Interest rates finally starting to impact economy: Home sales now below 2009

[LearningMachine]

Surprised no-one is talking about this, but the signals of impact of higher interest rates are starting to show up in the real economy in home & boat sales but not in the stock market yet.

 

Malibu Boat sales fell 37% year over year because buyers are going on the "sidelines".  See https://malibuboatsinc.com/investor-information/events-presentations/default.aspx.

 

Wonder how many construction & other workers will continue to be needed to build more homes, boats and other interest rate sensitive items.

 

How long before it starts to show up in profits of more companies, and Mr. Market starts to notice?

 

Source: https://tradingeconomics.com/united-states/existing-home-sales

 

 

Source: https://fred.stlouisfed.org/series/MSACSRNSA

 

 

Source: https://fred.stlouisfed.org/series/NHFSEPT

 

 

 

 

Edited January 30 by LearningMachine

[RedLion]

5 minutes ago, LearningMachine said:

Surprised no-one is talking about this, but the signals of impact of higher interest rates are starting to show up in the real economy in home & boat sales but not in the stock market yet.

 

Malibu Boat sales fell 37% year over year because buyers are going on the "sidelines".  See https://malibuboatsinc.com/investor-information/events-presentations/default.aspx.

 

Wonder how many construction & other workers will continue to be needed to build more homes, boats and other interest rate sensitive items.

 

How long before it starts to show up in profits of more companies, and Mr. Market starts to notice?

 

Source: https://tradingeconomics.com/united-states/existing-home-sales

 

 

Source: https://fred.stlouisfed.org/series/MSACSRNSA

 

 

Source: https://fred.stlouisfed.org/series/NHFSEPT

 

 

 

 

The funny thing is the market for construction workers is still hot. New home sales are doing great considering, and presumably remodel activity is heading up with all these people staying at home. 
 

I can say that there’s still a very tight market for construction workers in California and Hawaii, and it certainly sounds like around the rest of the country as well. 
 

If anything I think we have a demographic time bomb in store for more wage inflation and low unemployment as far as the eye can see. 
 

Gen z doesn’t want to work. Millennials and gen x have already mostly taken the non productive boomer jobs. The productive boomers will eventually fully exit the market.
 

We will have a huge, retired and wealthy, boomer generation around with us for the next 30-40 years. Almost zero legal immigration. Birth rates are rock bottom. All the housing stock is aging, and all the boomers are still scared of watching nursing home residents go down like flies. 
 

I just don’t see anything short of government shut downs causing anything but more tightness and pain in the labor market. 

[Gregmal]

Yea I think a lot of this sort of data gets woefully misrepresented, and quite often. Boats, sure...Ive noticed people have reverted to the mean on their love affair with boating, away off from peak covid. But the home sales for instance, are hardly this presented economic disaster in the making. Builders are making astronomical amounts of money compared to pre covid. So theres this, but then also the fact that theyre all still pretty much trading at single digit multiples....so what exactly does the market need to "wake up" to? If it was asleep, you'd expect 15x at peak earnings, not 8x. Im hardly bullish on the homebuilders, but the above doesnt really reflect anything important. Home sales slow when things get expensive and people dont want to move. If nothing else thats more money to be spent on wasteful discretionary consumer items. 

[Gmthebeau]

40 minutes ago, LearningMachine said:

 

 

How long before it starts to show up in profits of more companies, and Mr. Market starts to notice?

 

 

 

I think Mr Market has already noticed.  Take out the Top 7 stocks and the S&P was up like 12% last year not 26%.  Profits were down like 11% last year without them.   UPS just said they will cut 12,000 jobs because after giving them a raise it cuts into profits to much.

[LearningMachine]

23 minutes ago, Gregmal said:

Builders are making astronomical amounts of money compared to pre covid. 

 

37 minutes ago, RedLion said:

The funny thing is the market for construction workers is still hot. New home sales are doing great considering, and presumably remodel activity is heading up with all these people staying at home. 

 

I've been reading transcripts of the builders as well, and waiting to see when existing home sales are below 2009, when would it start impacting them also. 

 

Same thing happened in 2009.  First existing home sales started falling, then new home inventory started piling up, then builders stopped building, and then, unemployment started going up. 

 

So, these things take time.   We need to patiently keep an eye for the domino effect to unfold.   

 

I think causation has pretty high probability at each stage, i.e. much higher interest rates had high probability of impacting existing home sales and boat sales, and that we are seeing already. 

 

Next step in the causation chain is the existing home sales being below 2009, also starting to show up in new home sales starting to fall.  I think the probability is high for this causation link also.  One thing that is different this time is that people are willing to move far away from their jobs, and so there is a chance, new construction continues, but if that happens, housing supply will go up a lot over time.  Anyway, keeping an eye.  I think probability still high that this causation link will materialize. 

[gfp]

And remember also that "construction jobs" includes all of the infrastructure type jobs that are still ramping.  The lady standing on the interstate holding a sign that says 'yield' and 'stop' is a construction worker.  The huge federal spending on this stuff got pushed down to the states, where it sits for a while before making its way into the actual economy.  There is a lag before that federal deficit stimulus shows up in a private construction company's pocket.

 

And of course existing home sales being frozen out of the market is a huge tailwind for new construction.  It is their primary competition.  Mortgage rates have already peaked and are coming down.  Large national builders can offer creative financing buy-downs for buyers.  New construction is generally a lot more inexpensive to insure.  Right there you have hit a number of the pain points for home buyers currently.

[Gregmal]

From what I can see, the most likely scenario with builders is that pricing comes down modestly and that combined with somewhat lower rates creates the equilibrium everyone was seeking. Noway crashing or going back to precovid any time soon, or ever again imo. But every market I follow(Northeast and Southeast) there’s boatloads of demand probably 5-10% below current prices. Builders are pretty much choosing higher margins(as many of the building product inputs have collapsed further enhancing margin) or having to work more. The nationals like DR Horton or KBH will lower prices to move inventory but the regionals are probably more content working less and making the same.

[mattee2264]

I mean we all know that "higher for longer" is another Fed fairy tale? Sooner rather than later mortgage rates will come back down and real estate markets will unfreeze. If workers manage to negotiate wage increases this year that will also improve affordability and in some markets at least there has been a correction in prices. 

[RedLion]

Does anyone consider that with wage growth now coming in quite a bit higher than cpi, and rates coming down, housing certainly seems likely to (eventually) grow into its valuation? 

[Gregmal]

9 minutes ago, RedLion said:

Does anyone consider that with wage growth now coming in quite a bit higher than cpi, and rates coming down, housing certainly seems likely to (eventually) grow into its valuation? 

Yup. There is no credible bear thesis on housing currently. Nor has there been for probably 15 years, despite all the crash calls from the supposed "experts". The best you can do is make very regional arguments that tie into an exodus from high tax, high crime blue states. NYC, Chicago, LA/SF....other than those places, housing is gonna be fine. 

[ValueArb]

If we are going to weigh anecdotal evidence like that one boat builder then I have to share that my ex works for a large national home builder in the Phoenix area (epicenter of almost every housing bust), and her office is very busy.

 

As usual I can't make a dime wasting time making any macro guesses about the economy. I can only keep reading annual reports until I find an attractive investment at a great price offering outstanding future returns. If macro changes hurt its business, then I will probably still make good returns, if macro changes help it then my returns may turn out to be incredible. 

[RedLion]

12 minutes ago, Gregmal said:

Yup. There is no credible bear thesis on housing currently. Nor has there been for probably 15 years, despite all the crash calls from the supposed "experts". The best you can do is make very regional arguments that tie into an exodus from high tax, high crime blue states. NYC, Chicago, LA/SF....other than those places, housing is gonna be fine. 

This makes total sense to me. And I do think the big risk right now are the high tax high crime blue states, and I have to admit that's where most of my real estate investments are sitting right now. But even there, I think certain sub markets are set to flourish, and of course the high tax high crime blue states make it almost impossible to build housing stock, so it's all about picking the right areas and obviously looking for ways to bring a property to its highest and best use. 

 

I've noticed for example that even in the high tax areas like California, there's been a big movement from the SF Bay Area towards the Sacramento valley area which still has the same taxation and laws, but has/had a more attractive cost of living and less crime. 

[Gregmal]

12 minutes ago, RedLion said:

This makes total sense to me. And I do think the big risk right now are the high tax high crime blue states, and I have to admit that's where most of my real estate investments are sitting right now. But even there, I think certain sub markets are set to flourish, and of course the high tax high crime blue states make it almost impossible to build housing stock, so it's all about picking the right areas and obviously looking for ways to bring a property to its highest and best use. 

 

I've noticed for example that even in the high tax areas like California, there's been a big movement from the SF Bay Area towards the Sacramento valley area which still has the same taxation and laws, but has/had a more attractive cost of living and less crime. 

Exactly...NYC suburbs are on fire right now. So even in challenged markets, theres still very favorably supply/demand characteristics and if anything, the "pockets" are where the challenges are, rather than the overall all regional pictures being described as "bad, with pockets of good", if that makes sense. 

 

Further, in the event of macro weakness, this almost certainly becomes the catalyst for lower rates, which then subsidize the "net monthly payment" equation, further supporting prices. 

 

So we're still doing the Chinese finger trap thing with rentals versus home ownership. Both eb and flow but fairly inevitably continue to be the catalyst for each other and so we should continue higher for the foreseeable future. I just got a 10% rent bump in NWFL...its anecdotal, but certainly closer to reality than a lot of the cherry picked stuff you see the Twitter experts and macro alarmists proclaiming. 

[Sweet]

When you say not in the stock market yet what do you mean?

 

When rates were rising we had a decent correct across stocks.

[LC]

Everything in Denver priced under 2022 peaks is getting snatched up. The only stuff sitting is the stuff listed as if we're still @ 2.5% rates. 

[Gmthebeau]

The average stock has not really done that well, so the market has noticed.  If you mean when will the S&P500 come crashing down well that would be when/if MSFT, AAPL, GOOGL, AMZN, NVDA, META project a slowing in their businesses.  So far, we have not seen it.   AAPL looks the most expensive with their China risk especially.

 

As far as housing that is not going to crash.   Multiple bids on stuff where I live, sells right away.

[Hektor]

9 hours ago, LearningMachine said:

Source: https://tradingeconomics.com/united-states/existing-home-sales

Are the existing home sales falling because some of the owners are happy to sit on a low apr mortgage? 

[Gmthebeau]

1 hour ago, Hektor said:

Are the existing home sales falling because some of the owners are happy to sit on a low apr mortgage? 

yes.  Low inventory why sell if you have a sub 3% rate.  Homes sell very quickly when listed.  This will go on for many many years.  Prices will just go mostly up.

[LearningMachine]

22 hours ago, ValueArb said:

If we are going to weigh anecdotal evidence like that one boat builder then I have to share that my ex works for a large national home builder in the Phoenix area (epicenter of almost every housing bust), and her office is very busy.

 

As usual I can't make a dime wasting time making any macro guesses about the economy. I can only keep reading annual reports until I find an attractive investment at a great price offering outstanding future returns. If macro changes hurt its business, then I will probably still make good returns, if macro changes help it then my returns may turn out to be incredible. 

 

I agree you don't want to make macro guesses about economy and make investments based on those guesses.

I also agree you want to keep on reading SEC filings & transcripts until you find attractive investments. 

 

However, that doesn't stop you from also doing risk management by making sure your investments will do reasonably ok in case any reasonable probability macro events were to happen, e.g. before Mr. Market realized interest rate risk, folks could have questioned what would happen to an investment candidate if inflation or interest rates were to hit 10%.

 

In case of real estate, there is reflexivity and stickiness that humans are susceptible to. 

 

Thinking purely from a cash perspective under the hypothetical that whatever you buy, you have to hold forever, and can't sell to anyone.

• #1. If you bought a property yielding 6% unleveraged and locked in 2.5% interest rate for 30 years, you can calculate how much cash will come to you.
• #2. If you buy a property yielding 6% unleveraged now and lock in 7% interest rate for 30 years, you can calculate how much cash will leave you. 
  • You can now make an assumption that rents will keep on rising, and calculate which year you will start getting cash instead of giving cash
  • You can also try to speculate that interest rates will come down, etc., but that would be hopeful speculation.

 

If you were to calculate amount of cash you will get for #1 vs. #2 in next 10 years, there will be a HUGE difference, as much as 10X to 100X to 1000X to even 1000,000X depending on situation. 

 

However, when people in #1 scenario don't want to sell, it makes real estate prices seem sticky and reflexivity of real estate prices causes some humans to miss how HUGE the difference is between two items above, and they irrationally start doing #2. 

 

However, if prices fall a little that causes people to start questioning stickiness and reflexivity, and narrative starts spreading through social media and traditional media on how starkly different #1 and #2 are, it can cause people to stop doing #2.   Whether and when this narrative spread could happen is hard to predict, but you could always try to calculate probability of this happening and watch metrics, SEC filings & transcripts that indicate probability increasing/decreasing, and be aware how your housing-related stocks would be impacted if that happened, and you could also be prepared to take advantage of it happening. 

 

In no way I'm saying you wait for that.  You continue reading your SEC filings & transcripts and finding other investments, while keeping it at the back of your mind that this narrative spread might happen and an opportunity might come. 

 

Edited January 31 by LearningMachine

[Gregmal]

17 minutes ago, LearningMachine said:

However, if prices fall a little that causes people to start questioning stickiness and reflexivity, and narrative starts spreading through social media and traditional media on how starkly different #1 and #2 are, it can cause people to stop doing #2. 

We already had this. 2022 was filled with people who for some reason, felt the need to blatantly lie, make things up, and deliberately misrepresent housing data…all over media outlets and social media. Not sure what the agenda was, but at best they were just seeking attention and didn’t actually put money behind the ideas they were promoting, at worst they got their heads handed to them. 
 

The supply and demand dynamics simply don’t support any sort of material decline. Neither does the consolidation in the home building space over the past decade. This time is largely different. On top of that, 2008 was an exception to the rule. Previously, housing as a whole was pretty damn difficult to topple. Many of the baselines that lead to the extremities of the GFC, were actually true. They just applied to a normal housing market, with standard lending and securitization practices, not the monster that was created leading up to GFC. 
 

For the things you are insinuating to even begin to occur above, you need 1) significantly higher rates than here…probably not happening

 

2) the 80+% of the people who currently own their homes for the purpose of shelter, to out of nowhere, warp their fundamental views of their home into some financially measured instrument. Also a very long shot.

 

 

[ValueArb]

1 hour ago, LearningMachine said:

 

I agree you don't want to make macro guesses about economy and make investments based on those guesses.

I also agree you want to keep on reading SEC filings & transcripts until you find attractive investments. 

 

However, that doesn't stop you from also doing risk management by making sure your investments will do reasonably ok in case any reasonable probability macro events were to happen, e.g. before Mr. Market realized interest rate risk, folks could have questioned what would happen to an investment candidate if inflation or interest rates were to hit 10%.

 

In case of real estate, there is reflexivity and stickiness that humans are susceptible to. 

 

Thinking purely from a cash perspective under the hypothetical that whatever you buy, you have to hold forever, and can't sell to anyone.

• #1. If you bought a property yielding 6% unleveraged and locked in 2.5% interest rate for 30 years, you can calculate how much cash will come to you.
• #2. If you buy a property yielding 6% unleveraged now and lock in 7% interest rate for 30 years, you can calculate how much cash will leave you. 
  • You can now make an assumption that rents will keep on rising, and calculate which year you will start getting cash instead of giving cash
  • You can also try to speculate that interest rates will come down, etc., but that would be hopeful speculation.

 

If you were to calculate amount of cash you will get for #1 vs. #2 in next 10 years, there will be a HUGE difference, as much as 10X to 100X to 1000X to even 1000,000X depending on situation. 

 

However, when people in #1 scenario don't want to sell, it makes real estate prices seem sticky and reflexivity of real estate prices causes some humans to miss how HUGE the difference is between two items above, and they irrationally start doing #2. 

 

However, if prices fall a little that causes people to start questioning stickiness and reflexivity, and narrative starts spreading through social media and traditional media on how starkly different #1 and #2 are, it can cause people to stop doing #2.   Whether and when this narrative spread could happen is hard to predict, but you could always try to calculate probability of this happening and watch metrics, SEC filings & transcripts that indicate probability increasing/decreasing, and be aware how your housing-related stocks would be impacted if that happened, and you could also be prepared to take advantage of it happening. 

 

In no way I'm saying you wait for that.  You continue reading your SEC filings & transcripts and finding other investments, while keeping it at the back of your mind that this narrative spread might happen and an opportunity might come. 

 

 

I do have a macro viewpoint on interest rates, that they historically always return to the 5-7% level, and given our record breaking national debt load, may even go higher in the long run. But again, it almost never comes into play in my investment decisions. I own no real estate, and never run any DCFs. I might use Graham's formula, and I would use a historic interest rate instead of near zero rates when we had them. But that's it. 

 

If I was going to buy real estate I'd much rather buy it when interest rates are high, but either way, if the cash flow works out to offer a reasonable return I'd probably do the deal. I would always treat appreciation as a bonus, my only concern is the property pay for itself with a reasonable margin of safety. So in RE like in stocks, I'd say no to a hundred opportunities before saying yes to one.

[Hektor]

15 hours ago, Gmthebeau said:

yes.  Low inventory why sell if you have a sub 3% rate.  Homes sell very quickly when listed.  This will go on for many many years.  Prices will just go mostly up.

Thanks @Gmthebeau. Could the lack of existing home also be driving the demand for new homes?

[Malmqky]

In my neck of the woods housing prices are out of control. Think nation leading increases for population centers >100k.

 

Big problem is zoning and laws regarding the height of buildings - can’t be taller than the capital building or block lake views  There’s no supply. Some apartments are being built, but houses? Only in suburbs.

 

I don’t see housing prices coming down around here anytime soon.

Edited January 31 by Malmqky

[Gmthebeau]

20 minutes ago, Hektor said:

Thanks @Gmthebeau. Could the lack of existing home also be driving the demand for new homes?

 

Yes, I think having a shortage of existing homes for sale would increase demand for new homes.   This will probably continue as well.  Unless unemployment rises a lot, which is very unlikely, these trends will continue.

Edited January 31 by Gmthebeau

[RedLion]

2 hours ago, ValueArb said:

I do have a macro viewpoint on interest rates, that they historically always return to the 5-7% level, and given our record breaking national debt load, may even go higher in the long run.

 

It's sort of irrelevant because I don't have a macro trade in place on this (unless you count real estate), but I think we are going to see the opposite occur. It probably doesn't matter as long as we invest in productive assets either way, but my position is that interest rates cannot return to the 5-7% level for any meaningful period of time because the federal government can't withstand this level of interest burden based on the monumental debt to GDP. Maybe debt always historically reverts to the 5-7% level, but not when there is such an absolute high level of debt in the system. The only other time we had this level of national debt was right after WWII, and we actually maintained low interest rates and inflated our way out that time. 

 

So I suspect that through yield control / quantitative easing / and of course Federal reserve setting the short term rate we will have lower rates for longer while the economy inflates itself out of this staggering debt:GDP. 

 

The alternative, if rates revert to 5-7 or higher level, where does the cash flow come to pay the interest on the national debt? You can't raise this money through tax revenue without causing a depression, at least in my opinion, especially with the level of debt in the private economy and rolling over debt at higher rates along with way higher income tax. 

 

So assuming we run this 5-7+ interest rates for a long period of time, without raising massive amounts of tax revenue, then there are only two alternatives to pay our deficits:

 

1) Continuing to issue even more 5-7+ rate government bonds, entering into the "White Swan" debt spiral that Taleb is talking about; or 

2) Congress prints money to pay the national debt 

 

Under both cases we probably lose reserve currency status, and cause a great deal of pain.

 

So it really does seem like the path of least resistance is to have lower interest rates, to use yield control, and to try to grow GDP faster than the national debt for long enough to straighten out our finances. 

Edited January 31 by RedLion