Landmark Links January 13th – Divergence


Lead Story… I’ve been writing about the inherent conflict in the housing market between economic growth and rising interest rates for a while now.  Today, I want to focus on an important divergence that is occuring.  This is the situation that we currently find ourselves in:

  • Generally speaking it takes accelerating economic growth to, spur growth in household income.  After years of income stagnation, we are finally beginning to see growth in real incomes.  This should be good for the housing market.
  • Home builder sentiment is soaring in expectation of economic growth and market deregulation.  Thus far, builders are largely discounting the impact of interest rates.  This should be good for housing since aloptimistic builders are likely to start more projects, which creates more jobs and eventually leads to a healthier economy.
  • Consumer sentiment is also strong – at it’s highest level since before the Great Recession.
  • Housing prices are going up.  In fact, they have been rising for 53 straight months in the US.  In the first 3 quarters of 2016 alone, homeowners added $837 billion in total equity.
  • A large group of Millennials are entering their mid-30s – a key age for household formation

Given the above, one might think that consumer sentiment towards housing would be on the rise as well.  However, it’s doing just the opposite as Diana Olick wrote for CNBC (emphasis mine):

Consumer sentiment for home buying is falling, despite the fact that more young Americans are employed and more millennials are aging into their prime home buying years.

Why the wet blanket on home sentiment? It’s twofold: A diminishing number of consumers expect the recent spike in mortgage rates to abate, and even fewer consumers say their household income is significantly higher today than it was a year ago, according to a monthly survey by Fannie Mae.

“Despite the post-election bump in general consumer attitudes, a rapid rise in mortgage rate expectations has tamped down home-purchase sentiment, at least in the near term. A spike in economic optimism in the immediate aftermath of an election is typical. Whether consumers will sustain this level of optimism into 2017 remains unclear,” said Doug Duncan, senior vice president and chief economist at Fannie Mae.

Interest rates have risen substantially since early November in expectation of fiscal stimulus, tax cuts and easing conditions in the credit market.  Taken on their own, rising interest rates are generally not good for the housing market since nearly everyone borrows money to buy a home and higher mortgage rates reduce purchasing power.  However, if incomes rise as well, they can (at least partially) offset the increase in cost.  But here’s the rub: interest rates rise and fall based on future inflation expectations.  And, while that move is already taking place, the aforementioned fiscal stimulus, tax cuts and reduction in bank regulations have not.  This divergence actually began during the summer as rates increased from the Brexit low but it seems to have picked up speed since the end of October when rates really began to move upward.

Given the current makeup of the federal government, it is likely we will have some level of fiscal stimulus, tax cuts and bank regulatory easing. However, it will take months to enact at the very least and no one really knows what the end product will look like since the legislative process can be a messy endevour even with a single party controlling the presidency, Congress and Senate. So, while potential home buyers (and builders for that matter) may be optimistic about future economic growth and more access to credit, they have to deal with the conditions that we have today: interest rates that are rising far faster than incomes in expectation of future growth.   That divergence between rates and financial conditions is why consumer sentiment for home buying is falling.  Eventually, market conditions will either catch up with interest rates or rates will fall again to meet real economic growth.  Either way, there is a disconnect right now.


Little Bundles of $$: Earlier this week I posted an article about how Americans aren’t having enough kids.  Here’s one reason why: it now costs an average of $233,610 to raise a child from infancy to adulthood.  I guarantee that it’s a lot higher in expensive coastal areas.

Turnaround?  Oil drillers are in expansion mode again after shedding nearly 500,000 jobs in a 3-year period.


Here Today, Gone Tomorrow: Empty urban storefronts have a new savior – online retailers setting up pop-up shops.

Mind the Gap: Interest rates are rising but low cap rates have been resilient due mostly to still historically wide spreads over the 10-year treasury. 

Overtaken: Industrial has overtaken multifamily as the most popular US real estate class. It’s the first time in 5 years that multifamily has been out of the top spot. 


Still Digging a Hole: California’s housing affordability problem is as bad as it’s ever been (and doesn’t appear to be improving anytime soon).  See Also: California home ownership rate hasn’t been this low since the 1940s.


Happy Birthday: The iPhone turned 10 this week.  Here’s a cool visual history of Apple’s most important product.

The Juggernaut: Holiday shopping experiences illustrate why Amazon’s dominance of the retail sector is going to continue to grow. 

Complete Waste: Each penny costs 50% more to produce than it is worth. So why do they still exist?

Chart of the Day


Source: Fannie Mae


Munchies Musings: San Francisco’s newer workout craze is ganja yoga. For those of you who are too old or unhip to figure out what that means it’s a stoned yoga class. 

That’s Odd: 15 insane things that correlate with each other almost perfectly. Example: there is an incredible correlation between the number of people per year who drown in swimming pools and the number of films that Nicolas Cage appears in.

Death Wish: A French tourist was bitten by a crocodile in Thailand after trying to take a selfie with it.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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