Fallacy of Wage Growth and a Housing "Shortage" in Pictures

Mish

The WSJ says there is a "historic shortage of homes". That's nonsense, but sales are depressed. Why? Real wages explain.

The Wall Street Journal claims there is a Historic Shortage of New Homes.

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Housing Crisis?

Supposedly that picture constitutes "The Next Housing Crisis".

Why? Is everyone entitled to a home?

The Journal interviewed one builder who was burnt in the Great Financial Crisis. When the market crashed, he was stuck sitting on inventory. He learned his lesson and will no longer build on spec.

That seems like a smart move to me.

"Nationwide, membership in the National Association of Home Builders peaked at 240,000 in 2007, then dropped to 140,000 in 2012, where it has remained throughout the recovery."

So what? I fail to see a crisis, at least the one the WSJ is moaning about.

Median Home Prices

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It seems to me we have an affordability issue, not a housing issue.

Those who want a home and can afford a home likely already have a home. Let's look at the wage side of things.

Real Hourly Wages Production and Nonsupervisory Workers

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Real Hourly Wages All Workers

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​Take your pick. Real wages have not kept up with housing prices. Note that those are "average" real wages.

Salary increases at the high end bump up the averages. The median worker, seeking a median-priced home is much worse off.

​The following charts are from the Occupational Employment Statistics (OES) data downloads with additional CPI data from the BLS.

Data for these charts are from May 2005 through May 2016. Those are not arbitrary dates.

The latest OES data is from May of 2016 and prior to May of 2005, the OES used varying months. Having all yearly data from May allows easy comparison of wages vs. year-over-year CPI measurements.

National Hourly Wages

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Wage Differentials Mean vs. Median Hourly Wages by State

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Every month, analysts track the monthly jobs report for “average” wage increases. Such analysis is misleading because most of the benefits go to the top tier groups.

This behavior is not unexpected, but it makes it very difficult for the bottom half of wage earners, who do not own a house, to buy a house.

Who Can Afford a Home?

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The median wage rose from $14.15 in 2005 to $17.81 in 2016, a percentage increase of 25.9%.

The median new home price rose from $228,300 in 2005 to $335,400 in 2016, a percentage increase of 46.9%.

Rising Tide Lifts All Boats?

Some claim that a rising tide lifts all boats but, the median wage earner is falling further and further behind. This contributes to asset price chasing and “better buy now” philosophies as happened in the housing bubble years.

Inflation-adjusted charts show the situation is even worse.

“Real” Year-Over-Year Percentage Increases

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The chart shows “real” inflation-adjusted median wages declined in 2007, 2009, 2011, 2012, 2013, 2014, and 2015.

Mean inflation-adjusted wages declined “only” in 2007, 2009, 2011, 2012, and 2013.

Disturbing Results

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Congratulations to the top ten percent whose real wages rose 8 times in 11 years. At the 75th percentile level, the score is 6-5.

It’s simply too bad for the median and bottom twenty-five percent whose real wages fell seven times in 11 years.

Don’t Blame Corporations

Many blame “greedy” corporations for wage stagnation.

Corporations have a responsibility to do what is best for shareholders, not employees. Sometimes those interests align and sometimes they don’t.

Don’t Blame Minimum Wage Laws

Minimum wages are also not the problem.

There is no reason to expect minimum wages to keep up with home prices. Home prices are not even in the CPI.

The Fed ignored rising home prices from 2003-2006, and they did it again recently. Central banks fail to learn from past mistakes.

Asset prices are in another massive bubble with plenty of blame to share.

Blame the Fed, Congress, Nixon

  1. Blame Nixon for closing the gold window in 1972; that allowed Congressional deficit spending at will.
  2. Blame the Fed for insisting on 2% inflation in a technological price-deflationary world.
  3. Blame Congress for massive fiscal deficits every year.
  4. Blame fractional reserve lending for being the enabler of trillions of dollars worth of mortgage and other loans, constituting money borrowed into existence chasing rising asset prices.
  5. Blame the media and academics for parroting the ridiculous notion that there is a benefit to rising prices. In the real world, standards of living improve when goods are cheaper.

Price Deflation Not a Problem

The Fed desperately seeks more inflation, but a BIS Study on the Historical Costs of Deflation shows routine price deflation is not a problem.

According to the BIS, “Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive.”

Counterproductive Fed Policy

The Fed’s policies are extremely counterproductive. To produce 2% inflation in a price-deflationary world, the Fed helped inflate asset prices to the extremes seen in 2007, 2000, and 1929.

Another Fed-induced asset-price bust is baked in the economic cake.

Meanwhile, a debate is taking place why economic growth is so low.

Secular Stagnation Thesis

In 2014 economist Larry Summers proposed Secular Stagnation is what ails the economy. Summers proposed “It may be very difficult for investment to absorb all saving.

In 2017, Summers doubled down on his secular stagnation thesis. He blames austerity for the lack of inflation. His purported cure is more public investment.

Savings Glut Thesis

In 2005, former Fed chairman Ben Bernanke proposed economic growth was slow because of a Savings Glut.

Bernanke defines the glut as an imbalance between savings in China and consumption in the US.

Quick Rebuttal of Bernanke, Summers

To Larry Summers, I suggest that deficit spending is out of control globally. If more public spending was the answer, Japan would be the shining beacon of global excellence.

To Ben Bernanke I say, "Let’s not confuse “savings” with monetary printing. In the classic sense, savings = production minus consumption."

The bulk of what’s been “produced” is dollars out of thin air, yuan out of thin air, euros out of thin air, and yen out of thin air.

In their analysis of “savings” both Summers and Bernanke ignore the massive buildup of debt that has occurred.

To the extent there is an imbalance between the wealthy and not wealthy, Fed policy exacerbated the problem.

History Lesson

The Fed bailed out the banks in 2000. At that time banks were troubled by soured dotcom bubble loans and loans to foreign countries like Argentina.

The result was a housing bubble, as Greenspan kept interest rates too low, too long.

In 2009, the Fed bailed out the banks when the housing bubble burst.

Since then, the Fed’s inflationary policies benefited the asset holders, the banks, and the top 10% of wage earners at the expense of everyone else.

Current Account Balance

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Credit Explosion

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Here is an excellent article on President Nixon: The Man Who Sold the World Fiat Money.

Prior to Nixon's closing the gold window, countries could not run massive fiscal deficits for years on end without hiking interest rates.

Summers believes we need still more public spending stimulus. Japan provides convincing evidence that Summers’ thesis is false.

Discussion Needed

The Fed’s inflation policies are contrary to BIS findings, contrary to common sense, and contrary to the real-life results of median-wage earners falling further and further behind.

Please, let’s have a genuine discussion regarding the Fed’s inflation policies.

That discussion needs to incorporate ideas outside the Fed’s “group-think” box of more inflation, secular stagnation, and savings glut theories, all of which are easily proven wrong.

Discussion Rejected

I sent a portion of this article to the Wall Street Journal as an Op-Ed submission. It was rejected via a robot or a non-thinking person imitating a robot.

I know this because I sent in an inquiry to Editorial Features Editor, James Taranto, asking to speak with him about the rejection, and guess what.

My short Email request to speak to Taranto, not a submission, received the identical rejection notice. Thank you WSJ!

My submission title was "Fed’s Inflation Policy Destroys the Median Wage Earner".

Mainstream media does not want to discuss what's happening and why. They already "know". Nearly everyone but the Austrians believes "secular stagnation" is caused by "savings gluts".

Besides, criticisms of the Fed, Larry Summers, or Ben Bernanke would ruffle too many feathers to be published.

Housing Shortage?

There is no housing shortage.

However, there is a severe shortage of common sense at the Fed, central banks in general.

In search of "inflation" without even understanding what it is, the Fed blew another asset bubble that it cannot see.

That's the crisis.

Mike “Mish” Shedlock ​

Comments (30)
No. 1-30
killben
killben

When this one bursts what happens? QE4EVER, ZIRP and NIRP?

The story of another decade of creating another asset bubble begins with the Fed in charge. Looks like we are in for an endless cycles of bubble and crash led by the Pied Piper Fed.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

The Fed blows bubbles of increasing amplitude over time

Stuki
Stuki

“Why? Is everyone entitled to a home?”

No, but everyone is entitled to no artificial restrictions put in place on obtaining one. At least in anything even remotely pretending to be a free society.

As in all free or semifree markets, the result is that virtually everyone can afford one. Then two, then three….. Then they start throwing them away on landfills, once they are no longer the latest and greatest.

That’s the end result of how freedom always works. It enables people to obtain those things that are desirable. In greater and greater quantities. In exchange for less and less effort and work.

The only reason the above does not hold true for housing; like education, health care and government; is specifically that wrt housing, there is NO, zero freedom. Probably less than in North Korea. Otherwise, the price of an additional thousand square feet of house would, by definition, be no higher than the physical cost of building such a structure. Or of adding 1000 square feet to an existing one. Whichever is cheaper.

With the result, in the real world, being largely indifferent from everyone being entitled not just to one home, but to an ever increasing number of them. Some semblance of freedom, is kind of nice that way, compared to the alternative of a complete lack of any.

SweetKenny
SweetKenny

In Canada the phrase is “there’s not enough land” which for Canada is a hysterical statement. Prices are so idiotic that no one is selling unless they’re leaving a market to go to another cheaper market AND how can richer people “upgrade” when poorer people are too poor to enter the market?

FlyOver_Country
FlyOver_Country

What has skewed new home prices since 2008, and maybe even a couple years prior is that builders are constructing high end homes almost exclusively. As I have mentioned in prior posts, once the Great Recession started, homebuilders focused on the only customers that could be approved for new homes, the top 20% income earners. There is a shortage of affordable homes in most of the country. I do think the upper income markets are tapped out and builders will adjust accordingly.

FlyOver_Country
FlyOver_Country

In Central Ohio, affordable starter homes are in shortage. The two tell tale stats, the number of bidders per house and days-on-market. My wife sees multiple bids, sometimes up to 20 bids for first time buyer home and days on market are sometimes only hours. As for the high end homes, they might be on the market for months and rarely get into a biding war.

whirlaway
whirlaway

"I sent a portion of this article to the Wall Street Journal as an Op-Ed submission. It was rejected via a robot or a non-thinking person imitating a robot."

Hahaha. Robots do do a much better job of everything than humans, don't they?!

Cry me a river, Mish!

DFWRealEstate
DFWRealEstate

There is no shortage of homes for sale, only affordable homes for sale. This is a direct result of the response(s) to the last housing crash. The banking system, and all its glorious corruption, was bailed out in full at the expense of the American taxpayer. The Fed juiced asset prices every step of the way to cover up the previous mess, making an entirely new mess with even higher home prices that only top tier wage earners can afford. This is a feature not a bug. One of the biggest cons of the past century is the lie of "full employment" and "stable" prices.

pi314
pi314

I see a lot of speculations here. The truth is builders can't build the same starter homes for the same (real) costs anymore. Costs include land, labor, regulations. They can only make money building higher end houses.

hmk
hmk

Builders in the Detroit metro area can't make a profit on middle to lower end homes thus the shortage. Labor is tight wages are going up despite what the fake fed data shows. Lumber prices are the highest ever as a result of Trumps tariff on Canadian lumber. Again thank the Fed for the artificial suppression of interest rates.

JonSellers
JonSellers

So it seems we are missing something here. Is there a market for houses for middle-income people? If so, why isn't someone attempting to create a product for this market? If the Fed is the problem, how would charging a higher interest rate help middle-income people?

Mike Mish Shedlock
Mike Mish Shedlock

Editor

The Fed is the problem. Insistence on 2% inflation with decades of cheap money is the problem. Baling out banks when they get into trouble is the problem. Fed sponsored problems. Add in FRL and unsound money.

lvran
lvran

mish, but even if wages increased. all that would accomplish is for house prices is to increase even more i think. at least in my area (south florida) what we lack is the supply that will keep prices in check. unfortunately the local governments appear to have a vested interest in keeping supply low and the general public seems to be ok with that.

baldski
baldski

Inequality, wages down. Don't blame corporations. Don't blame minimum wage laws. Gee, Mish, who is left? How about Capitalism? That's who I blame after reading Thomas Picketty's book. Capitalism is the problem.

Advancingtime
Advancingtime

My frustration with America's housing policy boiled over when I read a piece about how roughly 80% of new apartment construction was for the high-end luxury market. The government holds huge responsibility for a rising share of our housing problems in low-income situations because its policies avoid dealing with the growing number of tenants that are irresponsible.
Government housing cherry-picks the best of the low-income renters providing them with very low rents and nice apartments and dumps the rest on the private sector. The following piece argues the best way to address or level the playing field would be to move away from public housing and give those needing housing aid "rent only vouchers" that could be used with any landlord rather than putting these people into a quasi-government ran project.
http://brucewilds.blogspot.com/2018/02/housing-policy-feeds-and-hides-growing.html

MntGoat
MntGoat

You should include a chart of housing starts and completions. They are definitely building FAR less housing then previous recoveries that you can see in these charts. Less building, yet continued population growth. Rents have been on a historic tear in many cities since 2010 (Seattle, Portland, SF Bay, San Diego, Denver, Boston, etc...). One problem in CA is NIMBY's and bureaucratic red tape making it difficult to add more supply of apartments, condos and SFR. Labor and materials are more expensive too. I do agree though that Fed induced low rates and QE help inflate house prices (and lower commercial cap rates) more then they would be if mortgage rates were closer to historic averages.

MntGoat
MntGoat

Also to be more precise, the supply issue is especially acute in anything that is affordable in apartments and homes. They have built a lot of high rent apartments in Seattle, Dallas, NYC, SF Bay, etc... But they build NO apartments that are considered affordable. Because they can't build affordable housing profitably. So it will be interesting what will eventually give. Lower income people keep having more and more of their paychecks go to rent then historically has been the case. Something has to give eventually.

MntGoat
MntGoat

These trends of stagnant wages but rising rents are a reason mobile home parks have been one of the best yielding investments in commercial real estate the last few years. MHP are the lowest cost housing units that can be found for tenants. Especially if the resident owns the MH and just pays the lot rent. Lot rents are $250-$400/mo generally. It is REALLY hard to develop new MHP's because NO CITIES want more MHP's! Talk about NIMBY's, no one wants a MHP in their backyard. Couple that inability to create more supply with trends of stagnant wages, skyrocketing rents on apartments, and you have a great investment with a BIG MOAT.

MntGoat
MntGoat

Something is going to eventually have to give in this country with stagnant wages and rising rents. There already is a lot of homelessness in CA, Portland and Seattle.

DannnyB
DannnyB

There is another huge area of blame,,, CRONY capitalism. Graham-Leachy killed Glass-Steagal. ALL your savings were available to the big banks with trading desks. They front-run EVERYTHING that you buy,,, with YOUR money. A Bbl. of oil is sold 25--40 times before it is consumed. 50% of the cost of everything that you buy is for finance.

Miggy
Miggy

No it is not Capitalism. Plus I am not reading any alternative. While Capitalism is not perfect no system is and utopia does not exist. Any alternative puts commerce in the hands of even fewer. The article clearly states it is monetary policy causing the inequality.

hmk
hmk

Free market capitalism is still the best path to prosperity. Unfortunately greed which is part of human nature will stop at nothing in its pursuit. This is where the rule of law and govt come into the equation. They are supposed to put gently handcuffs onto it so the playing field remains level. But the devil is in the details and corrupt crony capitalism seems to be whats winning now. We have the best government money can buy.

Stuki
Stuki

Seriously, people; it ain’t that hard. If people are allowed to build what housing they fancy, where they fancy building them, there’s plenty of housing. And plenty of well-paying jobs in the housing industry as well, as a side effect.

If you had “use” and “zoning” laws banning sale, use and construction of cell phones, except for perhaps some feelgood government aggrandizing program allowing the sale of rusted out dysfunctional ones at a few select spots at the bottom of the Mariana Trench, you’d have cell phone shortages as well. And very few well paying jobs in the cell phone business. Along with a bunch of self rightesous, economically illiterate halfwits, bending themselves over backwards to rationalize why such laws are “important” lest the scary Hobgoblins come; while preening around claiming to have been “smart” for “investing” in cell phones, and how the gommiment needs to pjotect the vaijue of their cell phone “investment.” Lest “The System collapses.” And the Hobgoblins starts driving “tanks in the streets.”

Housing is not even a microlick different. In free societies it is everywhere abundant by definition. In totalitarian dystopias, there are shortages. As are most things in such places. Weird, ain’t it, how restricting house building, leads to fewer houses being built. Monkey really needs to scratch his head over that one…

Mike Mish Shedlock
Mike Mish Shedlock

Editor

as is typically the case we agree on most things. This is another one.

Pater_Tenebrarum
Pater_Tenebrarum

I concur - you get the "got it in one" award again.

Pater_Tenebrarum
Pater_Tenebrarum

Pikkety is not only a truly atrocious economic theorist, even his data are incorrect - and the errors are not exactly negligible. Economics books that can teach you something worthwhile do actually exist - Pikkety's tome sure isn't one of them. http://www.acting-man.com/?p=30782

klausmkl
klausmkl

Face it, It is literally the law of the Jungle out there. Most folks are struggling. I struggle too, not about money though.


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