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Wednesday, April 29, 2015

Fed Makes Renters Pay America's Bills...And POTUS Approves?!?

To save the "free world" in 2008 (and since) from economic ruin, the Federal Reserve collapsed interest rates by maintaining a ZIRP (zero interest rate policy) and it's QE ("quantitative easing", buying Treasury and MBS bonds to artificially create demand and artificially lower yields).  As can be seen in the chart below, an "interesting" outcome of that policy has been the surge in rental income.

As the chart below shows, the surge in rental income since '07 is unprecedented and also likely entirely responsible for saving the housing market valuations from continuing to slide downward.  Just a reminder that banks largest asset is real estate and continued underwater homeowners were dragging on banks, particularly the largest which not so coincidentally are the owners of the private Federal Reserve.

So, as the chart below highlights, rental income in the US remained fairly low compared to rising incomes from 1965 'til 2007.

However, the chart below shows the rise of rental income (and rent in general) has likely singlehandedly eaten up all gross income gains since '07.  The reason I say this is net rental income is up to nearly a half trillion meaning gross rental income is far higher.  Combine this with the data in  the chart is solely representing "individual" rental income...not including corporations, LLC's, sole proprietorships, partnerships all holding rental properties.  Rental income from all these are reported separately under corporate profits.

So, focus on the relationship of rental income vs. total gross wage / salary growth...the chart below helps explain why renters likely feel poor, GDP continues to struggle, and landlords feel no pain.  The Fed's policies are causing renters to pay record high rents, landlords to collect record profits, push housing prices, and ensuring renters cannot become 1st time buyers as they can neither save for a purchase or afford spiral home prices.

As an aside...The Fed Chairmen of Ben Bernanke and Janet Yellen supposedly serve at the discretion of the POTUS...and yet their policies disproportionally economically harmed the current administrations political base to the benefit of the other parties supporters.  This is a curious twist to say the least.

I entirely understand why  democratic supporters are loathe to support republican candidates as they have by and large been entirely awful since...well, for a long time.  Still, the fact that democratic supporters are still enthusiastically supporting an administration that is actively economically destroying their lives is astounding.  Some simple facts to this effect...
  1. Wage gains and asset appreciation are going almost entirely to the top 20% and in particular the top 5% of America's citizens.  http://econimica.blogspot.com/2015/02/fundamentally-flawed-chapter-36-wagesqe.html
  2. The rate of Corporate taxation is at 50yr lows while corporate profits at record highs...and yet corporations have created no net jobs since '00.  http://econimica.blogspot.com/2015/02/fundamentally-flawed-chapter-35-taxes.html
  3. Unemployment #'s are a farce and there are fewer full time jobs today than in 2007 despite the growth of US population by about 18 million over that timespan.  All job gains since '07 are part time jobs absent wages or benefits.  http://econimica.blogspot.com/2015/04/employment-train-wreck-economy-that.html  and http://econimica.blogspot.com/2015/04/an-update-on-ongoing-us-job.html
  4. As noted above - Rental income is at record highs outstripping all income gains since '07...to the benefit of rental property investors and the harm of America's most vulnerable.
The current administrations policies are so harmful to it's base that it's astounding there aren't far more American cities burning than Baltimore.  Maybe American's simply see no credible alternative to the proven failure presently serving the other parties elitists at the expense of the average Americans supposedly represented by his policies.
 

8 comments:

  1. Not including corporations, LLCs, and sole proprietorships when discussing landlords is like trying to determine the state of the economy by looking at profitability of kid lemonade stands. All your data is examining is single family or single condo owners. Anyone with a multi-unit property is using an LLC, and given the proliferation of 100+ unit complexes in major metro areas, I can't see how these conclusions apply to the broader rental market. The majority of people are renting from businesses, not single owners. Especially since a significant portion of the single owners may still be underwater, I doubt they are highly profitable. I own two rentals in suburbs of DC and Chicago, both bought pre-2004 with homeowner financing. They are only now approaching equity and cashflow break even...

    That said, I suspect your conclusions are generally in line, and if anything, the reality is likely much worse, given the strong performance of REITs...

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    1. Thanks for your thoughts and taking time to read.

      You are right and I acknowledge two shortcomings of my data. 1, as noted, it does not include corporations, and 2, this is net rental data and not gross. But the point is the individual owners have seen in excess of a tripling of net income since '07 in line with 50% of all US wage / salary income increases over the same period.

      So, if we extrapolate for all the corporations and LLC's rental income (almost surely seeing the same surge) and imagine what the gross rent is for all rental owners (both individuals and corporations)...it seems rents are growing well in excess of all wage gains and well in excess of what is "normal" or historically viable. Likewise, didn't get into this but rents as a % of income are moving into unchartered territory. Implications are that renters are being sucked dry with all sorts of negative economic and inequality ramifications.

      Chris

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    2. As rents increase, and rental incomes increase, income capitalization approaches to vale increase the value, which increases your property taxes... Never ending cycle. ....because then they have to raise rents again to cover the taxes.

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    4. Read this from Wolf Richter and thought of your comments...Wolf shows clearly that it's the small investors moving to the fore now and big money to the backseat....good article @ the link

      http://wolfstreet.com/2015/05/01/housing-bubble-2-investor-purchases-hit-record-small-investors-pile-in-as-smart-money-gets-out/

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  2. Just got a letter from my Landlord two days ago. Rent on my apartment is going up 5.7%. They say that the reason is mainly due to increased property taxes. So once again it is the poor paying the taxes, as the "rich" landlord just passes the bill onto the poor tenants. As you see, "Taxing the rich" doesn't work...the rich don't pay taxes anyway, the poor always end up paying them all. Another thing, my rent has been going up 5-7% every year while at bthe same time, the company I work for only increases wages in accordance with what CPI does which is at 1.5% this year.

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  3. This also is dependent on the local market. I find the best way to gage it is to look at the military housing allowance to get a feel for the local market. Of course Congress has been messing with military pay lately.

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