Dave Wald’s Post

“With the labor market deteriorating, the economic outlook darkens ... the U.S. economy is on a slippery slope.” “The problem with a slippery slope is that it doesn’t appear dangerous.” “A cliff strikes fear, a bright line between safety and abyss.” “A gradual gradient breeds complacency as you inch towards the point of no return.” The Last Bear Standing (via X) TheLastBearStanding.com 🍀 “I think I've made my stance clear that I expect the U.S. economy to enter a recession at some point.” Francois Trahan, M²SD (via X) Trahan Macro Research 🍀 “My take: A really bad recession lies ahead.” Leo Kolivakis Pension Pulse via LinkedIn 🍀 “788 days of [2/10] inversion is the longest stretch since 1929 and about to finally come to a close.” “We are witnessing history.” Danielle DiMartino Booth QI Research via X 🍀 “In fact, the recession from 1974-75 —the worst one at the time post WWII, and the one that sealed Arthur Burns’ notoriety — can dispel the notion that an unemployment driven by labor force expansion and temp layoffs can be dismissed as benign.” “Even though there are obvious differences with today’s context, it suggests these two factors are not exceptional.” “Payrolls didn’t turn negative until 11th month in that recession. (Because economy had significant labor shortage in the lead up).” “March 1974 marked the beginning of the continuous rise in unemployment. At that month, only 49% of unemployment are job losers. (Compared to 58% since April 2023 til July).” “Then: “ the remainder were new entrants into the labor force (11 percent), reentrants (25 percent), and those who had quit their previous jobs (15 percent). Young people accounted for a very large fraction of new entrants and reentrants, and women reentrants for a substantial fraction of the unemployment not associated with job loss.” Anna Wong chief economist Bloomberg (via X) 🍀 "It's really hard to read the economy right now.” Claudia Sahm / Yahoo Finance 🍀🍀🍀

Bloomberg: ‘US Pending Home Sales Gauge Drops to Lowest on Record’ 🍀 Another ‘record’. / Does it matter? / The four horsemen of housing demand capitulation. “A gauge of pending US sales of existing homes sunk in July to the lowest level on record, as high prices and borrowing costs continue to scare buyers away.” 🍀 Bloomberg But wait a minute … “US Home Prices hit another all-time high in June, rising 5% over the last year. Meanwhile, affordability remains near record lows.” 🍀 Charlie Bilello / Creative Planning If real estate is the economy, does this matter? Are the ‘four horsemen of housing demand capitulation’ on their way? According to a post by Mohamed El-Erian a few years ago, the four horsemen of housing demand capitulation are: ✅ interest rates ✅ savings depletion ✅ unemployment ✅ consumer spending anxiety My notes included a fifth horsemen: ✅ household contraction This may be more of a consequence of the other four horsemen? 🍀 The loose concensus based on housing prices, consumer spending and GDP - among other things - suggests that no, we’re not in a recession. But the pundits are split on whether a recession is on the way, and if so, how bad it will be. We keep hearing about ‘lagging effects’ of higher interest rates and quantitative tapering (QT). From a recent LinkedIn post by economist Francois Trahan, M²SD: “I certainly believe that a recession is in the cards for the U.S. economy, BUT I don't think we are in one ...” “In my mind it is on the way, but if we were already in a recession then retail sales would be weaker, employment would look worse than it does, S&P 500 EPS expectations would likely be trending lower, and the list goes on.” On the other hand, “[Fed] Policy is not restrictive until you make home prices fall. Not even close. 🍀 Richard Christopher Whalen The Fed thinks recession is a risk, since they’re looking to start lowering interest rates. “The soft landing remains the base case.” 🍀 Claudia Sahm 🍀 As to ‘lagging effects’ … Swiss Re suggests that locked-in low home mortgage rates gave consumers billions more to spend: “Mortgages locked in at low costs provided US consumers with an extra $600 billion in spending cash since 2022, blunting the efficacy of Fed rate hikes: Swiss Re study.” “The boost received by homeowners with fixed-rate mortgages amounted to almost 2% of all personal consumption spending …” Lisa Abramowicz Bloomberg via X 🍀 The CRE community is adapting to the change in the financial environment, and cheering on the Fed’s pivot to lower interest rates. On the other hand, if we get a meaningful recession, then underlying credit quality probably goes south, and creates a whole lot more pain for CRE lenders and their CRE borrowers - particularly the borrowers with personal guarantees. 🍀🍀🍀

“Inventory of new completed houses jumped to 99,000 houses in July, the highest since 2009, and about triple the inventory during the price-spike era of March 2021 through June 2022, according to Census Bureau data ...” WolfStreet.com “Sales of completed houses jumped by 27% year-over-year to 28,000 houses.” “At this brisk rate of sales, the unsold inventory of completed houses translates into a healthy 3.5 months of supply.” “These speculative houses are essentially move-in ready, they have to be sold quickly, builders have tied up lots of capital in them, and that inventory is encouraging builders to throw more incentives and mortgage-rate buydowns into the mix.” “This buildup of spec houses is exactly what the entire housing market needs the most to tamp down on prices.” “Inventories of [new] houses in all stages of construction – from not yet started to completed – remained at about 466,000 houses for the third month in a row, along with August-October 2022 the highest since 2008. Supply, given the jump in sales in July, fell to 7.3 months.” “… [new home builders are] taking advantage of [existing] homeowners’ refusal to adjust their price expectations to reality, and so sales of new single-family houses have held up well, even as sales of existing houses have plunged to the lowest levels since the depth of the Housing Bust (in July -27% from the same period in 2018 and 2019).” 🍀 Chart from WolfStreet.com 🍀🍀🍀

“There are now 476,000 new homes for sale in the US, the highest inventory since February 2008.” 🍀 Charlie Bilello Creative Planning X / Twitter 🍀 “We are now building as simple as you can get. In fairness to the builders, there is nothing left to remove except SQFT and/or profit margin.” Ryan Schade Brand Vaughan Lumber 🍀 “Full-time employment component in Philadelphia Fed Services Index fell in August to lowest since May 2020.” Liz Ann Sonders Charles Schwab X / Twitter 🍀 “The 2 vs. 10-year spread is about to un-invert.” “The yield curve is sending a clear message about the potential direction of the economy in the near future, while markets continue to stubbornly ignore these signs.” “Rate cuts late in the cycle have never ended well in history.” Otavio (Tavi) Costa Crescat Capital X / Twitter 🍀 “A recession is coming in the U.S., and ‘a few rate cuts’ won’t prevent it.” “Every single one of us [at BCA Research] now believes there’s a recession, and that’s exactly the opposite of what the market believes.” “There’s things that are breaking down quite rapidly now.” “A few rate cuts are not going to prevent a recession.” “Average recession is 10 months … It takes something like a year before fed cuts actually start to give a boost to the economy.” “The market believes that the fed fund rate at the end of next year will be 3%. It’s currently at 5.3%. That will not happen unless there is a recession.” Garry Evans chief strategist of global asset allocation BCA Research / CNBC 🍀 “It would be so nice if something made sense for a change.” 😁 Alice in Wonderland 🍀🍀🍀

Office buildings: The great rebalancing has begun. “As Class-B and C offices empty out, owners are getting increasingly nervous.” “Most dream of giving their buildings a new life by converting them to apartments, especially in a city like New York, where residential vacancy is at a 50-year low. Others are wrestling with the wrecking ball.” Bisnow “A pretty high percentage of those [office] buildings won't have a future.” “[Pre-World War II] buildings lend themselves better to residential, but you’re going to have quite a few of the massive floor plate buildings after World War II. What do you do with them?” Peter Bafitis managing principal RKTB Architects, P.C. 🍀 “The cities where you will see some [office building] knockdowns because they have more glass, modern, fatter and taller buildings are the cities where the office market is not coming back at all because they have really strong suburban office or people have bigger homes and are deciding to work from home, and the delta between the residential and the office rent isn't that great.” “A place like Charlotte, they have a lot of new buildings, and the resi market isn't that much more valuable than the cost to create residential.” “In those cities, wrecking balls are already coming out.” Kate Wittels partner HR&A Advisors 🍀 The great rebalancing has begun. 🍀🍀🍀

[Multifamily] properties across the country have experienced a 43.86% increase in [taxes, insurance and utilities] from 2017 to 2023. Trepp, Inc. 🍀 “[Multifamily] insurance costs have skyrocketed by 75% since 2013 …” “CBRE determined that higher insurance premiums had resulted in a 3.6% drop in apartment property values since 2019.” “… while premiums comprise 8% of properties' total expenses, they've contributed to 17% of total expense growth at apartment properties since then.” “Deloitte’s Center for Financial Services recently predicted that insurance costs would climb by a compounded annual rate of just more than 8% through 2030.” “The chart [below], generated using data from TreppCRE and TreppInsights, [is] an aggregation of major expense line items such as real estate taxes, property insurance and utilities on a per unit per annum (PUPA) basis reveals that no metro area or state mentioned in … the United States as a whole, is safe from expense inflation.” from Trepp, Inc. 🍀 Of course, as always, these are national averages, so your mileage may vary. 😁 🍀🍀🍀

“This is just a reminder that the Fed doesn't control long-term interest rates.” "The market" does.” "The market" has delivered the equivalent of four 25 basis-point rate cuts since the 10-year T-Bond's recent closing high of 4.71% in late April 2024.” “Meanwhile, FFR is unchanged.” Rebel Cole Former Fed Staffer / Professor of Finance Florida Atlantic University via X / Twitter (including chart) 🍀 Thanks for everyone’s great comments! Always appreciated, and I learn a lot. 🍀🍀🍀

‘It’s too soon to buy distressed CRE.’ Torsten Slok chief economist Apollo Global Management, Inc. “The argument for buying distressed commercial real estate today is that interest rates are about to come down.” “But if interest rates come down because of a recession, then buying distressed CRE today is not a good idea.” “If the economy starts to slow down more meaningfully, as the consensus expects, the problems for rental housing, multifamily, and warehouses will get a lot worse.” 🍀 Thanks for everyone’s great comments! Always appreciated, and I learn a lot. 🍀🍀🍀

Is housing still the business cycle? 🤔 “Single-family housing starts dropped 14.8% on a year-on-year basis in July.” “Homebuilding has now declined for five straight months.” “… a jump in new housing inventory to levels last seen in early 2008 could limit any rebound in housing starts.” “A National Association of Home Builders survey on Thursday showed homebuilder sentiment fell to an eight-month low in August … the fourth straight monthly drop in confidence.” Reuters / Yahoo Finance 🍀 “Edward Leamer, a professor at the UCLA Anderson School of Management, has argued that housing is a leading indicator of the business cycle and a key factor in understanding the relationship between the two.” Google 🍀 "There are now 476,000 new homes for sale in the US, the highest inventory since February 2008." Carl Quintanilla CNBC / via X 🍀 “… when you are concerned with the total loss of GDP during recessions, residential investment is an important component, but it is not the only one you should worry about: On average it contributed about 15 percent …” Kansas City Fed 🍀 Bloomberg: “Treasury yields surged after signs of a resilient US economy in the latest data releases prompted traders to lower their expectations of aggressive Federal Reserve interest-rate cuts this year.” 🍀 “Not going to get close to 200bps of cuts over the next year with inflation printing 2-3%, real growth printing 2-3%, and stocks just off all time highs.” Either the 2s are wrong, or the Spoos [S&P]. Probably both.” Bob Elliott Unlimited / Formerly Bridgewater 🍀 “Inflation is almost always above 2% when cuts begin because inflation lags the peak of the business cycle.” “Not many are yet convinced the rise in U3 is a real business cycle move.” “The unemployment rate increased by 0.1% from December 2022 to June 2023 and 0.1% from June 2023 to December 2023.” “In December 2023, the pace worsened, rising 0.4% through June 2024.” “If the pace of deterioration remains the same (not including the July 4.3% print), the unemployment rate should land in the 4.5% range by year-end.” “The Fed will have to address this as only 3 officials penciled an unemployment rate above 4.1% by year-end in the last SEP.” Eric Basmajian EPB Research 🍀 “… the reality is that most roads lead back to the US jobs market.” “It’s that, and less so inflation, which holds the key to the size of that first cut in September.” “A move lower in the jobless rate in a few weeks would … tilt the balance back in favour of a smaller move.” “But keep an eye out for benchmark revisions to the payrolls figures next week.” James Smith ING Bank 🍀 Chart from Peter Berezin / BCA Research 🍀🍀🍀

Unemployment: Gradually, then suddenly. 🍀 “The increase in the unemployment rate tends to be smaller at the start of a recession, but gets large quickly.” Markets & Mayhem on X / MacroVisor (including chart) Chart shows increase in unemployment during recessions between 1960 and 2008. 🍀🍀🍀