This Week’s Economic Update, January 23, 2023

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We often count down the shopping days to Christmas. Typically, one will not count down the days to Easter.  However, this year may be different, we have 75 EGG Shopping Days until Easter.  At $4.99  a dozen, finding enough affordable eggs for dying and hiding at Easter is a concern.  At this price, you might not want to hide them very well.

The question is arising, is the automotive market an early indicator of what is coming in the real estate market?  The high prices in 2022 of used vehicles along with the significant shortage of new cars and trucks priced many buyers out of the market.  The supply chain in the automotive market appears to have been corrected with dealers’ inventory of new product increasing.  At the end of November, the average inventory level was 52 days.  This was lower for Asian models as shipping still is problematic.  However, many domestic models are holding at a level of 80 to over 100 days. Here in January, the average inventory level has risen to 58 days and is not expecting to level out. 

Since the first of December used car prices have been falling, since October there has been an 8.8% deflation in the average used car price.  The high price tags, interest rates, as well as more new vehicle options sitting on the lots has buyers reconsidering what and when to buy.  With supply heading beyond ample to surplus and expectations of further price reductions, the show room floors are again gathering dust.  This time it is not for lack of inventory, but rather high prices.  December sales were down 7% from November on a month-to-month basis.  January is not looking any better.

Beyond the sales numbers, those who did buy in the past 24 months at the inflated prices are showing significant stress.  Delinquency in auto loans is now higher than 2019, pre pandemic levels.  Delinquency rates are up 26.7% from a year ago showing significant stress as consumers struggle with inflation.  Right now the delinquency rate overall has risen to 2.35% of all vehicle loans.  The outlook is not getting better.

The housing market has gone through much of what the automotive market has over the past three years.  Limited supply of both new housing and existing homes for sale drove up prices.  Supply chain issues curtailed new construction.  Interest rates rose making affordability even worse.  Typically, when rates rise, prices fall, however, in the last two years that linkage was temporarily broken.  As the supply chain corrected, new construction began booming.  However, buyers are still priced out of the market.  The Case Shiller housing price index dropped by 3% in the third quarter last year.  It is expected to have declined by more in the fourth, we are still awaiting the numbers.

Over supply issues are also rising.  The number of multifamily housing units coming on-line is rapidly rising which will force prices down on attached single family units.  Rents charged will follow the downward trend later this year investment housing.  As interest rates continue to rise, affordability on purchases of both new and existing housing will be dampened.  This will lead to further declines in housing values, similar to new and used car prices.  2023 could see property values dropping by percentages not seen since 2007. 

Mortgage delinquencies right now are about 1.16%.  While this is higher than the target of 1% historically, it is not troublesome, yet.  There are signs that delinquencies are starting to rise and as the economy softens, liquidity in the market ebbs and long term inflation erodes peoples budget, the level could again rise to over 2.25% by late in 2023.  FHA loan delinquencies are already at 4.6%, not usually a leading indicator, but not good at all.

Some quick hits before I close.  The Empire State Manufacturing index dropped by 32.9% in January.  Inventories appear to be piling up leading to lower demand for new production, at least on the East Coast.  Retail sales in December were abysmal, down 1.1% during the Christmas Season.  Retailers are now working hard to discount product to make room for Spring merchandise.  Expect this to impact the inflation numbers.  The Producer Price Index fell .5% in December, many commodity prices are falling back in line as supply levels are returning to pre pandemic levels.

Have a great week.



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