Morning Report – Rising Rents are pushing Millennials to buy 3/25/15

Markets are flat this morning on no major news. Bonds and MBS are flat as well.

Mortgage Applications rose 9.5% last week as purchases rose 4.9% and refis rose 12.3%. Refis were 60.5% of all applications last week.

Durable Goods orders fell 1.4% in February. Cap Goods Orders Non-Defense / Ex-air (a proxy for business capital investment) fell 1.4%, while January was revised downward from .6% to -.1%. Corporate America is not increasing capacity at all, and is not pursuing expansion opportunities.

What do companies with cash burning a hole in their pockets do when there are no great expansion opportunities out there? Buy each other. In a bit of a complicated deal, Heinz is buying Kraft. As oil stays down here, I expect to see some deals in the energy patch. The last time oil was this low (aside from the financial crisis days) we saw some huge deals:  Exxon buying Mobil, Conoco buying Philips, and BP buying Amoco.

Rents are rising so fast that they are forcing Millennials to buy houses. In fact, Millennials are now a bigger homebuying cohort than Generation X. Student loan debt remains the biggest hurdle, however. As the economy recovers, a lot of pent-up demand is going to be unleashed. We have gone from a glut of housing to an extreme shortage, which means the builders are going to have to bump up production. The economy is already reasonably strong with only 1.1 million housing starts. If we get back to normalcy (1.5 million), that will provide a big boost. Plus construction employs a lot of people.

11 Responses

  1. Taking the shortage of housing for pent up demand news of today’s edition coupled with the historically higher price to personal income ratio from yesterday’s edition makes me wonder if when new homes are finally on line rents will be significantly lower. I think rents are riding the same shortage in units as the owner market.

    Or are rental and homeowner markets sufficiently “segregated” that no prediction can be made?



    • Interesting article on new originalist theories of constitutional interpretation, and why they go astray.

      The conservative legal movement is in the midst of a great debate about its future. For decades, originalism—the theory that the original meaning of the Constitution is binding on today’s interpreters—has been the default theory of legal conservatism, and so it remains today. But the struggle within legal conservatism is about the very meaning of originalism, as novel theories have challenged longstanding beliefs about originalism’s core philosophical premises.

      Since its inception, originalism has insisted on obedience to the past in order to vindicate the sovereignty of the living. It has demanded that today’s majorities adhere to the original meaning of the Constitution, recognizing that this is essential if those majorities are to govern themselves. In this, originalism has stood against the all-too-understandable impulse to break free of past constraints and empower the present. It has spurned calls for a “living Constitution,” the meaning of which changes to reflect the values of society or of a chosen elite.

      The new trend in originalism abandons this heritage. It selfconsciously rejects the authority of the past and the duties rightfully imposed by our forebears, elevating instead the will of the present and the ideologies of its theorists. Having internalized the basic assumptions of living constitutionalism, it is but one step away from becoming what has always been considered originalism’s intellectual adversary.


  2. I think rents are riding the same shortage in units as the owner market.

    They are around here. I might be moving to the other side of town (closer to yellojkt, in fact) and it’s a bear finding decent rentals in a price range I’m willing to pay.

    Brent, it was suggested to me that monthly rent is generally 10% of what a house is worth–any idea if that’s in the right ballpark?


  3. @kevinwillis1

    You should know better than to get into a history argument with Aletheia!


  4. Mark, I would imagine that rents will at least stabilize instead of continuing to climb. Of course the Fed is on a mission to create inflation. Eventually they will succeed.

    Michi, not sure about the 10% number, but it sounds about right…Probably in the 8% – 10% range or so…


  5. Thanks, Brent!


    • ‘Goose – as Rosanne and I look for rental units to buy we seek units priced at less than 100 months rental.


    • jnc:

      Editorial in the WSJ today tangentially related to the “unapologetically long” article you posted the other day. It is the same topic (Fannie and Freddie being misled in its purchase of mortgage loans) but with regard to Nomura rather than Citi. It is unfortunately behind the firewall, but I thought these were notable points probably applicable to the Citi case as well:

      Life is good these days for regulators prosecuting big banks. Most banks surrender without a fight. And if a bank doesn’t settle, you don’t even have to provide witnesses from the alleged victims of bank behavior.

      At least that’s the story in the federal government lawsuit against the U.S. unit of Japanese bank Nomura now running in federal court in New York. The government claims that Fannie Mae and Freddie Mac were misled by giant banks into buying bundles of shoddy mortgages. But even though Fannie and Freddie together employed more than 10,000 people in the years before the financial panic, no one from either company is saying in court that Nomura misled them.

      …So far the judge has ruled out evidence that Fan and Fred had a hand in selecting the particular loans that went into the securities they bought, including evidence that they wanted risky loans to satisfy federal affordable housing goals. Judge Cote also ruled out evidence showing Fan and Fred had examined and favorably reviewed the originators of loans that went into those securities.

      …Ruling out evidence of Fan and Fred’s knowledge of the market and the particular loan pools they bought allows the judge to treat the toxic twins as babes-in-the-woods abused by banks. This makes a mockery of the securities laws, which are intended to ensure that investors have access to relevant, material facts about a potential investment. Can other investors now sue by pretending not to know information and then claiming it was withheld from them?

      The article you linked to seemed to also imply that Fannie and Freddie were just innocent victims of fraud. I don’t find that very believable.


  6. The court process with the settlements is mostly a sham involving no admission of guilt but the payment of fines. I’d prefer real trials where there’s a determination of guilt or innocence on the actual charges.


    • jnc:

      I’d prefer real trials where there’s a determination of guilt or innocence on the actual charges.

      My understanding of the Nomura situation is that it is a trial, albeit not a jury trial because the government dropped its damages claim.

      BTW, if the WSJ description of judge’s actions are accurate, it appears that the trial is mostly a sham, too.


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