Archive for December 2016
Merry Christmas to all!
Hope everyone’s having a great holiday season (Christmas here, but with homage to Hanukkah, Kwanza, Winter Solstice, Festivus, and such and so forth….)! Needless to say, 2016 has continued is reign of terror — our condolences go out to the families of Carrie Fisher, George Michael, and a long list of folks who left us w-a-a-a-a-a-y too soon. (We lost three of my favorite space travelers this year — John Glenn, Carrie Fisher, and David Bowie!) This past year suggests the United States may have been founded on an old Native American burial ground….
Ahhh… but enough on that. NAREIT tells me this morning that 2016 was a tough one for REITs in general, but 2017 looks better. (My wife’s Pomeranian could have written THAT press release.) On a somewhat more realistic tone, private equity fund raising is projected to be down among real estate funds in the coming year, which does not portent good things. The Limited appears to be poised for bankruptcy filing, and many (most?) stores that are still open are refusing to accept returns this week. I just wandered into a shopping mall this morning (as I do about twice a year) and noted that The Limited was boarded up. The timing is interesting, since retailers do about 14% of their holiday sales during the week AFTER Christmas.
On another note, S&P CoreLogic’s Case Shiller Index (whew… a mouthful for something started as a student’s MBA project a few years ago…) just announced that house prices from October 2015 to October 2016 rose 5.8%, which isn’t a bad number, and in fact may be a bit high given the present rate of inflation. However, this doesn’t take into account the impact of November’s election, and the likelihood that newly empowered Republicans in Congress will likely tighten capital constraints on major banks. (Ha-Ha-Ha to everyone who thought the GOP was in the pockets of the bankers.) This portends tightening of capital throughout the lending system. Add to this that the dollar is strengthening (the dollar always strengthens in the wake of global uncertainty, irrespective of the source of the uncertainty!) and you get declines both on the supply side and demand side for capital. Couple with this both recent and impending rate hikes at the FED, and one has to wonder what will be a good investment in 2017. (Hint — cash continues to be King.)
Once again, this blog is NOT investment advice, and Greenfield and its senior folks may, from time to time, have investments in things discussed here. It’s just a blog… nothing more….
Well, by for now! May the Force be with you!
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FED raises rates — now what?
There is plenty of news about the FED bumping rates today — a whopping 0.25% (“yawn”) and only the 2nd time in a decade. The argument is that the FED no longer sees low rates as a needed crutch for the economy. Perhaps they’re right. My interest is real estate — how will higher rates impact property returns? More to the point, if the Trump administration goes ahead with infrastructure spending, as was promised, and the FED follows with further rate bumps, as has been projected, will real estate continue its upward climb?
Rather than answer that directly, there’s a great piece on that topic from TIAA — you can access it by clicking here. Looking at data from back to 1980, TIAA finds that real estate appears to perform just as well during periods of rising rates as it does in other times. Indeed, they find a 70% correlation between acquisition cap rates and long-term Treasury rates, suggesting that real estate buyers are agnostic on rates, within reason. Indeed, as the graphic above indicates, the most upsetting quarterly property returns came during periods of relatively stable, downward trending long-bond rates. For the last half-decade, quarterly property returns have tracked the long-bond quite nicely.
So there ya have it, folks.
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Livingston Survey
I’ve noted in the past that one of my favorite economic forecasts comes from the Philadelphia FED. The semi-annual Livingston Survey captures the sentiments of 28 leading economic forecasters on key metrics, such as unemployment, GDP growth, and inflation. Year after year, the forecast remains fairly accurate and steady — much to the disappointment of politicians who fail to realize that the worlds largest non-centrally-planned economy changes course fairly slowly.
Of course, 2017 may be a bit of an exception. Indeed, so was 2009. The forecast can’t take into account shocks to the system (such as the recent economic melt-down) nor can it handle significant policy shifts from D.C. I have some “gut” feelings that differ a bit from the Livingston folks, and I’ll note those at the end.
Now, on to the details. GDP growth for the second half of 2016 was a bit better than had been previously forecast, coming in at about 2.7% rather than the previously forecast 2.4%. Looking forward, the forecasters project a 2.2% annualized growth in the economy during the first half of the coming year, rising slightly to 2.4% in the second half of 2017.
Ironically, unemployment appears to be coming in slightly higher than forecasted, about 4.9% rather than the previously projected 4.7%. Of course, neither of these numbers is anything to complain about. Forecasters look to continued improvement in the unemployment numbers through the coming year, ending up around 4.6% next December.
Inflation measured by the consumer price index (CPI) is right on target at 1.3%. Next year, forecasters are projecting 2.4% (slightly up from previous 2017 forecasts) and the crystal balls (which is all they are this far out) suggest 2.5% in 2018. The yield curve is ending the year a bit steeper than previously projected. Earlier forecasts put the short end (3-month T-Bill) at 0.75% and the long end (10-year) at 2.25%. Currently, they see the year ending at 0.55% and 2.3% respectively. For 2017, the soothsayers forecast a year-end 1.12% at the short end and 2.75% at the high. This is somewhat higher at the high end and lower at the near end than had been projected previously, suggesting an expectation of higher overall interest rates in the future. Finally, forecasters see the stock market rising over the next two years, but at a fairly lackluster rate.
I promised my own bit of forecasting. During the tumultuous months surrounding the recent melt-down, I played a bit of follow-the-leader with this survey, and went on record that the melt-down would be short-lived. Boy was I wrong! As noted, this survey is pretty good when the economic ship is on a steady course, but doesn’t handle rough water very well. For the past several years, we’ve had an unprecedented period of economic growth, by all metrics (GDP, stock prices, unemployment, and inflation). Just from a pure market-cycle perspective, we may be overdue for some unpleasantries. Looking at the political horizon, I’ve already noted that politicians are generally disappointed that the economy doesn’t move as quickly as they wish or even in the desired directly. That said, we have a Congress that is frothing to trim the Federal budget, and will probably opt to do so in the transfer payments arena (welfare, health care subsidies, etc.). They’ll hope to balance this with tax cuts. However, tax cuts fall slowly, and on one sector of the economy, while entitlement cuts (and any budget cuts, for that matter) happen quickly and are usually borne by a different segment of the economy. I think I’ll be watching GDP reports fairly closely for the next couple of years. I would note what happened in the years leading up to the 1982 recession — not withstanding inflation (driving nominal interest rates), the economy looked OK in 1981, and the metrics were generally pointed in the right direction. (For a good visual representation, I’d refer you to the August, 1981, report to Congress of the Council of Economic Advisors, a copy of which you can view on the St. Louis FED’s website by clicking here.)
All in all, we’ve been focused on politics for the past several months, and now we’re going to find if those political decisions have actual economic repercussions. Stay tuned!
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How many homes do we need?
It is HARD to keep up with a blog when the news seems to move out from under you every day. Now that the election is over, we can get back to normal stuff, like how’s the economy doing and where do we go from here.
Back on the campaign trail, ONE of the presidential candidates (HE will remain nameless) complained about the level of home ownership, which hit the “lowest level” in 50 years or so. Admittedly, that’s true, but also a bit misleading. Since the peak — which led, by the way, to the recent mortgage melt-down, home ownership in America declined from 69.2% (June, 2004) to 62.9%% (June, 2016). That’s not a huge decline, but indicative of just how sensitive our economy is to the level of home ownership. I’ll be the first one to admit (and in my early days, I did more than a bit of research on this) that lots of good things eminate from new home construction and from the home brokerage business. For one, there are a lot of good jobs at stake — from skilled carpentry to mortgage lending and everything in-between. I’ll also note that there have been many studies thru the years focused on the social benefits of home ownership, which add to neighborhood quality, school quality, and even reduced crime levels.
That said, most good things come in “optimum” levels. For example, eating a well balanced diet is superior to either starving or binge eating. Human bodies are optimized for a temperature of 98.6F, and will die if internal temps are sustained even a few degrees on either side. Not enough water and you die, and yet people drown each year from too much. See the connection?
Home ownership would not have hit record levels without lending practices that were neither healthy nor sustainable. We don’t know exactly what the optimum level of home ownership in the U.S. economy might be, since the economy is anything but static. However, right now, the economy seems to be chugging along quite nicely with current home ownership levels. Are we at a sustainable optimum? Perhaps, but only time, and stable economic policies, will give us some empirical data.
From a small northwestern observatory... 