Eq: Total Market
Before President Trump got elected, and immediately after, there was a great deal of excitement that financial firms were going to experience a flourishing as the US cut back heavily on financial regulation. 500 days in that hope has failed to significantly materialize. While small and medium sized banks have benefitted, and the DOL’s fiduciary rule is gone (great for wealth management), large banks have not seen gains. For instance, the Fed has made stress tests for large banks more stringent.
FINSUM: Banks had the prop trading rules (Volcker rule) weakened recently, so that is positive, but otherwise there hasn’t been much change.
The US real estate market looks set to change in a big way. Brokers and developers are sensing it, and consumers are making it happen. The change is in the geography of the market. The new SALT limits in the updated tax code mean that wealthy residents of higher tax states like New York, New Jersey, and California, now face much higher tax liabilities. As a response, many of them are seeking to buy homes and domicile themselves in tax-free states like Florida, Texas, or Nevada. One real estate developer in Nevada explains the situation, saying “If you’re a wealthy tech executive from the Bay Area who can live wherever you want and you have a $3 million income, you would have $399,000 a year in savings here. That’s a lot of money to spend on real estate”.
FINSUM: We think this trend will be both long-term and very bullish for markets like south Florida and other sizable metropolitan areas in low tax states . The high tax states might face a reckoning, especially those without a major metropolitan area to suck in residents (e.g. Oregon).
If we were to tell you that median sales price per square foot was down 18% from a year ago in New York City, would that make you worry about the real estate market? Well, that is exactly what has happened, all alongside sales volume hitting its lowest level in six years in the Big Apple. The developments have brokers and real estate developers worried there, but perhaps the whole country should be paying attention. New York has experienced a great deal of new apartment inventory over the last few years as developers have pushed through many new projects, all of which seems to have conspired to oversupply the market.
FINSUM: The boom in real estate since the Crisis was always urban-driven, and so the downfall may be an urban-led one too. New York’s real estate woes are not unique, so we would not be shocked to see prime urban property fall in value across the country, especially with mortgage rates on the rise.
In what could be could news for those worried about the Fed hiking us into a recession, one of the Fed’s top leaders has just come out with a very dovish tone. St. Louis Fed chief Bullard says the Fed needs to slow its pace of rate hikes to preserve its credibility. “Inflation expectations in the U.S. remain somewhat low, suggesting that further normalization may not be necessary to keep inflation near target”. He suggests that the best policy going forward may be to freeze hikes.
FINSUM: One of the things that has worried us about the Fed is that they seem to be viewing rate hikes as some sort of automatic pre-determined path towards normalization rather than basing it on actual inflation numbers.
There have been some serious warnings about real estate from reputable sources lately, but not much data to support them. To this point, most fears have been centered around how rising rates might hurt the market, but none of that had emerged in the data, until now. A new US housing report has just showed that sales of existing US homes fell 2.5% in April. Low inventory and higher prices seem to be putting a dampening effect on buyers, says the Wall Street Journal.
FINSUM: This is a worrying stat for us, and its importance is elevated by the fact that the figure comes from April, which is part of the all-important spring home-buying season. The next few months of data will be very important.
US real estate has been humming along quite nicely for several years. The market has been so steady as to be considered in a goldilocks period. Rates were low, lending standards slowly slipped, and the market kept rolling with high demand. However, that period may finally now have come to an end as mortgage rates are rising quickly. Mortgage rates just hit a seven year high, which could mean demand for housing softens as borrowers are unwilling to pay higher rates. The average rate for a 30-year fixed mortgage now sits at 4.61%. Rates bottomed in 2012 at an average rate of 3.31%.
FINSUM: We think this is definitely going to have an effect on mortgage demand, especially on mortgages in urban areas, where amounts tend to be larger.