Star Glyph Icon

5/13 - 5/17

Star Glyph Icon

New York Times Misleads ​Potential Buyers

The NYT wrote an article and sent out an email on their new buy vs ​rent calculator. In the screenshot and example they sent out, they ​compared a $500,000 home to a $2,000 per month rental, showing ​renting being better by $133,000 over 10 years.

They are assuming that if you rent and save money on a down ​payment and on monthly expenses, you are going to take all that ​money and invest it at an arbitrary rate of return… which is highly ​unlikely. They also have unreasonable costs for closing costs and ​maintenance and repairs.

Using their calculator, and imputing a more realistic and fair scenario, ​it’s better to buy vs rent by about $250,000 after 10-years – assuming ​their math is right and they are calculating the amortization and ​everything else correctly.

Consumer Confidence ​Falls

The University of Michigan release their Consumer Confidence report for May, showing that ​confidence dropped sharply from 77.2 to 67.4 – well below estimates of 76.2 and the ​weakest reading in six months. There was also a big drop in spending intentions across the ​board.

This coincides with the weakening consumer story we discussed last week. Pandemic savings ​are exhausted, personal savings is at the lowest level in years, and consumer credit appears ​to be exhausted. New methods like buy now pay later are also coming under duress, where ​43% that use it are delinquent. And now the UoM is reporting that consumers are not feeling ​good about the economy and their finances.

One-year inflation expectations rose from 3.2% to 3.5%, while the longer term expectations ​rose one tenth to 3.1%. A big factor here was expectations for higher gasoline prices.

The employment component fell by a large 15 point and that matches the softest read since ​August 2011. Almost 40% of consumers now anticipate that unemployment rates will rise in ​the year ahead, rising 8 points from the previous report. The UoM said, “This surge is unusually ​large, about double the size of the typical month-to-month change, suggesting that ​consumer views on labor markets have materially changed in May.”

This is important as the latest jobs data and initial jobless claims data have started to show ​weakness, with the unemployment rate rising to 3.9%. Remember, a jump to 4.2% would likely ​cause the Fed to change their tone on rate cuts.

The income expectations component was down by 6 points to the lowest level since 2014 not ​including Covid.

Producer Price Index (PPI)

The Producer Price Index (PPI) report, which measures wholesale or producer inflation, rose 0.5% in ​April, which was even hotter than the 0.4 expected. The Core rate, which strips out food and energy ​prices, also rose by 0.5%, much hotter than the 0.2% anticipated.

On the surface, this looked like a significant rise in monthly wholesale inflation, and the media ​sounded the alarms on the increase and said the Fed stopping hiking too soon. Initially, the markets ​sold off… but a deeper dive shows a different story.

The reason for the big monthly rise was a sharp negative revision to the previous report. Initially, the ​numbers for March showed that headline and core producer inflation rose by 0.2% each. In today’s ​report, we see that they revised both figures lower by 0.3%, making the March figures -0.1% for both ​headline and core…what a big difference. This again raises the question as to what is happening at ​the BLS with their data, as it’s very unusual to see this big of a revision in inflation data…we are ​accustomed to seeing it with the Jobs data by now.

It's a bit frustrating, because last month we would have likely seen a rally in Mortgage Bonds and ​decline in rates if the initial numbers reported were negative, but the market does not react as much ​to revisions. Additionally, the inputs from PPI go into PCE, the Fed’s favorite measures, so that number ​could have been lower as well and sparked a rally.

We are hopeful that in tomorrow’s CPI report, which is more important than PPI, we see some negative ​revisions as well, because last month’s surprisingly high CPI report on April 10 caused a huge sell off in ​the Bond market.

After all of the noise around the monthly numbers and revisions, year over year the inflation figures ​were as expected. Headline inflation rose to 2.2%, while core remained at 2.4%...both pretty good ​inflation readings and in line with what the Fed wants to see.

Some notable components - Food prices fell 0.7% in April, while Energy prices rose 2%, driven by ​gasoline prices.

NFIB Small Business ​Optimism Index

The NFIB Small Business Optimism Index rose 1.2 points to 89.7 ​in April, but from very depressed levels. The 50-year Average is ​98 for perspective. Those that Expect a Better Economy fell 1 ​point and remains extremely negative at -37%.

Plans to hire rose 1 point from the lowest level since 2016 when ​removing Covid, so while it was a slight improvement, the small ​businesses are not planning to hire much.

Higher Selling Prices fell 3 points after rising by 7 last month. ​Only 26% of owners plan price hikes in April, down 7 points ​and the lowest reading since April of last year, which is a good ​sign for inflation. you’re enjoying this beautiful weekend!

Consumer Price Index

The March Consumer Price Index (CPI) report showed that overall inflation rose 0.3% for the month, which was cooler than estimates of 0.4%. Year over year, inflation ​decreased from 3.5% to 3.4%, which was in line.

The Core rate, which strips out food and energy prices, also increased by 0.3%, which was in line with estimates. Year over year, Core CPI declined from 3.8% to 3.6%, ​which was slightly better than estimates.

Let’s break down the internals:

  • Energy prices rose 1.1% for the second month in a row, with gasoline up 2.8%, which hurt the headline.
  • Motor Vehicle Insurance continued to rise, increasing by 1.8% in April and now up almost 23% year over year.
  • Apparel also caused the index to rise for the third month in a row, rising 1.2%.
  • Used car prices fell 1.4%, while new cars fell 0.4%, helping inflation move lower.
  • Shelter costs, which makes up 45% of the core index, rose 0.4%. Shelter declined from 5.7% to 5.5% year over year.
  • Rents rose 0.4% last month and are up 5.4% year over year, down from 5.7% in the previous report.
  • Owner’s equivalent rent, which tries to capture the increase in homeownership costs, rose 0.4% and is up 5.8% year over year, down from 5.9%.

All of the inflation on a YoY basis is coming from two areas – Shelter and Motor Vehicle Insurance. When removing those items, the entire rest of the items are up only ​0.27%. We know the Fed policy can’t do anything about Motor Vehicle Insurance rates going up, and shelter continues to lag behind real time numbers. Nonetheless, ​today’s progress was well received by the markets.

Retail Sales

Retails Sales for the month of April were flat, which was lower than the 0.4% expected. Additionally, last month’s figure was revised slightly lower from 0.7% to 0.6%.

When stripping out Autos and gas, sales actually fell 0.1%. The core retail sales, which gets plugged into GDP, declined 0.3%. And last month’s strong 1.1% core reading was ​revised lower to 1%. The -0.3% monthly reading is the lowest since January and really coincides with what we have been saying – there are a lot of signs the consumer is coming ​under stress.

After both CPI and Retail Sales, the markets are now pricing in two rate cuts by the end of the year.

Mortgage Applications

The MBA released their Mortgage Application data for last week, showing that purchases decreased 2% last week. Purchases are now down 14% from this time last year. ​Interest rates fell from 7.18% to 7.08% and are 0.5% higher than this time last year.

NAHB Housing Market Index

The May NAHB Housing Market Index, which measures builder confidence, fell 6 points to 45, back under the 50 level that signals expansion/contraction. The big driver ​was higher mortgage rates, but they have since started to come down, which leads us to believe next month’s report should be much better.

“We are also concerned about the recent codes rules that require HUD and USDA to insure mortgages for new single-family homes only if they are built to the 2021 ​International Energy Conservation Code. This will further increase the cost of construction in a market that sorely needs more inventory for first-time and first-generation ​buyers.”

Here is a breakdown of the internal metrics:

  • Current Sales: fell 6 points to 51 (still slightly in expansion)
  • Future Expectations: fell 9 points to 51 (still slightly in expansion)
  • Buyer Traffic: fell 4 points to 30 (contraction, lowest level since January)

The May HMI survey also revealed that 25% of builders cut home prices to bolster sales in May, ending four months of consecutive declines in this metric and up from ​22%. This number was 36% in December, however. The use of sales incentives ticked up to 59% in May from a reading of 57% in April, but still down from 60% in March.

Housing Starts and Permits

Housing Starts rose 5.7% in April to an annualized pace of 1.36M units. Starts ​are now down 0.6% year over year. Single-Family Starts, which are most ​important, were relatively flat at a 1.03M unit annualized pace. SF Starts are ​now up 18% YoY.

There were just 329,000 multifamily starts, which is not far from the lowest ​level since 2017 not including Covid. There is a near record high of 934k multi-​family units under construction, which should add some supply and ease rental ​pricing pressures.

Building Permits, which is the future supply, fell 3% to a 1.44M unit annualized ​pace and are now down 2% year over year. Single-Family Permits fell almost ​1% to 976k unit annualized pace and are up 11% year over year.

Completions rose almost 9% last month to a 1.62M unit annualized pace, while ​Single-Family rose 15% to 10.5% to a 1.09M unit pace. This should add some ​additional single-family supply, leading to more transactions, so long as rates ​continue to cooperate. But behind it, there are not enough starts happening ​and points to a slowdown in new construction, which bodes well for ​appreciation.

Initial Jobless Claims

Initial Jobless Claims, which measures individuals filing for unemployment ​benefits for the first time, fell 10,000 to 222,000, but remains above the ​previous low levels we have seen for a long time. The four-week moving ​average is up to 218,000, the most since November 2023.

Continuing Claims, or those that continue to receive benefits after their initial ​claims, rose 13,000 to 1.794M, near the highest levels since November 2021 and ​still pointing to the fact that after someone is laid off, it’s much harder to find ​a job.

If we continue to see a trend in softer employment data, that would be a good ​thing for rates and could pressure the Fed to cut, especially if the ​unemployment rate rises above 4%.

Industrial Production and ​Capacity Utilization

Industrial Production in January fell 0.1%, which was lower than the 0.3% ​expected. This is continuing to show weakness in manufacturing. Capacity ​utilization, or how maxed out capacity is at factories, fell from 78.7% to 78.5%, ​which is deflationary.