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Why house prices will fall less than doomsday scenarios predict

I published a piece last week analysing the US housing market. I wrote that with rising mortgage rates and an economy dragging its heels (to be polite),…

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I published a piece last week analysing the US housing market.

I wrote that with rising mortgage rates and an economy dragging its heels (to be polite), house prices were bound to fall. However, I hypothesised that the decline would be far from devastating, with prices unlikely to fall back down below pre-pandemic levels.

For homeowners, while the mortgage payments will hurt, house prices rose 44% during COVID, looking at the median house prices sale in the US. Against this context, even a hypothetical 25% cut to house prices for Q1 of 2023 would not even pull prices down to the level they were at in Q2 of 2020.  

To be clear – I am not forecasting a 25% decline. The most extreme analyst predictions out there bottom out around this level, and that is over a time period of the next year or two, not one quarter. This is purely a demonstration of how far house prices have risen, and how zooming out can give perspective.

There is reason to believe house prices will fall less

There are also many reasons to throw doubt on the most extreme downside predictions, however. The first is the most prominent – supply. In many major cities especially, demand still far outstrips supply. Do you know what they say about demand and supply?

Hence a blow to demand will definitely slow price growth, but it is hard to imagine a disaster crash in highly desirable areas for the simple reason that there are too many people for too few homes.

Many point towards 2008 as a symbol of how nasty things can get in the housing market. This is not a fair comparison, however. Firstly, banks are far better capitalised today than they were in 2008, while reserve requirements are also higher. The subprime mortgage collapse was an extreme case of madness descending upon the housing and banking sectors. This will not happen again.

The other major difference this time around – compared to 2008 and other periods of slowdown – is the continued resilience of the labour market. Unemployment will not reach the depths of 2008, with the IMF forecasting a 1% rise in unemployment next year. During the 2008 crash, this number was tripled.

Household debt – both in Europe and the US – is also lower today than it was during the crash. With interest rates rising, this has a key effect. Higher interest rates means more burdensome payments; indeed, these higher rates are the single biggest driver of the housing softness, as mortgage payments become more onerous.

Yet despite sovereign debt going totally bananas in recent years (and something I often cover in my analysis), at a household level there is less debt than in 2008. This means individuals aren’t as severely squeezed by rising rates as they otherwise would be, again helping to prevent house demand and prices from falling off a cliff.

Mortgage lending is a lot more regulated and conservative than it previously was. Governments and regulators moved to clean up the market in the wake of the 2008 crisis, and these actions will protect consumers.

How bad was the Financial Crisis?

And yet, despite all these large weaknesses in the housing market that the 2008 crisis exposed, prices still fell by only 13% from peak to trough in the most industrialised countries, as reported last week in the Financial Times. This is why, when reading reports such as a recent prediction by UK mortgage lender Nationwide that prices could fall by up to 30%, I am hesitant.

The housing market will obviously soften. Indeed, it already has. The 30-year mortgage is now north of 7% in the US, having been less than 3% only a year ago. Against this context, it is impossible to argue the housing market won’t get hit.

But when predictions of numbers such as 20% come out, I struggle to follow the logic. Factors like anaemic supply in big cities, a resilient labour market, tighter lending, less household debt and a healthier reserve situation for banks all combine to produce a very strong batch of evidence that the fall here will not on the scale of 2008. And even then, we didn’t see some of the numbers that these scenarios predict.

Another thing we haven’t even discussed here is the different nature of mortgages today with regard to interest-only payments and floating rates. There are substantially fewer interest-only mortgages on the market than was the case in 2008, while floating-rate mortgages (i.e. the ones most hurt by rising rates) have fallen drastically in almost every developed nation.

Strap in people. Like I have been saying for a while, I expect a really rough winter. But for house prices, I am not in panic mode yet. While I certainly expect to see a moderate pullback, I see too much evidence to suggest that the fall will come nowhere close to the Armageddon scenarios some studies are predicting, especially in the most desirable cities.

The post Why house prices will fall less than doomsday scenarios predict appeared first on Invezz.

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Angry Shouting Aside, Here’s What Biden Is Running On

Angry Shouting Aside, Here’s What Biden Is Running On

Last night, Joe Biden gave an extremely dark, threatening, angry State of the Union…

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4 hours ago

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March 8, 2024

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Angry Shouting Aside, Here's What Biden Is Running On

Last night, Joe Biden gave an extremely dark, threatening, angry State of the Union address - in which he insisted that the American economy is doing better than ever, blamed inflation on 'corporate greed,' and warned that Donald Trump poses an existential threat to the republic.

But in between the angry rhetoric, he also laid out his 2024 election platform - for which additional details will be released on March 11, when the White House sends its proposed budget to Congress.

To that end, Goldman Sachs' Alec Phillips and Tim Krupa have summarized the key points:

Taxes

While railing against billionaires (nothing new there), Biden repeated the claim that anyone making under $400,000 per year won't see an increase in their taxes.  He also proposed a 21% corporate minimum tax, up from 15% on book income outlined in the Inflation Reduction Act (IRA), as well as raising the corporate tax rate from 21% to 28% (which would promptly be passed along to consumers in the form of more inflation). Goldman notes that "Congress is unlikely to consider any of these proposals this year, they would only come into play in a second Biden term, if Democrats also won House and Senate majorities."

Biden also called on Congress to restore the pandemic-era child tax credit.

Immigration

Instead of simply passing a slew of border security Executive Orders like the Trump ones he shredded on day one, Biden repeated the lie that Congress 'needs to act' before he can (translation: send money to Ukraine or the US border will continue to be a sieve).

As immigration comes into even greater focus heading into the election, we continue to expect the Administration to tighten policy (e.g., immigration has surged 20pp the last 7 months to first place with 28% in Gallup’s “most important problem” survey). As such, we estimate the foreign-born contribution to monthly labor force growth will moderate from 110k/month in 2023 to around 70-90k/month in 2024. -GS

Ukraine

Biden, with House Speaker Mike Johnson doing his best impression of a bobble-head, urged Congress to pass additional assistance for Ukraine based entirely on the premise that Russia 'won't stop' there (and would what, trigger article 5 and WW3 no matter what?), despite the fact that Putin explicitly told Tucker Carlson he has no further ambitions, and in fact seeks a settlement.

As Goldman estimates, "While there is still a clear chance that such a deal could come together, for now there is no clear path forward for Ukraine aid in Congress."

China

Biden, forgetting about all the aggressive tariffs, suggested that Trump had been soft on China, and that he will stand up "against China's unfair economic practices" and "for peace and stability across the Taiwan Strait."

Healthcare

Lastly, Biden proposed to expand drug price negotiations to 50 additional drugs each year (an increase from 20 outlined in the IRA), which Goldman said would likely require bipartisan support "even if Democrats controlled Congress and the White House," as such policies would likely be ineligible for the budget "reconciliation" process which has been used in previous years to pass the IRA and other major fiscal party when Congressional margins are just too thin.

So there you have it. With no actual accomplishments to speak of, Biden can only attack Trump, lie, and make empty promises.

Tyler Durden Fri, 03/08/2024 - 18:00

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United Airlines adds new flights to faraway destinations

The airline said that it has been working hard to "find hidden gem destinations."

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12 hours ago

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March 8, 2024

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Since countries started opening up after the pandemic in 2021 and 2022, airlines have been seeing demand soar not just for major global cities and popular routes but also for farther-away destinations.

Numerous reports, including a recent TripAdvisor survey of trending destinations, showed that there has been a rise in U.S. traveler interest in Asian countries such as Japan, South Korea and Vietnam as well as growing tourism traction in off-the-beaten-path European countries such as Slovenia, Estonia and Montenegro.

Related: 'No more flying for you': Travel agency sounds alarm over risk of 'carbon passports'

As a result, airlines have been looking at their networks to include more faraway destinations as well as smaller cities that are growing increasingly popular with tourists and may not be served by their competitors.

The Philippines has been popular among tourists in recent years.

Shutterstock

United brings back more routes, says it is committed to 'finding hidden gems'

This week, United Airlines  (UAL)  announced that it will be launching a new route from Newark Liberty International Airport (EWR) to Morocco's Marrakesh. While it is only the country's fourth-largest city, Marrakesh is a particularly popular place for tourists to seek out the sights and experiences that many associate with the country — colorful souks, gardens with ornate architecture and mosques from the Moorish period.

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"We have consistently been ahead of the curve in finding hidden gem destinations for our customers to explore and remain committed to providing the most unique slate of travel options for their adventures abroad," United's SVP of Global Network Planning Patrick Quayle, said in a press statement.

The new route will launch on Oct. 24 and take place three times a week on a Boeing 767-300ER  (BA)  plane that is equipped with 46 Polaris business class and 22 Premium Plus seats. The plane choice was a way to reach a luxury customer customer looking to start their holiday in Marrakesh in the plane.

Along with the new Morocco route, United is also launching a flight between Houston (IAH) and Colombia's Medellín on Oct. 27 as well as a route between Tokyo and Cebu in the Philippines on July 31 — the latter is known as a "fifth freedom" flight in which the airline flies to the larger hub from the mainland U.S. and then goes on to smaller Asian city popular with tourists after some travelers get off (and others get on) in Tokyo.

United's network expansion includes new 'fifth freedom' flight

In the fall of 2023, United became the first U.S. airline to fly to the Philippines with a new Manila-San Francisco flight. It has expanded its service to Asia from different U.S. cities earlier last year. Cebu has been on its radar amid growing tourist interest in the region known for marine parks, rainforests and Spanish-style architecture.

With the summer coming up, United also announced that it plans to run its current flights to Hong Kong, Seoul, and Portugal's Porto more frequently at different points of the week and reach four weekly flights between Los Angeles and Shanghai by August 29.

"This is your normal, exciting network planning team back in action," Quayle told travel website The Points Guy of the airline's plans for the new routes.

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Walmart launches clever answer to Target’s new membership program

The retail superstore is adding a new feature to its Walmart+ plan — and customers will be happy.

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12 hours ago

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March 8, 2024

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It's just been a few days since Target  (TGT)  launched its new Target Circle 360 paid membership plan. 

The plan offers free and fast shipping on many products to customers, initially for $49 a year and then $99 after the initial promotional signup period. It promises to be a success, since many Target customers are loyal to the brand and will go out of their way to shop at one instead of at its two larger peers, Walmart and Amazon.

Related: Walmart makes a major price cut that will delight customers

And stop us if this sounds familiar: Target will rely on its more than 2,000 stores to act as fulfillment hubs. 

This model is a proven winner; Walmart also uses its more than 4,600 stores as fulfillment and shipping locations to get orders to customers as soon as possible.

Sometimes, this means shipping goods from the nearest warehouse. But if a desired product is in-store and closer to a customer, it reduces miles on the road and delivery time. It's a kind of logistical magic that makes any efficiency lover's (or retail nerd's) heart go pitter patter. 

Walmart rolls out answer to Target's new membership tier

Walmart has certainly had more time than Target to develop and work out the kinks in Walmart+. It first launched the paid membership in 2020 during the height of the pandemic, when many shoppers sheltered at home but still required many staples they might ordinarily pick up at a Walmart, like cleaning supplies, personal-care products, pantry goods and, of course, toilet paper. 

It also undercut Amazon  (AMZN)  Prime, which costs customers $139 a year for free and fast shipping (plus several other benefits including access to its streaming service, Amazon Prime Video). 

Walmart+ costs $98 a year, which also gets you free and speedy delivery, plus access to a Paramount+ streaming subscription, fuel savings, and more. 

An employee at a Merida, Mexico, Walmart. (Photo by Jeffrey Greenberg/Universal Images Group via Getty Images)

Jeff Greenberg/Getty Images

If that's not enough to tempt you, however, Walmart+ just added a new benefit to its membership program, ostensibly to compete directly with something Target now has: ultrafast delivery. 

Target Circle 360 particularly attracts customers with free same-day delivery for select orders over $35 and as little as one-hour delivery on select items. Target executes this through its Shipt subsidiary.

We've seen this lightning-fast delivery speed only in snippets from Amazon, the king of delivery efficiency. Who better to take on Target, though, than Walmart, which is using a similar store-as-fulfillment-center model? 

"Walmart is stepping up to save our customers even more time with our latest delivery offering: Express On-Demand Early Morning Delivery," Walmart said in a statement, just a day after Target Circle 360 launched. "Starting at 6 a.m., earlier than ever before, customers can enjoy the convenience of On-Demand delivery."

Walmart  (WMT)  clearly sees consumers' desire for near-instant delivery, which obviously saves time and trips to the store. Rather than waiting a day for your order to show up, it might be on your doorstep when you wake up. 

Consumers also tend to spend more money when they shop online, and they remain stickier as paying annual members. So, to a growing number of retail giants, almost instant gratification like this seems like something worth striving for.

Related: Veteran fund manager picks favorite stocks for 2024

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