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THE LOCATION STRATEGY TOP 10

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LOCATION STRATEGY IN PERSON NEXT WEEK

SCOTT DAVIS WILL BE SPEAKING AT THE FOLLOWING EVENTS NEXT WEEK:

• DFW MASTER PLANNED COMMUNITIES - TUES FEB 21, 8 AM
• HOUSTON MASTER-PLANNED DEVELOPMENTS & COMMUNITIES - THUR FEB 23, 8 AM

TELL ME AGAIN ABOUT THAT GREAT JOB MARKET

The Wall Street Journal recommends that you skip breakfast to help make ends meet.

Wells Fargo sees three down quarters of GDP growth this year, but a resumption of growth in 2Q24.

The Fed’s Magic Housing Inflation Chart is Back! 

Shelter inflation is the single largest component of Core CPI. Remember the housing inflation according the USFG is based on asking homeowners how much their houses would rent for, and lags actual transaction-based indices by 6-9 months.

Apparently the Fed is still only looking at year-over-year charts, like this chart below from S&P Case-Shiller national index. While it's true the current YOY figure shows home prices up 7.7% versus a year ago, the index peaked in July 2022, it's presently declining at nearly 1% point per month and that rate of decline is accelerating. That is not the same thing as "home prices are up almost 8% over last year." But the policy is treating like it is - which is why we think a higher mortgage rate environment will persist longer than seems necessary.

The chart below clearly illustrates the phenomenon: pandemic boom gains are masking significant declines this year - and we've confused "prices went up" with "prices are still going up" in calculating home price gains and even the CPI - about 40% of which is comprised of home price gains.

The Fed's index for rental costs has the same flaws as the one for owned homes. The OER is aligned with Zillow data advanced by 10 months - meaning that the Zillow data started showing declines months ago, while OER is still showing increases.

WHAT IS A LANDING FOR THE ECONOMY?

When it comes to "soft landings," every Fed chair thinks they are Sully Sullenberger. The reality is building permits have bottomed and reversed 13 times since 1960; only 4 have been "soft landings," which are reversals that took place without a recession. But in the other nine times, the recession did not end until housing broke out. While the outlook for rate chages is unclear, and Location Strategy still thinks the terminal Fed funds rate will be 5.25-5.5%, we expect to see a quick reversal in building permit trends because the underlying supply and demand factors that caused the rapid increase in prices over the last few years have not really been resolved.

HISTORY DOESN'T ALWAYS REPEAT ITSELF

Busts start alike but end differently. Despite being caused by the most rapid change in interest rates in history, the decline in sales is similar to the late 1970s and post-2005. Both of those were fairly long recoveries and we expect sales to return to near peak levels in shorter time frames than either of these prior downturns.

Builders are already starting to see sales increase in some areas in response to lower base prices.