Nine straight months of negative homebuilding sentiment … half of renters are spending 30%+ on shelter costs … rents on Main Street are crushing small businesses … Crypto Cash Calendar is back!
Homebuilders are losing confidence in the housing market.
Yesterday, we learned that September’s homebuilder sentiment fell 3 points to 46 – anything below “50” is a negative reading.
The National Association of Home Builders/Wells Fargo Housing Market Index now sits at its lowest level since May 2014. Yesterday’s reading also marks nine consecutive months of declines.
Behind this negativity are higher input costs meeting lower demand.
On the cost front, builders have been dealing with elevated construction costs – specifically, land, labor, and material costs. This is squeezing their margins.
On the demand side, would-be homebuyers have fallen off a cliff in recent months. Beyond the costlier home prices themselves, homebuyers are dealing with red-hot mortgage rates.
And beyond both of these problems are soaring interest rates.
Indeed, builders blame rising rates for their falling sentiment.
The average on the 30-year fixed started this year around 3% and then began rising steadily, crossing 6% for a few days in June, according to Mortgage News Daily.
It then fell back a bit and almost hit 5% in August, before rising sharply again, back over 6% this month.
That made an already pricey housing market even less affordable.
Meanwhile, it’s certain that we’ll see another rate hike from the Fed when it convenes its September policy meeting tomorrow. The only question is whether it will be a 75- or 100-basis-point hike.
Either way, the higher that rates go, the more pain these homebuilders feel.
The lack of homeownership affordability has sent potential buyers into an overcrowded rental market
You want to buy a home, but you’ve watching prices soar while mortgage rates have pushed through 6%. So, you’re accumulating cash, waiting for a meaningful pullback.
Here’s the problem, from Redfin chief economist Daryl Fairweather:
Homeowners, they don’t really have a good reason to sell right now.
They’re sitting on record equity, they locked in low mortgage rates last year, so for them they can just keep paying those low monthly mortgage payments and just hold on until the housing market eventually turns around.
So, you give up your homeownership dreams for the time-being and turn to the rental market…only to find nosebleed prices because everyone else is doing the same thing.
In July, rents hit a new record, with the national median asking rent coming in at $2,032. That up 14% year-over-year.
Now, the good news is this 14% figure is down.
Here’s Redfin with those details:
[The 14% rental increase is] the smallest annual increase since November, and compares with a revised gain of 15% in June and 16% in May.
On a month-over-month basis, the median asking rent climbed 0.6%, the slowest growth since February and down from a 2.1% increase a year earlier.
The bad news is that rents are still climbing during a period in which real wages are negative and broad household expenses have been soaring.
Put it all together, and more Americans are breaking an old rule-of-thumb when it comes to shelter costs
You might have heard of the “30-percent rule.” The idea is that a household should spend no more than 30% of its income on housing costs.
Studies show that spending a higher percentage quickly becomes a major financial stressor (less so if you don’t have significant debt).
Well, according to a report from Harvard University’s Joint Center for Housing Studies, nearly half of all renters in the U.S. are now paying 30% or more of their annual income on rent.
That’s not good news. And yet, as I’m researching this topic, I’m finding a number of silver-lining-tinged articles.
For example, here’s ABC News:
But there are reasons for optimism. Analysts said a record volume of apartment construction over the next year could help ease a supply crunch which, in turn, would work to keep rental prices in check.
CoStar projects rent growth will continue to slow in the coming months, ending the year 6.2% higher than last year. Things are expected to decelerate even further in 2023, when CoStar projects rents to rise 4.9%.
Now, sure, rents that are rising slower than in the past is better than rental rates that will be rising faster. But don’t miss the point…
Rental rates are at historic highs – and they’re headed higher.
This echoes the point we made in yesterday’s Digest about needing to shift our focus away from inflation data onto the health of corporate earnings and the American consumer
Yesterday, we wrote that inflation data is likely to begin to drop substantially in the fall. This is because last year’s starting values were nosebleed high. That’s going to make the difference between those values and today’s nosebleed values much smaller.
But these decreased inflation readings won’t mean a thing when it comes to the absolute level of prices that consumers are paying. The situation with rents is just another example of this dynamic.
This article from ABC with its “but there are reasons for optimism” perspective could be rewritten as “but there are reasons for optimism because rental inflation is easing up.”
But to a renter who’s already paying the highest rents in history…and those rents account for more than 30% of her gross income…and those rents are projected to head higher…where’s the good news, exactly?
This summer, the average monthly rent in Manhattan topped $5,000 for the first time ever. Well, let’s say that in the fall, inflation drops to 0%.
As a renter, you’re still on the hook to pay $5,000 a month. And for many Manhattanites, that’s likely to put major pressure on monthly budgets.
So, what’s the bigger financial influence for these renters – 0% inflation or a 12-month apartment lease with a $5,000 price tag?
Meanwhile, though residential renters are getting the spotlight in this Digest, let’s not forget mom ‘n pop Main Street business renters
Federal Reserve Chairman Jerome Powell said there will be “pain” in the economy.
Well, if you’re a small business owner, there already is. And rent is a big reason.
According to a new national survey of small business owners by Alignable, [there has been] a big jump in August in the percentage of small business owners who couldn’t pay full rent in August…
…The Alignable data shows that the rent inflation crisis for small businesses is actually getting worse.
Forty percent of small business said they could not pay their rent in full this month, up 6% month over month and setting a record for 2022.
“I’ve been following this closely every month since March 2020, and I was shocked,” said Chuck Casto, head of research and communications for Alignable.
The percentage of small business owners unable to make rent hasn’t been this high since March 2021.
“This is a number we would have expected right in the middle of the pandemic, when a third of places were shut down, everyone was wearing masks or not going out to restaurants,” Casto said.
It turns out that 45% of the surveyed small business owners said they’re now paying at least 50% more in rent than pre-Covid. A whopping 24% say they’re paying double rent. And 12% say their rents have surged 3X.
Now, consider that in the midst of this rental surge, many mom ‘n pop businesses are still struggling to get back to pre-Covid revenues.
Now, let’s throw into the mix the little factoid that small businesses account for 44% of total U.S economic activity…
Do “revenues that aren’t back to pre-Covid levels” plus “rents that are multiples more expensive than pre-Covid levels” seem like a recipe for a soft landing from the Fed?
It’s also getting worse as the Fed continues hiking rates.
Back to CNBC on this:
Last December, amid the critical holiday season for many small businesses, 43% said they were “fully back,” according to Alignable.
“It’s 23% now,” Casto said, “and has just been slipping. … even people who thought they were out of the woods in December or January, all of a sudden they’re not.”
We’ll say it again – yes, inflation data remain important. But not nearly as important anymore as the condition of corporate earnings and consumer health.
We’ll keep you updated on these variables in upcoming Digests.
Before we sign off, a quick heads-up
There’s another Crypto Cash Calendar event happening today.
If you’re new to the Digest, here are our crypto experts Luke Lango and Charlie Shrem to explain what this is:
Crypto is the future. But that doesn’t mean all cryptocurrencies are the future.
To sift through all the blockchain noise, we’ve put together an exclusive team of crypto engineers and coders to collectively research, analyze, and understand the core technologies underlying the cryptocurrency revolution.
Informed by this research, we’re able to interpret the usefulness and potential impacts of those technologies.
Here’s how it works: Behind the scenes, our proprietary research system gathers information and indicates which altcoins and crypto events are of particular interest.
From there, we’ll share with you the most exciting and promising of those coins and events in our Crypto Cash Calendar.
Just this morning, Luke and Charlie announced an event that’s triggered their Crypto Cash Calendar system.
Here’s more from Luke on this specific opportunity:
For this month’s Crypto Cash Calendar highlight, we’re introducing a cryptocurrency with superior speeds to most blockchain networks.
It’s an incredibly scalable crypto, too, with zero fees in most cases. And yet, it has weathered its fair share of storms this crypto winter.
Now, it’s ready to break out on the back of several large catalysts.
You can read more about this crypto right here.
Have a good evening,