Roofstock Research

The Fed is expected to begin cutting rates this week. CME FedWatch shows a 100% probability of a rate cut with the market now favoring a 50 basis point cut. At the end of last week expectations were evenly balanced between a 50 basis point cut and a 25 basis point cut. Only a week ago, market expectations heavily favored a 25 basis point cut. August Consumer Price Index (CPI) and Producer Price Index (PPI) reports both showed year-over-year inflation is slowing, but CPI remains stubbornly high, largely due to the methodology used to calculate shelter costs. Reported CPI shelter costs rose 5.2% year-over-year as of August, resulting in a 2.5% increase in headline CPI. Back in April, Roofstock released a research report in which we adjusted March inflation data for more current market-based measures of rent from Rental Genome and other sources. This analysis showed year-over-year CPI growth of 2.3% versus a reported 3.5%. We have updated that analysis in the accompanying table. After our shelter adjustments, year-over-year August CPI growth was below the Fed’s target, at 1.8%. Our research shows shelter inflation is running at 3.0%, compared to the 5.2% increase reported by the BLS. How the Fed views the latest inflation data and how strongly they are considering market-based measures of rent remains to be seen. Using the Phillips curve to assess monetary policy relative to current labor market conditions and our inflation measure would point the Fed to a 50 basis point cut. As I noted recently, the labor market has been consistently slowing, with rolling three-month average job gains decreasing for the past five months and rolling three-month average unemployment rising for the past seven months. The Fed has made it clear they want to avoid significant deterioration in the labor market and their margin for error here is narrowing. A 25 basis point cut could still be in play considering the Fed’s desire to show conviction that its policy stance has been appropriate. It will also not want to appear to be tipping the scales prior to the upcoming presidential election. Fed governors may also be concerned about reported shelter inflation and the risk of acceleration in those numbers if they cut too quickly. A low unemployment rate and rising wages would give them some cover here. In any case, the time for rate cuts has arrived. The April report on inflation from Roofstock Research can be found here: https://lnkd.in/emm5UySA

Taken on its own, August was a solid month for the labor market. The U.S. economy added 142,000 jobs and unemployment ticked down from 4.3% in July to 4.2%. Workers are seeing solid wage gains, with average hourly earnings up 0.4% in August. But taking a broader view of the past several months shows an undeniable pattern of cooling labor market conditions. August’s gain was below consensus and only made possible by revisions to June and July that left July employment 86,000 jobs lower than previously reported. Smoothing through the monthly changes using three-month moving averages, job growth averaged just over 116,000 during the three months ending in August. Excluding the severe employment declines during the pandemic, this is the weakest three-month job gain since July of 2019. The trend is also clear, rolling three-month average job gains have decreased for five consecutive months and the rolling three-month average unemployment rate has risen in each of the past seven months. The direction of the labor market is undeniable, and the commencement of rate cuts that the Fed has clearly signaled should occur at the next FOMC meeting in a couple of weeks. Interestingly, at the time of this writing, the probability of a 50-basis point rate cut eased to 27% per CME Group, lower than it had been yesterday, last week, or last month. Wage gains and a sequential decline in unemployment are likely being viewed positively. The much higher probability of a 25-basis point cut still feels appropriate to me. Fed officials will want to appear in control and politically neutral and a larger cut jeopardizes those things. Barring any economic surprises or outside shocks, orderly rate cuts should keep the markets calm, and the Fed has a good chance of landing the plane successfully. But there will be some bumps as monetary policy is normalized, and certainly reasonable risks that the Fed will need to act more boldly to keep the soft landing in sight. What are your thoughts? Have the latest numbers changed your perspective?

Homebuilder sentiment and housing starts data are signaling cooler economic growth ahead as high prices and mortgage rates weigh on buyer demand. The NAHB/Wells Fargo Housing Market Index (HMI) declined for a fourth straight month in August. Homebuilders have noted declining traffic, and a third of builders dropped prices to boost sales in the most recent month. Nearly two-thirds of survey respondents offered incentives to homebuyers. Housing starts have been well-correlated with movements in the HMI since the inception of the index in 1985, and recent starts have held to script. Single-family housing starts have fallen for five months in a row through July, and at an annualized 851,000 they were below the nearly 905,000 home average over the past decade. Single-family permits have now declined in each of the past six months. Multifamily starts are also running below the prior decade trend but have ticked higher over the past two months. High interest rates have an acute impact on homebuilders due to both increased borrowing costs and weaker homebuyer demand and the Fed increasingly risks shutting down the housing supply spigot through restrictive monetary policy. The good news is that the probability of the Fed beginning to cut rates in September is high. Additionally, most HMI responses were received before the recent decline in mortgage rates that caused mortgage applications to surge. The downward trend in homebuilding over the past several months, along with an uptick in the inventory of homes for sale, should give the Fed additional evidence that rate cuts are warranted. That said, similar to recent labor market data, severe weather has likely played a role in reducing single-family construction starts and it remains to be seen how the Fed will choose to interpret the data. What’s your take? Is this the beginning of a more protracted decline in homebuilding? or just a bump in the road?

July’s employment report from the Bureau of Labor Statistics should give the Fed the exclamation point they have been looking for to show that the economy is slowing enough to warrant a rate cut. Market expectations have shifted firmly to a 50-bps interest rate cut at the Fed’s meeting in mid-September, rather than a 25-bps cut which had been the prevailing view prior to this report. Now handwringing will ratchet higher as to whether the Fed is in the process of successfully orchestrating a soft landing or if they have waited too long to shift their monetary policy stance. Job growth slowed more than expected in July and gains in May and June were revised lower. The unemployment rate increased 20 bps during the month and is up 60 bps over the past six months – unemployment rate changes of 50 bps or more over a six-month period have typically corresponded with recessions (see accompanying chart). Wage growth also appears to have slowed over the past couple of months. Even allowing for some volatility in the monthly data, the three-month moving average in employment growth and unemployment show an undeniable softening. Unemployment insurance claims add further evidence to the slowing trend. Initial unemployment claims have ticked higher over the past three weeks and continuing claims are at their highest level since the fourth quarter of 2021. It is difficult to call current labor market conditions weak with the unemployment rate still at 4.3%, but job gains appear increasingly lackluster across major employment sectors and the loss of momentum is undeniable. Stock and bond market participants are reacting in a way that suggests increased recession fears. Earnings reports have only fueled these concerns. The 10-year Treasury rate has fallen materially below 4.0%. Mortgage rates have also been ticking lower, which is good news for prospective home buyers. Rate cuts appear to be on the way, but macroeconomic conditions are increasingly precarious and the Fed’s September meeting may start to feel like a lifetime away if more bad news unfolds. The week ahead is not a busy one from an economic news perspective, but ISM services, mortgage delinquency, Fed Senior Loan Office Survey, and jobless claims, among others will be interesting to watch for additional information on the economy’s trajectory. What indicators are you watching for?

Given the legitimate concerns around housing supply and affordability in the U.S. and the variety of editorializations around institutional investors buying up homes, U.S. Census Bureau data provide a good reality check on homeownership. The Current Population Survey/Housing Vacancy Survey (CPS/HVS) gives us a quarterly look at homeownership based on a sample of 72,000 addresses across the country. Here are some key takeaways: • The homeownership rate was 65.6% in 24Q1 vs. 66.0% in 23Q1, according to the CPS/HVS. • This change was not statistically significant per the U.S. Census Bureau (i.e., within the survey’s margin of error). • Over the past five years the homeownership rate has averaged 65.7%. • Homeownership was lower, averaging less than 65.0%, in the 1970s, 1980s, 1990s, and 2010s. • Homeownership was higher during the 2000s, with the housing boom pushing the average above 68.0%. • The survey shows a nearly 550,000 increase in owner-occupied housing units over the past year and a 7.5 million increase over the past five years. • Owner-occupied housing units grew at 5.7x the 1.3 million increase in renter-occupied housing units over the past five years, per the CPS/HVS. While we should not discount the affordability and availability challenges facing prospective homeowners, homeownership and resilient home price data show that we do not have an ownership crisis in the U.S. Further, the data are also a reminder that roughly one-third of households rent their primary residence (and about a third of those rent detached or attached single-family homes). Ownership could be a long-term goal for many of these households, but affordability and stage of life may not make that practical today. Many households begin as renters and eventually become owners. Also, people rent for a myriad of reasons and price to purchase isn’t the only deciding factor. A desire or need for geographic mobility and financial flexibility are two notable contributors to households choosing to rent instead of own. Some people simply prefer the renter lifestyle. State and federal housing policies should not ignore the equally valid desires of renter households to have access to high quality, affordable options to rent the type of home they want in a neighborhood they would like to live in. Homeownership is traditionally included as an aspect of achieving the American Dream, but it may not be the right or desired choice for every household. For perspective here, I’ve also attached homeownership rates in some other developed nations. Homeownership is less common in a number of developed economies across the world than it is in the U.S. The homeownership rate in France is ~5 percentage points lower than it is in the U.S. The difference is even more extreme in Germany where the homeownership rate is less than 41.0%. The data show that homeownership is holding up well in the U.S. What are your observations?

Given the legitimate concerns around housing supply and affordability in the U.S. and the variety of editorializations around institutional investors buying up homes, U.S. Census Bureau data provide a good reality check on homeownership. The Current Population Survey/Housing Vacancy Survey (CPS/HVS) gives us a quarterly look at homeownership based on a sample of 72,000 addresses across the country. Here are some key takeaways: • The homeownership rate was 65.6% in 24Q1 vs. 66.0% in 23Q1, according to the CPS/HVS. • This change was not statistically significant per the U.S. Census Bureau (i.e., within the survey’s margin of error). • Over the past five years the homeownership rate has averaged 65.7%. • Homeownership was lower, averaging less than 65.0%, in the 1970s, 1980s, 1990s, and 2010s. • Homeownership was higher during the 2000s, with the housing boom pushing the average above 68.0%. • The survey shows a nearly 550,000 increase in owner-occupied housing units over the past year and a 7.5 million increase over the past five years. • Owner-occupied housing units grew at 5.7x the 1.3 million increase in renter-occupied housing units over the past five years, per the CPS/HVS. While we should not discount the affordability and availability challenges facing prospective homeowners, homeownership and resilient home price data show that we do not have an ownership crisis in the U.S. Further, the data are also a reminder that roughly one-third of households rent their primary residence (and about a third of those rent detached or attached single-family homes). Ownership could be a long-term goal for many of these households, but affordability and stage of life may not make that practical today. Many households begin as renters and eventually become owners. Also, people rent for a myriad of reasons and price to purchase isn’t the only deciding factor. A desire or need for geographic mobility and financial flexibility are two notable contributors to households choosing to rent instead of own. Some people simply prefer the renter lifestyle. State and federal housing policies should not ignore the equally valid desires of renter households to have access to high quality, affordable options to rent the type of home they want in a neighborhood they would like to live in. Homeownership is traditionally included as an aspect of achieving the American Dream, but it may not be the right or desired choice for every household. For perspective here, I’ve also attached homeownership rates in some other developed nations. Homeownership is less common in a number of developed economies across the world than it is in the U.S. The homeownership rate in France is ~5 percentage points lower than it is in the U.S. The difference is even more extreme in Germany where the homeownership rate is less than 41.0%. The data show that homeownership is holding up well in the U.S. What are your observations?

Friday’s Personal Income and Outlays report for March released by the Bureau of Economic Analysis gives us the latest read on the consumer and the Fed’s preferred inflation measure, personal consumption expenditures (PCE). The report appears to have assuaged concerns in the stock and bond markets somewhat after Thursday’s preliminary report on first quarter GDP growth, which includes a quarterly measure of PCE, suggested the economy was slowing and inflation was hotter than expected. Stock prices fell and bond yields rose in reaction to the GDP report and that appears to be reversing. The March Personal Income and Outlays report shows the consumer is holding up and that PCE is not as hot as the initial read on first quarter PCE implied. PCE and Core PCE were both up 0.3% in March, in line with expectations. Year-over-Year growth was 2.7% and 2.8%, respectively, which the Fed may still perceive as too strong for its liking. On net, the recent shift in market expectations towards fewer and later rate cuts during 2024 seems to be appropriate. Economic growth and labor market strength give the Fed cover to keep rates high. That said, we continue to see evidence in the data that monetary policy is restrictive. Headline inflation stats show a mixed bag of plateauing, acceleration, and continued decline. But Core PCE, the Fed’s preferred inflation measure continues to trend downward on a year-over-year basis. PCE data also have a lower weighting to housing than CPI, helping to keep the measure lower. As we noted in our recent piece linked below, real-time measures of shelter inflation should put the Fed more at ease about the headline statistics. Our adjustment to year-over-year CPI growth as of March using more current rent data from Rental Genome puts inflation at 2.3% versus the 3.5% reported by the BLS. Access our CPI analysis here: https://lnkd.in/e9fkHrf5