Affordability

We start the week with the good news about the reopening of the U.S. government, which has been closed for a record 40 days. But there is a full laundry list of items that are problematic for the Trump administration. Among them: The SCOTUS decision on tariffs, which doesn’t look good at this point, inflation and high short rates, which are squeezing the middle class, and housing affordability. In the chart below you can see two charts that would indicate the American dream is no longer attainable: in the upper chart you can see the gap between the income is needed to buy a new house (orange line) and the median income prime buyers are actually making (blue line). In the bottom chart, you can see the average age of the first time home buyer, which is at an all time high of 40 years old. As affordability decreases, young Americans need to stay at home with parents longer, or rent. As a result, household formation is going down, and the middle class class is slowly disappearing. What is the solution to this problem? Either house prices go down, or incomes go up, or mortgage payments become lower by a combination of longer terms and lower rates. That’s why Trump has announced the 50 year mortgage, coinciding with the potential market relisting of FNMA and FLMCC, which will surely create a program for these mortgages. This will increase duration in the newly issued MBS, which’s is what the Fed will buy when long rates go up and they reinstate QE. This is another case of circular economy, where at the end, we piled up more debt on the back of the government, that will guarantee those mortgage payments on top of the $38Tn we already have.

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