Lead Story….. Regular readers of this blog know that I fall pretty solidly on the side of supply and demand (inventory) holding more sway over the housing market than interest rates. Assuming that view is correct – and it has been so far this cycle as rates have been on the rise for quite a while with no price correction in sight – home values are unlikely to fall much even if rates rise, so long as inventory stays at historically low levels. At the same time, the old truism that all real estate is local is as important as ever today and I would add a caveat to it – real estate price segments can move independent of each other for periods of time. Perhaps the best illustration of this is the period after the Great Recession where the high end market recovered rapidly while pretty much everything else stagnated for several years.
Today’s conditions are very different – lower priced homes are in high demand and the entry level segment is appreciating rapidly since there is little to no inventory to be found. At the same time, high end appreciation has slowed substantially and inventory has been building. Zillow Chief Economist Svenja Gudell pointed this out in a recent report (emphasis mine):
The total inventory of homes for sale nationwide fell 8.6 percent in March from a year ago, the 38th consecutive month of annual inventory declines, according to the March Zillow Real Estate Market Report. This general supply shortage is painful to most buyers, doubly so because demand is incredibly high, driven in large part by a good economy and the large millennial generation beginning to age into their prime home buying years.
And because they’re generally working with a more limited budget, these late-twenty/early-thirtysomethings are typically in the market for a less-expensive, entry-level home valued in the bottom-third of all homes. But as of the end of March – traditionally the first month in the busy spring home shopping season – more than half (51.4 percent) of all homes for sale nationwide were in the most expensive one-third of the market, not the least. Only about one in five (21.9 percent) U.S. homes for sale in March were in the entry-level, bottom-third.
The folks at John Burns Real Estate Consulting crunched some numbers on income distribution that was highlighted in a recent InvestorPlace article by James Brumley that shows just how out of whack inventory really is (emphasis mine):
John Burns Real Estate Consulting crunched the numbers to figure out why. The firm found that the United States true “middle class” has shrunk from 57% of the population in 1970 to 45% now. The wealthier echelon has expanded from 12% then to 19% now, while the lower third of earners now make up 35% of the country’s consumers. That figure was 31% nearly 50 years ago.
The stats above paint a picture of a very top-heavy market but one that still varies widely by region. One of the coolest features with the charts provided in the Zillow link above is that you can sort it by city. It’s interesting to note that supply is still incredibly low across the board in west coast markets like LA and San Francisco where the lowest tier price points are still substantially higher than the most expensive tier nationwide. I can only assume that is due to little if any new construction in these markets and the tendency of people to stay put due to Prop 13 protection and capital gains avoidance. At the same time, the picture is not looking great for the top tier in the non-nosebleed cities.
If 19% of potential buyers are looking for homes priced in the top tier which has 51.4% of market inventory, then prices are likely to come down or at least stagnate in that segment. However, if 35% of buyers are looking for entry level homes and only 21.9% of the inventory falls into this range, it’s a recipe for prices to rise substantially faster than incomes at the lower end – which is exactly what has been happening. If this condition persists for a long period of time, low-end scarcity drives the price of even the low-end homes to a level where no true entry level supply remains which is exactly what has happened in coastal California. Those who can’t afford to buy end up renting which results in more pressure on an already-limited apartment supply, leading to rent growth that outpaces wage growth. The end result is what we have in California today which has 24% of the homeless population in the US despite being home to only 12% of the population. Of course, it is something that can be fixed by allowing for more development at the entry level of both for sale and for rent but for many regions via loosening of land use regulations but time is running out.
Stepping Up: How local governments are filling the infrastructure void left by the Federal Government.
Better Metric: Today’s unemployment rate is at a low not last seen since the tech bubble. However, wages were growing much quicker in those days than they are now. There is a growing view that economists should be judging the economy by prime age employment to population ratio, which represents the percentage of Americans between the ages of 25 and 54 who have a job. This metric is still sitting substantially below the tech bubble era (and the mid-aughts for that matter) which helps to explain why wage growth is not accelerating like you would expect it to with such low unemployment.
Feeling the Squeeze: Gas is headed towards $3/gallon again – $4/gallon if you live in California – which will end up wiping out about a third of the increase in take home pay from tax reform. As a quick aside, I was in the camp that thought the economy would get a boost from falling oil prices a couple of years ago and I was wrong. Now prices are moving upward again and that’s supposed to be a headwind to the economy as well. Heads you win, tails I lose.
Die Hard: Despite its recent controversy and supposed phase-out, Libor still underpins more than $370 trillion in instruments across various currencies. On top of that, its chosen replacement had a less than smooth roll-out, leading to an effort to save Libor from it’s scheduled death.
Bye Felicia: Fast food restaurants are on the edge of a crisis as there are simply too many of them and their appeal is still more tailored to older generations. Say what you will about Millennials but they do tend to have better standards for food than their elders.
Inflating: The cost of residential construction inputs is already up 4% in 2018 as cost inflation continues to be a headwind for builders.
Heads in the Sand: A new survey found that Bay Area residents still predominately blame tech companies and developers for the regions housing shortage while largely letting state and local governments, NIMBYs and environmentalists off the hook.
Loophole: New Jersey Governor Phil Murphy signed legislation to let homeowners declare property taxes as charitable donations, deductible on their annual tax filings, which will give residents of one of America’s most highly taxed states a way to avoid the new $10k cap imposed on deductability of state and local taxes. I’m going to go out on a limb here and guess that the IRS will not take this lying down.
Don’t Call it a Comeback: Older generations fled cities for the suburbs in order to avoid crime and put their kids in better public schools. Today’s young people are increasingly leaving cities for the suburbs due to the high cost of living.
A Different Approach: High-paying trade jobs are sitting empty while high school graduates line up to go into debt for a college degree. A construction trade school outside of Seattle wants to help change that.
Feeding Frenzy: How a $200MM debt problem at Toys R Us could lead to an obscene $348MM in bankruptcy costs, highlighted by attorneys charging up to $1,750/hour. The sharks have latched on to this one and they always get paid before employees or investors as the corporate bankruptcy racket rolls on.
Unit of Exchange: Wealthy investors are hoarding billions of dollars of bitcoin stored on thumb drive-like devices in underground bunkers. This is exactly the way that a stable currency that is a unit of exchange and a store of value is supposed to work.
Chart of the Day
Hero: Richard Overton, America’s oldest man, just turned 112 and celebrated with several cigars and a bunch of whiskey. 99% of us will ever come close to being this cool:
According to a recent profile in the Dallas Morning News, Overton’s path to longevity isn’t what most doctors would recommend.
He smokes a dozen cigars a day (smoking increases cancer risk). He enjoys whiskey and coke (alcohol is reported to cut life expectancy). And he wakes up with multiple cups of coffee (California is adding cancer warnings to coffee), the newspaper reports.
His secret to longevity? “Just keep living, don’t die.”
NOPE: A cockroach crawled into a woman’s ear and it took nine days to get it out because Florida.
Brilliant Disguise: A pet ‘dog’ raised by a family for two years turned out to be a bear because China (amazingly this did not happen in Russia).
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