So headline economic data has been good lately. Yet the markets are leaning towards a bearish view on the economy and a dovish view on the Fed. With such confusion, it is hard to figure out what might happen. Therefore, we are going to focus on some alternative economic indicators and today we found an interesting one: lumber prices are slumping badly at the time of year they are supposed to be rising. Lumber prices usually rise in the spring as builders stock up for construction. However, poor weather and a lack of construction is badly hurting prices. In May 2018 prices were at $639 per thousand board feet, now they are just $334, or down about 50%! Mills are cutting back production as a response.
FINSUM: That is a pretty alarming price drop and another sign that the underlying health of the real estate market is not good.
The term that property owners and landlords generally cringe at hearing is echoing in cities all across the US. That term is rent control. Oregon passed a law this February to cap rent increases at 7% plus inflation, and now many other locations, including Colorado and New York are considering such measures. In some instances, it is a matter of repealing an existing ban on rent control, which would then let cities set their own rules.
FINSUM: The biggest hit to public markets from the spread of such measures will be in apartment REITs like Equity Residential, AvalonBay Communities, and Essex Property Trust.
The real estate market has been worrying and disappointing for well over a year now. Home sales and new constructions have been trending poorly, all of which has worried investors that a recession may be on the way. However, this year’s drop in yields has made mortgages much more affordable, which seems to be helping the market. Big market player Realtor.com has just put out its updated outlook for the year, saying “lower, but still increasing mortgage rates that will buoy home prices and sales by boosting buyers’ purchasing power beyond what we initially projected”.
FINSUM: For a $200,000 mortgage, the difference in monthly payments right now is already almost a $150 lower versus what it was in the fourth quarter. That is a meaningful difference for many families.
Senator Elizabeth Warren, who is running for the Democratic presidential bid, has just put forward a brazen new policy. She is calling for a large scale program to forgive student debt for millions of Americans. She wants to offer a $50,000 forgiveness program to those with incomes under $100,000. She plans to finance the overall program, which also includes making future tuition free, through a tax on the ultra wealthy. Her plan has faced some internal party criticism, because many times those with the highest debt are also those that went to elite colleges and tend to be at the higher echelons of the earnings spectrum.
FINSUM: While this is a LONG way from happening, it is worth thinking through, especially as other candidates are likely to adopt some form of it. In our view, the biggest beneficiary of this policy would be real estate, as it would enable a whole generation of Millennials and Gen Zers to buy homes because they would suddenly be unsaddled by student debt.
The market has been fretting about real estate for over a year now. Numbers in the sector have been in a funk and there is a definite weakening occurring. However, that may prove short-lived as a new factor may slowly push that market back into a sustainable boom cycle. That factor is the grow of $15 per hour minimum wages across the US. Such wages are likely to significantly increase the earning power of millions of Americans, allowing many couples to afford to buy a home. For instance, a couple with one worker at Target and another at Bank of America could afford to buy up to a $300,000 home at the new wage levels.
FINSUM: If the new higher wage rate takes hold, it is likely to unlock a major source of untapped demand for housing.