THE LOCATION STRATEGY TOP 10

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MARK YOUR CALENDAR

Scott Davis will be speaking at the North Houston Counties Builder Association meeting on December 7.  

Location Strategy has just committed to events with Bisnow in Houston and Dallas in 2023. Stay tuned for more details.

OUR THESIS ON THE ECONOMY

For new readers, remember the Location Strategy thesis is:

1. Rapid inflation was caused by aggressive financial and monetary stimulus from the Federal Reserve and Congress in response to an economic slowdown caused by a misguided and political response to a pandemic that itself was very likely the result of an accident related to US-Chinese research collaboration in Wuhan, China.
2. To fight inflation, the Fed is now trying to push down employment and housing costs (one of the few costs it actually doesn't even measure directly) to using data that produce fantasy results.
3. 1&2 were done independent of actual housing demand, which happens to remain quite high. Location Strategy's base case scenario is that high rates will continue through 2024 and will slowly lower into a housing market facing similar demand and pricing pressures that we saw in 2019-2021, only without the 2019 levels of inventory to meet it.

That makes the status of job growth and home prices pretty important, which we focus on here today.

ECONOMY CREATES MILLIONS OF JOBS

ON THE SPREADSHEETS OF BLS COMPUTERS

We've covered before how the Federal govt uses two surveys of employment; the establishment and household surveys - and although each surveys different segments, each usually report the same levels of employment, even if they occasionally diverge during, ahem, presidential election years.

But here they have diverged widely since March: the Establishment survey shows 2.7 million new jobs, while the Household survey shows 12,000. I'm a firm believer in Hanlon's Razor, so I don't believe it's a conspiracy. Two things instead seem to be happening with the data:

• New business starts are up and the BLS is overweighting this impact on new job growth. It is well known (even by the Fed) that new business starts rise during a recession as people who are laid off start new companies, often with severance packages from their former employers; and
• we are seeing employment fall in while average hourly wages are increasing - which could be explained by layoffs + severance packages. This is exactly how severance packages would show up in the data.

State labor departments are showing data I think is more consistent than the BLS is; and we should remember states have elections, too:

What does this mean? THE FED IS CONSTRICTING THE ECONOMY USING A GHOST. THE GROWTH AGAINST WHICH THEY ARE MEASURING EFFORTS TO FIGHT INFLATION PROBABLY DOESN'T EXIST.

JOB LOSSES TO CONTINUE THROUGH 2024

The best case scenario we've seen is job losses through mid-2023 to get back to the 20-year pre-covid trend. Location Strategy thinks the Fed will overshoot for a number of reasons including the data they are using has about a six month lag. Here's the Goldman forecast:

JOB LOSSES CONCENTRATED IN THE TECH SECTOR

If effective job gains this year are zero, why aren't job losses more noticeable? So far they are more concentrated in the tech sector than any where else.

DOES THIS LOOK LIKE 3 MILLION JOBS IN 6 MONTHS?

The chart below shows the drag on GDP from declining sectors, including residential investment. But the headline is consumption; it's contribution to GDP growth has been declining for four quarters in a row. Does this look like the economic behavior you would expect from an economy that was adding 500,000 jobs per month?

SOLID QUARTER OF HOME PRICE DECLINES

On to housing costs - which the BLS thinks are still rising. Case-Shiller shows three solid months of home price declines. Note: Dallas, but not Houston, are part of the 20-City composite index.

MORE DECLINES AHEAD I

2013 was the last time household income growth matched home price growth. While I don't believe we will see home prices fall back to the income line, they will likely need to get a lot closer than they area now.

MORE DECLINES AHEAD II

Real housing prices have pretty much tracked the inverse of mortgage rates since 2008. Current rates also suggest that housing prices will continue to decline - and remember that mortgage rates are largely a function of the Fed funds rate.

MORE DECLINES AHEAD III

How do we know this is largely a fiscal policy and not a market phenomenon? Inventories are currently at levels that suggest 12-18% annual price increases, yet prices continue to fall.

THE RENT IS NOT SO DAMN HIGH

We are now on our third solid month of rent declines on yet another indicator. As a reminder, instead of measuring actual transactions to estimate pricing changes, the BLS uses a telephone survey of owners to ask them what they guess their homes would lease for.

SFR WILL CONTINUE TO BE POPULAR

Buy/Rent ratios are heavy on the rental side. Our colleagues at John Burns did a nice job on this analysis.

JOBS!

DALLAS

• Land Development Manager
• Land Project Manager
• Land Development Project Manager
• EV Real Estate Portfolio Manager
• Real Estate Development Manager

HOUSTON

• NEW! Real Estate Director
• Development Manager
• Forward planner
• Division manager
• Land Superintendent - Build To Rent
• Land Development Project Manager