From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for the ‘Inflation’ Category

Boring stuff for a Sunday morning

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Any reasonably good education in finance or economics will include a discussion of the term structure of interest rates.  It’s important to understand — in normal times, short term rates (both borrowing and lending) are lower than long term rates.  However, these rates move all over the map, and at times the relationship can be inverted, as it was back in 2000 (see below).

U_S__Treasury_Yield_Curves_-_v1
(By Farcaster – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=66130747)

 

Why do these rates move around so much, and how can they become inverted (yes, that IS illogical)? Ahhh…. that’s important, but still terribly boring. In general, there are three theories — market expectations, market segmentation, and liquidity preference. Today, I’m interested in the third. In short, in times of trouble, investors (that’s you and me, by the way) want to stay liquid. As such, shorter term rates are artificially pushed down and longer term rates pushed up. The 2011 experience is an example.

So why is this of interest (pun intended) on a boring Sunday morning? Because I made the mistake of reading the news this morning, and happened upon a story from Quentin Fottrell of Marketwatch.com, reprinted in Yahoo Finance (yes, THEY’RE still around!) titled “Americans are hoarding money in their checking accounts — and that could be a problem.” In short, yes it could. To quote, “When times are good, Americans feel confident by keeping little in checking, but when times are difficult consumers store money in checking accounts, effectively pulling back on spending on retail and restaurants.” It’s an excellent article, and I highly recommend it.

Written by johnkilpatrick

May 27, 2018 at 8:10 am

Quarterly Phily FED survey

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Hey, gang!  It’s been a while!  I’ve been having a darned good winter, how about you?  It’s been busy, I’ll say that, hence the gap since my last post.

Anyway, as you may know by now, I’m a regular follower of the Phily Fed’s quarterly survey of economic forecasters.  It’s a delightfully simple model — just ask a not-so-random group of economist where they think the economy is headed, then look at both the central tendency (you know, mean, median, mode, that stuff) as well as the dispersion of forecasts (standard deviation, median absolute deviation, stuff like that).  The results are not only interesting in and of themselves, but also it’s fascinating to track what the forecasters were saying a quarter ago compared to what they’re saying now (which the FED does).

For example, the forecasters, PREVIOUSLY (end of the year last year) projected that GDP growth for 2018 would be 2.5% (real, annualized), the unemployment rate would be 4.1% on average (and 4.0% at year-end) and that we would add 163,400 folks to the nation’s payrolls on average each month during the year.  Today, however, these same forecasters have up’d the ante a bit, forecasting real GDP growth at 2.8% for the year, average unemployment at 4.0% (and ending the year at 3.8%) and adding 175,100 workers to payrolls per month.

Now, don’t get too excited, folks, because as with everything the “devil’s in the details.”  A big chunk of the change comes from shifting the shape of the new employment curve.  Previously, the forecasters projected a fairly flat payrolls change over the year — not bad, just flat.  However, new forecasts project this to be skewed to the early part of the year, and then declining after the summer.  Indeed, 2019 is currently projected to be anemic.  Early employment numbers has the effect of driving up GDP (people earn and spend money for more months in the year).  Note that when we look at the dispersion of GDP growth, there is some great news (very little sentiment for a recession this year) but also some not-so-great news (very little sentiment for growth above 4%).

The Phily FED also surveys for inflation projections, but that’s been flat-lined for years now.  Current CPI projections for the year are 2.1%, which is the same as previous projections.  Of more specific interest to us at Greenfield, the Phily FED is now reporting forecasts of house price growth for the coming two years, although rather than use their regular panel they are synopsizing several publicly available indices (Case-Shiller, FHFA, CoreLogic, and NAR).  In general these indices point to price growth from 4% to 5.2% this year, and slightly lower growth (3.3% to 5.1%) next year.

There’s a bit more to the survey, and if you’d like you’re own copy, just click here.

Written by johnkilpatrick

February 28, 2018 at 12:56 pm

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