Yellen’s statement hints at no rate increase for 2016

US: Will there be no rate increase in 2016?

Yellen allays fears of a rate increase
Yellen allays fears of a rate increase

[dropcap color=”#008040″ boxed=”yes” boxed_radius=”8px” class=”” id=””]S[/dropcap]peaking at the Economic Club of New York, Fed Chair Janet Yellen made soothing sounds that the U.S. central bank will move cautiously on a rate increase, allaying fears from recent hawkish comments by other Fed officials. This effectively rules out a rate hit till at least the US Presidential elections, to be held in November.

I had written in October of last year that a rate increase in an election year is a very low probability. Plus the inflation was just not there to justify the rate increase. While the Government is quick to claim that Unemployment is below 5%, it does not count the number of people who have stopped looking for jobs. Job creation is only happening in the service sector, which is more or less close to minimum wages. Often times, workers are hired part time (which the Government counts as employment) and in most cases do not get health care benefits. Yet, if you look at the US Stock market, it makes one think that everything is just fine! Is it? Let us look at some data:

  • Cash only sales in real estate – Since the 2008 debacle, Cash Sales accounted for a large amount of home sales. This is the case when the buyer comes with all-cash to buy the house. The rate of cash only sales dipped a bit in 2015, to 34 Percent of All Home Sales. That is 1 in 3 sales. Who in the United States has that kind of money? Well the answer is Foreign investors! In the southern part of the United States, Latin American (LatAm) investors were buying up property. Major metro areas with the highest share of cash sales in November were Miami (59.7 percent), New Orleans (54.8 percent), Oklahoma City (51.4 percent), Tampa (50.6 percent), and Orlando (49.9 percent). It is as if the world is acknowledging that the US is the best destination for its money. Cash only sales also drives up the house prices because the majority of home aspirants cannot afford to pay down the cost of the house. Therefore a bidding war starts, leaving the local buyer in the lurch.

  • There is Asset Inflation which the Fed is perhaps looking at – Another factor that pushes up the sale price of a home is the low interest rate, especially in areas such as the Silicon Valley, New York etc. Home to a large population of Asian American immigrants who believe in owning a home at all costs, families are starting to pool together resources to own a house. A single family of two earning members is just not enough to buy a house. Therefore more than 1 family ends up living in a house. This puts strain on several local resources – schools (especially the ones with High Academic Scores) expect only 2-3 students per household but it is not uncommon to see double that number for a single house. Likewise School buses get crowded.

  • Capital flight from China – RealtyTrac, a leading real estate online site reports that in the period 2005-2015, the number of Chinese speaking buyers paying cash for their houses has gone up by 229%! This suggests that capital continues to flee from mainland China to safer places such as the United States.

    Table – 1. Cash only sales breakdown
    Native Language 2005 Cash Share 2015 Cash Share Percent Increase
    Chinese Speakers 14% 46% 229%
    All Buyers 20% 33% 65%

Perhaps looking at all these figures, Yellen may have figured out that once this froth is set aside, the real growth in US is not strong enough to warrant a rate increase.

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