The Extreme Linearity of U.S. Housing

Extremely linear. That's the term we would use to describe the basic relationship between what people pay to live in the homes they own and what they earn.

Here's the evidence. We constructed the chart below from data collected as part of the Consumer Expenditure Survey for each year from 1984 through 2011 (full year data for 2012 won't be available until late September 2013), which presents the average annual amount of money spent toward mortgage and interest payments, property taxes, insurance and other expenses associated with home ownership for a number of income ranges.

In this chart, we've excluded the data for the lowest and highest income ranges presented in the data, since these cover unbounded conditions that makes them outliers with respect to all the other reported data.

The data points are then clustered at the average annual income before taxes that apply for the reported income ranges, which are the standard ranges reported in Table 2 of the Consumer Expenditure Survey, which covers expenditures for various income levels up to $70,000, and also Table 2301 (for 2003 and after), which provides additional detail of average annual expenditures for a number of income levels above $70,000.

Taking all the data together, what we find is that there is a very strong and direct straight-line relationship between the expenditures for home owners and their income before taxes.

That relationship continues to exist after we adjust for the effects of inflation over time. Our next chart shows the same data as the first, but in terms of constant 2011 U.S. dollars.

Just for fun, we next performed a linear regression for the data for three years, 1986, 2007 and 2011, which we've presented in our third chart (all data is presented in terms of non-inflation adjusted current year dollars.)

We selected these years because they include a very long-ago pre-housing bubble year (1986), the peak housing bubble year (2007) and a post-bubble pop year (2011).

Here, we find that the lines for the relationship between housing expenditures and incomes for the non-housing bubble years of 1986 and 2011 are close to parallel to each other, but the slope for the peak housing bubble year of 2011 is considerably steeper, as housing expenditures spread considerably for a given level of income compared to non-bubble years.

That observation suggests that one of the characteristics of a housing bubble is that it will affect the slope of the relationship between housing expenditures and incomes, as expenditures first swell with the inflation phase of the bubble before collapsing after it pops and begins to deflate, in tune with the illusion of having more wealth than can be afforded on the incomes of homeowners.

We think that the actual mechanism by which this phenomenon works is pretty humdrum, largely amounting to homeowners tapping the apparently growing equity in their properties through refinanced mortgages and home equity loans during the inflation phase of the housing bubble, the payments for which are then added to the expenditures for housing. As a housing bubble grows, the slope steepens until it pops, after which the slope levels back out as homeowners struggle to get their housing expenditures back in line with their actual level of household income. (Or as the sentimental data jocks at the Bureau of Labor Statistics like to call them, "consumer units").

It's pretty amazing difference that such an apparently small change in the slope of the relationship between housing expenditures and income makes for all the difference between excessive exuberance and depression in the U.S. housing market.

The "Strongest Start" for Teen Summer Jobs in Seven Years

In June 2013, the number of people Age 16 or older in the United States who were counted as having jobs rose by 160,000 to 144,058,000. The biggest gains were claimed by Americans between the ages of 20 and 24, who saw their numbers in the workforce increase by 193,000 to 13,605,000, while American teenagers between the ages of 16 and 19 saw their seasonally-adjusted number in the workforce rise by just 24,000 to 4,469,000.

Unfortunately, the number of adult Americans (Age 25 and older) who were counted as having jobs fell by 57,000 to 125,984,000 in June 2013, which is why the net change in the number of employed Americans only rose by 160,000 from the previous month.

Our chart below shows the change in the number of employed Americans for each of these age groups since November 2007, which marked the most recent peak for the total number of employed Americans of 146,595,000:

Compared to November 2007, there are 2,537,000 fewer Americans with jobs as of June 2013. Of these, teenagers make up the largest share, with 1,458,000 fewer employed teens making up 57% of the sustained job loss observed since that time. U.S. teens have gone from representing 4.04% of all American workers in November 2007 to just 3.10% in June 2013.

If it helps put the teen employment situation in context, June 2013's seasonally-adjusted increase of 24,000 teens with jobs would, according to the outplacement firm of Challenger, Gray & Christmas, represent the strongest start for teen summer employment in seven years.

To be fair, Challenger, Gray & Christmas' claim would appear to be based on the BLS' non-seasonally adjusted figures, which indicate that some 779,000 U.S. teens found jobs in June 2013. Overall, they claim that 994,000 teens have become employed since the "official" start of the summer jobs season with the Memorial Day holiday weekend in May.

The firm indicates that U.S. teens seeking work will have the best luck in finding summer employment in nontraditional jobs, such as at "trampoline centers, large bowling alleys with arcades, movie theaters offering full-service dining, and pools with water slides".

They also indicate that teens have been competing with older, displaced workers in the economic recovery. What they don't indicate is whether having raised the federal minimum wage by nearly 41% from June 2007 to July 2009 might have negatively affected whether U.S. employers could continue to afford to hire U.S. teens, who represent the least skilled, least educated and least experienced portion of the entire U.S. workforce, at the higher wage levels mandated by the U.S. government or in those states that have set even higher minimum wage levels.

Odd how the seasonally-adjusted total number of employed teenagers just hasn't budged much at all since the U.S. job market absorbed the impact of the last federal minimum wage hike in the months following its implementation, isn't it?

Data Reference

U.S. Bureau of Labor Statistics. June 2013 Employment Situation Report. [PDF Document]. 5 July 2013.

"Never Bet Against the Fed"

Two weeks ago, we observed that the Fed's attempts to walk back the damage done by outgoing Fed Chairman Ben Bernanke's comments suggesting that the Fed was moving up the timetable for ending its quantitative easing programs had appeared successful in arresting the declines in U.S. markets, as investors were suddenly forced to shift their forward-looking focus to a much less positive nearer term future. Today, as promised, we'll review just how successful they've been.

Our chart below, which shows the change in the growth rate of U.S. stock prices, as represented by the S&P 500, has changed with respect to the expected changes in the growth rates of trailing year dividends per share of the index for the next four quarters ending in the future (mind the notes in the margin and the changes from previous versions):

In this chart, we see that after a number of influential Fed officials succeeded in arresting the decline of U.S. stocks through their comments, stock prices held mostly level until the Fed released the minutes from its June 2013 meeting and Fed Chairman Bernanke spoke to the press again on 10 July 2013. This combination of new information for the market appears to have reassured investors that the Fed will not begin any significant tapering its quantitative easing policies in 2013, as the change in the growth rate of stock prices has once again begun to converge with the level that coincides with the expectations investors have for the first quarter of 2014.

We would expect that stock prices will continue to converge with this level in the absence of new, negative noise events. And for now, that means rising stock prices.

"Never Bet Against the Fed"

During what we can now accurately describe as the Bernanke Noise Event, we presented two investing-related posts where we asked "Now Is It Time to Sell?" and "Now What Will You Do?", where we indicated that stock prices were getting set to send, and then sending, a pretty clear "sell signal".

But we never came right out and said "sell"! That's because we recognized very early on that the Fed would have to respond to Chairman Bernanke's unfortunate comments in a way that would re-shift the forward-looking focus of major investors back to 2014-Q1, which would mean that the decline in stock prices would be arrested and stabilized (at least), and potentially recover to much higher levels depending upon how successful the Fed's efforts to walk back its mistake would be.

Why work to focus investors on the first quarter of 2014 in setting their future expectations? Right now, in the absence of good data quantifying the reasonable future expectations of investors beyond 2014-Q2, it was really the only option available to the Fed that doesn't come with a minimum market decline of 30%, which would coincide with a major decline in the economic confidence of Americans, which in turn, would have severely negative consequences for the entire U.S. economy. That's why it won't be until 2014-Q1 at the very earliest that we'll see any tapering in the Fed's quantitative easing programs, when investors will hopefully also have a much less negative alternative future to focus upon.

If there's one lesson that every investor should take to heart it's this: "Never bet against the Fed"! Especially when it needs to act to fix its self-inflicted wounds before its mistakes might cause both markets and the economy to implode.

Previously on Political Calculations

For the benefit of our NSA readers, or just if you're interested, here's a good part of the electronic trail for how we got here!

• How Stock Prices Work - The basic theory for why "Which Future?" is the most important question for investors to answer.


• The Math Behind How Stock Prices Work - Just as advertised. Welcome to chaos!


• The Bernanke Noise Event - as the Summer of 2013 shall ever be known to investors....


• Now Is It Time to Sell? - according to statistics.


• The Fed's Real QE Mistake: Timing - We explain how Bernanke really screwed up.


• Now What Will You Do? - the statistical line is crossed!


• The Fed Attempts to Walk It Back - not only did we anticipate how the Fed would respond, we determine if it will work.


• The GDP Multiplier for QE - Not about investing, at all! Instead, we explain why QE is so important to the U.S. economy at present.


• Whither Dividend Futures - we tell you exactly where we get our data. Between this and our math (linked above), you can do this kind of cutting edge analysis too....


• "Never Bet Against the Fed" - this article, as it appears on our own site!

We tossed the last link in because we're well aware that the vast majority of our readers encounter our articles elsewhere on the web! Come and visit us, if for no other reason than it's the one place on the web where our work appears, and in the case of the tools we develop, works, just about exactly as we intended!

Ironman Robs Bank

Unfortunately, the really elaborate series of multiple bank heists that we were considering participating in was a no go, as the funding for the project fell well short of the minimum needed to make it happen.

But, at least we can still live vicariously through our alter ego, even though if anyone asks, we'll say we were framed!

More of the story here.

How Much Is Your Time in Traffic Worth?

Suppose, for a moment, that the people who run your local government really cared enough about you and your fellow citizens to do something that might actually benefit you, by funding a fancy transportation project that could shave 13 minutes off your time while commuting once it's done.

Is it worth it?

The answer, at this point, is "it depends". And honestly, what it depends upon is what your and your fellow commuters' time is really worth.

That's why we've created the tool below, so you can see how much you're saying your time in traffic is worth if the project goes forward! Just enter the indicated data in the tool below, and we'll do the math....

If you're reading this article on a site that republishes our RSS news feed, click here to access a working version of this tool!

Project Cost and Time Data
Input Data	Values
Cost of the Transportation Project
Number of People Who Would Benefit in a Year
Amount of Time Each Would Save Daily [minutes]
Opportunity Cost/Discount Rate [%]

How Much Are You Saying Your Time While Traveling is Worth?
Calculated Results	Values
Value of Travel Time [$ per hour]

All the default numbers in the tool above are taken from a federally-funded transportation project in North Carolina, which promised to spend $461 million to reduce the travel time of some 100,000 train commuters between Charlotte and Raleigh by 13 minutes a trip, which would bring their one-way transit time down to just under three hours. We then adapted the math developed by John Whitehead for determining the benefit-cost ratio for the project to estimate what value per hour saved per individual that the state's politicians were assigning to the primary declared benefit of the project.

If that value is equal to or less than what you actually earn per hour, then the project is probably worthwhile for you. Keep in mind though that the median wage that Americans earn is about $13 per hour (see 2011's data here), while most Americans value their time while traveling at roughly 70% of the hourly wage they earn. That makes the real break-even travel time value for this benefit cost analysis come out to be about $9 per hour for the majority of Americans.

So if you're a member of the politician-developer industrial complex, that's the number you need to aim for in the projects you pursue. That is, if you really care about pursuing genuinely worthwhile projects for the people who live in your communities.

But then, we know you have other priorities....

The Dividend Recession

In June 2013, there were 20 public U.S. companies that announced that they would cut their dividend payments going forward. Unfortunately, that's double the level that indicates that the U.S. economy is experiencing recessionary conditions.

In the chart above, we see that the number of U.S. companies slashing their dividends first tipped over the "recession line" back in May 2012, before dipping back for a single month in July 2012, and then remaining steadily above the line ever since, with one four-month long period of extreme volatility.

The extreme volatility in the data running from December 2012 through March 2012 coincides with the so-called "fiscal cliff" tax crisis. Here, after U.S. companies raided the future to pay out extra large dividend payments before the end of 2012 to avoid the risk of having tax rates on dividends almost triple in 2013, many of these companies then announced that they would be cutting their future dividend payments in two separate waves - the first before the end of 2012, and the second before the end of the first quarter of 2013.

The Bureau of Economic Analysis will be releasing a major, mulit-year revision of the nation's GDP at the end of July 2013 - it will be interesting to see if any part of the period since May 2012 will be reclassified as having experienced the negative growth that corresponds to periods of outright recession.

China Back in Recession, U.S. Economy Sluggish

Now that we're well past the statistical anomalies associated with the timing of the Chinese New Year/Spring Festival holiday, the year-over-year growth rates of the value of trade between the U.S. and China indicates that China's economy has likely fallen back into recession, while the U.S. economy is growing, if sluggishly, through May 2013:

The data in the chart above has been adjusted to reflect what each nation's economy "sees" in terms of its own currency. For the most recent trends in the overall data, the value of the U.S. dollar has been falling steadily with respect to the value of the Chinese Yuan since May 2010, as the relative value of U.S. goods in China has fallen while the relative value of Chinese goods in the U.S. have become more expensive.

References

U.S. Census Bureau. Trade in Goods with China. Accessed 03 July 2013.

Board of Governors of the Federal Reserve System. China / U.S. Foreign Exchange Rate. G.5 Foreign Exchange Rates. Accessed 03 July 2013.