On Tuesday, FHFA (the Federal Housing Finance Agency) will release the Housing Price Index for both Q1 and March 2022. While data is still lagging, and may not reveal it yet, real estate analysts conducting live surveys among builders and brokers are reporting a slowdown in sales, and cooling prices.1 And it would be hard to believe otherwise, as mortgage rates have jumped faster than anytime in US history except for the period between 1978 and 1981. However, supply remains constrained, and demand still outstrips it, especially in Southern States. In addition, rising mortgage rates are discouraging first home buyers the most, which can be an opportunity for the rental market.
On Wednesday and Friday, May PMI releases are likely to offer additional clues about the state of the US economy. Flash data released on May 24th points to PMIs being at 3-month low for manufacturing and 4-month lows for services and composite – but still indicating economic expansion (>50).
On Friday, investors are expected to focus on wage growth data, as non-farm-payroll (NFP) numbers will be released. Any indication that wage increases are slowing down can be seen as a clue of peaking inflation, and perhaps suggest employers may be fearing an upcoming recession.
Investors are currently struggling to navigate a complex global economic environment, with competing forces of rising inflation and fears of a global economic slowdown pushing in opposite directions. The result has been increased uncertainty – especially on rates – and lack of directionality in the equity market.
Some analysts2 are expecting a slowdown in inflation to be highlighted in the April Price Consumer Index (PCE) data, which will be released after the publication of this post. If that were to be the case, we could see some repricing in fixed income, though not necessarily in equities just yet.
What is most concerning for global growth, however, is the situation in the two other large economic powerhouses – Europe and China.
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In Europe, raging inflation has pushed the European Central Bank (ECB) to bring forward its first hike to July. Europe’s inflation drivers may be slightly different compared to the US’s, and heavily skewed towards energy, but more recently, wage increases have been negotiated in collective agreements in Germany, which tends to move the needle as it represents a large portion of the eurozone’s economy. On the positive side, the Ukraine-Russia war appears to have reached a stalemate, with both sides running out of resources. This may potentially increase the appeal of a negotiated settlement, which can be a positive catalyst for equities.
Potentially concerning news for investors may also be coming from China, where the economic outlook appears murkier. Vice-Premier Li Kequiang called a videoconference with over 100,000 government officials with the goal of drawing a plan to stabilize the economy. According to state media, Li stressed the need for stability in “market entities, employment and people’s livelihood” and to keep the economy afloat “wherever possible,” while acknowledging that economic indices have been worsening since March-April, and that the situation may be worse than during the 2020 pandemic.
Yieldstreet has launched a debt multi-family rental residential real estate offering, with a relatively short maturity of 34 months – which it believes to be appropriate given the current market cycle – and with a loan-to-cost ratio of 80%, which translates into potential downside protection that can increase if the value of the equity increases. The property is based in Portland, one of the US metro areas still experiencing “very strong” growth as of April.3
More broadly, the US rental market continues to benefit from strong performance, with consistent rent growth – 9.4% year-over-year as of April, higher than the current inflation rate – as rising mortgage rates continue to put pressure on housing affordability and housing inventory (and pipeline) remain subdued.
1 According to a proprietary survey conducted by John Burns Consulting, many builders report slower traffic volume, longer sales processes, and declining interest lists. However, prices appear to be still rising according to the survey.
2 “To this end, Friday’s April PCE inflation report, which we expect to show a core reading of 0.2% month-over-month, could provide further support for a tentative improvement in inflation and lend some relief from the relentless pressure for tighter policy.” (GS – What’s Top of Mind in Macro Research: Growth risks, wage pressures, from TINA to TARA)
3 Source: John Burns real estate consulting
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