Lead Story… Late in 2016, the Federal Reserve had a dollar problem on it’s hands. The Fed had embarked on the beginning of a tightening cycle by boosting short term rates while other major economies were actually easing rates. When a central bank raises rates, it’s currency tends to appreciate, all else being equal. So every time that the Fed indicated that it would raise rates via a statement or meeting minutes, the dollar would shoot up in value, raising concerns about currency over-valuation versus trading partners and slowing growth. As a result, the Fed was forced to push it’s rate increases back several times in 2016 and hike less than initially intended. The US economy (and by extension the dollar) was the prettiest girl at a dance populated mainly by 2s and 3s as economies in the rest of the developed world battled deflation and economic contraction.
The dollar appreciation had a profound impact on real estate markets (and commodities, for that matter) especially where foreign investors were concerned. As noted here back in May of 2016, dollar appreciation created a conundrum for foreign buyers who had put non-refundable deposits on to-be-built condos in Miami when the dollar increased in value during the construction period. The problem was that the buyer would need to come up with more money than anticipated to close since their native currency depreciated versus the dollar. As a result, many chose to flip their contracts, creating a glut of condo inventory that Miami has not recovered from. The silver lining was that dollar appreciation led to a potentially large profit (in native currency terms at least) if and when a sale took place even if the value of the unit hadn’t gone up in price. Miami’s foreign condo buyers essentially became Forex currency traders by default. By the middle of last year the dollar had strengthened to such an extent that it substantially impacted foreign buying power and inventory surged substantially as offshore buyers disappeared.
Oh what a difference a year makes when it comes to the Greenback. The dollar topped out in January of 2017 and has continued to fall ever since. In fact, it’s now on it’s longest monthly losing streak in 14 years and has fallen nearly 10% year to date. Eshe Nelson at Quartz covered this last week (emphasis mine):
American employers added 156,000 jobs in August (pdf), missing economists’ forecasts for a 180,000 gain in payrolls. Meanwhile, the unemployment rate ticked up to 4.4%, from a 16-year low of 4.3%, and annual wage growth remained stubbornly sluggish at 2.5%. Traders reacted swiftly to the disappointment, and sent the dollar index down 0.5%, just minutes after the report was published.
For 2017, the average monthly payrolls increase is 176,000, about the same as 2016. While this is still a healthy pace of jobs gains, the stagnant labor force participation rate and wage growth will have policymakers at the Federal Reserve wondering if the US economy is prepared for more interest rate increases.
Most officials expected in June (pdf) that they would raise rates at least one more time by the end of the year, but weak inflation convinced many investors that they probably wouldn’t. This is keeping the dollar suppressed. Geopolitical concerns over tensions with North Korea and the looming need to increase the US debt ceiling aren’t helping the dollar either. But as the dollar languishes, other currencies are soaring. Most notably, the euro:
The dollar has lost 11% of its value against the European shared currency in the past six months. While, Europe is experiencing a growth spurt in its economy, the benefits have almost become too good. The euro climbed above $1.20 for the first time since January 2015 this week and is reportedly worrying European Central Bank policymakers who are trying to rollback stimulus measures. Now, they are now concerned the eurozone will face a fresh bout of low inflation because of the strength of the currency. ECB officials meet next week to announce their latest policy decision.
So, what does this mean for US real estate? It means that foreign currency buys 10% more in the US than it did a year ago. That could lead to a resurgence of foreign interest in areas like NY, Miami and even San Francisco (to a lesser extent) where they have had trouble with high condo inventory of late. It could also have a positive impact on US markets that are attractive to Canadians like the Coachella Valley. Canadian buyers largely kept the Valley afloat coming out of the downturn but buying slowed down and many ended up selling when oil tanked, taking the Canadian dollar and economy with it. The Coachella Valley has struggled in a way that most of the rest of the California housing market has not as it tried to cope with the exodus of Canadians who had propped the market up. The Greenback losing value against the Loonie could be just what the doctor ordered for a region that has seen housing activity stuck in neutral at best.
There are plenty of downsides to a falling dollar. It’s makes it more expensive to travel, imports go up in price and commodities tend to go up as well. However, a cheaper dollar means that dollar-denominated assets are more attractive to foreigners. That could provide a tailwind to some over-supplied housing markets that depend on foreign buyers…..and add even more fuel to the already-raging fire in markets that are already experiencing a massive supply shortage and soaring home prices.
Puzzling: Low inflation data continues to defy Federal Reserve expectations.
Dropping Standards: Job satisfaction is way up, mainly because workers have increasingly lowered their expectations.
False Alarm? Fear not the robot apocalypse. Automation commonly creates more, and better-paying, jobs than it destroys. A case in point: U.S. retailing and the eCommerce boom.
Sticker Shock: Institutional investors identified elevated valuations as their primary concern when it comes to commercial real estate in the US.
Sea Change: Great piece from Rick Palacios, Jr. of JBREC about how self-driving cars are going to change housing.
Race to the Bottom: The fascinating backstory of how solar panels went from an expensive luxury to cheap enough for mass adoption.
Frothy: Yale economist Robert Shiller wrote the book on bubbles (and collected a Nobel Prize along the way) and he says that “the best example right now is bitcoin.” See Also: Why cryptocurrencies are like Beanie Babies.
Too Little Too Late? Kroger, the largest supermarket by store count and sales, is attempting to fight off Amazon by slashing prices, investing in technology and adding online ordering options. Shouldn’t they have been doing this years ago?
Smoke and Mirrors? According to Moody’s, Amazon is actually the weakest of the big US retailers, not one of the strongest.
Just Stop Already: People who fake service dogs are monsters.
Polly Want a Xanax: Parrots are probably the world’s worst pets yet they remain relatively popular.
Chart of the Day
The labor shortage in residential construction continues.
Suns Out, ___ Out: A couple was arrested for having sex on a crowded beach in broad daylight because, Florida. Also because Four Loko. (h/t Steve Sims)
That Stinks: Woman ends Tinder date stuck in window trying to grab her own poop.
Hell No: People at the Burning Man Festival drank breast milk lattes mainly because people at Burning Man are freak shows.
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