Central Banks Hold Steady in August, No Sign of Rate Hikes

August is now behind us, and as a sign of the concern central bankers share over the weakness found in the world's major economies, there is no sign of any effort to rise target rates at central banks. 

From the Fed to the European Central Bank, to the Bank of England and beyond, there appears to be no appetite for attempting to return to more "normal" monetary policy. We're apparently in a state of virtual permanency when it comes to "extraordinary" monetary policy which involves keeping the target interest rate at zero or near zero for years on end. 

In fact, the only movement we've seen at a major central bank in recent days comes from the Bank of England where the bank cut the target rate from 0.5 percent to 0.25 percent. Except for that change, and continued declines in Australia, nothing has moved since last Spring: 

In late July, the Fed declined to raise the Federal Funds rate. But, of course, they maintained the usual posture of saying that a rate hike was just around the corner. Cutting through the posturing, Bloomberg wondered at the time if the Fed is becoming even more dovish. 

Now, the Fed appears likely to do nothing at its next meeting. The Wall Street Journal avers:

[W]ith inflation holding below the Fed’s 2% target and the unemployment rate little changed in recent months, senior officials feel little sense of urgency about moving and an inclination toward delay, according to their public comments and recent interviews.

This comes just weeks after the Bank of England cut its key interest rate to the lowest rate of its 322-year history, dropping the target rate to .25 percent. 

The given excuse for this was the chance that Brexit might lead to an economic slowdown. Thus, according to BofE Governor Mark Carney:

 “There is a clear case for stimulus, and stimulus now,” Mr. Carney said at a news conference, in the latest attempt by officials to reassure Britons that they are acting decisively.

Meanwhile, as one looks around the central-bank landscape, one is left wondering what central banks will do when something really goes wrong. With rates all already so close to zero (or even below zero) any serious economic disruption, such as an obvious recession, is increasingly likely to lead to helicopter money, negative rates, or an intensification of attacks on cash, such as that found in Ken Rogoff's recent book The Curse of Cash. 

Another possible route to "stimulus," of course, is good ol' fashioned fiscal policy such as spending on public works and other types of government spending. 

The European Central Bank urged European governments to do as much last week when ECB president Mario Draghi sang the praises of government stimulus and criticized Germany for not spending enough. 

The European economy overall is so weak, though, that projections suggest that even with massive amounts of monetary stimulus, price inflation will not reach the ECB's 2 percent target any time soon. With its credibility on the line, however, the ECB appears reluctant to cut its deposit rate even further below negative 0.4 percent, or its MRO rate below zero, where it already sits. 

"Wait and see" appears to be the approach for now.

Note:

Through August, here are central bank target rates and resources: 

• USA: 0.5%
• Canada: 0.5%
• UK: 0.25%
• Australia: 1.5%
• China: 4.35%
• ECB: -0.4%
• Japan: -0.1%

The rates used for this analysis are: 

• Fed. Reserve: Federal Funds Rate 
• Bank of England: Official Bank Rate
• Reserve Bank of Australia: Cash Rate
• Bank of Japan: Overnight Call Rate (Observed); (Target Rate)
• Bank of Canada: Overnight Target Rate
• ECB: Deposit Facility Rate
• People's Bank of China: Overnight Rate

Here's a look at recent changes in closer detail:

Colorado Springs average rent grows by all-time high of 10.2 percent

During the second quarter of 2016, rent growt hin Colorado springs hit an all-time high of 10.2 percent, bringing the average rent in the metro area to 991 dollars, which is also an all-time high. That's up from the first quarter  of this year when the average rent was 959. The average rent during the second quarter of last year was 899 dollars.

According to data released by the Colorado Division of Housing, the average rent in Colorado Springs continues to grow at a historically high rates:

The last time the average rent grew at a similar rate was during the dot-com boom at the very end of the 1990s. If we look at the average rent over, time, we find that the general trend has, not surprisingly been upward, but has increased more rapidly over the past five years than was the case during the previous decade:

Looking just at nominal rent levels, however, can be misleading, and if we adjust for inflation using the nationwide CPI, we find that rents actually went down in real terms from 2003 to 2009. While there was some growth from 2009 to 2013, we see that even in inflation-adjusted terms that rent growth has picked up since 2014. Real rents only surpassed the 2001 high in 2014 following a long period of flat rents. Now, however, inflation-adjusted rents have surpassed the old 2001 peak, and have set several new all-time highs in recent quarters:

As one might expect, this year's robust rent growth reflects low vacancy rates. While not setting any records, the vacancy rates for Colorado Springs over the past year have been generally rather low, with the vacancy rate even dipping below five percent twice over the past two years. (A vacancy rate below five percent is generally regarded as "low".) In any case, recent vacancy rates are among the lowest we've seen since the dot-com boom days, and certainly among the lowest we've seen over the past decade.

Finally, we should note that vacancy rates and rents can be significantly affected by seasonal issues, with the fourth quarter often showing the softest markets each year, with the third quarter often showing the strongest markets. 

So, it can be helpful to compare vacancy rates to the same quarters in previous years. In the final graph, we see the second quarter of this year compared to previous years. 2016's second quarter vacancy rate was higher than the previous year, but nevertheless remains near a ten-year low. 

With some of the highest foreclosure rates among metro counties in Colorado, and with a fairly sedate job market compared to Denver and northern Colorado, Colorado Springs has been more slow to experience strong price growth in housing. However, over the past two years, it has become clear that Colorado Springs is now seeing unusually high growth in rents and housing demand. Future rents will depend partially on new housing construction, and we'll look at that in a future post.

Bankruptcy filings up 11 percent from July to August, contrary to the usual trend

According to federal bankruptcy court records, there were 1,106 bankruptcy filings in Colorado during August. That's up 11 percent from July's total of 990, and it's down 8.5 percent from August 2015's total of 1,208.

Overall, the general trend has been downward since 2010, as we can see in the first graph:

An unusual thing happened in August, though: bankruptcy filings increased from July to August. Since 2007, this only happened once before, during 2011.  In other words, bankruptcies usually fall during this period, but from July to August of this year, bankruptcies rose at the highest rate experience since 2006:

It remains to be seen whether or not this signals a change in the downward trend we've seen seeing for the past six years.

There have been other indicators, though, that this year bankruptcy activity has been leveling off, rather than continuing the sharp down ward trend that we saw from about 2012 to 2015. The next graph shows how year-over-year changes in bankruptcy activity has been rather sizable with year-over-year declines of 20 percent or more being rather common. So far, this year, the degree to which filings have been declining become smaller compared to 2015. From August 2015 to August 2016, bankruptcies fell 8.5 percent. From August 2014 to August 2015, bankruptcies fell 16.9 percent.

Are bankruptcies surging in Colorado? At this time, there's not enough or an established trend to say this, although the most recent data may suggest that the most robust portion of the current expansion may be softening. 

Housing construction rising in Pueblo,but not by much

Through July of this year, the Pueblo area reported 156 permits for private housing units. That's an increase of 13.3 percent compared to 2015, although overall permitting activity is up from the low points experienced in the wake of the 2007-2009 recession. (All permit data used in this article is form the Census Bureau.)

The first graph shows total permit activity for each year for the period of January-July:

While permits are down this year compared to last, they are nonetheless up compared to every year in the period from 2011-2014.

Over the past decade, only three years showed increases over the previous year. The second graph shows year-to-year change in permits for the period from January-July (values are in %):

Most of the past decade has reflected an experience of declining permit activity from the housing-bubble highs prior to 2008. A significant decline began in 2007 and the area really didn't begin to show signs of life again until 2015.

The vast majority of this activity is in singlefamily homes, as the next graph shows. The red bars show where multifamily units were built in addition to singlefamily units. Small numbers of multifamily units were built in a number of months during 2008 and 2009. However, after 2009, multifamily units only register in six months of the more than 80 months that have passed since then. The last multifamily permitting that took place was in May 2015 when 62 units were permitted for a senior housing project known as Oakshire Trails.

Other than that, multifamily housing construction has been exceedingly rare in recent years.

Needless to say, the Pueblo area has not experienced the same sort of apartment demand that was notably strong in the metro Denver area from 2012 to around 2015.

Singlefamily housing has slowly come back since 2011, but gains have been slow and measured. Nevertheless, if we look just at singlefamily permits (excluding multifamily) for the period of Jan-July, we find that 2016's singlefamily activity is at an eight-year high:

Moreover, with the exception of the change from 2011-2012, the year-over-year increases for 2015-2016 was at a ten-year high through July of this year.

Total nonfarm employment in Colorado up in July, growth trend continues

For now, there are few dark clouds on the horizon for payroll employment totals in Colorado. While employment growth has softened somewhat since 2014, it remains well above zero.

According to state-level employment data, released on August 22, year-over-year employment growth in Colorado increased 3 percent, which was the largest increase since July of last year when growth reached 3.2 percent. There were a total of 2.62 million jobs in Colorado in July, compared to 2.55 million jobs one year earlier.

That equates to 76,000 more jobs, year-over-year.

This should not be equated for new employed persons, however, as this measure of employment counts only jobs and not people. Thus, a single person with two jobs would show up as two jobs by this measure, and two job holders should not be assumed. The Household Survey, which counts employed persons, will be considered in a separate post.

Nevertheless, job growth, strictly speaking, continues in positive territory.

On a month-to-month basis, we also find that July 2016 was strong. In this case, job growth tends to be negative from June to July due to seasonal issues. So, to get a better sense of how July compares, we must compare to previous June-July periods in each year. When we do this, we find that the job losses for the June-July period were the smallest we've seen in more than a decade:

So, by both these measures, we find that job growth in July was solidly positive.

This continues a period of net job growth over the job losses that occurred in the wake of the 2008 financial crisis when more than 200,000 jobs were lost in Colorado. Since 2013, though, Colorado has added 255,000 jobs above and beyond its old 2008 peak prior to the last recession:

Average rent in metro Denver hits new high as vacancies remain low

To the surprise of very few, the Denver Post reported last month that the average rent in metro Denver continues to rise. According to the Metro Denver Apartment Vacancy and Rent Survey, the average rent during the second quarter of 2016 was $1,371, which was up from teh first quarter's average rent of 1,315. The second quarter rent marks a new all-time high:

The increases in rental rates reflects ongoing low vacancy rates in the region. For the second quarter, the apartment vacancy rate in Metro Denver was 5.4 percent, which was down from the first quarter rate of 6.1 percent. During the second quarter 2015, the vacancy rate was 4.5 percent. Overall, we can see that, excluding a surge in vacancies during the fourth quarter of last year, the vacancy rate in metro Denver remains low, although not as low as what we frequently saw during the 1990s:

As the economy has slowly expanded in the wake of the 2007-2009 recession, apartment vacancies have tightened, and reached especially low levels in 2014. The market has loosened a bit since then, but vacancies remains generally low.

With the second quarter's all-time high of 1,371, the average rent is up 8.3 percent over the average rent a year earlier. The average rent was 1,254 during the second quarter of 2015.

While an increase in the average rent of 8.3 percent is substantial, it nevertheless shows a declining trend on rent growth. Rent growth peaked at an all-time high of 13.2 percent during the second quarter last year. Since then, the rent growth rate has fallen in each quarter. In other words, rents are growing, but the pace at which they are growing is slowing.

The boom in apartment rents is still going. Just not as strong as was the case in the previous two years. 

Adjusting for Inflation 

When looking at rents over time, it's always important to consider rents compared to the Consumer Price Index. While the graph (above) of nominal rents shows unabated growth since 2000, we see a different trend when adjusting for inflation. 

In inflation-adjusted terms, the average rent declined from 2001 to 2010. Only after 2010 did the average rent reach its former peak reached in 2001. Since 2010 though, the average rent has repeatedly been reaching new highs, even after adjusting for inflation. 

during 2001, the high was $1,108 in 2015 dollars. In recent quarter, that rate has been repeatedly topped, with 2016's second quarter rent coming in at 1,358 in 2015 dollars:

Year-over-year growth in inflation-adjusted rent is similar to that seen in the nominal rents. Over the past year, rent growth has been large, but has been gradually getting smaller. During the second quarter of this year, the inflation-adjusted average rent grew 7.1 percent, which is down from the second-quarter 2015 rate of 13.2 percent:

For now continued population growth and a generally solid economy continues to fuel demand for housing, and especially rentals. (See my recent article on the homeownership rate.) Neither the national economy nor the local economy are especially robust when compared to previous expansions, but as long as the Colorado economy is performing at least as well as the country overall, it looks like there will be ongoing demand for a place to live in Colorado.

Colorado homeownership rate falls to lowest point since 1994

Americans have long regarded owning a home to be largely synonymous with the so-called "American dream." High homeownership rates are not necessarily synonymous with a high-income prosperous society. Switzerland and Germany, for example, have homeownership rates well below that usually found in the US.

Nevertheless, the US government has long made increasing homeownership an important policy goal, and this has led to a number of large and costly programs and institutions including Fannie Mae and Freddie Mac, FHA, and a plethora of federal regulations surrounding mortgage lending and banking.

Things haven't quite gone as planned.

The most recent quarterly data from the Us Census Bureau shows that the homeownership rate in the United States has fallen to a 51-year low.  as of the second quarter of 2016.

As of the second quarter of 2016, the homeownership rate in the United States was, according to the Bureau, 62.9 percent. That's exactly equal to the rate recorded during the third quarter of 1965 — 51 years ago:

The homeownership rate has been declining since 2004 when it peaked at 69.2 percent. The rate has gone into virtual free-fall over the past two years, however, as home prices have continued to rise and incomes have not kept up.

In Colorado, the trend has been somewhat similar in recent years, although the homeownership rate here is only at a 21-year low.

The Census Bureau only publishes annual data on Colorado-specific homeownership rates, but using annual data, we find that 2015's homeownership rate is the lowest recorded since 1994.

In 2015, the homeownership rate in Colorado was 63. 6 percent, and it hasn't been that low since it was 62.9 percent in 1994:

Colorado's economy was in a recession for much of the 1980s, so we find that the homeownership rate hit a multi-year low in 1989 (58.6 percent) and gradually increased until hitting in 2003 what was likely the highest level ever achieved since white men started building houses in Colorado. Since 2003, though, when the rate was 71.3 percent, the rate has fallen nearly nonstop.

This is likely due to several factors, although the big ones are likely rising housing costs and stagnant household incomes.

In this post, I looked at household incomes in Colorado and found that incomes have remained largely flat over the past decade.

Meanwhile, as most everyone on the Front Range knows, housing prices have moved upward, with the Case-Shiller home price index increasing around 10 percent, year over year, in most months in recent years.

In other words, household incomes do not appear to be keeping up with home prices, and it stands to reason that is pushing down the homeownership rate. That's not the only reason that homeownership is declining, of course. There could be other factors such as demographic shifts, including more young people choosing to marry later and have children later, which can lead to less demand for a for-purchase home.

Affordability does look to be a real issue, however, and if potential buyers must turn to renting a home (although that is an expensive alternative) this pushes down the homeownership rate.

One should use caution in using homeownership as a proxy measure of economic prosperity, although in the past the homeownership rate has often tracked with general economic conditions, as was the case in the 1980s.

Whatever the cause, the latest data does suggest that both the national and local economies are moving more toward a rental-housing focused real estate economy, it this does not look like it will reverse itself unless real incomes begin to gain more steam or more home construction begins to ramp up.