Monday, September 19, 2016

America's Cities Busting At The Seams...Rural Interior Depopulating...Now What?

What is the most overvalued asset in America?  The asset for which there is no bid and no buyer but many sellers.  In urban locations like San Francisco, New York, Portland, or many other locations where prices have soared...the number of potential buyers is also growing.  If the price falls adequately, there will be buyers.

However, in rural America prices have been unnaturally maintained while populations have ceased growing. 

America's population growth is primarily among the...
  • South / West
  • Urban
  • Elderly
  • Immigration

1- US Population growth among South and West...Population longevity in NE and MW

Since 2000, South / West has grown by 17% (33.2m) while the NE / MW has grown by 5% (6m).
2- Rural vs. Urban
America's "rural" population ceased growing about 1940 (growing by only 2 million from 1940 through the 2010 Census).  Meanwhile, America's urban centers have seen almost 99% of the US population growth since the advent of WWII (+174 million from '40-->'10).

3- Young vs. Elderly
Since the advent of mass urbanization coming out of WWII, birth rates have collapsed.   Below, total births peak in 1957 and have been decelerating since.  And now, a further birth dearth is coming as Millennials in America (& urban settings worldwide) are simply not reproducing at a rate anywhere near sufficient to replace themselves.

Below, the population of American young (under 15yr/olds) surged coming out of WWII and peaked in 1965 but then essentially never again only 2 million more young Americans than in 1965.
And below, nearly all American population growth since 1965 came from the old living decades longer than previous generations (+120 million 15+ yr/olds)...not from increasing births or a growing young population.

So, America's stagnant young adult population have almost entirely moved to cities where they have continually reproduced at lower rates.  And since 2010, from all accounts, this trend has significantly accelerated as the young adults are chasing the limited jobs that are primarily in the cities...but not marrying nor reproducing.

4- Immigration
The total population of illegal immigrants in America peaked in 2007 and has been declining since while the annual flow of legal immigrants peaked in 2006 and has been decelerating since, based on estimates from the Pew Research Center and US Dept. of Homeland Security (outlined HERE).

Since at least 1981, during each recession there was a slowdown in the growth (or even outright downturn) in the illegal population within the US.  However, in each recovery following the recession, there was an upturn as plentiful jobs and relatively high wages that tempted foreigners to come to the US illegally.  However, like so many indicators since the official end of the recession, this time is different.
  • In the seven years since the 2007 peak, the illegal population has declined by a half million or about a 4% decline in the illegal population in the US.  This action is more typically associated with recession than a recovery now seven years old.
  • Despite BLS claims of full employment and labor shortages, potential illegals are not seeing the opportunity (at least not on a net basis) and voting with their feet as they leave.
  • Also noteworthy is if illegals are, on a net basis, leaving...why would the US go to the trouble of building a wall?  Is it to keep them out or keep them in?
The chart below shows total illegal population (blue line) and recessions (pink columns).  Note the lack of growth among illegals since '07 vs. previous recoveries.

The chart below details the total immigration (legal + illegal) into the US over like seven year periods back to 1971.  The 2008-->14 period was the slowest net growth since 1978-->84.

Below, a breakdown (by period) of the growth in US legal vs. illegal immigrants back to 1985.  Note the net outflow of illegal immigrants since '07 is unlike any previous period.
US home prices have rebounded and now sit just 3% below the 2007 record valuations (chart below).

US Housing Valuation Index

Role of Interest Rate Cuts on Housing Prices
How is it house prices have gone up so much anyways?  You can thank the Federal Reserve for that.  The Federal Reserve has been cutting the FFR (Federal Funds Rate) since 1981.  The 30yr mortgage (roughly linked to the 10yr Treasury yield + fees) has been falling with each cut to the FFR along the way (chart below).  If your curious why rates rose so much and have fallen so long, so low, and will likely only keep falling (
Since the 1981 peak, the Federal Reserve has lowered the Federal Funds Rate by 97% and the 30yr mortgage has followed, declining by 81% over the same time period (chart below).

This means that to borrow $100,000 in 1981, it cost $1426/mo (principal & interest) at the then 17% 30yr fixed mortgage rate.  As rate cuts were deemed appropriate by the Fed, the cost of credit continually fell.  The same $100 k loan only cost $699/mo by 2000, is only $443/mo now (chart below)...and assuming the 10yr hits 0% by 2018 (not a stretch as many other major 10yr bonds are presently sporting negative yields), the cost of a $100k could be as low as $370/mo.  (This assumes money is free but banks still get their approx. 2%).

But American's didn't take out smaller loans.  Instead, the same monthly payment was necessary to keep up with fast rising home prices (rising because of the declining interest rates).  With the same $1426/mo loan, the homeowner now controls over 3x's the debt with the same interest payment.  And homeowners will control 4x's the debt once the 30yr mortgage hits 2%...and that will be necessary because the house price will likely have gone up 5x's thanks to decreasing necessary down-payments and the like means to put homeowners into ever more debt for the same house.

However, if the Federal Reserve is sincere in it's proclamations that it has begun a rate hike cycle, the implication for housing as interest rates home prices will decidedly fall as a greater proportion of the monthly payment must go to interest service rather than principal repayment.  Systemic implications abound if the Fed were to be believed regarding rate hikes, especially considering the following trends...

Supply of New Housing vs. Demographics & Full Time Job growth
Some historical context...the demographic outflow of boomers and decelerating inflow of 15-64yr/old replacements is entirely unlike any previous period in the US.  Add in the deceleration of net new full time job creation (by both quantity and quality of full time  jobs) and this wouldn't seem to add up to higher home prices but many things aren't what they seem nowadays. 


  • 13 million new homes were added
  • 29 million increase in the 15-64yr/old population
  • 24 million net new Full Time jobs
  • 01-->16
  • 13 million new homes were added
  • 22 million increase in the 15-64yr/old population
  • 9 million net new Full Time jobs
  • 16-->30
  • ? million new homes were added***
  • 5 million increase in the 15-64yr/old population (includes anticipated immigration)
  • ? million net new Full Time jobs

  • ***If less than 13 million new homes are added over the '16-->'30 period, GDP (flawed as it is) will take a big hit without all the secondary and tertiary housing induced activity.  If 13 million or more are built...there don't seem to be adequate buyers and what will the impact of significant excess housing units be on the overall housing market?

    Over the next presidents term, there will be 3.5 million more 25-64yr/olds (potential buyers) vs. 14 million more 65+yr/olds (potential sellers).  This is a situation that has never taken place before in America with such an imbalance of potential sellers vs. potential buyers.  The 65+yr/olds will be net sellers downsizing moving to condo's, townhomes, or even moving to managed care.   Plus, upon their passing, the homes will generally either be sold or passed to their 25-64yr/old heirs (whom will more often than not sell the properties).

    Since 2000, the 25-54yr/old population has grown by 5 million persons, but full time employment among this group has shrunk by a half million.  On the flip side, the 55+yr/old population has grown by 31 million over the same time span but the real kicker is all the net new full time jobs went to the 55+yr/olds.  So, this cohort that will be moving into retirement has continued working in an attempt to bridge shortfalls in retirement savings and avoid paying health care costs until Medicare and Medicaid kick in.  Some of the depressed wage gains are likely due to 55+ boomers willing to work for less particularly to keep their benefits.  But this has left much of the 25-54yr/old population without means or savings to become future potential buyers.

    Alas, you need to live somewhere and if you don't will likely need to pay rent.  And renters are getting creamed (chart below).  While the national housing index is still 3% below the '07 "bubble" peak, the rental index is 27% higher than the then record rents of 2007 (no talk of a "rent bubble"?).

    Of course, fast rising rents absent rising real incomes means rent is taking a record portion of renters income.  And this means that renters are generally too busy paying their rents to think about becoming first time home buyers...taking away another group of potential buyers.   But at least homeowners have tax advantages (so long as they have income to shelter) writing off their mortgage interest.  However, if you have little taxable income then that mortgage interest tax deductibility means little to you.

    Rural America Real Estate Collapse Delayed
    For rural areas, this means a massive drain of high school and college grads leaving rural America and moving to the cities in search of employment and opportunity.  As a result, the rural population is far older and aging far more rapidly than the urban centers.  The vast bulk of America's landscape, the rural interior is depopulating (a trend set to rapidly accelerate with the boomers).  Rural real estate has massive quantities of aging sellers and few and far between buyers.  When one thinks of a place with deflationary depopulation...ZIRP and record low mortgage rates have been the only savior for rural American real estate prices (and the banks holding this mortgage debt) from cratering (so far).

    Bubbles for Urban America
    As for urban areas, they are growing rapidly from "young adult rural refugees" relocating.  Rural areas are strained to build out the infrastructure to handle the growth.  ZIRP and record low mortgage rates are entirely inappropriate given the large quantities relocating to the cities...and the combination of rising population, record low rates, and limiting factors to supply (commute times, urban growth boundaries, etc.) are creating massive bubbles and record rental prices.  However, as noted below, these urbanites are choosing not to reproduce at accelerating there is essentially no economic virtuous cycle and the collapse in birth rates among US Millennials (chart below) is mirroring the falls seen in Japan, Germany, etc.
    Eventually, this 3+ decades of declining rates since 1981 will destroy what is left of America and the bubbles in bonds, equities, and real estate will all deflate simultaneously.  The Fed's parlor trick reducing Federal Funds Rate by 97% resulting in an 80%+ drop in mortgage rates is nearly played out.
    Absent some very large change, births will fall even faster and the downward spiral of deflation, depression, and depopulation is about to really begin picking up speed.
    • '90 PDX Total Population = 1.4m
      • +628k Pop. --> +306k Emp. (49%)
    • '90 Rest of OR Total Population = 1.6m
      • +491k Pop.--> +169k Emp. (34%)
    • '08 PDX Total Population = 2.2m
      • +219k Pop. --> +68k Emp. (31%)
    • '08 Rest of OR Total Population = 2.3m
      • +131k Pop. --> <-20>k Emp.  <-15%>