Friday Market Update: March 17th 2023

Since 1942, Homes Have Appreciated 73 Out of the 81 Years!

Happy Friday! Brian Manning here with the weekly update. Let’s get right to it. First of all, happy St. Patrick’s Day. I must be a bad Irishman because I am Irish, but I have no green on today. But don’t worry, Maureen McCarthy and Sean, I got some green that I’m going to break out later for your party. Super stoked.

Let’s see. Monday this week… Yeah, bonds were crazy on Monday. So, we had the Silicon Valley Bank and just all the chaos over the weekend with the banking system and the stress in the banking system. Anytime you have stress like that in the financial markets, it usually bodes well for the bond markets and for interest rates. So, we saw a big improvement in interest rates from last week to this week because of that.

Tuesday this week, we got the CPI report. That’s Consumer Price Index. Let’s take a look at some feedback here for CPI. So… So, this is for the month of February. Let’s see if I can get rid of this thing right here. So, this is for the month of February. So, the headline number was up 4/10th of a percent. That was in line with estimates. On a year-over-year basis, we had CPI go from 6%… I’m sorry, from 6.4% to 6%. So, you know, not a huge decline, but we’re still seeing declines in appreciation there.

The core rate came back at being up 5/10th of a percent versus estimates that were at 4/10th of a percent. And the core rate itself moved from 5.6% to 5.5%. We put a lot of weight on the core rate of inflation because this strips out volatile items such as food and energy. A big component, and probably one of the largest components of CPI is going to be shelter. So, we’ll just call this housing and lodging away expenses. This makes up 43% of CPI. So, on a month-over-month basis, this was up 8/10th of a percent.

On a year-over-year basis, this was up 8.1%. So, the shelter number is still up really high. Lodging away from home is a big part of this as well. So, this is travelling costs and hotel accommodations. So, lodging away from home was up 2.3% on a month-over-month basis and 6.7% on a year-over-year basis. So, we’re still seeing impacts on these shelter costs that are extremely impactful in the CPI report and they are showing inflation probably looking higher than it really is because there’s a lagging effect here.

So… If we look at this, this shows us a chart. The middle blue line is the shelter right now. So, it shows shelters going up at a rate of 8.1% per year. The purple line here shows apartment list. So, apartment list tracks rents across the nation and rents are only going up at 3% per year right now. The challenge is when you look at what’s going on with apartment list versus the CPI report, apartment list had an apex back in January 2022 and started coming down. The shelter costs and CPI are an average and they’re usually… we’re going to say anywhere from like 12 to 14, maybe 13 to 15 months old.

So, if you look at what happened in the past and we look at the shelter costs here, when we start to see this rollover and shelter costs come down in like February, March of 2022, we’re about a year out from this rollover that took place and shelter costs declining. So… Hopefully, and likely what we’re going to see, and hopefully eventually, sooner versus later, we’re going to see this rollover in the shelter costs here and when you start to see the shelter costs come down here, that’s going to have an extremely positive impact on the CPI report and inflation.

What’s interesting is that if you looked at this and you use the shelter costs and you said, okay, shelter costs are really going to 3% per year, not 8.1% per year, CPI actually would be at 3.3%, not 5.5%. So, we are going to see this rollover happen eventually. When we do, it’s going to be impactful for us. Another thing I want to look at is just what’s going to happen with inflation going forward because this is always going to be impactful for interest rates. So… When we get inflation data in the year of 2023, it’s replacing inflation data in the year of 2022. So, when we got this report here on March 14th, we replaced the numbers in 2022.

So, in 2022, inflation was going up 5/10th of a percent and shelter costs were going up at 6/10th of a percent. The next reading we’re going to get, so this is going to be the reading for March. We get that on April 12th. I don’t think it’s going to be a great reading for us because we’re replacing a very low number for inflation. But… If you look at May 10th and we have this… Mark this on your calendar. starting May 10th going forward, the numbers that we’re replacing in 2022 are high CPI numbers for inflation and high shelter costs and they just kind of go up and they run really high for the rest of the year. So… We really think that May 10th, going forward, we’ll just start to see a big impact on interest rates there.

Another thing I want to look at really quick is just some info on housing. So much negativity in the news about housing. Are we in a housing bubble? Is housing crashing? So, here’s a report that was pulled out and we’re extremely appreciative of MBS Highway for providing this kind of information. This looks at the housing market all the way back to 1942. It’s unbelievable. So, since 19 42, 73 years have been a win. So, they’ve appreciated in value. Seven years have gone down in value, and only one year has been a zero.

So, if you look at what happened in the housing market across the country since 1942, across the board, consistently, houses have always appreciated with the exception of seven years, right? This little blip right here was due to so many variables, poor underwriting standards, and the kind of list goes on and on and on about what happened here leading into the 07, 08 housing crisis. But if you take that out of it, and that’s definitely stabilized now. Underwriting is completely different now. You look at these 73 years in a row. I’m sorry, not in a row, 73 years total. Since 1942, we’ve had positive appreciation, which is unbelievable and great to see.

Let’s see, Wednesday this week, we got PPI. So, PPI is the Producer Price Index. This measures inflation at the wholesale level. PPI for the month of February was down 1/10th of a percent. It was expected the PPI would be down… would be up excuse me, 3/10th of a percent. So that was really good to see. On a year-over-year basis, PPI moved from being up 5.7% to being up only 4.6%. So that’s a huge move lower. It’s really good to see. There was a time at the peak of PPI, it was at almost 11%. So, it’s definitely come down a lot.

We also got some feedback from Cass Freight. It’s called the Cass Freight Shipping Index. This is an index that tracks the cost of moving goods across the country. So, if you buy something from Amazon and that maybe they get shipped from Texas to Colorado, what is the cost of moving those goods around? And those costs are down now 5.5%. So, we’re starting to see inflationary pressures easing there as well.

We also got retail sales. Retail sales were down 4/10th of a percent on a month-over-month basis. They were expected tube down 3/10th of a percent. So, retail sales a little calmer. So, everywhere we’re seeing just a little bit of calming in inflation. What we really have to see is these shelter costs come down. When we start to see the shelter costs rollover and come down, that’s going to be yet even more impactful, and that’s going to have more of a positive impact on interest rates.

Thursday this week. we got Housing Starts. So, this is new construction. Housing Starts always looks at multifamily and single family. We’re always focused on single family, not as focused on the multifamily starts. So, for the month of February, single family housing starts were down 32% on a year-over-year basis. We also looked at permits. Permits were down 36%. So, what does this tell us? This tells us that new construction going forward is going to continue to be low on inventory. So… As mortgage rates continue to move lower, as inflationary numbers improve, as more and more buyers jump back into the marketplace, new construction, unlike 2007, 2008, where we had over 3 million homes for sale, new construction inventory is going to remain low, and that’s going to continue to put pressure on the housing market, give us stability, and keep us in palace where we’re probably seeing appreciation.

Today, Friday, we saw, unfortunately, some more bad news from the banking sector. We had Silicon Valley Bank holding company file for bankruptcy. We also have a lot of news out there on First Republic Bank. So, First Republic Bank has a lot of uninsured deposits. So, with the number of uninsured deposits that they have, there’s just been concerns and a risk of a run on the bank there. Normally, like you have with Silicon Valley Bank, you have the Federal Reserve getting involved. What’s interesting on First Republic is that the Federal Reserve didn’t get involved. They coerced eleven of the largest banks across the country to deposit over $30 billion to shore up their deposits and liquidity. And we’ve never seen that before. It’s kind of weird. I don’t understand why it’s happened. I don’t have a great explanation for you there. But now you have First Republic Bank kind of getting fixed there. What we have to watch out for, though, is this is 120-day Band Aid. You have all these banks that put liquidity in there. We don’t know what’s going to happen after the 120 days is up. It hasn’t really been figured out.

Next week is going to be a big week for us because we have a Fed meeting. So, we have Fed meeting with Jerome Powell ending on Wednesday. There’s going to be a lot of discussion about rate hikes. We’re going to figure out what they’re going to do there. What’s interesting, if you look at the Federal Reserve through Covid, they had this version of what’s called quantitative easing. So, the Federal Reserve was pushing liquidity in the marketplace and forcing rates low. Then, they had to go into what’s called quantitative tightening. So, they have this balance sheet. They’ve been trying to run off the balance sheet, and they’ve been running off about $95 billion a month off the balance sheet, and that’s in mortgage-backed securities and US. treasuries. But now… In the last week or so, they’ve picked up an extra $300 billion because they’re having to fix this liquidity crisis with the bank. So… I’m not sure how that’s going to come into play and what’s going to happen, but it’s interesting to see the reverse role in the quantitative tightening there.

Next week, though, we have to wait and see. So, the European Union or the European Central Bank, similar situation to ours, they hiked rates half a percent. It was almost like they said, well, we don’t really care about the banking system, we’re just going to hike rates anyway because we need to continue doing this. Wednesday, when Jerome Powell speaks, probably they shouldn’t even hike rates at all. They should probably hold off because they’ve gone through a pretty massive series of rate hikes over the last year.

They should probably hang tight and see what happens and just kind of roll with this process for a little while and see what the impacts are in the marketplace and on inflation. But I’m not going to be surprised if you see the Federal Reserve hike rates a quarter of a percent in the next meeting. What’s going to be interesting, though, is what does Jerome Powell say? And does he allude to saying, hey, this is our last rate hike, going forward, we’re not going to hike rates again. We have to wait and see what happens, and we have to really fix our banking system. So, there’s going to be a lot of volatility between now and next week. Markets are going to be haywire. Mortgage rates are going to be all over the place. We just have to be on our toes. And I’ll keep you updated with what’s going on. I’m around all weekend. If you have any questions, let me know. If you want to go through our strategic buyer consultation, give me a call. If you want to learn how you can close the purchase transaction in twelve days, I’m your guy. We’re here to help you.

Happy Friday. Have a great day!



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