Eq: Total Market
The Wall Street Journal has just put out the first thoroughly insightful article about the new homes crisis that we have yet seen. The US is currently plagued by one of the most severe declines in new home construction in the last century and the piece interviews many parties, including home builders, to understand why. The heart of the issue is that the costs to build a new home have roughly doubled since just before the Crisis, as labor, land, and materials have surged in price. Accordingly, many builders now only build luxury homes, where the margins are fatter for them. The low end of the market has been left with very few homes for a large number of buyers, which has sent prices through the roof.
FINSUM: So we have surging pricing at the same time as rising interest rates. Prices look set for a big fall in the near to medium term.
Barron’s has just interviewed a prominent economist—Stephanie Pomboy—and she has some very interesting opinions about the economy. Rather than seeing the economy’s recent growth as a good performance, she analyzes the data to show that this pickup in growth is actually the last gasp of American consumers before a big recession. Digging into corporate spending data, she shows how the US consumer has been stretched by everyday expenses even as discretionary spending is weak. Consumers have had to pay for extra everyday costs, such as on food and energy, from savings or credit. Now that the savings rate is starting to rise, Pomboy thinks we are headed for a recession.
FINSUM: This is an entirely different way to read the tape, but may not be that far off the truth.
There is a very particular kind of housing problem currently affecting the US—a serious shortage of homes at the lower end of the cost spectrum. Not only is inventory thin, but the housing stock available for first time buyers is in poor condition and prices are rising quickly (10% in the last year). The average starter home on the market is 9 years older than it was in 2012 and is 2% smaller. That price growth is outpacing other categories.
FINSUM: So the big worry we have is that with all the price appreciation happening, prices are more primed to fall considerably as rates hit a tipping point where they start to curtail mortgage borrowing.
Those looking for signs of what will happen to the US economy would be wise to keep an eye on mortgage issuance. While the supply of homes is notoriously tight, many are worried that higher rates might doom the mortgage market. Well, despite several hikes in 2017, the year ended up being a very strong one for commercial mortgage issuance. Total commercial mortgage debt rose by $200 bn in the year to hit $3.18 tn total. It was the strongest year of mortgage debt growth since 2007.
FINSUM: This is one of the stats where you are not sure whether to be nervous or hopeful. On the one hand, it is good that issuance wasn’t dented by rate hikes, but on the other, the stats seem almost worryingly positive.
In what seems a status quo that has been in place for eons, the way credit is measured in the mortgage market appears poised to change. For many years, Fair Isaac Corp’s FICO score has been by far the dominant credit score used when determining mortgage issuance. Now Congress is trying to shake things up with a bank deregulation bill that would require Fannie Mae and Freddie Mac to consider credit scores beyond FICO. If the move happens, it is expected that more mortgages would be approved.
FINSUM: This would be a huge shakeup with big implications for the market. If more mortgages get approved, it seems like credit-worthiness would fall in aggregate, with a commensurate rise in rates.
President Trump has just sent a strong message to overseas investors: that US tech is not for sale. The president rejected Broadcom’s hostile takeover of Qualcomm. Although Broadcom is based in Singapore, the prospect of China, which loomed over the deal, was enough to get the White House to block the hostile takeover. American Qualcomm is in a heated race with overseas rivals, including Huawei, to build next-generation wireless technologies, and the US is warned about its strategic interests.
FINSUM: The US is right to worry about this, and we think blocking the deal was a great move. China runs its companies like China Inc., which puts the US at a bit of a structural disadvantage (because our firms don’t share as much info). Therefore, Washington needs to be very careful.