Janet In Blunderland: Bubble State Home Prices Rising While Income Declines (Juiced!)

One measure of the effectiveness of Fed interest rate policy is the disparity it creates in terms of home prices relative to median family income.

As a reminder, The Federal Reserve started lowering their Fed Funds target rate in September 2007, then followed with asset purchases in late 2008 (known as quantitative easing or QE). The third round of QE was announced in September 2012 under Chairman Ben Bernanke.


Janet Yellen, the current Federal Reserve Chair, continued her predecessor’s policies.

To what end for American families?

Here are charts for several bubble state cities showing rising home prices since 2012 and declines in median family incomes.

San Francisco:

sfhpinc (1)

Los Angeles:

lawoman (1)


miamibubbl (1)



Las Vegas:


While not a bubble state or city, Detroit has a similar chart.


The common theme among these bubble state cities is the rise in home prices along with declining median family incomes.

I hope that The Fed in the future considers the damaging distortions in markets that it creates through its policies.


Wells Fargo to Raise Minimum Credit Scores on FHA Loans (As CFPB Director Cordray Takes Credit For Success)

O-ho the Wells Fargo Wagon isn’t a-comin’ down the street, Oh please let it be for me! (not if your FICO score is too low!)

According to American Banker’s Kate Berry,

Wells Fargo is raising minimum credit score requirements on Federal Housing Administration loans, part of the ongoing jockeying by large banks to limit lawsuits by the Justice Department for defective FHA loans.

John Shrewsberry, Wells Fargo’s CFO, said Wednesday that the San Francisco bank will not make loans to FHA borrowers with low credit scores because of their higher rates of default.

“We will be adding back the credit overlays so we make fewer loans that are close to [the FHA’s] most accommodative end of the credit spectrum,” Shrewsberry said at the Barclays Global Financial Services Conference in New York. “Those are the loans that are going to default and those are the defaults loans that we’re going to be arguing about 10 years from now and we’re not going to do that again.”

Actually, I testified in the House or Senate that I was surprised that banks were still originating mortgage loans since you get raked over the coals … if the borrower isn’t clothed in AAA-armor coated with gold. And the mortgage isn’t something that is disdained by regulators, like the CFPB.

Richard Cordray, Director of the CFPB, is taking credit for the success of the housing market.

This is success? Lowest new home sales (adjusted by population) and crashing homeownership rates?



Perhaps Cordray can record “76,000 regulations.”

Is restricting mortgage designs and the supply of credit the same as “success?”

China Syndrome: Are Negative Interest Rates Coming To The USA?

Once again, Janet Yellen and the Federal Reserve Open Market Committee (FOMC) failed to raise The Fed Funds Target rate. I wasn’t expecting them to raise The Fed Funds Target rate, so there was nothing shocking about Yellen’s speech.

Other than the words “negative interest rates” were uttered.

Let me be clear that negative interest rates was not something that we considered very seriously at all today. It was not one of our main policy options.

Ah, but negative interest rates are already in Europe.

The Central Banks of Switzerland and Sweden have already gone there and the Euro OverNight rate is negative as well.


For sovereign debt, Switzerland, Sweden, Netherlands, Germany and France have negative 2 year sovereign yields.


And The Fed’s “Connect The Dots!” study revealed some chance of negative rates.

FOMC negative

Yellen recognized that the economic (and financial) turbulence in the global economy (like China) are making The Fed nervous about raising rates.

Gee, negative interest rates certainly worked well for Europe!

Whip It, Janet! Producer Price Index Final Demand YoY Falls 0.8 Percent (Fed Can’t Generate Inflation)

The Federal Reserve is having trouble getting to their target inflation rate of 2%.

Today’s Producer Price Index (PPI) final demand was released. On a YoY basis, PPI Final Demand fell 0.8%.


This chart is consistent with the failure of The Federal Reserve to generate core inflation. The target rate is 21%, but core inflation is only growing at 1.235%.


The M1 Money Multiplier has remained below 1.0 since The Fed’s intervention in 2008.


M2 Money Velocity, average wage growth YoY and real median household income have been falling since The Fed’s massive intervention in 2008.


Now Janet Yellen and The Federal Reserve Open Market Committee (FOMC) must decide if they should raise rates.

Whip it, Janet! Whip it good!


Fed Policies And Mortgage Rates: What Will Happen Next? (Mortgage Rates WILL Rise)

The Federal Reserve undertook two types of stimulus since August 31, 2007. The first was a lowering of The Fed Funds target rate of interest.


Well, lowering the Fed Funds target rate to near zero by December 2008 didn’t do the trick of stimulating the economy, so The Fed launched their second wave of stimulus known as Quantitative Easing (QE). Essentially, The Fed decided to purchase Treasury bonds (and Agency Mortgage-backed securitie (MBS) to help drive down interest rates.

Below are three different yield curves. One of June 29, 2007 BEFORE The Fed started lowering The Fed Funds Target rate. The second one is for late November 2008 when The Fed announced QE1. The third yield curve is today’s yield curve.


Notice how flat the yield curve was on June 29, 2007. The Fed helped steepen the yield curve by lowering The Fed Funds Target rate. You can see the steepness of the curve as of November 25,2008 with the near zero rates at the short end. Today’s yield curve is about 100 basis points lower at the 10 year.

The spread between the 30 year fixed-rate mortgage and the 10 year Treasury yield is about 164 basis points (or 1.64%).


An increase in The Fed Funds Target rate will raise the short end of the yield curve. The mid and long sections of the yield curve may not be impacted, unless The Fed decides to terminate QE and start selling their bond and MBS holdings. But according to the expectations hypothesis of the term structure, a rise in the Fed Funds target rate should cause the rest of the yield curve to rise, including the 10 year yield.


Of course, the 10 year Treasury 10 is also impacted by economic expectations, both domestic and foreign. Worsening conditions in China and Europe can push the 10 year Treasury yield down … again and mortgage rates as well.

Pension funds and investors holding Treasuries and agency MBS are not looking forward to interest rate increases. The red boxes show the decline in MBS prices with local increases in the 10 year Treasury yield.


While The Fed may hold steady on a September rate increase, there is a good chance that there will be a December rate increase.

Perhaps Janet Yellen will announce a rate increase with the help of a dummy to deflect any attacks if the yield curve rises and markets tank.


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.