Weekly Part 1: Why House Prices Won't Back Down
Housing Will Not Lead the Recession (if it comes).
Why House Prices will Herald the Next Round of Inflation
Intro:
Normally housing demand leads recessions. Closely tied with unemployment, housing is the grassroots of the US economic engine. Thus far housing has not dipped appreciably. This, even with CRE taking some catastrophic hits. Why is that? The main reason is supply.
Housing Demand: A Resilient Force
There just are not enough houses where people want to live now. Covid and its aftermath raised awareness in quality-of-life issues leading to what one GoldFix Founder has called a “Bright Flight” out of affluent city areas and into remote suburbs. Incidentally, he is an exec at a Real Estate Bank focused on high end housing (“we can’t print permits fast enough”) and has confirmed this exodus that people who can afford to move are doing so asap.
Housing economics are getting distorted by coastal immigrants searching inland for a respite from urban decay. In many ways, this is the 1970’s post manufacturing collapse of cities all over again. This time, instead of manufacturing leaving the US, it is financial companies just closing doors and office parks. Those that are not closing continue to permit WFH to stay alive.
Chicago and New York can become the next Detroit and Camden if they are not careful as Citadel and other large tax contributors relocate to Florida.
All one has to do is look at an immigration map in the US and you can see the trend that started during Covd has not stopped.
Combine that with logistics issues— namely smaller towns do not create building permits and can’t just rezone land out of thin air— Labor issues ( the pool of talented workers has shrunk even if you pay them more, and you will pay them more), and the cost of raw materials (thank you supply-chain debacle); and you get a near perfect storm for housing.
We’ve covered this indirectly by banging tables saying: Services inflation (which is mostly housing expenses and labor) will not recede as the fed had hoped it would. Turns out, that has been right so far.
Which brings us to this TS Lombard piece on topic. Steven Blitz has quantified and made it clear that unlike past recessions, housing will not be the leading edge down. Further, houses will likely lead the recovery if we get a recession.
We agree..
Housing demand remains sturdy, bolstered by favorable demographics and rising real incomes. While a recession might soften the housing sector, it won’t sow the seeds of economic decline. The Federal Reserve envisions an economy witnessing re surging growth in mortgages and income, inevitably leading inflation above the 2% threshold.