SHI Update 11/30/16: We’re BACK!

No, this is not another Trump commentary.   Although there are comments and predictions a-plenty in the media:

• GDP will grow north of 4%;
• We will see massive cuts in regulation;
• A retrenchment of ‘ObamaCare’ is certain;
• A modification (tightening) of US trade policies is coming; and, of course,
• The Wall.

No, “We’re BACK!” refers to the aggregate value of US homes.   According to the Case-Shiller Index (the CSI), home values now exceed the high water mark set back in July of 2006.   An impressive feat to be sure!

And, of course, we must discuss the latest official GDP release!   Welcome to this week’s Steak House Index update.

As always, if you need a refresher on the SHI, or its objective and methodology, I suggest you open and read the original BLOG: https://terryliebman.wordpress.com/2016/03/02/move-over-big-mac-index-here-comes-the-steak-house-index/)

Why You Should Care:   Is our economy expanding?  Has recession been ‘Trumped’?  Or are we heading over the economic edge … into contraction?

The objective of the SHI is simple: To predict the direction of our behemoth economy.  But while the objective is simple, the task is not.

The BEA publishes GDP figures the instant they’re available. Unfortunately, it is a trailing index. The data is old news; it’s a lagging indicator.  It only explains … it doesn’t predict.

We want to know how the economy is doing in advance of the GDP release.

Personal consumption expenditures, or PCE, is the single largest component of the GDP. In fact, the majority of all GDP increases (or declines) usually result from consumer spending. Thus, this is clearly an important metric to track.

I intend the SHI is to be predictive, anticipating where the economy is going – not where it’s been.  Thereby giving us the ability to take action early.  Not when it’s too late.

Taking action:  Keep up with this weekly BLOG update.  If the index moves appreciably – either showing massive improvement or significant declines – indicating expanding economic strength or a potential recession, we’ll discuss possible actions at that time.

The BLOG:    There’s plenty of consumer confidence in housing!

Per the CSI, US homes are now worth more than ever before!

Per David Blitzer, Managing Director/Chairman of the Index Committee:  “The new peak set by the S&P Case-Shiller CoreLogic National Index will be seen as marking a shift from the housing recovery to the hoped-for start of a new advance.”

Blitzer provided this chart …

… and commented further, “The table summarizes how housing, incomes and the stock market have moved over the past few decades. From 1975 (the earliest date for the S&P Case-Shiller CoreLogic National Index) to this report, home prices rose at an annual rate of 4.9% before adjusting for inflation. The real or inflation adjusted pace was 1.1% per year.  Real disposable personal income rose 1.9%, outpacing home prices over the entire period. The stock market, measured by the S&P 500 adjusted for inflation, did better at 4.4% per year.  We are currently experiencing the best real estate returns since the bottom in July of 2012 when prices rose at a 5.9% real annual rate.  Given history, this trend is unlikely to be sustained.”

Well, that’s a bit of a buzz-kill.   Value increases will not be sustained?   Hmmm….I don’t know about this one ….  Permit me a few comments.

First, while ‘real’ (adjusted for inflation) stock market returns since 1975 equal 4.4% per year, and the return (CSI value) from a home investment has been a paltry 1.1% per year, it’s important to keep two unique differences in mind:

1. One cannot live in a stock certificate.
2. Unless you are a very aggressive trader, you probably don’t use leverage in your investments.   Conversely, leverage is quite common for most homeowners.  Said another way, if one purchased a home with a 20% down-payment, their investment represents 1/5 of the total cost.  Thus, ROIs are magnified by 5X.   Meaning while the ‘un-levered’ ROI may be only 1.1% per year, a homeowner making a 20% down-payment in 1975 would have actually realized a 5.5% annual ROI from that investment.   With 10% down, the ROI would have been 11% per annum.

Second, I disagree with the statement that home value increases will not continue.  I believe they will.  While the supply/demand relationship has improved a bit, it is still heavily out of balance.   The supply of US housing is not growing fast enough.  (Take a look at this BLOG from June:  https://terryliebman.wordpress.com/2016/06/01/values-up-ownership-down/)

Now, it’s possible he meant value increases will not continue at a 5.9% annual rate above the rate of inflation.  I would agree this rate is unsustainable over the long term.  In fact, I would argue that US home values, in the aggregate, will likely increase at about 1.0 – 1.5% above the rate of inflation over the long term?  This is actually supported by very long term trend data.

Also keep in mind these are national numbers.  Some areas, for business, demographic or geographic reasons, tend to appreciate more.   For example, the greatest YOY appreciation has been in Seattle (11.0%) … followed closely by Portland (10.9%).    Ironically, home values in New York have lagged … showing only a 1.8% increase YOY.  (If you’d like more housing information, go directly to the source:  http://us.spindices.com/index-family/real-estate/sp-corelogic-case-shiller)

Let’s take a quick look at the latest GDP release:

Good news!   Our 3rd quarter GDP grew at an even greater rate than earlier reported!   The ‘advance’ estimate suggested a 2.9% rate … this “second” estimate has increased to 3.2%.   Per the BEA:

“The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE)….”   Once again, the consumer is leading the way … but are they doing their part at our exclusive eateries with their lofty steak prices?

Yes!  They are!   It appears last week’s SHI decline was, in fact, a flash-in-the-pan so to speak.   A Thanksgiving aberration.  This week, the SHI has bounced back dramatically:  Up a positive 10:

With the exception of the Capital Grille (clearly once again the ‘chuck wagon’ of our group) pricey cuts of beef are flying off the shelf.   Clearly, our well-heeled Orange County, CA folk have had enough turkey!   It’s time for a thick, juicy bone-in Ribeye!

Once again, the Mastros Ocean Club is fully booked – not one table for 4 was available on Saturday evening.   Here is our longer term trend chart:

For whatever reason, this week’s SHI is quite strong.   Once again, the SHI is indicating our economy is on solid footing, with the PCE continuing to underpin strong GDP growth.

Whether or not we find long-term correlation with real GDP growth or not remains an open question.   But for now, both the SHI and GDP trends remain well aligned.

• Terry Liebman