Weekend Talking Points - 'Concentrate'

The Case-Shiller (+0.4% MoM) and FHFA (+1.2% MoM) home price indices showed renewed home price appreciation in March, but the lack of recent progress on inflation kept the Fed on hold — again.

Fed on hold for what feels like forever. At its May 1 meeting, the FMOC (Federal Open Markets Committee) voted to keep short-term rates steady at 525–550 basis points (5.25%-5.50%). The last time the Fed raised rates was July 2023!

Relief rally for bonds. The clearest sign of how much things have changed is that bond prices rallied because Chairman Jerome Powell said it was unlikely that the Fed would RAISE rates again! Despite this nice move, the Fed Funds futures market is still implying that rate cuts won’t start until November! [CME]

Slower than seasonal rent growth. National median rents rose 0.5% in April. That looks like a big number, but it’s slower growth than you’d normally expect in spring. The (near-record) supply of new apartments is clearly putting a damper on rent growth. [Apartment List]

Is the ‘double dip’ over? Case-Shiller’s national home price index rose 0.4% MoM in February 2024. That’s up from +0.3% MoM in January 2024. Only 1 city (Tampa) saw prices fall MoM (on a seasonally-adjusted basis) in February, down from 8 cities showing declines in January. [S&P Global] Much more on this later.

FHFA index was even stronger. The FHFA’s national home price index rose 1.2% MoM in February, up from a modest 0.1% decline in January 2024. That was the highest monthly price appreciation since April 2022. All 9 regions posted MoM growth. The New England region saw prices rise an incredible 3.0% MoM (!!!), and the Middle Atlantic region was up 2.6% MoM. [FHFA]

Consumer confidence weakens. The Conference Board’s consumer confidence index came in at 97, the lowest figure since July 2022. “Consumers became less positive about the current labor market situation, and more concerned about future business conditions, job availability, and income.” [Conference Board]

A mixed picture from jobs week so far
Nothing shocking from JOLTs. The Job Openings and Labor Turnover Survey for April showed that total job openings declined 4% MoM (and -12% YoY) to 8,448,000. That’s the lowest figure since March 2021. The hiring rate (3.7% → 3.5%), separations rate (3.5% → 3.3%) and quits rate (2.2% → 2.1%) all declined modestly. [BLS]

But strong jobs growth from ADP. The private sector added 192,000 jobs in April, down slightly from the upwardly revised 208,000 jobs added in March. This was the 4th-straight month that the 3-month moving average for job additions increased. The annual pay increase for “job stayers” eased slightly (+5.1% YoY → 5.0% YoY) while the annual pay increase for “job leavers” reversed part of the huge gain seen in March (+7.6% YoY in Feb, +10.1% in Mar, +9.3% YoY in April). [ADP]

BLS jobs report preview. The extremely important BLS jobs report for April will come out on Friday morning. The Street is looking for a 243,000 increase in jobs, with the unemployment rate flat at 3.8%.

Hottest housing markets for March. Where are homes seeing the most online interest and selling the fastest? The Northeast and Midwest continue to dominate. The Top 5 were Manchester NH, Rochester NY, Springfield MA, Worcester MA, and Concord NH. [realtor.com]

Politicians coming after mega-landlords? Legislation has been proposed (at both the federal and state level) that would force large, corporate owners of single family homes (such as Blackrock and Invitation Homes) to sell to individual/family buyers. [Wall Street Journal]

On the Case (Shiller) Again

Is the double-dip over? The very strong February data from Case-Shiller suggests that it is.

For the last few months, I’ve been highlighting the rising number of Big 20 city indexes that were experiencing month-over-month declines on a seasonally-adjusted basis. In January 2024, 8 out of 20 city indexes declined, up from 6 in December 2023, and 5 in November 2023.

That all changed with the February 2024 data. Only one city (Tampa) saw a MoM decline. And 14 out of 20 showed an improvement in February versus January. Some city indexes saw a huge turnaround (Seattle -0.1% in Jan → +1.1% in Feb).

Overall, the Case-Shiller national home price index rose 0.4% MoM in Feb, higher than +0.3% MoM in January. Compared to last year, the national price index was up 6.4% YoY in Feb, stronger than +6.0% YoY in Jan.

So is YoY price growth accelerating? Well, not really. Recall that home prices peaked in mid-2022 and then bottomed around Jan/Feb 2023. In other words, year-over-year comparisons will get tougher from here.

Still…the national index is already up 0.7% year-to-date, which is +4.3% annualized. And that’s after the Case-Shiller national index rose 5.7% in 2022 and 5.6% in 2022. Home prices up nearly 16% in the 3 years (2022–2024F) even after the pandemic-driven +19% spike in 2021? Like Darth Vader said, “Impressive. Most impressive.”

An important caveat
This all sounds very rosy — for homeowners, that is. But keep in mind that there are still 7 Big 20 city indexes that are below their mid-2022 peak! It’s been a slow, 2-year road to recovery for cities like San Francisco (-8.2% from mid-2022 peak), Seattle (-6.1%) and Portland (-4.0%).

Building Concentration

It all starts with supply. With existing home inventory constrained by the ‘locked-in’ effect, we really need the construction industry to fill the gap and begin addressing more than a decade of underbuilding (relative to household growth). The problem — as I see it — is that the new home construction industry has become very concentrated AND 90% of the Top 10 are listed companies!

I decided to update my analysis from early last year. Here’s what I found:

• The Top 10 builders generated 42% of the new home sales in 2023, and 9 out of 10 were listed.
• The Top 20 builders generated 52% of the new home sales in 2023, and 15 out of 20 were listed.
• A decade earlier, the Top 10 was 25% of new home sales; the Top 20, 33%.

These national mega-builders (DR Horton, Lennar, Pulte, NVR, Meritage etc.) benefit from access to capital, economies of scale in land purchases/materials sourcing, and ability to offer attractive financing plans (rate buydowns etc.).

The management of listed companies have a responsibility to increase shareholder value — which generally means growing earnings (more projects, higher prices, cutting costs, better margins).

Listed companies certainly do not exist to make homes more affordable for first-time buyers, or to solve our nation’s housing shortage by building tens of thousands of cheaper homes.

How do you try to smooth revenues and earnings when you know you’re in a highly cyclical industry? You don’t go for broke when times are good. You de-risk by selling a big chunk of homes to mega-landlords.

We need more new homes. It is wild that we sold 25% FEWER new homes in 2023 than we did in 2000. You can blame it on local government regulations or insufficient skilled labor (that’s who builders blame) or greedy builders or mega-landlords (that’s who people and the politicians blame).

The reality is that you can’t have 50%+ concentration in an industry that delivers something as important as new homes, and have 75% of the Top 20 be listed.

Mortgage Market

Over the course of April, average 30-year mortgage rates moved up 68 basis points (0.68%) and exceeded 7.5% on three occasions. There was nothing in the jobs data this week (so far) to suggest that the labor market was loosening up, and, as expected, the Fed kept rates on hold — again.

Two bits of good news from the Fed meeting, however: 1) Jerome Powell said it was unlikely that the next policy move would be to RAISE rates, and 2) the Fed’s quantitative tightening (QT or ‘tapering’) program will slow significantly. In other words, they will taper the tapering :).

So we’re hovering between 7.40–7.50% for average 30-year mortgage rates. Of course this could change today if the big April BLS jobs report delivers >243,000 job gains.

Current odds on Fed rate cuts at upcoming FOMC meetings:

• Jun 12: 9% (steady from last week)
• July 31: 28% (down from 32% last week)
• Sept 18: 54% (down from 59% last week)
• Nov 7: 67%

They Said It

“Home sales have lingered at 30-year lows, and since 70 million more Americans live in the country now compared to three decades ago, it’s inevitable that sales will rise in coming years. Inventory will grow steadily from more home construction, and various life-changing events will require people to trade up, trade down or move to another location.” Lawrence Yun, NAR’s Chief Economist

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