May 26, 2023
By Steve Blumenthal
“I am somebody who has been very fortunate to have had the opportunity to test my limits. And I would remind you philosophically that my definition of a fool is somebody who has reached his limits. Almost by definition, whatever goals you set, you need to constantly readjust them so that at no time do you reach your goals before your time is up.”
I spent this morning re-listening to John Barns and Barry Habib’s presentation from the Mauldin Economics 2023 Strategic Investment Conference (SIC). So, for today’s On My Radar, as promised last week, I’d like to jump right into a discussion of the state of the U.S. real estate market.
Grab that coffee and find your favorite chair. While mortgage rates are higher, the current supply-vs-demand dynamic supports a bullish forecast—bearing zero resemblance to 2007.
It’s important to focus on high-job-growth markets. And, as Barry shared with me last week, the next Fed meeting is on June 14. The markets are predicting a 40% chance that the Fed will increase rates by another 25 bps. However, the next CPI print will come on June 13, which could affect the Fed’s move. The last print was 4.9%, and Barry believes we’ll see a dramatic drop in the next one, coupled with a year-over-year CPI of ~3.5%. He also expects the PCE price index to drop to 3%, with a chance of dipping below 3% in July. In his view, all this talk about persistent inflation will go away.
If Barry’s predictions are right, the numbers will shift the Fed’s thinking. We could see bond yields decline and bond prices rally, and mortgage rates may drop below 5.5%. I remain in the recession camp with a hard landing in the fall. That will put downward pressure on real estate; however, there is reason to see opportunity. I mentioned I’d be recording a short podcast with Barry—stay tuned. It’s coming soon.
Before you scroll down, a special hat tip to Sam Zell. Zell passed away last week at the age of 81. I’m sure he was actively striving to reach that next goal. He was a frequent media guest. I always loved his blunt, logical, matter-of-fact candor. Welcome home, Sam, welcome home.
Here are the sections in this week’s On My Radar:
- John Burns and Barry Habib on Real Estate
- Link to John Mauldin – Steve Blumenthal Post 2023 SIC Video Discussion
- Trade Signals: Extreme Optimism – Extreme Patience – Extreme Decisiveness
- Personal Note: Memorial Day
(Reminder: This is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion purposes only.)
If you are not signed up to receive the free weekly On My Radar letter, subscribe here.
John Burns and Barry Habib on Real Estate
John Burns:
John Burns is the head of John Burns Research and Consulting. He’s one of the nation’s most sought-after advisors in residential real estate, construction, rental, and sales at the investor level. Working with big investor companies, such as Home Depot and Kohler, and all the big home builders, his firm provides a full suite of research services to real estate investors and professionals.
In Burns’s presentation at the 2023 SIC, he looked at structural demand vs. supply, as well as cyclical demand and supply, and concluded with a picture of today’s real estate landscape.
There are 144 million housing units in America, 131 million of which are occupied. He noted that nobody talks about the 13 million housing units sitting vacant, even though it’s almost 10% of the supply. Here’s how the other 90% breaks down:
- 86 million are owned.
- 45 million are rented.
- 52 million owners have mortgages.
- 34 million have no mortgage at all.
We’re also seeing a lot of older people helping their kids get an apartment or buy a home since the parents have full equity in their homes. Burns noted that the mortgage-rate increase is having a huge impact on the market. I also found the data point about the 34 million homes with no mortgage at all very interesting in terms of the potential for return on investment.
Turning to the rental market, in which a large percentage of Burns’s clients are big players, we see the following numbers:
- 16 million individuals live in large apartment complexes.
- 8 million live in small apartment complexes (think: row homes).
- 12 million people rent detached homes.
- 3 million people rent condos that are individually owned by somebody else.
- 1 million are in mobile homes.
Large institutional investors started getting into the rental business in 2012. Today, 3% of all homes are owned by institutions, and 12 investment groups own 5,000 or more homes each, including:
- Progress Residential, which is owned by Pretium and was founded in 2012 by Don Mullen from Goldman Sachs, is the largest institutional player, owning 90,000 homes.
- Invitation Homes, started by Blackstone, owns 80,000 homes.
- American Homes for Rent (AMH) was started by Wayne Hughes, a titan in the public storage business.
- FirstKey, which is owned by Cerberus
- Amherst
Burns showed who each of these groups are and what they’re doing and pointed out that there are opportunities to invest with them in both the private and public markets.
Of the 12 big players, none are focused on the lower-rent market, and only one is focused on the higher-rent market.
In the single rental market, 28% of renters pay less than $750 a month. A lot of the regulation targets the big players, but they are not renting to the people that are struggling. They’re targeting the more affluent renters because that’s where they’re making more money.
A chart on the current demographics of Americans by decade showed the following statistics:
- 23 million Americans born in the 1940s will turn 80 in this decade.
- 38 million Americans, born at the height of the Baby Boom, will turn 70 this decade.
- 43 million people in American now were born in the 1960s. (Burns pointed out that a lot of people born in the 1960s migrated to America in the 1980s.)
- 41 million were born in the 1970s, 23% of whom were born in another country.
- 43 million people in American right now, born in the 1980s—the Millennials—will turn 40 this decade.
- 44 million people in America were born in the 1990s.
Making a bullish case for residential real estate: Burns noted there are two million more people entering their thirties today than there were ten years ago. This caused the apartment boom ten years ago, which has become the single-family-home-buying boom today.
In terms of future GDP growth, John made a point he believes few economists are focused on: There are about 4.2 million people graduating from high school and college and entering the workforce this year, and exactly 4.2 million people turning 65 as well as a lot of people are retiring earlier. Back when he entered the workforce, there were 4 million people entering the workforce and 2 million people retiring per year. Now it’s even.
- How are we going to grow our economy when our working-age population is not growing?
- This is the big miss in terms of future GDP growth, and he believes most economists are missing it. Expect slower economic growth.
Other points:
- He noted the surge in the work-from-home movement has improved buyer affordability (think: shift in costs and buyers’ ability to move to other locations).
- The Fed is trying to kill the construction market. They have the leverage to do that. It’s not been very effective.
- The apartment development, which is nearing an all-time high… needs to contract. It’s contracting but very, very slowly.
- The working-age population isn’t growing very much.
- He expects strong wage increases purely because of the demographics.
- The retirement boom will continue. Florida will be the biggest beneficiary.
Here’s what he thinks we need:
- Over this decade, we’re expecting demographically about 12.7 million new household formations
- In 2016, we were oversupplied by about 3 million homes. In 2020, we were undersupplied by 1.7 million homes.
A few more points:
- There is a shrinking population in New York, California, Louisiana, and Illinois. That’s where we don’t need housing supply growth.
- California is the most undersupplied housing market in the country when looking at it in terms of housing vacancy rates and if you look at it in comparison to its adult per household ratio by age. There are opportunities really everywhere in California. (SB – this surprised me due to the migration out of California to other states like Arizona, Utah, Florida and Texas).
Housing supply and demand:
- It’s not just demographics; it’s a “Am I going to move this year or not?” Supply is low, prices are high, and mortgage rates are high.
- In 1977, mortgage rates were 9%, and then they rose to 17%. Existing home sales were 4.7 million and then plummeted to 2.3 million. Nominal (before inflation is factored in) home prices rose 35% during that time period.
- Therefore, your mortgage was never underwater.
- If you paid all cash for your house, it was not a good investment. However, if you were levered based on the money you put into the house, it was a good investment.
- Because the higher mortgage rates increased the payment by 67% in the late 70s, and early 80s, real estate sales plunged 51%.
- We had two recessions, but we had some great demographics.
Then if you look at the next period, where mortgage rates fell from ’82 to ’84 (17% interest rates went down to 14%), sales went up to 3.6 million units. If you look at that whole period, ’78 to ’84, sales were down 24%. The point is interest rates matter.
- So, over the period 1977 – 1984, interest rates went that from 9 to 14%, and sales declined by 25%.
Fast forward to the last couple of years. A few years ago, mortgage rates were 3%. Last year, in October, they hit 7%. They’re down in the mid to low sixes right now.
- When mortgage rates fell to 3%, the Fed used housing as a tool to get the economy going… when other sectors of the economy were tanking.
- Now that those other sectors have come back, they’re trying to use housing to kill the economy by taking rates from 3 to 7%.
- The Fed certainly hurt home sales.
- Nominal home prices in 2022 were up about 5%, but the interest rates increased 58%. Sales plunged 30%. But still hit 5.3 million units. That’s not an abnormal number. It is what sales were a few years ago.
- And home prices surged, meaning homeowners have just crazy wealth. It’s far more in Florida (up 57%) than in northern California (up 26%).
- Institutional investor demand is playing a big role in all of this.
- Part of the why is: A lot of the government stimulus money went into home investment either by individuals.
- Part of the why is: All the capital that came from sovereign wealth funds and big institutions who entered single-family rental… it was just unbelievable, John noted.
- Now, large institutional investors have slowed their buying due to higher interest rates.
- Their buying was down 79% in Q4 2022.
- Their buying is down 90% in the first quarter of 2023.
- Whereas owner-occupants are down 37%.
- The investor-heavy markets, which tend to be in the south because investors were focusing on where the growth was, have seen the biggest pullback.
Here’s the distribution of people with mortgages and mortgage rate levels:
- 20% of them below 3%
- 39% are below 4%
- 20+% are below 5%
- In total, 83% of the world has a sub-5 % mortgage rate.
John said, When I speak in front of groups live, I ask people to raise their hand if they own a home, and most of the hands go up, and I say keep it up if you’re looking to move and just about every hand comes down. I mean, a sub-3 % mortgage rate or a sub-4 % mortgage rate is a huge asset that people don’t want to give up. It is painful to give it up.
- Because of that, there are not a lot of homes on the market.
- This is very different than the last time, which is keeping home prices up.
There are only 1.2 million homes in the country that you can purchase today. Enter new construction:
- A third of the homes now in America that are available for sale are built by home builders. This has been great for the new home market.
- It is not what Chairman Powell wants to see because he is trying to kill construction.
- Construction is doing fine. Yes, they’re down year over year, but they’re above normal historically.
- The Fed is not killing new home construction. And if you look at the balance sheets, in fact, a good percentage of the home builders’ stocks are at all-time highs and their debt ratios are near or at an all-time low.
- The big builders: These are not distressed companies that are going to shut it down. These are companies whose business model is to build and sell homes profitably.
- Today, they can buy land even though it hasn’t corrected as much as they would like and build homes profitably.
So where are we in May 2023?
- A year ago, the demand was super strong. Then in the fourth quarter, it cooled dramatically… Yes, there was some seasonality involved, but it was worse than normal because mortgage rates shot up to 7%.
- In April 2023, demand was not as strong as a year ago but better than in the fourth quarter of 2022.
- The home builders had a good spring.
- Home prices are coming down, but if you owned your asset and it went up 60% and then came down five, that’s not a big deal.
Some conclusions:
- We need 1.72 million homes built per year over the next ten years to get back to normal household vacancy and adult/household ratios. We overbuilt in the early 2000s but are now short needing 1.72 million homes built per year over ten years.
- Home prices surged in the last three years, so homeowners have tremendous wealth.
- Homeowners aren’t moving as much.
- 63% of homeowners with a mortgage have a sub 4% mortgage rate they don’t want to give up.
- There are very few homes for sale, which keeps home prices up.
- New construction is strong. Home prices have fallen dramatically in the tech and investor-heavy markets (those markets are down 11.3% to 9%), they include:
- Austin, Boise, Seattle, San Francisco, Las Vegas, Phoenix, Reno, Stockton, Salt Lake City
- Home prices were slightly higher to slightly negative (0% to -2%) in the following markets (in order from higher to lower):
- Southeast coastal areas, Pennsylvania, Delaware, North and South Carolina, Georgia, Florida, and in the mid-west (Ohio, Tennessee) and several spots in Texas (notably, San Antonio).
- Burns Housing Cycle Risk Index™ (HCRI) for the 50 Largest Markets shows that 98% of markets are rated High or Very High Risk.
- Burns rates new construction favorable in 47% of the US markets, with the previously sited southeast coastal areas strongest: Richmond, Atlanta, Raleigh-Durham, Charlotte, Charleston, Orlando, Tampa, Sarasota, West Palm Beach…
A notable chart I’ve shared with you before from other sources:
A few notable quotes John shared.
- When you have the people like Jamie Dimon who are seeing what’s going on around the world and making the loans and knowing what their competitors are doing, saying the odds of a recession have increased and getting super bearish. I’m agreeing with him.
We have a way to go to get back to housing being affordable. Burns said that due to the work-from-home (work-from-anywhere movement), he is reevaluating that black line (the 30% line in the next chart) and whether or not it’s going to go up permanently. (SB – looking at the Burns Affordability Index – housing cost to income ratio… we sit at a level higher than 2006 and 1985. The long-term affordability fair value is the black 30% line in the chart. Burns is saying the line should shift higher due to the work-from-home-anywhere movement. The next recession should bring prices down but not as much as previous corrections. And, of course, certain markets are better than others).
Barry Habib:
Barry remains optimistic about Real Estate.
Inflation drives mortgage rates – as noted in the introduction section above, Barry sees inflation and mortgage rates coming down.
- Mortgage rates decline in recession.
- Housing stays strong through recessions:
- Strong household formations are bullish for real estate.
- Vacancy rates are low. More demand than supply.
- Homes for sale? Inventory is low, but it is lower than the 980k on the next chart. Barry noted that 417k homes are under contract leaving just 563,000 homes on the market. Today’s situation is nothing like the one in 2007, just prior to the housing crisis. Barry sees no crisis.
- The average loan-to-value is down meaningfully. Homeowners have more equity in their homes.
- Barry noted that while home prices and mortgage rates are high, incomes are also higher, and individuals can still afford homes.
- Don’t bet against the champ. Here is a look at the long-term price history
- Is it any wonder why 2007 to 2011 was negative (SB – btw, Barry called that turning point in advance).
Bottom line – Barry sees the following:
2023 Housing Forecast
- Lower inflation
- Recession-like slowdown
- Incomes increasing to help affordability
- Very tight inventory environment • Rents still expensive and rising
- Mid-single-digit appreciation for most of the US with a pickup in activity
You can learn more about Barry here – Follow him; he’s the best.
(Reminder: This is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion purposes only.)
If you are not signed up to receive the free weekly On My Radar letter, subscribe here.
Link to John Mauldin – Steve Blumenthal Post 2023SIC Video Discussion
Last week I interviewed John Mauldin for the On My Radar podcast. I was curious as to what he thought about the conference—his annual macroeconomic masterpiece. I can tell you, the artist was pleased. Had anything changed his “Great Reset” (for debt, pension, entitlement programs) outlook? His short answer is no.
Click here for the YouTube link to our discussion, and you can find the audio recording on Spotify here.
(Reminder: This is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion purposes only.)
If you are not signed up to receive the free weekly On My Radar letter, you can subscribe here.
Trade Signals: Extreme Optimism – Extreme Patience – Extreme Decisiveness
“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.”
– Charlie Munger
Trade Signals is Organized in the Following Sections:
- Market Commentary
- Trade Signals – Dashboard of Indicators
- Current Stock Market Valuations and Subsequent 10-year Returns
- Charts with Explanations
Market Commentary:
NDR’s Daily Trading Sentiment Composite just breached the “Excessive Optimism” level reaching 66.67. Readings above 62.50 have been historically negative for the S&P 500 Index. Excessive optimism combined with equity market technical sell signals (Daily MACD, Monthly MACD, and negative Volume Demand vs. Volume Supply) suggests continued caution on U.S. equity indices.
Median PE suggests fair value on the S&P 500 Index is at ~ 3,000. Channel your inner Charlie Munger. Extreme patience now, extreme decisiveness later.
Here is a look at the S&P 500 Index struggling at the resistance level (yellow highlight in the chart).
The recession has started and will become deeper by the fall of 2023. Higher oil prices, higher dollar, and higher interest rates, when occurring together, have historically spelled trouble for stocks. That is the current state. Keep that in mind as you look at the technical indicators that follow. Of course, no guarantees. Let’s keep our eye on the data and trend signals.
For subscribers, the dashboard of indicators is next, followed by the charts with explanations.
Click on the “Subscribe to Trade Signals” picture to log in or sign up.
About Trade Signals
Trade Signals provides a weekly snapshot of current stock, bond, currency, and gold market trends. We provide a summary of technical indicators to help you identify where we sit in short, intermediate, and long-term cycles. We track important valuation metrics to determine the probability of future returns (i.e. when return opportunity is best/least). Trade Signals also tracks investor sentiment indicators and economic and select recession watch indicators. Trade Signals is now a low-cost subscription service, about the cost of two Starbucks lattes every month. You can find the archive of weekly Trade Signals posts (2008 through 2-15-23) by clicking here.
100% Spam-free. No list sharing. No solicitations. Opt out anytime with one click.
TRADE SIGNALS SUBSCRIPTION ACKNOWLEDGEMENT / IMPORTANT DISCLOSURES
Not a recommendation for you to buy or sell any security. For information purposes only. Please discuss needs, goals, time horizons, and risk tolerances with your advisor. Investing involves risk. You can lose some or all of your money.
If you are not signed up to receive the free weekly On My Radar letter, you can sign up here.
Personal Note: Memorial Day
President Reagan gave one of the most impactful speeches about Memorial Day in my memory at Arlington National Cemetery on May 26, 1986. His words captured the essence of the day and the significance of honoring those who have made the ultimate sacrifice for their country. Here is an excerpt:
“Today is the day we put aside to remember fallen heroes and to pray that no heroes will ever have to die for us again. It’s a day of thanks for the valor of others, a day to remember the splendor of America and those of her children who rest in this cemetery and others. It’s a day to be with the family and remember.
War threatens our freedom; but we preserve it with our lives. Freedom—distinguished from freedom of worship, speech, and assembly—was embodied in our lives. And because nothing worth doing is easy, our course is not always easy. We’ve learned that nothing is easy—least of all, building a good society. And we must always be vigilant. There’s no end to the struggle. Our freedom must be defended over and over again, and then again.”
With his powerful words, President Reagan inspired a sense of duty and gratitude, reminding us of the price of freedom and our ongoing need to protect it.
Thank you, veterans, for your service! Let’s stay together and stay strong.
I send a heartfelt prayer to you and yours and wish you a wonderful Memorial Day holiday weekend.
Peace,
Steve
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
Private Wealth Client Website – www.cmgprivatewealth.com
TAMP Advisor Client Webiste – www.cmgwealth.com
If you are not signed up to receive the free weekly On My Radar letter, you can sign up here. Follow me on Spotify, Twitter @SBlumenthalCMG, and LinkedIn.
Forbes Book – On My Radar, Navigating Stock Market Cycles. Stephen Blumenthal gives investors a game plan and the advice they need to develop a risk-minded and opportunity-based investment approach. It is about how to grow and defend your wealth. You can learn more here.
Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.
Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.
IMPORTANT DISCLOSURE INFORMATION
This document is prepared by CMG Capital Management Group, Inc. (“CMG”) and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives, or tolerances of any of the recipients. Additionally, CMG’s actual investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment restrictions, portfolio rebalancing, and transaction costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This material is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors which are necessary considerations before making any investment decision. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including legal, tax, accounting, investment, or other advice.
Investing involves risk. Past performance does not guarantee or indicate future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by CMG), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CMG. Please remember to contact CMG, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. CMG is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice.
No portion of the content should be construed as an offer or solicitation for the purchase or sale of any security. References to specific securities, investment programs or funds are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities.
This presentation does not discuss, directly or indirectly, the amount of the profits or losses realized or unrealized, by any CMG client from any specific funds or securities. Please note: In the event that CMG references performance results for an actual CMG portfolio, the results are reported net of advisory fees and inclusive of dividends. The performance referenced is that as determined and/or provided directly by the referenced funds and/or publishers, has not been independently verified, and does not reflect the performance of any specific CMG client. CMG clients may have experienced materially different performance based upon various factors during the corresponding time periods. See in links provided citing limitations of hypothetical back-tested information. Past performance cannot predict or guarantee future performance. Not a recommendation to buy or sell. Please talk to your advisor.
Information herein has been obtained from sources believed to be reliable, but we do not warrant its accuracy. This document is general communication and is provided for informational and/or educational purposes only. None of the content should be viewed as a suggestion that you take or refrain from taking any action nor as a recommendation for any specific investment product, strategy, or other such purposes.
In a rising interest rate environment, the value of fixed-income securities generally declines, and conversely, in a falling interest rate environment, the value of fixed-income securities generally increases. High-yield securities may be subject to heightened market, interest rate, or credit risk and should not be purchased solely because of the stated yield. Ratings are measured on a scale that ranges from AAA or Aaa (highest) to D or C (lowest). Investment-grade investments are those rated from highest down to BBB- or Baa3.
NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
Certain information contained herein has been obtained from third-party sources believed to be reliable, but we cannot guarantee its accuracy or completeness.
In the event that there has been a change in an individual’s investment objective or financial situation, he/she is encouraged to consult with his/her investment professional.
Written Disclosure Statement. CMG is an SEC-registered investment adviser located in Malvern, Pennsylvania. Stephen B. Blumenthal is CMG’s founder and CEO. Please note: The above views are those of CMG and its CEO, Stephen Blumenthal, and do not reflect those of any sub-advisor that CMG may engage to manage any CMG strategy, or exclusively determines any internal strategy employed by CMG. A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet web site at www.cmgwealth.com/disclosures. CMG is committed to protecting your personal information. Click here to review CMG’s privacy policies.