We saw the first signs of slowing real estate activity this week. April new home sales dropped 16.6% MoM and home builder surveys show an uptick in cancellations. This slowdown is needed to cool the economy and ease inflation. Rents (aka shelter) is over 40% of the core-CPI index, and we need easing house prices to have any chance to cool inflation.
What about the rally in stocks and bonds this week? We are very much of the view that these moves are misplaced. The Fed, once again, is prematurely playing politician by suggesting that they could pause rate hikes in September after two more 0.50% increases. We worry that these needless predictions could further erode the Fed’s dwindling credibility and raise the risk of a hard landing.
Dispatch #13 on May 27th, 2022, has the following lineup of stories:
- First signs of slowing real estate market
- Fed is prematurely signalling easing
- Crypto insider trading?
- NFTs facilitate StubHub for hotel rooms
First signs of slowing real estate market
April new home sales dropped 16.6% MoM, the largest monthly drop since 2013. It was well behind economists’ expectation of 1.7% decline. New homes have notable exposure to first-time buyers, many of whom can’t qualify for a purchase following higher mortgage rates. However, new homes only make up about 10% of the all homes sales, as this WSJ article explains.
In the stock market, home builder stocks have sharply underperformed the market, falling ~30% YTD despite strong results. The market is forward looking and is likely pricing a slowdown. The chart below is of the home builder ETF (ITB).
There are clear signs that new home purchase cancellation in select markets is picking up. Denver is shown below.
However, bulk of survey sample see no changes to cancellations, as noted below.
This survey of realtors, a notoriously bullish group, as shows evidence of changing buyer behavior and buying capacity.
While we are not surprised by signs of slowing, our view remains (see Dispatch #10) that a property downturn will be modest. Unlike the mid-2000s, mortgages have been almost exclusively fixed rate. Plus, we have not built enough homes to match population growth, as shown below.
The media narrative remains mixed, which is a sign that we are still early in any potential trend. This Fortune article quotes Moodys calling for a slowdown while the NY Times story has a more upbeat take on real estate price prospects.
The Fed is prematurely signalling easing
The current Fed leaders are constantly on TV, like politicians, trying to articulate their views on the economy. The Fed has been resoundingly wrong on most economic predictions of the past 18 months. With credibility already thin, Fed leaders are starting to jawbone future rate direction before they have really gotten inflation under control. This opinion article in The Economist by Berkeley professor lays out the serious risks of the Fed losing credibility. The Bloomberg headline below shows commentary last week from the Atlanta Fed Chair Bostic.
In addition to Mr Bostic, the St. Louis Fed Chair was also out taking of rate cuts in 2023 as this WSJ article on May 23rd highlights. Partly because of these comments, we’ve seen both bonds and stocks rally this week. These rallies will short circuit the financial conditions tightening that is needed to cool the economy and ease inflation.
For example, just with the recent jawboning, mortgage rates have started to ease before there’s any meaningful easing of real estate prices. Recall that rents are over 40% of the core-CPI index, and it is essential that we cool housing prices to have any chance of getting inflation under control.
Why predict what they might do in September or next year when there’s very little Fed credibility? The Fed blabbering, if taken too far, could increase the risks of a hard landing. That risk increased this week.
Crypto insider trading?
This WSJ article highlights signs of insider trader ahead of crypto asset listing on centralized exchanges. The actions are possible, perhaps even likely because centralized crypto asset venues, especially those offshore, don’t have any oversight. These allegations support the SEC’s claims that crypto is the Wild West. However, the issue is NOT “crypto”, but rather the centralized entities run by humans. Crypto Assets themselves are open blockchains with activity visible to all. As this Blockworks story explains, there’s no insider information in blockchains themselves. Blockchain data is available for all to see, whereas company data is available to privileged insiders. The article does a good job of parsing the difference between the lack of “insider information” in crypto assets and the risks of trading crypto assets on centralized exchanges based on privileged information from that exchange.
Any trading on privileged information should be stopped, the industry regulated appropriately and anyone front-running client trades prosecuted. It just should NOT be characterized as “crypto insider trading” because it’s not about decentralized crypto assets, but rather an issue with centralized venues, just like a brokerage firm for stocks. The risk here is that regulators will try to regulate decentralized blockchains and services when the focus should be on centralized exchanges and other traditional service providers.
Using NFTs to create a StubHub for hotel rooms
This WSJ story explains how new companies are using NFTs to provide lodging firms with better revenue management. The idea is that hotel groups can sell stays via an NFT as a final sale instead of experiencing client cancellations. That way, if the original purchaser has to cancel, they would sell the NFT to another potential guest, just like event tickets they would sell on StubHub. Pinktada and Stayopen are the two companies featured in the article. This is an example of the services that blockchains can facilitate. NFTs offer legitimate use cases and many of those use cases are probably yet to be dreamed up!
Thank you for making it all the way down to the end! The Dispatch will be off the next two weeks. We hope everyone is looking forward to Northern hemisphere summer. Stay safe and do reach out if you have any questions or comments about the material in this Dispatch.
Asi
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