From a small northwestern observatory…

Finance and economics generally focused on real estate

Fed signals?

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The FED is expected to reduce its benchmark rate by 1/4 point today.  Market observers note that this is the first cut since the onset of the 2008 recession, and only the 5th time in 25 years that the FED has reversed from increasing to decreasing rates.

effective fed funds rate

The general role of the FED is to calm the waters, so to speak, and anticipate inflation or recessions.  Indeed, the powerful cut in 2008 was in response to a market on the precipice of an epochal recession.  Note that the most previous cut was in 2001, and before that in 1998. The 2001 cut was in response to an inverted yield curve and an impending recession, while the 1998 cut was in response to a close-call on the yield curve.  There were a series of cuts beginning in 1989 that foreshadowed the 1991/92 recession.

In a perfect world, FED rate cuts would forestall a recession.  In practice, however, all they can really do is soften the blow.


Written by johnkilpatrick

July 31, 2019 at 10:02 am

Posted in Uncategorized

Harvard Study Projects Remodeling Downtrend

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The good folks at the Joint Center for Housing Studies at Harvard (a well-respected old college near Boston) maintain, among other things, the Leading Indicator of Remodeling Activity.  Home remodeling is a pretty significant component of our nation’s economy, with about a third of a trillion dollars spent annually fixing up homes.  In recent years, remodeling has grown by 6% to 7% per year, fueling job growth and the bottom lines of many of our leading manufacturers and retailers.

However, remodeling is (and this may come as a surprise to the uninitiated) heavily tied to home purchases.  Lest we forget, most homes bought in America, in fact about 90%, are “used” homes.  Whether bought as an investment (rental property) or for owner-occupancy, the first thing most “used” home buyers do is some remodeling.  This may be as little as repainting some rooms all the way to a major kitchen or bath re-do, or even adding on rooms, re-habbing the heating and air system, or replacing a roof.  As home sales have soared in America in recent years, so have remodeling budgets.

However, tightening interest rates and increasing prices have led many forecasters to project declining home sales.  Indeed, my own research suggests that homeownership rates, having bottomed out at about 63% after the recession, are now approaching a more market-normal rate of about 65%.  Thus, any residual pent-up demand may have already been spent.

So, the folks at Harvard suggest that by the first quarter, 2020, the annualize average rate of growth in remodeling will decline precipitously, to about 2.6%.  Further, on an annulized basis, actual dollars spent on remodeling are projected to plateau in the fourth quarter of this year, with a seasonally adjusted decline in the 1st quarter, 2020.


Graphic courtesty Harvard JCHS

Of course, major components of the remodeling sector actually thrive during downturns.  Homeowners who otherwise might “move up” to a bigger house may spend those move-up dollars remodeling.  Further, houses need to be maintained, and stuff just wears out. Thus, any decline in remodeling spending may not be as severe as home sales downturns.  However, it’s worth noting.



Written by johnkilpatrick

June 13, 2019 at 6:41 am

Posted in Uncategorized

Robots — free from their cages?

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I’ve long posited that the principle threat to manufacturing jobs in the future will be the robot.  Indeed, in there are presently 84 robots for every 10,000 workers in America, and almost 200 for every 10,000 factory workers.  In Korea, there are over 500 robots for every 10,000 factory workers.  One of the big constraints holding back the proliferation of robotics is the danger of human-robot contact.  Robots are smart in some ways, but very dumb in a lot of others.  Add to that the fact that they are huge and powerful, and you can see why most — in fact nearly all — robots on a factory floor are kept in cages.  The fencing is there not to keep the robots in place (they’re usually bolted to the floor) but to keep people from wandering into one.


Many of you may have seen Youtube videos of walking robots, and indeed the military is making use of mobile robots on the battlefield for a variety of purposes.  However, on the factory floor, mobile robots are usually limited in both size and scope.  This could all change, however, with new software and sensor technology which was just rolled out today by Veo Robotics.  These tools give the robots spatial awareness, and a monitoring system slows or even stops a robot if an unexpected human-size object is within a geofenced area.  When the obstruction leaves or passes, the robot can then continue as programmed, allowing work to proceed.

Four of the largest robot manufacturers have partnered with Veo on this project, which uses Microsoft’s Xbox Kinect depth cameras as a sensing device.  (Veo says they are working on their own technology to replace the Xbox tools.)

According to Patrick Sobalvarro, VEO’s CEO, “What we hear from every factory, every line manager … is that they can’t hire enough production workers. The production labor workforce is aging out, and one of the things we see as an advantage of our system is that physical strength will no longer be required for production workers.”  A recent study by McKinsey & Company suggest that almost half of human activities in the workplace have the potential to be automated.

Magdalena Petrova of CNBC has a great article on this, along with a video.  Click here to take a peek.  I can’t help but think that this is one of the more important issues facing the American workforce and productivity right now.

Written by johnkilpatrick

June 10, 2019 at 12:46 pm

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The environment, the economy, and general welfare

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This is a bit off my normal subject, but I stumbled on this graphic this morning and wanted to share it.  I haven’t checked the author’s data or methodology, but the graphic generally follows pretty common logic.


The graphic basically shows that there is a positive correlation between environmental performance and “happiness” (or general welfare, if you will).  That makes some sense.  I was pleased to see how well the United States scored on both metrics, but that’s an aside.

More to the point, this graphic is an example of two effects having the same core feature — economic prosperity and a strong middle class.  The happiness index measures a country’s welfare across fourteen metrics: (1) business & economic, (2) citizen engagement, (3) communications & technology, (4) diversity (social issues), (5) education & families, (6) emotions (well-being), (7) environment & energy, (8) food & shelter, (9) government and politics, (10) law & order (safety), (11) health, (12) religion and ethics, (13) transportation, and (14) work.  All of these are driven by a strong economy.    The EPI, in turn, measures across ten metrics:  (1) air quality, (2) water & sanitation, (3) heavy metals, (4) biodiversity & habitat, (5) forests, (6) fisheries, (7) climate & energy, (8) air pollution, (9) water resources, and (10) agriculture.

Now quite obviously, both of these scales are related to economic success.  Poor countries are less likely to have good education, sustainable agriculture, adequate food and shelter, and work for everyone.  That said, there is a real chicken and the egg issue here.  Does a strong economy drive these factors, or is a strong economy (and I might mention, sustainable national security) driven by these?  For example, does the United States have good public education because we have a strong economy, or do we have a strong economy because we have good public education?

I would note that a lot of folks want to “make America great again” (not withstanding the fact that we’re already pretty great).  However, I would note that our best days — and the spark of great prosperity in our country — were times when we were focused on education, scientific research, preservation of our environment (anyone ever read about Teddy Roosevelt?) and securing, “…the blessings of liberty on ourselves and our posterity…”.

I’m glad to see that the U.S. ranks pretty high on both of these scales.  We should rank at the top. We used to.  We should treat education, scientific research, and environmental protection like national security issues, because indeed they are.

Written by johnkilpatrick

May 28, 2019 at 4:12 am

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Real estate preferred over stocks

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In a Gallup Poll released yesterday, Americans preferred real estate to the stock market by a margin of 35% to 27%.  This comes even as stock market indices are nearing all-time highs.

According to Gallup’s numbers, real estate has been the leader among four investment classes (real estate, stocks, savings accounts, and gold) since 2014.   Indeed, real estate as a preferred investment has actually grown in stature, from 30% to 35%, even as the stock market continued to lofty heights.  The big loser during this period was gold, shrinking from 24% of Americans preferring it in 2014 down to 14% today.

Gallup’s survey of investment preferences began in 2002.  Back then, and until the onset of the recession, real estate was preferred by investors at 50%.  During the recession, savings accounts or CDs were on the ascendency, and in fact gold topped the list in 2011 and 2012.

By the way, Gallup also finds that American stock ownership has declined in recent years.  Before the recession, in 2004, about 63% of Americans directly owned stocks or a stock mutual fund.  That declined to 52% in 2013 and today stands at 55%.

Written by johnkilpatrick

May 8, 2019 at 4:54 am

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Sad news from Seattle

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It’s been a busy April, and sadly, this blog gets shoved to the back burner w-a-a-a-ay too easily.  But, two very sad issues from Seattle have attracted my attention of late, and I wanted to comment on them.

First, we are all saddened by the loss of life from a high-rise crane that collapsed on Saturday.  The crane was working on the new Google campus, located in the hot South Lake Union area, just about a mile north of downtown.  Our hearts go out to the four people killed and the others injured in this terrific incident.  Given the proliferation of cranes in Seattle, we hope the authorities immediately get to the bottom of the cause of this tragedy and learn from it.

That leads, inexorably, to the second sad thing.  A TV station in Seattle, owned by a an out-of-town consortium with no ties to Seattle, produced an editorial (labeled as a documentary) titled “Seattle is Dying”.  This editorial has garnered some attention among the chattering class who believe Seattle is badly governed.  Now, everyone is entitled to their opinion, and I am a firm supporter of the First Amendment.  That said, labeling an “opinion” as a “documentary” is a bit disingenuous, but that’s what the fringe media does now-a-days.  I am also not really the biggest supporter of Seattle’s governance, but that’s another story entirely.

What I really wanted to point out is that Seattle has the highest number of these high-rise cranes of any city in the United States.  Read that sentence again, folks.  We’re the 20th largest city, but #1 in high-rise cranes supporting our exploding skyline. From a real estate development perspective, Seattle is the hottest market in the country right now, if not the world.  If you believe in Richard Florida’s concept of the “creative class” (and I certainly ascribe to that), then Seattle is the center of the universe.   The arts, sciences, education, economy, and business opportunities in Seattle are all world-class.

Now, admittedly Seattle has it’s problems, as does every city on the globe.  We have a really serious homeless problem, our transportation infrastructure needs attention, and to quote one famous NYC politico, “The rent’s too d*&^ high!”  But dying?  Me thinks the TV folks protest too much…


Written by johnkilpatrick

April 29, 2019 at 10:01 am

Posted in Uncategorized

Yield curves and real estate

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Every economist and his kid brother are out there touting the negative slope on the yield curve as a harbinger of the Apocalypse. I have to confess I raised the issue in a blog post back in August. ( Dr. Ed Yardini of Yardini Research released some charts yesterday which suggest that all this wailing and rending of clothes may be a bit premature ( Nonetheless, none of this says anything about the yield curve and real estate.

To reflect, here is the core chart I used back in August, although I’ve updated it to reflect end-of-February numbers. Note that as of the end of February, the yield curve was still positive. It didn’t turn negative until last week.

Yield Curve Inverting

The orange line notes the incidence and length of recessions. (I happen to use 6-month t-bills in my data, while other analysts use 3-month. The difference is negligible.)

Last week, I took a look at the NAREIT index back to 1972 (the earliest data I have available). Admittedly, the NCREIF index might be a bit more telling, but NAREIT also includes income along with capital gains, and as a matter of simplicity, I don’t have NCREIF data handy right now. Anyway, I did two things. First, I replicated the chart above but rather than looking at the incidence of recessions, I looked at the incidence of down-turns in the NAREIT index. To smooth thing out, I used a 12-month moving average. The results are visually interesting, and in fact very conclusive.

4 1 19

As you can see, real estate returns, when viewed on a 12-month scale, have been fairly positive almost continuously since 1972, with the exception of course of the “great recession” of 2007-2009. Indeed, visually there appears to be no relationship at all between the yield curve and real estate returns.

To analyze this a bit further, I looked at the relationship with a simple regression. There is simply no relationship at all (p-value = 0.50) between the yield curve and real estate returns.  Indeed, notably, the real estate downturn in 07-09 followed a yield curve inversion, but by over two years.  I think few economists would disagree that the 07-09 downturn was related to a host of structural issues, and had very little to do with a yield curve inversion.  Indeed, one might posit that the yield curve inversion was driven by real estate returns, and not the other way around!

In short, while the stock market may be shuddering from yield curve flu, the real estate markets are another thing entirely.  That’s one of the reasons why properly and expertly curated real estate is usually viewed as an excellent diversifier in a portfolio.

Written by johnkilpatrick

April 1, 2019 at 10:46 am

Posted in Uncategorized

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