This Weeks’s Economic Update, June 28, 2021

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Hard to believe that July 4th is just a week away.  Fireworks, hot dogs, watermelon (with seeds), sparklers, Sulphur snakes, and putting out flags all over the place are my memories of this special holiday.  I always thought it was strange that we could not have fire crackers but my grandmother was ok giving us essentially welding rods, lighting them and watching the sparks fly all over our dry lawn. Ah the good old days before seat belts, bike helmets and they banned Lawn Jarts! Take the time this coming weekend to put out a flag to celebrate our nation, the Land of the Free.

If you can’t find it and can’t afford it, you can’t buy it.  That is the complaint in the housing industry right now. New home sales fell 5.9% in May due to lack of inventory, lack of supplies to build, as well as the inability of a growing number of buyers being able to afford the sky-high prices.  Another issue that is a more long-term concern, is the amount of investment funds purchasing single family housing to be used as rentals.  This “new” buyer pool is adding to the demand, pushing up prices and crowding out the family buyer.

The US homeownership rate peaked in 2004 at 69.2%.  This was during the hot housing market which was fed by exotic mortgages that allowed buyers to purchase a house with little down, at an artificially low payment which set them up for failure.  By 2016, the homeownership rate had fallen to 62.9%.  As the economy strengthened, the rate popped back up to 67% before recently falling back to 65% this year.  The homeownership rate has always been an indicator of how well the middle class is doing.  Long term homeownership can build equity, producing net worth for the retirement years.  If a population can no longer purchase and own a home, they become nothing more than serfs who are limited in the paths to build net worth. 

Pushing the current prospective buyers out of the market are investment funds that have moved into the residential market.  Their goal is to achieve a long-term payment stream of rents that will provide a dual source of return for the investors.  The first stream is the rental income, the second is the gain when the property is eventually sold.  With the amount of liquidity in the market, investment firms are ripe with cash and need to use it to achieve the returns the investors want. 

While it is hard to compare apples to oranges, the US has always had a higher home ownership rate than the European countries.  France is in the low 60’s, Germany at 51% and Great Britain is at 65%. We will have to see what the appetite is for the investment funds to continue to not only purchase but hold the real estate investments that they have made.  The key will be whether rents and values hold at the current levels.  If rental rates fall and values do the same, we could see a rapid dis-investment occur which might open the market up again.

Durable goods for May rose only 2.3% month over month.  When you remove the automotive numbers, it fell to only .3% growth.  Last week I discussed the rise in automotive production, it was proved out by the May durable goods performance.  It also confirms that consumers are moving from purchasing stuff, to spending on experiences such as trips. 

Lastly, it appears that the stimulus check impact is waning.  Personal income dropped 2% in May after a drop of 13.1% in April.  With expectations of income growth at 0% for the rest of the year, we could see spending dry up in the coming months.  This will likely cool off the economy by the fourth quarter.

Have a great week and a wonderful 4th of July.



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