Happy Thanksgiving. I trust everyone will have a blessed Thanksgiving, hopefully spending time with family and friends. Please take time this week to consider what you are grateful for. In spite of everything going on in our world, we do have much to be thankful for. I will be spending time with family which is always a blessing. I will be taking next week off so my next update will be December 4.
There is a growing concern in the housing industry right now. Last Friday the housing starts number for October was released. Based on higher interest rates and overall supply considerations, the number was supposed to moderate from the big September results. In September new starts increased by a whopping 7%. There was a bit of a surprise in October, the starts were up another 1.9% over the September numbers. There is a huge amount of new construction in the residential market going on. Getting behind the numbers, the concern is even more pronounced, and should be something that any bank should be worried about.
The October number included a nearly 5% increase in multifamily construction. Based on the current open supply of apartments along with the level of units currently pending completion and are not yet on line, we are looking at an overwhelming amount of supply building. Rents are already down 1% in the last quarter.
The financing of these projects is raising red flags. Since Labor Day, large charter banks have cut, actually exited or shed over $10 Billion in commercial real estate assets. At the same time small charter banks have put on $15 Billion in new commercial real estate loans. These loans are primarily multifamily projects.
Based on the current interest rate levels, falling residential rent levels, longer stabilization periods and increased costs of construction, the margin of error on these new loans is virtually nil. Many housing industry experts, including Ivy Zelman from Zelman and Associates, are raising concerns over the viability of multifamily projects to cash flow. This is an area to watch and be cautious of in your bank’s credit portfolio.
The month over month inflation rate for October was at 0%. Before getting too gleeful, recognize that the core inflation grew by .2% over the September number. For the year, overall inflation is running at a 3.2% level and core inflation is at 4%. The core inflation rate pulls out food and energy. Based on the recent drop in gasoline, you can see why the core level is higher. The deflation in energy prices pulled the overall inflation rate to a 0% level. Throughout the economy, prices are not rising as much as they have earlier in the year. This is partly due to the supply chain issues that have plagued us for the last couple of years being corrected. In many areas the new concern may be deflation as inventories pile up. Christmas may not come soon enough for many retailers.
The service sector, primarily insurance, is the hot point in inflation right now. It appears that the low hanging fruit of inflation has been tamed. However, getting down to a 2% year over year number is going to take a lot more work and pain. The economy will have to soften which includes consumer demand drying up. As consumer liquidity continues to abate and now the job market might be softening, it is looking more and more like the economy might hit a bit more than a soft landing next year. While that might push the inflation rate down, it likely will come at a cost of a great many job losses and both consumer and business bankruptcies.
Have a great week and a blessed Thanksgiving.