Home sector thoughts from a broad perspective | MBMG IA
There remains a relative shortage (low inventory) of residential property (especially some sectors/locations), despite a small jump in April but both starts and permits are broadly in a falling trend since the middle of last year.
Higher interest rates (up from below 4% to almost 7% on 30 year fixed) are likely to reduce transaction volumes – existing home sales also shared this same trend of broad declines from last year was interrupted with a sharp m-o-m spike in Feb (still well below Feb last year though) and the declining pattern then resumed.
Unless mortgage rates fall back below 4%, that creates a real drag on the market (even if rates fall back to 5%, that’s an additional cost burden for the vast majority of mortgaged homeowners.
It’s also a drag on the economy through primary factors like suddenly not being able to re-mortgage more cheaply and get paid for doing so like in the halcyon days of HELOCs (Home Equity Lines Of Credit) or depressed real estate and construction sectors.
It’s also a drag on the economy through secondary factors like a bigger share of pay cheques going on rent and mortgages and less on discretionary spending. Anecdotally this is resulting in a shift that could see a challenging 3rd quarter for retail, for restaurants and also for delivery services. Logically, this will hurt the gig economy, zero hours workers and second incomes. Permanent workers in sectors like manufacturing are already seeing their workhours reduce since the start of the year. Falling disposable income, trapped between the closing jaws of higher prices and more challenging household incomes, can quickly become deeply recessionary, creating a vicious spiral down.
In a sense, these are the conditions that policymakers have been looking to create in order to reduce demand across the board so severely that it will reduce demand for goods and services whose supply chains have been compromised by COVID, lockdowns, sanctions and geopolitical fracture, especially as bank lending appears to have stalled (total bank assets are volatile but seem to have reached a plateau of around $23 trillion) and credit cards seem quite maxxed out at the magic $1 trillion level.
In a little less than one year to March, policymakers had taken around $700 billion out of the system before being forced, in the space of a fortnight, to put most of this back again in view of the small number of bank failures that occurred and the much larger number that appear so far, to have been averted. They have now withdrawn most of that again.
One final random thought – we keep hearing commercial vacancy rates explained away as being due to work from home. We’re sure that’s a factor but we also wonder if there’s an element of economic slowdown already baked in. Either way, lower commercial real estate demand going forwards could weigh heavily on the sector, on the economy and on asset prices.
Added together, these data paint a bleak picture until and unless we reach pivot, assuming that policymakers are able to pivot in time and haven’t already done too much damage by then. These are big assumptions – in effect relying on policymakers to get calibrate policy perfectly when, as Senator Elizabeth Warren recently pointed out, they’re currently 0 for 12 (https://www.warren.senate.gov/newsroom/press-releases/icymi-at-hearing-senator-warren-calls-out-chair-powell-for-feds-plan-to-throw-at-least-2-million-people-out-of-work)
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About the Author:
Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment Planner.
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