Almost Daily Archive Grant's Website

Thursday, July 12, 2018

Two ships in the night

Now is an excellent time to buy! Or something like that. Across the U.S., house prices march higher, with the National Association of Realtors reporting that the median home price reached a record high of $264,800 in May, up 4.9% year-over-year, while the Federal Housing Finance Authority’s Price Index made its own record in the first quarter, up 7.5%.  The ascent in prices comes despite a less-than brisk sales environment; existing home sales declined by 0.4% in May, against consensus expectations of a 1.5% rise, and have remained range bound for years. 
While prices party, activity slumbers. FHFA Home Price Index in white, existing home sales in orange. Source: The Bloomberg
The divergence between prices and activity can be explained by tight supply. According to real estate broker Redfin Corp., the average home spent just 34 days on the market in May, eclipsing the previous record low of 36 established a month prior and 38 last year (in Denver, the average listing lasted just six days in May). Aaron Terrazas, senior economist at Zillow Group, Inc., told Reuters: “Supply is woefully inadequate to meet demand.” Trulia, Inc. reports that nationwide inventories declined 5.3% from 2017 in the second quarter, the 14th straight year-over-year drop. 
Housing might be strong nationwide, but it’s a different story in New York City. Residential real estate in Manhattan has endured an ugly start to 2018 and weakness appears to be accelerating. According to brokerage firm Douglas Elliman, second quarter sales in Manhattan plunged 16.6% to 2,629 transactions, the lowest total since 2009, while the median sales price sank 7.5% year-over-year. Total inventory is up 10.7% from the second quarter last year, while the absorption rate, or months to sell existing inventories at the current pace, jumped to 8.4 months from 6 months last year. 
This is no one-borough phenomenon either. Both prices and activity declined year-over-year in Brooklyn and Queens, while the Westchester suburbs saw their biggest sales drop on a percentage basis since 2011 in the second quarter, according to Elliman.   
What gives? The December enactment of the Tax Cuts and Jobs Act caps state and local tax deductions at $10,000, representing a financial hit to residents of high tax localities like the New York metro area (ATTOM Data Solutions reports that the average Westchester resident coughed up more than $17,000 in property taxes last year).  The new law also caps mortgage interest deductions at $750,000, down from $1,000,000 prior to its passage. 
Grant’s asked Jonathan Miller, president, CEO and co-founder of eponymous real estate appraisal firm Miller Samuel, Inc., how much the changes to the tax code may be impacting behavior. Miller didn’t mince words in assessing the significance:
There is nothing positive in the tax law as it relates to housing, the best case is neutral. The worst case? As negative as you can think of.
That isn’t to say that the turn in fortunes can be solely chalked up to the taxman. The rising interest rate regime has not spared housing debt, as the average mortgage rate ticked to 4.39% as of Monday, up from 3.67% in September. 
But the uptick in rates is of course a national phenomenon.  For New York, and specifically Manhattan, a glut of new higher-end housing (a walk through midtown in the last 10 years with an eye on the abundant skyward cranes confirms this) contrasts with a shortage in other categories. Miller explains:
The vast majority of newly developed Manhattan inventory that has come online in this cycle has been in the top 20% of the market. There is excess supply at the high end, and static or insufficient supply for the other 80%. This phenomenon is playing out around the country. 
The impact of the pullback is greatest at the high end, and diminishes as prices decline. The outcome is dwindling affordability.
Asked about the potential broader implications of the soft New York market, Miller again points to affordability, while noting that sales trends typically lead price by 12 to 18 months:
The more expensive the market, the sooner you will see a slowdown in activity, higher inventories and lower prices. It’s a slow grind.
New York leads, the U.S. follows? 

QT progress report

The Fed took a breather this week, as its portfolio of securities held outright registered $4.084 trillion, a (relatively) tiny $130 million uptick from last week’s reading. Both Treasury and mortgage-backed securities holdings ticked higher from July 5.  However, today’s reading still represents a meaty $20.3 billion decline from the trailing four-week average.
Since the Fed began its QT portfolio unwind on Oct. 1, total assets are down by 3.69%, for a simple annualized 4.67% rate of decline. 

Recap July 12

Stocks caught another upside rip, with the S&P 500 rising nearly 1% and the tech-heavy NASDAQ reaching a fresh all-time high as the FANG stocks maintained their potent bullish momentum.  Treasury yields finished little changed, and commodities ticked higher with crude oil managing a modest bounce following yesterday’s 5% plunge. 
Second quarter earnings season kicks into high gear tomorrow, with J.P. Morgan Chase & Co., Citigroup, Inc. and Wells Fargo & Co. among the companies scheduled to report. 
- Philip Grant