Ok, I am a pessimist! Well not really but I have been accused of being too conservative concerning finance and investment. Granted most recently some of my portfolio was stopped out during the flash crash only to come roaring back within two weeks. And yes housing in Denver is still in-demand with limited supply and it seems overly eager buyers. However today’s headlines concerned me as follows:
US housing starts total 1.326 million in Jan, vs 1.234 million starts expected
- New home construction increased to more than a one-year high in January.
- The market was boosted by a rebound in the construction of single-family housing units.
- Building permits soared to their highest level since 2007.
On the surface I should be thrilled as housing starts are beginning to mirror our economy which continues to defy conventional cycles and this expansion looks never-ending HOWEVER review last line of the bullet points:
“Building permits soared to their highest levels since 2007” Yet just around the corner in 2009 we were in the depths of The Great Recession teetering on the edge of a Depression.
Concerning housing, most would agree our low-interest rate environment has been somewhat responsible for consumer demand i.e. many purchasing based on the amount of their monthly payment versus equity basis. If planning for the long-term hold this is not necessarily an issue as housing usually exceeds inflation. Granted the buyers from 2004-2006 who sold between 2009 and 2011 may have a different opinion. Yet, what happens if interest rates rise another 65 basis point to 5% which is still a low mortgage rate when looking at a historical chart.
According to Redfin: A 5 percent rate would cause more than a quarter of today’s homebuyers to slow their plans and housing affordability is starting to take a hit. The report goes on to advise buyers will still be house hunting however if one’s PITI increases will wages match? At present we have the signs of inflation yet wages remain stagnant.
Concerning employment and wages the good news is we are at a 17-year low concerning unemployment. The bad news the unemployment rate before the great recession was only 0.5% higher than it is today.
January 2018: Unemployment Rate at 4.1%
January 2007: Unemployment Rate at 4.6%
Of note the Recession officially started in December 2007 with unemployment rising to 5% that month and at its worst during The Great Recession, unemployment was at 9.5%
On to consumer sentiment i.e. how the average consumer feels about the economy:
January 2018: Consumer Sentiment 95.7
January 2007: Consumer Sentiment 96.9
For the remainder of 2007 the Consumer Sentiment stayed relatively strong hovering in the 80’s and 90’s yet by November and December of that year the Sentiment Index dropped into the mid 70’s as the recession began.
And finally an interesting article quoting an apartment developer:
Major apartment developer: ‘There is an acute crisis headed our way’
- The luxury market is largely overbuilt, while there is a shortage of affordable rental housing.
- Lower and middle-income households are spending proportionally more on their rent, says apartment developer Toby Bozzuto.
- Nearly half of all renter households pay more than 30 percent of their income for housing.
As you have probably noticed in downtown and Cherry Creek the crane has again become the “official bird” of the Front Range. Yet many experts are cautioning the cranes are associated with the building of luxury apartments. Of note, multifamily construction is now at a 40-year high; the trouble is, developers are putting up the wrong kinds of buildings. The luxury market is largely overbuilt, while there is a shortage of affordable rental housing, and developers are hamstrung by the now record-high cost of construction.
The statistics are suggesting a potential for an overbuilt/supply coming soon as apartment completions in the 150 largest U.S. cities jumped to 395,775 units in 2017, beating 2016 production by a staggering 46 percent and more than doubling the long-term average, according to RealPage, an apartment management software and data company. Luxury, upscale buildings accounted for between 75 and 80 percent of the new supply in the current cycle.
I am not necessarily sounding the alarm but as a real estate broker with a few decades under my belt AND one who has a good memory of business cycles I remain concerned. My gut feeling is we will begin to encounter inflation which while necessary I believe will exceed the Federal Reserves 2%. Couple this with rising interest rates yet wage increases being stagnant we can run into serious complications leading to a recession. If it is a soft landing or a violent correction, that remains to be seen.
Again based on a traffic signal my light is Yellow and the countdown to Red is fast approaching, thus speed up and if conservative brake now and wait for the light to change and maybe avoid a potential collison.