“Learning how to be still, to really be still and let life happen – that stillness becomes a radiance”
-Morgan Freeman
God was in a good mood the day he made connotive efficiency.
Regular readers know I’m a superfan of systematic attempts at simplifying the complex and raising the linguistic signal-to-fluffery quotient.
It just makes life easier.
For example: Suppose I told you to go create a generalized model for “X” and robustify it against multi-collinearity and every other statistical pitfall. You may or may not know what that means and I may or may not get back a usable model.
Instead, suppose I told you to go create the analytical equivalent of Morgan Freeman’s voice.
Intuitively, and without saying anything specific, the quality and utility of what’s expected is almost perfectly conveyed. And whether the end product meets that caliber threshold should be similarly apparent.
In other news, remember being “double-jointed”?
Back to the Global Macro Grind…
“Ever” - as in the highest ever, lowest ever, widest ever, tightest ever - carries a certain connotive je ne sais quoi that dilates the pupils of asymmetry stalkers and mean reversion enthusiasts.
While the new cycle high in Existing Home Sales captured most of yesterday’s headlines, the most notable highlight in the release was the decline in inventory to its lowest level ever.
Months-supply of inventory fell to a record low 3.56-months (6-months inventory is conventionally considered a balanced market) with months-supply falling year-over-year for 14 consecutive months and for 26 of the last 27 months.
On a unit basis, inventory fell -7.1% YoY, marking the 20th consecutive month of negative year-over-year growth. Recall, while sales data is seasonally adjusted, the supply data is not so the YoY figures offer the cleanest read on the underlying trend.
While some of the supply issues are cyclical in nature, the lead constraints are primarily secular. We reviewed a selection of those factors in an institutional note yesterday but given the broad relevance, I’ll redux them again here.
The Why of Supply:
- Low Rates: Low rates locked in during the post-crisis period remain a disincentive to selling/moving and an inertial headwind to rising inventory. Approximately 12M households purchased or refinanced their home near the all-time lows in interest rates. This represents ~16% of the owner occupied housing stock and ~25% of the encumbered housing stock. Thus, nearly a quarter of the total owner occupied housing base is disincentivized from moving from a rate/affordability perspective.
- Equity Overhang: ~4M households remain in a negative equity position and another 8-9M have sub-20% equity. Together with the low-rate cohort above, total disincentivized supply represents nearly 1/3 of owner occupied units and nearly half of the encumbered housing stock.
- Demographics: Top heavy demographics with Boomers (which are a significant % of the homeownership base) entering the peri-retirement period will weigh on housing turnover broadly. Aging in place remains an emergent trend and moving-out will not become an outsized driver of supply for another decade when the Boomer bulge starts moving beyond 80 YOA.
- Gen-X: If Boomers are dragging on inventory and Millennial demand is still early phase a key player in housing’s ladder remains Gen X’ers. Those aged ~35-50 represent a significant source of potential supply in the form of trade-up buying. A meaningful percentage in this group, however, remain in negative or near-negative equity positions, serving as a weight to both entry level supply and mid/upper market demand.
- New Home Price Spreads: New home price premiums over existing homes have increased ~80% since 2009 vs. a ~40% price increase in existing homes. This makes it harder for entry level buyers to get in or would be trade-up buyers to trade-up, particularly with credit availability remaining relatively tight on a historical basis.
- Supply Pull-Forward: Stepped up investor activity and conversion of single-family owner occupied units to rental units in the early post-crisis years, in effect, pulled forward would-be future supply. With rental demand still strong and for-rent inventory still at a record deficit (-0.7M units), that pull-forward continues to exert an effect.
Each of the above are valid to some greater or lesser extent and their collective influence will continue to anchor the inventory environment in the existing market over the nearer-term. It will also constrain the upside in sales.
Supply, Demand, and Price remain in a delicate three way dance towards normalization and the path to resolving tight supply has a host of challenges.
Realistically, the least disruptive path to balance on the supply side – without a cratering in demand – probably, and simply, remains time.
That’s not a particularly sensational call but it’s largely true.
Over the medium and longer-term, measured home price growth alongside ongoing recovery in household incomes (and continued, gradual expansion of the credit box) would provide for further emergence of 1st-time buyer demand in conjunction with crawling improvement in housing equity positions for prime trade-up buyers.
Over shorter durations, however, tight inventory, rising prices and declining affordability can be self-reinforcing.
A prospective buyer is unlikely to list their property if they haven’t yet or are unlikely to find another home, particularly if higher rates and declining affordability are increasingly emergent considerations.
A couple last thoughts:
- Yesterday’s EHS “beat” still only represented +3.8% YoY growth and remains in line with our expectation for underwhelming flat-to-mid-single digit growth in 2017. Comps are favorable next month but steepen from there.
- The (increasingly) divergent trend between Pending Home Sales (signed contract activity) and Existing Home sales (closed transactions) suggests moderate downside in EHS in the coming month(s) absent a positive revision or significant upside in January PHS.
- The recent increase in demand post-election and concomitant to the backup in rates is not inconsistent with historical episodes of sharp increases in mortgage rates. In prior instances of expedited interest rate increases, there is an observable pull-forward in demand before those 1st order effects ebb and demand begins to reverse. The sequential decline in mortgage purchase application volume thus far in February would be consistent with that phenomenon as well.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.36-2.53%
SPX 2
VIX 10.40-12.22
EUR/USD 1.04-1.06
Oil (WTI) 52.52-54.70
“Get Busy Living or Get Busy Dying”,
Christian B. Drake
U.S. Macro Analyst
