California’s housing crisis: What gives?

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It’s no new news that California is experiencing a housing crisis. Just how bad the crisis is might surprise you.

The San Jose Mercury News published an in-depth investigation into the current crisis and finally answered the question: “What gives?” and most importantly “What’s next?”

Home ownership in California is at an all-time low since World War II. The average home price is 2.5 times higher than the average price nationally. With a median cost of around $437,000 more and more people are choosing to rent instead of buy.

While renting may seem like the better option it still takes a toll on residents as nearly 70 percent of poor Californians see most of their paychecks go to constantly rising rent. Couple the cost of rent with student loan debt and you have a crisis.

It can be said that while rent is infinitely more expensive in California than other places, residents are still getting paid more. This is indeed true, however, hidden within the truth is the fact that income has not kept pace with rising home costs.

This large income inequality has led many to move out of California, namely those living on the poverty line. From 2000-2015 800,000 residents have moved out of California to other states including Texas. The average income for the thousands that left in 2007 was $50,000.

Those who choose to tough it out and stay in California often become homeless. Between 2015 and 2016, California saw an uptick in homelessness of about 2,400 people. Housing data website, Zillow estimates that a 5% rent increase in Los Angeles would result in an additional 2,000 homeless people. So far rent has increased 4%.

The study found that such a crisis has large repercussions on the economy as a whole. The McKinsey Global Institute found such crisis cost the economy between $143 billion and $233 billion annually.

So how can California fix its problem before the bubble bursts? The state will once again tackle its long-awaited housing package again this month. While help may be on the way it won’t fix the problem entirely. According to the Legislative Analysts Office, helping the 1.7 million poorest residents would cost around $15 billion at the very least. The Los Angeles times estimates that of the three bills being considered only 25% of that estimation would be provided.

What is Consumer Sentiment?

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Believe it or not, your opinions count! Your views regarding the health of the economy, long-term economic growth and your personal financial situation play a role in shaping public policy, economic policy and stock markets. You are, essentially, an economic indicator, according to the University of Michigan. Feeling special now?

Consumer sentiment is a measurement of the overall health of the economy, determined by consumer opinion. It directly relates to the strength of consumer spending. The University of Michigan’s Michigan Consumer Sentiment Index (MSCI) is the most popular publications of consumer sentiment. American households are contacted randomly each month via telephone. Here, the chosen ones are asked about their financial situation and attitudes about the economy.

The Force, aka. The University of Michigan, releases the final report of the previous month on the first of the next month. Basically, the index is useful to economists because it gives a snapshot of whether consumers feel like spending. Yep, Leo… We’ve all been there at Chipotle.

Inflation and favorable employment conditions are what give consumers the urge to spend. But, current events also affect how much we spend. Things like bull and bear markets, and geopolitical events.

Why are economists dying to know what consumers are up? Because consumer spending accounts for more than two-thirds of the economy. This is, basically, real-life Gossip Girl… your one and only source into the financial activities of America’s citizenry. Where have they been? And what have they been up to? Who knows? You know you love me, xoxo… the economy. So, the more confident consumers are about their finances and the economy, the more likely they are to spend.

The MCSI is determined by subtracting the percentage of unfavorable consumer responses from the percentage of favorable ones. It is calculated based on the following five core survey questions:

  1. Compare the pair – Would you say that you are better or worse off financially than you were a year ago?
  2. After some crystal ball gazing – Do you think a year from now you will be better off financially, worse off, or about the same as now?
  3. Now, let’s get down to business – As a nation, do you think the next 12-months will be financially good or bad?
  4. Back to the future – What would you say is more likely: the country, as a whole, having a good five-years or so, or periods of widespread unemployment / depression?
  5. To spend or not to spend? Do you think it’s a good or bad time to buy major household items, such as furniture, refrigerator television etc.

After the relative scores have been worked out, and the actual equation of CSI = x1 + x2 + x3 + x4 + x5 / 6.7558 + 2.0 has been left in the school hallway for the Will Huntings of the world to work out, we have the CSI!

And there we have it – the MCSI – one of the leading indicators of consumer sentiment in the United States.

 

References

Investopedia 1

Investopedia 2

Economic Calendar

One Rate Does Not Make a Summer, But May Indicate a Mild Fall

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It is almost the end of August and this summer seems to have brought positive news to both the U.S. and European markets. The latter especially may now breathe a sigh of relief since, as the Wall Street Journal reported on Aug. 24, 2017, even the weakest European economies such as the Greek, the Portuguese, and the Spanish have been showing growth over the last year. Along with them, the Italian economy seems to be enjoying a substantial reversal in its usual downward trend, as shown by the steady decrease of the unemployment rate released by Istat, the Italian National Institute of Statistics, on June 7.

These developments are being reported just as the Federal Reserve’s annual conference is taking place in Jackson Hole, Wyoming, where Mario Draghi, president of the European Central Bank, and Janet L. Yellen, the Federal Reserve chairwoman, will speak about the future of the European and U.S. monetary policies for the year to come. Their speeches will focus on whether the current lenient regulations will be removed.

The decision on this very hot topic—appropriate for the end of summer—might affect the improvements shown by the delicate economies of the Eurozone, such as Italy’s, which has been reinvigorated by the positive unemployment and employment figures released in June 2017.

Why do these rates matter? Even though they are mere numbers, they stand for people; people who have been struggling to find jobs. As reported by the Italian business newspaper Il Sole24ore,  the unemployment rate decreased 0.2 percent from May to June of 2017, and has settled at the level of fall 2012—when Italy reached its lowest unemployment rate. This news has created confidence among markets, entrepreneurs, and investors.

The recovery of Italy’s economy was also reported by Quartz and Bloomberg this month; these two media outlets showed that the Italian GDP increased by 0.4 percent in the last quarter, thanks to added value of manufacturing and services, as Lorenzo Totaro wrote on Aug. 16, 2017, on Bloomberg; this GDP increase reflects the larger number of employed people.

These indicators have also revealed another interesting aspect of the story: the employment rate of the female population has increased by 0.7 percent from June 2016 to June 2017, reaching the threshold of 48.8 percent. Women are more likely to be unemployed in Italy; this upturn signals a great change in the economy of the country.

In this scenario of mild recovery and optimism, the decision of whether to pull back the current stimulating monetary policy is very important for a country such as Italy, whose policies and efforts seem to be heading in the right direction. Certainly, as recently stated by Carlo Calenda, minister for economic development, and Ignazio Visco, governor of the Bank of Italy, the improvements observed through the lenses of economic indicators such as the GDP or the unemployment and employment rates do not mean that Italy has completely recovered from its financial crisis (Corriere della Sera, Aug. 24, 2017); the country still needs reforms to encourage business innovation, and support the work life of employees.

“For the first time in ten years all the major economies of the planet are growing,” (Marketplace, Aug. 24, 2017) and what might happen to Italy after the Federal Reserve’s annual conference concerns European countries as well as the U.S. We have to wait to see if this new wave of economic growth will be fostered and advanced by the new regulations that will be implemented by Mr. Draghi and Ms. Yellen at Jackson Hole. All we know now is that the enthusiasm about Italy’s steady growth is based on solid facts, and it is part of a remarkable turnover regarding the entire Eurozone.

Unemployment Rate Forecast; source: tradingeconomics.com/italy/unemployed-persons/forecast

 

 

 

 

 

 

 

Here’s One Way to Measure How People are Doing Financially

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Gross domestic product growth can provide valuable information about the health of a nation’s economy, but it rarely goes any deeper than that broad lens. Disposable personal income is one way to indicate how people are doing on a more narrow level.

Disposable personal income is a measure of how much money families have once taxes are deducted from their paycheck. Disposable personal income is usually displayed in billions of dollars.

Disposable personal income shows how much people have left over, not just what they spent. If consumption is low but disposable personal is high it could mean people are putting more money towards necessities and/or saving.

This metric can also be compared to other indicators, like food prices, to determine what percentage of a person’s disposable personal income is being spent on necessities.

The USA Today said in a recent article that people are spending almost half of what they used to on food, which may mean that they are spending more of a percentage of their disposable personal income on other necessities, like housing and healthcare.

Disposable personal income has been on a steady upward trend since 1960 and before the great recession between 2008-2009 it briefly spiked from 10.8 trillion to 11.4 trillion (numbers adjusted for inflation). During the recession disposable personal income contracted.

Disposable personal income since 1960.

Since the recession, the trend moved upward, and in 2012 reached a sudden peak of 13 trillion. More recently, in 2017 disposable personal income contracted by around 4 billion.

Disposable personal income in 2016 – 2017.

2017’s lower numbers could account for stagnant wages, higher taxes and a number of other things.

Disposable personal income is a helpful economic indicator because it can be compared easily to other indicators and shows how the average person is doing in the economy. But as it is in the aggregate it leaves economic inequality out of the picture.