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6/10 - 6/14

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CoreLogic Equity Report

CoreLogic reported that as of the end of Q1 2024, home equity ​increased 9.6% or $1.5 trillion from last year. This is due to the magic ​elixir of appreciation – Remember that homeowners on average have ​40x the net worth of renters.


As equity increases, the number of homes that are underwater ​continues to decline. From Q4 of last year, homes with negative ​equity decreased by 2.1% or almost 200,000 homes moved back into ​the black. Negative equity decreased 16% year over year. If home ​prices rise by 5% this year, over 100,000 homes will regain positive ​equity.

Home Equity

NFIB Small Business Optimism Index

The May NFIB Small Business Optimism index rose to 90.5 from 89.7 and remains ​near the lowest levels we have seen in over 10 years.


The Chief economist at the NFIB expressed the pessimism amongst small business ​owner and said, “For 29 consecutive months, small business owners have ​expressed historically low optimism and their views about future business ​conditions are at the worst levels seen in 50 years.”


The job component with the NFIB report is near the lowest levels in 8 years when ​removing Covid, and is another sign that the BLS is overstating small business job ​growth. Last Friday’s report showed that through the Birth/Death model they use, ​there were 231,000 job creations, mostly in small businesses. But ADP showed ​10,000 job losses in this category. The BLS clearly has a problem with their ​headline figures, but unfortunately, we will not know the extent of the revisions for ​months to come. We now know that according to the Census QCEW (Quarterly ​Census for Employment and Wages), the BLS overstated job growth by 800,000 in ​2023.


Consumer Price Index

The May Consumer Price Index (CPI) report showed that overall inflation was 0% for the month, which was cooler than estimates of 0.1%. Year over year, inflation ​decreased from 3.4% to 3.3%, which was softer than estimates of an unchanged reading. Helping the headline was a drop of 2% in energy prices, with gasoline falling ​3.6%.


The Core rate, which strips out food and energy prices, increased by 0.2%, which was also one tenth below estimates. Year over year, Core CPI declined from 3.6% to ​3.4%, which was lower than the unchanged to 3.5% anticipated.


Let’s break down the internals:


While the entire reading of Core CPI was 3.4% year over year, almost all of the inflation came from Shelter and Motor Vehicle Insurance. Everything else only rose ​0.21% from last year.


Shelter costs, which makes up 45% of the core index, moderated slightly as we expected because of the higher replacement figure falling out of the annual ​calculation from last year. Overall shelter rose 0.4%, causing the year over year reading to decline from 5.5% to 5.4% year over year. Rents rose 0.4% last month and ​are up 5.3% year over year, down from 5.4% in the previous report. Owner’s equivalent rent, which tries to capture the increase in homeownership costs, also rose 0.4% ​and is up 5.7% year over year, down from 5.8%. While we did not see much progress on shelter, it did moderate a bit and the monthly readings have been trending ​lower and have been somewhat tamer. Looking ahead, next month the figure falling off the annual calculation is 0.41%, which will make it hard to make additional ​progress, unless we see lower monthly readings beneath 0.4%. But looking further, we will likely see some a big benefit in September and January, as those are very ​high comparisons.


The other area responsible for most of the inflation we are seeing is Motor Vehicle Insurance. And this component finally cooled off after having a string of very high ​monthly readings. In today’s report, MV insurance fell 0.1% and the year over year reading moderated from a very high 23% to 20%, causing the overall Core index to ​fall 0.11% year over year. MV Insurance appears to finally be cooling after catching up to the big rise we saw in car prices from two years ago. If this trend continues, it ​will help inflation move lower. Another item that helped was Airline Fares, which fell 3.6% last month.


Mortgage Applications

There was a big spike of 16% in mortgage applications last week as rates ​declined for the first four days of last week, showing just how sensitive ​applications are to rate changes and how much demand there is on the ​sidelines just waiting for rates to normalize.


Interest rates fell from 7.07% to 7.02% over the entire week, but that ​includes the big spike we saw on Friday after the Jobs Report. Rates were ​down more than that over the majority of the week, causing activity to ​surge. Rates last week were a little more than 0.25% higher than this time ​last year.


Purchase applications rose 9% last week and are now down 12% from this ​time last year. Refinance rose by a whopping 28%, albeit from low levels, ​and are now up 28% from this time last year.


Mortgage

Producer Price Index

The Producer Price Index (PPI) report, which measures wholesale or producer inflation, ​fell 0.2%, which was much lower than the 0.1% rise expected. Year over year, ​Producer Inflation fell from a downwardly revised 2.3% to 2.2%, which was lower ​than the 2.5% expected. The drop in gasoline prices helped the headline come in ​negative.


The Core rate, which strips out food and energy prices, was 0% in May, which was ​much lower than the 0.3% expected. Year over year, Core PPI fell from 2.4% to 2.3%, ​which was lower than the 2.4% expected. Services inflation, which is where most of ​the inflation is coming from, came in at 0%.


This was a great wholesale inflation report and follows a tamer CPI (Consumer Price ​Index) report yesterday. PPI shares a lot of the same elements as the Fed’s favorite ​measure of inflation, PCE (Personal Consumption Expenditures) and would point to a ​favorable next reading at the end of the month.


The estimates for PCE have been revised lower from 0.23% to 0.1% after yesterday’s ​CPI, but this may get revised lower after they contemplate today’s higher claims and ​lower PPI data.

Initial Jobless Claims

Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, rose by 13,000 last week to 242,000, which is the highest reading in ​10 months and much higher than the 225,000 expected.


Continuing Claims, which measures Individuals continuing to receive benefits after their initial claims, rose 30,000 to 1.82M. This figure is at the highest level since ​November 2021 and shows that once you are laid off it’s becoming harder to find a new job.


This is another sign that the labor market is begging to turn in our favor.


Housing Forecasts

Zillow released their housing report for May, showing that home prices rose 0.8% in the month, following a 1.2% rise in April. Zillow is now reporting that home values ​are up 3.9% year over year, which is a bit below other estimates out there, but still strong.


Zillow said that price cuts increased to 24% in May, up from 19% last year…but some of this could certainly be a strategy to incent a bidding war because homes that ​sold above list price rose from 30% to 33%.


They forecast that home values will moderate later this year and only be up 0.4% by the end of 2024…which implies we will see home values decline 3.5% from current ​levels. Zillow also thinks that over the next 12 months home prices will moderate by 1.4%. We disagree and think that they are not contemplating the impact of rates ​coming down.


Also in contrast to Zillow’s forecasts was the Home Price Expectations survey from Pulsenomics and Fannie Mae, where the top 150 economists in the US are asked ​where they believe home prices will go.


This is the report that we have won three crystal balls for the most accurate forecasts – We came in 6th place last year for our forecasts. Within this survey, the average ​appreciation forecasted is 4.31% this year and between 3-5% each year over the next four years, with the average cumulative appreciation over that period of time at ​21%...which can be life changing.