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Finance and economics generally focused on real estate

Archive for the ‘Inflation’ Category

Livingston Survey strengthens

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One of my economic “touchstones” is the semi-annual Livingston Survey, begun in 1946 by the famed economist and journalist Joseph A. Livingston.  The survey continues today under the auspices of the Philadelphia FED.  Twice a year they survey a panel of economic forecasters on the key metrics of unemployment, GDP growth, inflation, T-Bill and Bond rates, and the S&P 500.  Not only are their opinions of interest, but also the change in the central tendency of those opinions over time.

For example, six months ago, the panel forecasted that year-end unemployment would be 4.3%, with a slight decline to 4.2% by mid-year, 2018.  Now, this forecast has shifted slightly downward, with an expected year-end unemployment rate of 4.1%, mid-year 2018 projected at 4.0%, and year-end 2018 at 3.9%.  These are decidedly low numbers, and suggest an econonomy at nearly full steam. (“Frictional” unemployment, which is the lowest level we would normally see, is generally thought to be close to 3%.)

Previously, year-end GDP growth was projected to come in at about 2.5%.  That’s now up to 2.9%, settling back to about 2.5% by mid-year 2018.  Projections of inflation are also solid, with CPI ending the year at about 2.1% and PPI (producer price index) at about 3.0%.  Both of these estimates are slightly lower than previously forecasted.  Intriguingly, CPI is forecasted to stay about the same in the coming year, while PPI should decline to about 2.0% by the end of the year next year.

The cost of debt is projected to increase in 2018, albeit at modest rates (and lower than previously projected).  Previously, the 10-year bond rate was forecasted to end the year at about 2.75%, but now should end the year at about 2.45%, according to the panel.  Rates should rise in 2018, but more slowly than previously projected, ending 2018 around 3.0%

Finally, the June survey projected that the S&P 500 would end the year at 2470, but now the panelists think the market will end the year at 2644.  (I note that the S&P sits at 2691 as I write this.)  The S&P is projected to end 2018 at 2805, or about 6% higher for the year.

The full survey also contains data on a variety of other topics (auto sales, corporate profits, average weekly earnings, etc.).  You can subscribe by visiting the Phily Fed at www.philadelphiafed.org/notifications.

 

Written by johnkilpatrick

December 18, 2017 at 11:25 am

So, folks, where are we going to live?

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Much has been said recently about housing starts being back up to where they were before the recession.  If this is the case, then why does Seattle, for example, have a 0.9 month supply of homes for sale?  As usual, the details are much more complicated than the headlines.

Prior to the “meltdown” (let’s say, 2004 – 2007), housing starts in the U.S. averaged about 1.865 million units per year.  Now, few analysts disagree that this was too many, but figuring out the right number is harder than one might think.  In 2008, the number dipped down to about 905,000, and hit a low of 583,000 in 2009.  Since then, the annual starts have trended up.  However, in 2016, we still were only at 1.207 million.  Of that, only 751,000 were single family units, compared to an average of 1.4 million single family homes per year in the 2004-2007 period.  Hence, nationally, we’re building about half as many homes as we were 10 years ago.

From 2004-2007, we started 7.462 million dwelling units in America, but in the past four years we’ve only started a total of about 4.432 million (all varieties).  That’s a shrinkage of about 3 million new homes, and most of that shrinkage is in the single family category.

One might posit that the decline in home ownership rates should have freed up some demand, and some of that’s true.  The home ownership rate in America peaked at 69% during the run-up to the recession, and dropped steadily after the melt-down, to a low of 62.9% in the 2nd quarter 2016.  As of the end of the 3rd quarter this year, it sits at 63.9%, or about 5 points below the peak of a decade ago.

There are about 76.146 million owner-occupied housing units in the U.S. today.  A five-percent swing in this number is a little over 3.5 million houses.  In short, we’ve now “absorbed” the decline in starts, and structurally we’re more-or-less “over” the recession, and we’re simply not building enough new homes to meet the demand.

Several consequences came out of the melt-down.  First, developing land takes quite a few years — five or more in the “hot” areas like Seattle, where land has to go thru a permitting and entitlement phase long before a house can be built.  All of this requires land planners, both in the private sector and downtown at the county or city hall. Many of these folks lost their jobs during the 2008-09 period, and indeed some county and city planning offices were eviscerated.  New home development frequently requires a significant outlay in public infrastructure, including schools, roads, and utilities.  Worse than that, many construction trades were gutted, with no replacements available.   Financing for acquisition, development, and construction is now problematic (although, arguably, it was too liberal pre-recession).

As such, it’s a sellers market for homes, and in hot markets, buyers compete by bidding up prices beyond reasonable levels.  Some pundits are nervous, and with good reason.

(Thanks to the U.S. Census Bureau for the October 31 data.)

Written by johnkilpatrick

December 11, 2017 at 11:29 am

Tax Reform and Senior Housing

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We follow some REITs at Greenfield, and in general REITs are having a lackluster year. REITs in general have outpaced the S&P 500 this year (though some have done very well), the goal is for a REIT to outperform its underlying net asset value, or NAV for short.  NAV is the theoretical amount of cash the REIT would have if it liquidated its holdings at current market value.  If the REIT management is doing well, or if the sector is expected to grow, then the REIT price should be higher, and should grow faster than NAV in anticipation of those future earnings.

Unfortunately, this has not been the case, particularly in some sectors.  For that reason, health care REITs have backed off acquisitions a bit, since new acquisitions would be dilute current values.  In their stead, non-REIT players (private equity, for example) are snatching up senior housing under the SWAG analysis that “hey, people are getting older, so senior housing is good.”  Yeah…. Andrew Carle, a senior housing analyst quoted in a November 13 National Real Estate Online article by John Egan, notes that these new players may not be giving “proper consideration to market-specific dynamics.”  That’s a nice way of saying they’re not doing their homework.  This is not to say that senior REITs aren’t a good idea, but like every good idea, picking thru the produce rack for the best fruit is a must, particularly when you’re investing other people’s money.  By the way, private equity accounted for 47% of senior housing deals in the first half of 2017, compared with about 10% done by public entities.

One of the “known unknowns” (to borrow from Donald Rumsfeld) is what will happen in Congress to taxes.  One might think that lowering taxes is generally good for real estate, but that’s not always the case.  Consider the Reagan tax cuts in the mid-1980’s.  Market anticipated one thing, and the final bill had something else.  In the end, much of the mistaken anticipation (for example, failure to grandfather certain deductible items) was one of the straws on the camel’s back that led to the S&L melt-down, FIRREA, the need for Fannie/Freddie oversight, etc.  That said, just like the early 1980s, there’s a lot of private money chasing real estate deals.  Let’s hope it all gets invested properly.  Nothing beats good due diligence, analysis, and careful selection.

 

Written by johnkilpatrick

November 15, 2017 at 8:15 am

Housing…. overheated again?

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“Home price increases appear to be unstoppable,” — a quote from David M. Blitzer, Chairman of the Index Committee at S&P Down Jones Indices, as quoted in a Tuesday article by Christopher Rugaber of the Associated Press, and featured on usatoday.com.  Am I the only one who felt cold chills reading that?

C’mon, David, exactly how did that turn out last time?  Prices, by the way, are headed up because money is still relatively cheap, demand is incessant, and supply is constrained.  S&P, which is in business, among other things, of promoting their Case Shiller index, notes that buyers are in bidding wars.  That index, released Tuesday, showed that house prices are up 6.1% from a year ago — well above inflation — and in 45% of the cities tracked, the house price increase has surged from a month earlier.  In short, not only is the car speeding, it’s accelerating.

However, sales volume has fallen 1.5% from a year ago.  That may not sound like much, but in a market that was already not at equilibrium, that’s economically significant.  Plus, the number of homes for sale was down 6.4% from a year ago, to the lowest level since the NAR started tracking these statistics.  Ever.  In history.

Sigh….

 

Written by johnkilpatrick

November 2, 2017 at 9:02 am

Not a good sign….

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The International Monetary Fund (IMF) tracks gross domestic product (GDP) both globally and by nation.  Their metrics are generally quite good.  They’ve downgraded the 2017 expectation to 2.1% from a prior forecast of 2.3%, in no small part to the abysmal 1.4% the U.S. turned in during the 1st quarter.  They’re currently projecting 2.1% for next year as well. This is a far cry from the 4% annual rate the Prez promised on the campaign trail, and the 3% he promised after taking office.

Admittedly, a president can’t be judged on the economics of his first year.  That said, a principal driver of the lousy 2018 forecast is the amazing lack of understanding this administration (and Congress, for that matter) has about the power of fiscal policy to drive the economy.  This lack of understanding can trace its roots to the early Reagan days and the GOP’s enamor with Milton Friedman.  The Chicago economists (and this is a wild oversimplification) preached monetary theory, holding that the entire economy was driven by the money supply, which could be improved with tax cuts.  This was in contrast to the Keynesians (and again, a wild oversimplification) who held that targeted fiscal policy was the order of the day.  Since the Kennedys were Keynesians (or at least Harvard graduates), then they had to be the enemy of all that was good.

Of course, many of us have been forecasting a recession for 2018 or so.  Why?  From a simple cyclical perspective, we’re long overdue.  My own thinking was that the Congress would enact a tighter budget which would be felt in the short-term, but that tax cuts wouldn’t be felt (if at all) until father out.  As it turns out, I was an optimist.  The budget cuts are draconian, and the tax cuts proposed will do nothing to add to consumption or investment.  (The former is patently obvious.  Give Bill Gates an extra million a year in tax cuts, and he’s not going to eat better or buy nicer clothes.  As for the investment side, money is already essentially free — overnight LIBOR is actually negative — and yet cash lays around on the sidelines looking for a new merger to fund.)

I’m presently not an optimist.  Neither are the economists at the IMF.  For a great synopsis of their report, read Rishi Iyengar’s report on CNN Money.

Written by johnkilpatrick

July 24, 2017 at 5:28 pm

Trump’s Tax “Reform”

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Mark Twain is usually — and incorrectly — quoted with the phrase “No man and his money are safe while Congress is in session.  (The actually quote goes to 19th century NY politico Gideon Tucker, but I digress.)  There’s little to be said, in general, about TheDonald’s proposals yesterday, simply because there’s little substance to analyze.  However, I’m old enough to remember the last tax overhaul, in the early stages of the Reagan administration, and perhaps I can offer a few observations.  I’ll limit my mental meanderings to real estate for now.

First, the Reagan tax re-hab (the 1986 Tax Act) was a disaster for real estate investing, particularly at the individual, atomistic investor level.  One of the “loopholes” to be cured was the elimination of deductibility of passive losses on real estate investments.  The real estate community reluctantly supported the tax act, in trade for increases in the deductibility of home mortgage interest and a guarantee that passive losses on then-existing real estate deals would be grandfathered.  Indeed, in the run-up to passage, there was a flurry of investing (by Main Street USA folks — the kind of folks who still, amazingly, support Trump) in just such “grandfathered” investments.  At the last minute, the grandfathering was removed, costing Main Street USA investors tons of alternative minimum tax payments on now-sour investments.  Some pundits suggest that this grandfathering-revocation, alone, led to the downfall of the Savings and Loan industry, but that excuse is a bit to simplistic.  It did, however, shut down the time share industry for a while.

Today, according to news reports, single family residences are enjoying record demand (which may or may not be good news).  The hottest market is among first-time buyers, and the demand is greatest among starter homes.  The Trump proposals would double the standard deduction for a married couple filing jointly.  While, on the surface this seems like a good idea, it will drastically shrink the number of tax payers who itemize mortgage interest and property taxes.  In short, for the biggest tranche of homebuyers, the biggest differentiation between ownership and renting would be effectively removed.  As a guy who invests in rental property, that’s nice, but the home building industry won’t react well.

Otherwise, I don’t see lowering the marginal tax rate on corporations as having much of an effect on real estate investing.  For one, most of those projects are either done thru tax-advantaged REITs or thru other pass-thru entities, like partnerships and LLCs.  Even if it did, the demand / supply of investment grade real estate depends on other factors, and slight changes in the tax rate may have an impact on the debt/equity mix, but not on the aggregate output of new commercial construction.  The ONE area most affected will be low income housing, which is funding in no small part by tax credits.  The value of those credits will be slashed, requiring a complete re-thinking in the finance side of low income housing.  The last time such a tax cut went into effect, it was a real mess for low income housing.

If I was the government, and I wanted to create good paying construction jobs, I’d embark on a long-term infrastructure redevelopment plan.  That would probably require actually raising tax rates a bit, but would have marvelous returns on investment for middle America.  But that’s just me….

…and the next thing…

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I’ve been critical of the current occupants of the White House, and particularly their apparent naivity about the economy.  One might falsely surmise from my criticism that I’m a raging lefty.  I would rejoinder that competence knows no political stripes.  That said, I would note this morning that an economist from two leading conservative think tanks also expresses skepticism over The Donald’s trade policies.

The conservative bona fides of the Club for Growth and the Heritage Foundation are beyond question.  The former bills itself as, “…the leading free-enterprise advocacy group in the nation,” while the latter is lead by former GOP Congressman and Tea Party stalwart Jim DeMint, from my former home state of South Carolina.   Stephen Moore, a Heritage economist and co-founder of the Club for Growth, appeared on CNN’s Party People podcast, and said, “On trade, I think he’s playing with fire here.”  He went on to say, “And I think the idea of a tariff against Mexico is a terrible idea.  I think it would hurt Mexico a lot, and I think it would hurt American consumers as well.  We don’t need a trade war with Mexico.”  He did, however, give a tentative pass to The Donald’s attitude toward China, noting  “I kind of approve of some of the things he’s doing on China.”

Full disclosure here — I don’t necessarily agree with Moore on every point he makes.  Moore invokes the legacy of Harry Truman, and says that Truman got off to a rocky start but learned the Presidency quickly.  I would beg to differ on the validity of Moore’s analogy.  Truman had held significant local office in Missouri, was an Army Reserve Colonel, and was late in his second term as a Senator when the nod for the VP job came along.  The Truman Committee in the Senate, during the war years, provided extraordinary oversight to the conduct of the war and investigated every aspect of government management during the several years he was chair. As such, Truman was probably the most prepared person to assume the presidency available at the time.  (Many would have preferred South Carolina’s Jimmy Byrnes, but Byrne’s record on segregation would have made him a tough sell.)

Any “rough start” to the Truman presidency had to be taken in the context of inheriting a 2-front war, an atomic bomb, the beginnings of the cold war, massive demobilization, turning the American economy from war production to consumption, open rebellion from two wings of his own party (the Dixiecrats under Thurmond and the Progressives under Wallace) and devastation around the world.  The Donald, on the other hand, has inherited a stable, growing economy, no inflation, low unemployment, and a loyal majority in both houses of congress.

Ahem….  If The Donald screws this one up, it’s all on him.

Written by johnkilpatrick

February 14, 2017 at 7:19 am