SHI 10.16.24 – A Tale of Two Nations
October 16, 2024SHI 10.30.24 – Happy 111th Birthday!
October 31, 2024
We know all things ebb and flow. Cycles are a fact of life. Over time, things tend to fall into a consistent rhythm.
The more difficult challenge we face, I feel, is discerning between a traditional, historic cycle, or ‘S-curve‘, and something that is actually far more durable. Something like a more chronic trend. At times, differentiating between the two can be quite difficult.
For months, I’ve blogged about the clear and obvious dissonance between our smokin’- hot economy and the generally morose perception of many Americans across the country. GDP growth has rarely been stronger. The unemployment rate is at generational lows and just about everyone who wants a job has a job. Retail sales remain strong. And I could go on and on. Yet, many Americans tell us they are unhappy with the economy. Their dissatisfaction shows up in comments in the mainstream media, in the various ‘consumer confidence‘ surveys we see. And it even shows up in the FEDs Beige Book report, published today, where many respondents claim “economic activity was flat” or “the economy declined slightly” or similar, across the US in the 12 districts of the FED.
At the consumer level, today’s high prices for both food and housing are often cited as the cause for this unhappiness. Here is where Americans seem to be focused today … and this appears to be “the economy” many voters are likely to focus upon when they cast their vote. GDP is not their economy. Food and shelter are.
With a presidential election just weeks away, we have to wonder if the outcome, once again, will come down to this 1992 mantra: “It’s the economy, stupid.” You remember this now infamous presidential election trope, right?
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Many Americans are unhappy today.“
Perhaps politics are always about the economy. Perhaps the economy is always the primary driver of presidential election results. Clearly, today the economy is front and center in everyone’s mind. Sure, there are many, many non-economic and non-financial issues Americans care about. Put on any of the mainstream news channels and you’ll hear about dozens of those.
But is it possible that in the final analysis, once again as Americans make their presidential choice, it’s the economy? If yes, might this entire election hinge on one specific aspect of the American economy?
I believe this election could hinge on housing.
More specifically, the exceptional durability of America’s chronic housing problem … and the fact that there simply isn’t enough of it. And there hasn’t been for decades. Let’s dive in.
Welcome to this week’s Steak House Index update.
Why You Should Care: The US economy and US dollar are the bedrock of the world’s economy.
But is the US economy expanding or contracting?
Expanding …. By the end of Q2, 2024, in ‘current-dollar‘ terms, US annual economic output rose to an annualized rate of $28.63 trillion. After enduring the fastest FED rate hike in over 40 years, America’s current-dollar GDP still increased at an annualized rate of 4.8% during the fourth quarter of 2023. Even the ‘real’ GDP growth rate was strong … clocking in at the annual rate of 3.3% during Q4.
According to the IMF, the world’s annual GDP expanded to over $105 trillion in 2023. Further, IMF expects global GDP to reach almost $135 trillion by 2028 — an increase of more than 28% in just 5 years.
America’s GDP remains around 25% of all global GDP. Collectively, the US, the European Common Market, and China generate about 70% of the global economic output. These are the 3 big, global players. They bear close scrutiny.
The objective of this blog is singular.
It attempts to predict the direction of our GDP ahead of official economic releases. Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth. In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending. Consumer spending is clearly a critical financial metric. In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric. I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.
Taking action: Keep up with this weekly BLOG update. Not only will we cover the SHI and SHI10, but we’ll explore “fun” items of economic importance. Hopefully you find the discussion fun, too.
If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.
The Blog:
“Throw the bums out!” might be the mantra of this presidential election. The bums, in this case, being the Party currently in the White House. Why might Americans want to throw them out?
Housing. If Americans are finally fed up about our housing issues, rightly or wrongly, the current resident of the White House might get the blame. Everyone, of course, knows we have a problem. Home prices ares sky high. Rental rates are sky high.
Many fortunate Boomers have owned a home for decades. But the generations that followed are struggling. ‘Millennial’ and ‘Gen X’ households are struggling. And they’ve been struggling for many years, as intra-US migratory patterns show. These patterns prove Americans are more interested in achieving the American dream of homeownership over the perfect job.
Perhaps the ‘Great Financial Crisis of 2008’ (GFC), which is also known as “the sub-prime mortgage crisis,” triggered a mass migration as many would-be homeowners lost their homes (for a variety of reasons). Evidence now suggests this was when the “homes-for-rent” (HFR) movement began. Starting in 2010, one company acquired more than 1,000 ‘distressed’ homes in Phoenix, Arizona, one of the first large HFR purchases. Many more followed. Wall Street buyers soon got into the HFR business and in 2012, Invitation Homes was born.
As of July of this year, Invitation Homes boasts they own 84,000 homes in 16 markets across the US. Progress Residential is about the same size, owning 85,000 homes according to their website. American Homes 4 Rent claims to own 60,000 single family homes across the country. Trincon Residential boasts 38,000. And the list goes on and on and on.
“California Research Bureau” (CRB) data, now about 1 year old, reports Invitation Homes owns 11,807 homes in California. They are the largest corporate owner in California. The CRB website does a great job of displaying the geographic dispersion of HFR properties. Viewing the data by ‘county’ on that site, we see that ‘private companies’ own 5.9% of the single family homes in Fresno County, and 5.6% in Tulare, 5.0% in Kern, 4.9 in Imperial, and the list goes on. Large corporate homeowners have acquired a sizable position within the California SFR marketplace. And as the data is now about a year old, the numbers could be even higher. Remember: These companies have a long-term ownership and rental plan. Their objective is to grow, not sell homes.
So here’s the problem: While the level of large corporate ownership in the California numbers above might appears somewhat minor, I believe we might be seeing only the proverbial “tip of the iceberg.” We only see a small portion of what’s really going on … and beneath the surface there’s a lot more corporate ownership than we see.
Today we learned from the National Association of Realtors (NAR) that last month 30% of all purchases were made with cash. This is very telling, as a “cash” buyer is often a corporate buyer. Not always, but often. When you or I buy a home, we typically obtain purchase money financing. When Signature buys 100 homes, they pay cash. When they need capital, they access the public debt or public equity markets, thereby accessing capital at a cost far below ours. If their cost of capital is 200 or 300 basis points lower than ours, their cost of ownership is also much lower, making them an aggressive competitor indeed.
In the final analysis, the net-net result is a lower existing home inventory available for individual homeowners and buyers. Thus, ultimately, while large corporate buyers are not the cause of the housing shortage problem, they have definitely exacerbated the problem.
In a market already stressed with inadequate supply, the net result here is there are fewer single family homes “on the market” so to speak. And since there are fewer homes available, fewer are selling. NAR statistics, shown in the chart below, demonstrate this fact. It’s easy to see that the number of existing homes sold each year has been generally declining since reaching the highest level ever in September of 2005.
By 2007, as the sub-prime and “Alt A” mortgage markets collapsed, existing home sales plummeted. But a recovery that started around 2010 and (ignoring the pandemic “valley” for a moment) really gained momentum into 2022.
In 2005, the US had a population of 296 million — today, our population is almost 335 million, more than 13% higher.
And yet, home sales in August only reached 3.86 million, far below the peak number of 7.25 million back in 2005. In fact, ignoring the outlier effects of the GFC housing crash, we have to go all the way back to 1995 to find a similar existing home sales rate. And back in June of 1995, the US population was about 261 million. Today’s population is more than 28% higher. In other words, if we were comparing apples-to-apples, at a population level 28% higher, existing home sales should be 28% higher. But they are not.
New apartment construction should have picked up the slack. And for a while, it did. During the super-low interest rate days triggered by the Pandemic, thousands of new apartments were built across the country. But new construction is one of the most interest rate sensitive segments of our economy. This bulge of new rental homes died a slow death as the FED quickly raised rates in Q2 of 2022. It’s easy to see from the chart below how quickly new construction dropped off.
As of last month, that annualized number of 1.88 million units back in March of 2022 has fallen to 1.43 million — a 31% decline.
Before the rate-hike cycle began, builders of new homes were happy enough to step in. But then, rates spiked. And then costs increased. They, too, have been severely impacted by both the inflated costs of construction materials and high interest rates. It goes without saying that the huge inflationary price spike we’ve all experienced in the CPI during the past few years impacted home builder costs just as much. Meaning that they, too, must sell their final product to the home buyer at prices much higher than in prior years.
And this brings us back full circle. According to the Census Bureau, America now has 335 million citizens. As highlighted in last week’s Blog, we have 146 million housing units in the United States today. Those ‘Boomers’ make up about 43 million. ‘Gen X’ — born 1965-1980, have about 35 million, and the same is true for ‘Millennials’ — born 1981 thru 1996. The census Bureau adds that as of 2022 almost 54% of boomers owned a home, folks between 34-54 (mostly our Gen X folks) had a home ownership rate of just over 34%, and homeowners under 35 years of age total just 12.2%.
And herein lies the foundation of the problem. This problem is so large … so enduring … I feel it just might decide the outcome of the current presidential election.
Housing is a chronic problem in America at large … and certainly here in California. Note I used the word ‘chronic‘ as opposed to the FEDs favorite word “transitory.” Our housing problem has been firmly in place since before the GFC housing crash, since around 2006. For 18 years now, America has failed to produce enough new homes to stay up with housing demand. For 18 years now, insufficient housing supply has failed dreadfully to keep up with demand.
As a result, as you can see in the chart below, housing inflation — as measured by the Corelogic housing rent index shown below — rental costs have FAR exceeded the peak level of the CPI at around 9% about a year ago. According to Corelogic, rental rate inflation peaked at over 15% per year.
This is an important point and bears repeating: While the CPI peaked at around 9% — and remember the CPI includes ‘housing cost’ as one of it’s components — the Corelogic SFR index peaked far higher. Like home prices, rental costs are way up, folks. I believe this problem, combined with the fact that our leaders have made no meaningful attempt to solve it, is finally bubbling over.
For example, consider these excerpts from this Bloomberg article:
Housing is typically a local issue. But the affordability crisis has moved to the center of national politics, posing complicated challenges for both Democratic nominee Kamala Harris and Republican Donald Trump as they try to woo voters in battleground states with promises to address housing costs. In several areas of swing states, the pain is especially acute for new and aspiring middle-class buyers.
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> In Las Vegas, almost three-quarters of mid-income households approved for mortgages last year had debt-to-income above 40%. That’s one of the highest shares in the country.
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> Montgomery, Chester and Bucks counties — suburbs of Philadelphia where working-class homes were once plentiful — had the biggest drop in for-sale inventory, to just under 3,000 from 10,800 listings two elections ago.
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> About 41% of the moderately priced homes in Atlanta were snapped up by cash buyers last year — a whopping 22-percentage-point jump from 2018 despite growing attention to that trend.
Even though the Federal Reserve has started cutting interest rates, it could take years to make homeownership affordable.
According to Fannie Mae calculations, it would take one of three things, or a combination of them, for affordability to return to 2016-2019 levels: The median price of a single-family home would need to fall 38% to $257,000 from September’s $414,340; median household income would have to rise more than 60% to $134,500; or the mortgage rate would need to fall to 2.35% from roughly 6.5%.
And while I respect the author of the article, I have to say I disagree. This is a problem caused by the lack of housing inventory, continuously exacerbated by decades of inept public policy at the local, county, state and federal levels. New home construction has been held back by exceptionally poor policy and excessive regulation for decades. I feel it’s likely American voters might finally say “enough” and cast blame the party currently in power, as Americans often do.
OK, you’re probably tired of my rant by now. Let’s head to the steakhouses.
Well, I don’t have much to add here. As we can see above and below, expensive eatery reservation demand is fairly consistent. We had an odd spike in demand last week in Chicago, but that market has normalized this week. All in all, not much here.
Above, I mentioned the Beige Book that was published earlier today. Here’s an excerpt from their summary:
Overall Economic Activity
“On balance, economic activity was little changed in nearly all Districts since early September, though two Districts reported modest growth. Most Districts reported declining manufacturing activity. Activity in the banking sector was generally steady to up slightly, and loan demand was mixed, with some Districts noting an improvement in the outlook due to the decline in interest rates. Reports on consumer spending were mixed, with some Districts noting shifts in the composition of purchases, mostly toward less expensive alternatives. Housing market activity has generally held up: inventory continued to expand in much of the nation, and home values largely held steady or rose slightly. Still, uncertainty about the path of mortgage rates kept some buyers on the sidelines, and the lack of affordable housing remained a persistent problem in many communities.”
Indeed. I’ll leave it there. Thanks for tuning in.
<(::)> Terry Liebman
