How 56.5 Million Households Live: $52,000 Median Household Income in 2009 Crushed by a Decade of Debt. A Decade of Lost Wages and Financial Debt Servitude.
The recent American Consumer Survey had some thought provoking data regarding the typical American household. Wages over the past decade have been stagnant. At least that is what is propagated in the common datasets but in reality, not only has income not grown it has actually declined. The U.S. dollar during this time has been crushed as well. So incomes moving in a horizontal fashion may appear to be steady for Americans, but in reality the purchasing power has fallen due to inflation (not recently) and the declining dollar. Think of the rising cost of housing, healthcare, food, and automobiles. In the last decade, even after the housing bust, prices are still higher yet incomes still lag.
Americans leveraged debt in this decade to make up for their lost purchasing power. Access to debt is now being limited. But let us first look at a crucial aspect of the typical household that seems to be missing from the mainstream financial press, household incomes:
This is the latest data we have and we should spend some time on the above chart. 20 percent of American households make more than $100,000 per year. The median income is $52,029. In other words over 56,500,000 households make due with $52,029 or less per year. This is the average American consumer and also helps to explain why things are still in a troubled state. I put together a budget before for someone making the median income and given the updated income figure, things haven’t changed much.
Keep in mind the above data reflects the 2008 year. A troubled year no doubt, but we have yet to factor in the increased unemployment brought about in 2009. This data will be reflected in September of 2010 and we already know that incomes are going to fall yet again. With 27,000,000 Americans unemployed or underemployed, we know the recession is deep and pervasive. But what is usually missed, is even the employed in those 56.5 million households are struggling with rising costs of healthcare and education. Housing costs may be going down but not because of a healthy economy. What we are seeing is debt destruction.
Now try to factor this out with a real world budget:
We’ll go with the state of Georgia just as an example. After taxes the median household is netting roughly $3,200 per month. In August, the median home price in the United States came in at $177,700. Now run the numbers on a FHA insured loan here with a 3.5% down payment:
Home Price: $177,700
Down payment: $6,219.50
30 Year Mortgage Amount: $171,480.50
PITI: $1,235
We’ll leave aside the $8,000 tax credit for the moment. So let us run a simulation on this budget since this on the face seems to workout:
Before you start picking the budget apart, keep in mind this is only a sample. If you look around your own neighborhood, how many people do you see with two relatively new cars? A flat screen TV? Designer clothes? The above budget doesn’t allow for that. And that is why we are seeing bankruptcies also rising in the current environment. The spending was done outside of the budget via credit cards and other forms of revolving and non-revolving debt.
Credit card companies are quickly jacking up fees, putting onerous terms, and decreasing credit available to a consumer that is losing income. You can see how quickly things can get out of hand. Take for example the budget above. What happens if one spouse loses their job? The net income will fall but expenses will stay the same most of the time. Or what about a medical emergency? One night in a hospital can wipe out one or two years of an emergency fund without insurance and millions fall in this category. What if the car busts the transmission? There goes $2,000. Things can escalate quickly without access to the easy debt machine that hid a decade of lost income.
But a sector that did do well in this time is the financial sector:
Source: New York Times
The financial sector has cannibalized a large part of our economy. After decades of bubbles and mismanagement, what have they left the average American with aside of the mountains of debt? We have $3.5 trillion in commercial real estate debt to contend with. Household net worth in the U.S. has fallen by over $12 trillion since this crisis started. It is hard to see what benefit the financial sector has brought to the typical American family. It gave people the illusion of wealth through debt but as we are now seeing, is quickly taking it away via bankruptcies, foreclosures, and yanking credit cards away. I agree that many Americans over spent and now many are paying the price. But what price does Wall Street pay? In fact, they are rewarded with bailouts.
The notion that things are getting better is hard to understand. If we mean that things are better because Wall Street is up, then yes, things are better. But jobs are still not on the horizon and most people associate employment with a healthy economy:
During this earning season what is rarely reported is that the jump in profits with many companies is coming from one time inventory replenishment and also, by cutting your largest cost. Employees. Look at the above chart. For every job opening you have six people trying to fill it. And job openings are below levels at the start of the decade and we have more people in raw numbers plus, we have the 27 million unemployed and underemployed Americans. Just to replenish the lost jobs since December of 2007 we would need to find 8 million jobs. Even if we added 150,000 jobs per month starting in November (not happening) it would take us over 4 years just to get back to where we were at the start of the recession.
Even after all the debt destruction, household debt is still weighing like an albatross on the American household balance sheet:
The above chart is important because it shows the stickiness of debt. That is, unemployment has been going up since December of 2007 but debt goes down slowly. The amount of workers in the U.S. economy is seeing a sort of lost decade. But look at the financial obligations above. We are only back to 2005 levels. The bubble started much further back. Why is that? As we now know, a foreclosure takes a very long time while being laid off can happen in one day. Those mortgage payments keep coming in while the income from work is cut off. It isn’t like the mortgage suddenly adjusts to reflect the real economy. The obligation is still there. So is the auto payment. And the credit card bill and everything else. So debt that was once seen as a supplement to income is now a massive drain on your monthly balance sheet.
Just looking at this data I’m not convinced of this job less recovery. We are still losing jobs at a rate of 3 million per year. In fact, just to keep at a normal pace we need to be creating 150,000 jobs per month. Until we get there, the average American is going to feel this as the deep recession that it is.
Commercial Real Estate Implosion: 67 Percent Fall in Multifamily Starts, Ghost Buildings, $3 Trillion in Debt, 41 Percent Drop in CRE, and Collapse in Rents.
Driving along the highway at night, it is an eerie sight to look at some of the vacant buildings. The lights are on but the floors are empty awaiting an audience that will never come. Can it be that commercial real estate, with over $3 trillion outstanding be in worse shape than residential housing? In a short answer, yes. I’ll give you a few reasons but the most obvious is that unlike housing, there is rarely a price point where a commercial real estate development will make sense without a sustainable economy.
For example, there are places in Nevada and Arizona that were built with no residences coming and commercial real estate to feed this ghost population. Another point that makes commercial real estate more problematic is the way commercial projects are financed. These projects are financed with short-term financing that requires refinancing every 5, 7, or even 10 years. This stands in sharp contrast to the 30 year fixed mortgages on residential properties.
If you really want to see what is happening on the ground, you need to look at housing starts. After all, these are the builders and should have a better sense of regional niches and demand. Now their projections are never perfect but they probably have a better sense than say Wall Street which is a few thousand miles from billion dollar construction projects:
Now here is a fascinating case and point. Single family starts have collapsed. This is true. Since the peak, they have been trending lower and lower. The U.S. Treasury and Federal Reserve even with virtually interest free money cannot stimulate demand in an overbuilt market. Single family starts are down 8.7 year over year. But multifamily starts? Try a stunning 67.4 percent. Many of these projects are financed with commercial loans and you can see that the demand is virtually gone. This is one of those unintended consequences that Wall Street and the government fail to notice.
With a tunnel vision focus on propping up the residential housing market, demand for homes has increased. People are buying up foreclosures and financing their purchase with historically low interest rates courtesy of the Federal Reserve. The government has also sweeten the pot with the $8,000 poorly targeted tax credit. But what the Fed fails to see is that vacancy rates were already high for both residential and commercial buildings in the form of say, apartments. So what happens? You shift demand from lower priced rental units to homes. Good news right? Not at all. Now what you have is an increase in defaults for commercial loans instead of residential loans because of even higher vacancy rates.
As I mentioned before, the problem with commercial real estate loans is also how they are financed. Take a look at the turnover profile for the next few years:
Source: Zero Hedge
From 2009 to 2010 the amount of MBS maturing is double and it only elevates from that point on. Who is going to refinance an empty strip mall? Or a gym with no membership? What about an office complex with no tenants? This is the big problem with commercial loans. Consumer demand has shifted. With the U.S. dollar tanking the average American is facing higher costs for daily items like food and is seeing some items like cars drop on the secondary market but what is a priority?
How deep have prices fallen on commercial real estate? Try 41 percent:
Unlike residential housing that has stabilized in terms of pricing because of trillions in bailouts, commercial real estate is on the way down. But make no mistake, the U.S. Treasury has been having off poorly publicized talks about preemptive bailouts in this market. Even without the talks, the Fed is willing to take everything and anything in exchange for Treasuries. While the residential housing market peaked in 2005, it looks like CRE peaked in late 2007. It looks like a two year lag is in the commercial real estate market and this is typical. These projects take longer to build and usually follow residential projects.
Rents have been falling and this has hurt real estate in Manhattan to apartments in Los Angeles. In many cases, you would think that a lower price for something is good but this is only reflecting a weaker American consumer that is confronting an unemployment and underemployment rate of 17 percent. We hear much about this jobless recovery but incomes are low, commercial real estate is a major problem, and the average American is seeing their view of the American Dream become more and more of a mirage. The only winner seems to be Wall Street.
David Einhorn from Greenlight Capital summed it up well:
“And the neighbors are angry, because at some level, Americans understand that the Washington-Wall Street relationship has rewarded the least deserving people and institutions at the expense of the prudent. They don’t know the particulars or how to argue against the “without banks, we have no economy” demagogues. So, they fight healthcare reform, where they have enough personal experience to equip them to argue with Congressmen at town hall meetings. As I see it, the revolt over healthcare isn’t really about healthcare, but represents a broader upset at Washington. The lack of trust over the inability to deal seriously with the party goers feeds the lack of trust over healthcare.”
And this leads us to where we are at. When have we heard prolonged debates regarding commercial real estate or even the bailouts? We sometimes hear the plutocracy argument that we should have bailed out Lehman Brothers. Really? We should have a talk about why we didn’t let more firms fail.
From both parties we get estimates of healthcare reform between $800 billion and $1.2 trillion over a decade. Commercial real estate has 3 times that sum! Not one hour of airtime is dedicated to talking about this. The U.S. Treasury and Federal Reserve have backstopped nearly $13 trillion from the banking sector. The airwaves should be saturated on a daily basis talking about this and the other bailouts that were never fully vetted. Don’t believe it? Here is your bill:
If there is no resistance, we are going to have another major stealth bailout of the commercial real estate industry. The U.S. Treasury already has a nice name of “Plan C” for it. Next time you see those empty buildings keep in mind that you might be paying the mortgage on it pretty soon.
