We are finally starting to see more and more effects on various parts of the economy from the most aggressive monetary policy since the days of Paul Volcker.
The monetary lag from 525 basis points worth of rate hikes from the Federal Reserve since March 2022 are definitely being felt more in myriad areas. These effects might have been delayed by the huge amount of excess savings that had been accrued during the Covid pandemic thanks to various congressional stimulus programs. However, those savings have now been largely spent and the economy is starting to feel the full brunt of much higher interest rates.
The last two BLS jobs reports have shown a decline in full-time positions — as well a surge in part-time positions. And if the UAW strike escalates and goes through mid-October, I think we will get an outright negative print in a monthly jobs report before the end of the year.
We are also finally starting to see major cracks developing in the housing market.
Home prices have largely dodged the highest average mortgage rates since the turn of the century, but I don’t think that lasts much longer — and the next direction for average selling prices will be down.
On Monday, The NAHB/Wells Fargo Housing Market Index fell to 45 in September versus the consensus expectation of 50, and the August level of 50. The five-point decline in September followed a six-point drop in August and puts the index firmly in contractionary territory.
Thirty-two percent of homebuilders reported lowering prices compared to 25% in the prior month. In addition, 60,000 home orders were cancelled in August, or 15.7% of all orders. This is the highest level since October 2022 when mortgage rates similarity spiked. On Tuesday, housing starts were reported to have plunged 11.3% in August from July’s levels, badly missing expectations.
My short positions in the SPDR S&P Homebuilders ETF (XHB) and LGI Homes (LGIH) are starting to pay off and I think both names will continue to head lower.
AirBnB (ABNB) is also facing increasing challenges. The company’s business is getting scapegoated by politicians and others for the huge hikes in home prices and rental costs over the past couple of years.
New York City has now all but made it impossible to be a AirBnB host instead of blaming its rent control and other housing policies for the record-high apartment rental prices in Gotham. Since new laws went into effect earlier this month in NYC, short-term AirBnB rentals have plunged by more than three quarters, according to the NY Post. NYC is AirBnB’s largest market, or was, I should say.
Other smaller venues such as Charleston, S.C., Las Vegas and New Orleans have also placed significant restrictions on short-term rentals. I have noticed that here in South Florida about one in every 12 new listings seem to be around an abode that was previously used primarily as an AirBnB property. This tells me the business is not nearly as lucrative for hosts here as it has been.
I believe the coming quarters will see more pressure on the residential real estate market as monetary policy starts to be fully reflected throughout the economy. The prospects for commercial real estate are even worse given the large amount of commercial mortgage-backed securities — and CRE loans that have to be rolled over at significantly higher rates. In a lot of cases, these assets that have lost considerable value since their last financing.
2024 looks like it could be a brutal one throughout the real estate sector.
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