Updated: Aug 24
Housing Market | New Home Sales
For the last 1.5 years, the housing market has been volatile to say the least. From a disconnect between sawmill supply and real economy demand leading to skyrocketing lumber prices to a technological work-from-home transformation, we have seen it all. Remote work also led to a shift from total construction spending in nonresidential to more dollars being allocated to residential housing. To paraphrase a16z co-founder Marc Andreessen: "It's possible there's just a massive technological transformation." Since housing is a relevant part of the real economy and shelter a significant component of CPI, we would like to provide you with a framework of sorts and aid your thinking about the current and future housing dynamics. We don't intend this to be a prediction about the future since forecasts contain flaws by definition; however, we find it a productive allocation of your time to demonstrate a probabilistic rather than a deterministic way of thought. On Tuesday at 9:00 am CT, we are due for another New Homes Sales print:
Exp. 690k; +3.0% MoM (prev. 676k; prev. -6.6% MoM)
New active home listings have collapsed and prices have rallied from one record high to the next as a result of low inventory going hand-in-hand with a behavioral change. According to Firstbase founder Chris Herd, companies are looking to cut commercial office space by 50-70% while allowing workers to come into the office 1-2 days/week. Company expectations largely stem from employees, who are anticipating greater choice in terms of where and how they get work done -- only 3/100 employees want to be back in the office full-time.
Such a drastic change in preferences has massive implications for the residential housing space and how the incremental Dollar gets allocated by home construction companies. In fact, there's a case to be made that a combination of demographics and record-low interest rates already set the stage for increased housing demand before the trend got accelerated by Covid-19.
In the face of compressed active listings and better work-life balance demands from employees, we focus on single-family units, which are seeing the largest YoY net increase since 1977.
As we've talked about at length in our NFP Review, Inflation preview section from 08/08, low inventories leading to higher housing prices are significant for the owners-equivalent rent component of CPI, which in turn aids Fed policy. As housing supply takes ~6-11 months to come onto the market - leading to a lag between active listings and construction spending, - higher prices could stick for longer.
The best cure for high prices are high prices as more supply is expected to hit the market. South Florida alone saw construction starts at $1.9bn in June with residential rising 234% YoY to $1.1bn.
We are dealing with a lag in data that's 3-fold (and potentially more when we account for unknowns):
High prices lead to an increase in OER/CPI on a lag
High prices in residential housing increase spending/housing starts
Construction takes 6-12 months
As legendary trader Paul Tudor Jones put it: "If trading is like chess, then macro is like 3D chess."
Unknowns, optionality, and complexity are the very reason why risk management is a core pillar of our approach. Combining conviction with an open mind towards new probabilities as they hit our radar will hopefully provide value to our clients for the decades and beyond to come.
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In a recent letter to Congress, Treasury Secretary Janet Yellen highlighted that extraordinary measures will likely last for longer without providing a specific time frame due to the uncertainty to the economic outlook; hence, leading to low visibility in terms of future treasury payments and receipts. Given that the suspension of the debt limit, which was set in place under the Budget Act of 2019, expired on July 31, 2021, we are at a critical juncture.
Federal debt is currently at the statutory limit and debt issuance has grinded to halt, draining cash from the federal balance sheet. Past spending and tax obligations the federal government has to meet are now under threat if the debt ceiling doesn't get suspended or raised again.
Due to large mandatory payments of the treasury, on October 1 alone, cash and extraordinary measures are expected to decrease by ~$150bn. Obligations include DoD-related retirement and health care investments which will not be serviced at that point if the debt ceiling remains in place. Besides obligations that the treasury wouldn't be able to meet, the worst-case scenario would be a default of the U.S. government, which would lead to massive knock-on effects across the U.S. and global economies.
While default is a tail risk, treasury futures and yields are moving ever more front & center on our radar. In case the debt ceiling gets amended, we are set to see a $698bn in treasury issuance during the remainder of Q3. It is also estimated that an additional $703bn in net issuance will occur in Q4.
We do note that treasury yields held above 1.20% throughout equity market whipsaws this week; are yields done going down with a mean reversion imminent?
Jackson Hole and GDP
On the back of this week's FOMC Minutes where the committee noted its commitment to maximum employment and average inflation anchored at 2%, eyes turn to Jackson Hole from Aug. 26-28. In many ways, the Minutes set the benchmark for what's expected from Jay Powell in light of another hot CPI read at 5.3% YoY and +943k jobs added to the payroll in July.
We are still ~5.7 million jobs shy from pre-pandemic levels, but as the committee noted, the most adversely affected sectors aren't "weak" anymore but rather "have not fully recovered". The Fed acknowledged that "the economy has made progress" as thy signal continued assessment of economic conditions in relation to asset purchases (taper talk).
While the FOMC continued to emphasize transitory inflation factors, any comments on the recent stickiness of inflation outside of used cars and trucks, as well as airfares, will be widely watched. In addition, Fed commentary on how they define maximum employment during this cycle will be very significant in light of labor shortages across the country and more than 10 million job openings.
Markets will listen closely to any indication on tapering.
The macro landscape will indeed stay very busy as GDP is set to be released at 7:30 am CT on Thursday:
GDP Q2 exp. +6.7% (advanced estimate of 6.5%; prev. 6.3%)
GDP Price Deflator exp. 6.1% (advanced est. 6.1%; prev. 4.3%)
Excerpt from a Reuters piece that caught our attention:
On Thursday, the Commerce Department's quarterly services survey (QSS) indicated GDP grew much faster than 6.5% annualized; ultimately why J.P. Morgan analyst Daniel Silver thinks: "Components will be revised up slightly in the BEA's upcoming GDP release as a result of QSS data."
Moody's Analytics economist Ryan Sweet notes: "This wave of Covid-19 cases in the U.S. will likely have less economic cost."
On the other end of the spectrum, Goldman Sachs revised its Q3 GDP outlook down to 5.5% from 9% based on higher inflation and the impact of the Delta variant.
Consensus: EPS est. $0.41; Revenue est. $38.65 bn
Any commentary on China regulation
Comments on Tencent's "voluntary" philanthropy will be highly anticipated
Consensuses: est. $1.91 EPS; Revenue est. $11.48bn
Investors will pay attention to brick and mortar vs. e-commerce amidst strong physical retail earnings of late; commentary on global chip shortages
Consensus: EPS est. $2.57; Revenue est. $8.56bn
Brick & mortar trends on the radar of investors across the retail space
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