (no income, no job) loans.


Even bank credit in general is still growing more slowly than during the last decade. The slow growth is a combination of increased regulation of the banking system (Dodd-Frank, Consumer Financial Protection Bureau) and lower household incomes (and slower wage growth).


The slower growth of bank credit in this decade (coupled with lower household income and tighter consumer lending regulation) has resulted in historically low levels of the M1 Money Multiplier and M2 Money Velocity.


Will The Fed raise the Fed Funds target in September? Vice Chair Stanley Fischer stated in Jackson Hole Wyoming that The Fed shouldn’t wait for the economy to hit 2% inflation.

Great. Now that 1-4 family mortgages outstanding growth has FINALLY become positive, The Fed wants to raise rates.

It is indeed a wild ride!


Simply Unaffordable: Renting In The USA Is The Most Expensive In History (San Francisco Leads Nation)

Living in the USA has never been less affordable, according to Zillow.

Americans living in rentals spent almost a third of their incomes on housing in the second quarter, the highest share in recent history.

Rental affordability has steadily worsened, according to a new report from Zillow, which tracked data going back to 1979. A renter making the median income in the U.S. spent 30.2 percent of her income on a median-priced apartment in the second quarter, compared with 29.5 percent a year earlier. The long-term average, from 1985 to 1999, was 24.4 percent.

Rental affordability worsened from a year earlier in 28 of the 35 largest metropolitan areas covered by Zillow. Rents were least affordable in Los Angeles, where residents devoted 49 percent of monthly income to rent. The share in San Francisco was 47 percent, 45 percent in Miami, and 41 percent in the New York metro area.


This is not that surprising when you consider that the CPI Urban Consumers Owners Equivalent Rent of Residences is growing at a slower pace YoY than average wage growth.


And homeownership rates keep on falling.


Effective rent growth has been climbing but is expected to decline in 2016.


San Francisco leads the nation in effective rent growth for 2015 with Oakland, Seattle and New York following closely.


Simply unaffordable.


Uh-oh! Mortgage Purchase Applications UP 20 Percent YoY While Homeownership Rate Declines 2 Percent

The Mortgage Bankers Association released their weekly survey of mortgage applications.

The good news? Mortgage purchase applications are UP 20% YoY!


The bad news? Homeownership rates dropped from Q2 2014 to Q2 2015 by 2%.


In fact, the homeownership rate looks in a free fall.

Another bit of good news is that mortgage refinancings rose with the recent decrease in mortgage rates.


When I see homeownership rates rising again, I’ll feel a whole lot better.


Ellie Mae: Loan Closing Average FICO 727 (Or Is It ELE Mae?), DTI For Denied Loans At 28/47!

Ellie Mae has released the summary of loans closed and loans denied for the most recent month. The report reveals that the average FICO score on closed loans in June was 727. The average LTV was 81% and the average Debt-to-income (DTI) was 24/38.


What about denied loans? They average a FICO score of 672 and a DTI of 28/47.

47???? Yes, that means excessive debt load is a problem for potential borrowers.

Not to mention lower average wage growth.


If wage growth doesn’t improve, Ellie Mae may have to change their name to ELE-Mae. As in Extinction Level Event.