The Rent is Too Damn High and Other Oddities
There are three harpies of inflation in the United States that are crippling economic growth. They are:
3. Health care
These three centers for crony capitalism are now ingrained in the bureaucracy and are unlikely to be "fixed" by any lawmaker in the near future.
Rents and housing prices have been going up since the foreclosure debacle started seven years ago. People lost their houses and moved into apartments, creating scarcity and driving up prices. This market truth has been around so long that this meme is old hat:
But it's not just an Internet legend; the trend will continue for years.
Overall shelter inflation is running at 3.11%, core services ex shelter is at 1.91%, and core goods is at -0.51% — in the context of an overall inflation rate of 1.80% for core CPI.
It is much higher in big cities. If you didn't buy and hold about 15 years ago, you are in serious trouble.
You can see by this graph that in most big cities, it costs more than 30% of your income to live there. The housing costs hit young people the hardest.
This trend should continue. Deutsche Bank reported that the bundling and secularization of rents is now a thing and grew $5 billion to $15 billion last year:
The growth over the last two years and the beginning of a securitization market can be traced back to the magnitude of the decline and the eight years that have passed since the housing market peaked, which have perhaps forever changed the way households view the choice of buying a home.
Do people want to own a home? Or can they even entertain the idea? It seems clear that young people can't afford it. If you have 20% down to buy a house (at 4%), your mortgage payment is almost half of what renters pay for the same space.
But due to their student loans and bartender jobs, young people especially don't have the required down payment.
Which is why more young people are living with their parents. Note: the numbers continue to increase despite the “recovery.”
Student loans outstanding are now at $1.3 trillion. This is higher than both credit card loans and car loans.
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Student Loans Triple in 10 Years
Credit to Dr. Housing Bubble for finding these charts
If you took out a big loan to go to university, you are now paying a large chunk of your income to cover your monthly nut. Many people don't pay at all — in fact, 17% haven’t paid in a full year.
This equals 7 million people who are in default for over $111 billion this year. That is up from $89 billion in 2013. Every year, the government gives out more loans; ever year, the universities jack up prices; and ever year, the student gets stuck with the bill.
Things that can't go on won't go on.
The obvious fix to the student loan problem would be to stop giving student loans. Cut all government subsidies for higher education, and allow the market to discover the true price.
Yet this will never happen.
What we will get is some form of price control and the same destruction of universities that we saw in the lower grades. Because as we all know, the solution to bad government is even more bad government.
The third leg of today's financial doom is health care costs.
According to an Arthur J. Gallagher & Co. survey of smaller employers reported in BusinessInsurance.com, 44% reported premium rate hikes of 6% or more in 2014. 23% saw rates in the double digits, the survey showed.
Dave Ratcliffe, Washington-based principal in the health and productivity practice with Buck Consultants at Xerox, said employer health care cost trends before measures are taken to control costs are actually higher than most surveys show.
“We see trend rates closer to 9%... not at 6%-7%,” Mr. Ratcliffe said. Many are reporting that the cost is rising at a lower rate than in the past, but at 7%, it is still well above the inflation rate and has been for years.
Most of this money is going to the Big Five health insurers, and they are doing well.
Aetna, Cigna, Humana, Anthem, and UnitedHealth Group reported sweet gains in Q2. Aetna saw income jump 33% to $731 million. Humana was up 25%, Cigna was up 9%, and Anthem's income climbed 18% to $859 million. UnitedHealth saw revenue climb by 11% to $36 billion.
The companies attribute the gains to the increase in high-deductible insurance. People have to get insurance due to Obamacare but don't use it due to the high cost of visiting the doctor or staying at the hospital.
But we all knew it was a big giveaway to the insurance companies from the get-go.
There you go. If you are looking for an economy to limp along at 2% GDP, make sure you have record-high and ever-increasing prices for health, shelter, and education.
More next week,
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