Is the U.S. Housing Market “Unhealthy” Despite Rising Prices?
From a broad view, the U.S. housing market looks very healthy. Demand is high, employment and wages are growing, and mortgage rates are low. But the nation’s housing market is assuredly unhealthy according to some economists; in fact, it is increasingly mismatched with today’s buyers. While the big numbers do not lie, they may not tell the real truth about the affordability and availability of U.S. housing for the bulk of would-be buyers.
Several reports out this week point to both continued pressure on home values as well as pushback from homebuyers. Prices remain nearly 6%t higher than they were a year ago, nationally, with some local markets seeing double-digit annual price gains. Those prices are being driven by a severe lack of supply at the low end of the market, which is where the most demand exists. That means lower-priced homes are seeing bigger price gains than higher-priced homes because of the competition. At the same time, sales are falling, again, because there are too few homes on the low end, and the homes that are available are very expensive.
“It sets up a situation in which the housing market looks largely healthy from a 50,000-foot view, but on the ground, the situation is much different, especially for younger, first-time buyers and/or buyers of more modest means,” wrote Svenja Gudell, chief economist at Zillow in a response to the latest home-price data. “Supply is low in general, but half of what is available to buy is priced in the top one-third of the market.” Supply on the low end is tight because during the housing crash investors large and small bought hundreds of thousands of foreclosed properties and turned them into rentals. There are currently 8 million more renter-occupied homes than there were in 2007, the peak of the housing boom, according to the U.S. Census.
Investors could take the opportunity of high prices and high demand to sell these properties, but today’s high rents offer them better returns. Low supply of homes for sale might also seem like a great opportunity for the nation’s homebuilders. They went through an epic housing crash, but they have since consolidated market share and righted their balance sheets. Homebuilders are simply not building enough inexpensive houses that the market needs. That is why sales of newly built homes, like existing homes, have been disappointing. The latest August new home sales from the U.S. Census surprised analysts with a 3.4% monthly drop, along with a rise in inventory. The homes are there, they are just not selling, and it is not hard to figure out why. “The recent home sales data has reflected a slower pace and I continue to believe it’s due to more of a push back on pricing,” wrote Peter Boockvar, chief market analyst with the Lindsey Group, in a response to the data release.
Just 2 percent of newly built homes sold in August were priced under $150,000, and just 14% priced under $200,000. Compare that with the existing home market, where more than half of homes sold in August were priced under $250,000. Builders say they would like to build more affordable homes but cannot because the math does not work. The costs of land, labor, materials and regulatory compliance are just too high. In addition, younger homebuyers want to live closer to urban areas, not in the far-out exurbs, where builder costs are far lower. “It’s time we stopped sugarcoating the truth with this data—the simple fact is that we are severely under-producing housing in this country, relative both to basic demographics and currently high demand from buyers,” wrote Gudell, who notes that inventory is stuck at roughly mid-1990s levels, but the country has grown by more than 60 million people since then. “Buying conditions, in theory, are great right now: Jobs and incomes are growing, and rock-bottom mortgage interest rates are helping keep financing costs low. What’s missing from the equation is a lack of homes actually available to buy at a price point that’s reasonable for most buyers.”
The trouble is, even though the market is woefully mismatched, home prices will not come down as long as there are some buyers out there willing and able to spend more and more money for less and less house. “We expect price pressure to remain pretty strong well into the fall,” said Nela Richardson, chief economist at Redfin. “First-time buyers are struggling to find a footing in this market. The first-time buyer share is down from historical levels, but the thing is, you don’t need everyone to buy a house in this market. As long as there are one or two buyers who can afford, and those buyers can be investors, then the sale will go through, and that’s what we’re seeing at some level.”
So, what does all this mean for the economy and personal wealth? For the time being, it means the renter nation will persist and fewer Americans will be able to save and grow their money in a home. It also means rents will continue to rise due to high demand, leaving more Americans with less disposable income to spend. In other words, it’s not healthy.
Citations
- http://cnb.cx/2y7L8Ju CNBC
- http://reut.rs/2xDy8ur – Reuters
Timberland Aims to Avoid the Retail Apocalypse with Pop-up Stores
Timberland, the New England-based outdoor lifestyle brand owned by VF Corporation, has long been a trailblazer in fashion. Famous for its iconic yellow boot, designed by Timberland’s founder Nathan Swartz and introduced in 1973, Timberland initially became the work boot of choice for rugged outdoorsmen (and outdoorswomen in 1984) and blue-collar workers. Then in the 90s Timberland boots were adopted by the hip-hop crowd, and became “the” footwear for urban hipsters both in the States and across the globe.
After growing to a global footprint of some 260 stores, including 16 full-priced branded stores and 41 outlets, Timberland is striking out to blaze a new trail at retail with two new initiatives: a “flex retail” concept to pop-up stores where and when its customers need them and a new experiential concept store called TreeLAB. Early signs are that Timberland is onto something. It may have discovered a path out of the impending retail apocalypse. As Ralph Waldo Emerson said, “Do not go where the path may lead, go instead where there is no path and leave a trail.” That is exactly what Timberland plans to do.
The stores, staffed with hoodie-clad associates, offer craft-brewed beer or water served in bottles it intends to repurpose into shoelaces. And—like pop-up stores and limited-edition collections—Timberland hopes it is a recipe that can build buzz and dispel the “more of the same” perception many shoppers have about mall-based retailers. The first collection, called Streetology, focuses on versatile style with hidden performance technology. In six weeks, it shifts to an entirely women-themed collection, SHEvolution, followed by a holiday-themed collection.
Speaking to the need for retail innovation and how Timberland is addressing it, Kate Kibler, Timberland’s vice president of direct-to-consumer retail, said, “The thing with retail today is every store shouldn’t be the same. Every store can’t be the same. This isn’t the retail of our fathers. This is a new day.”
She stresses that retail concepts need to continually evolve and Timberland is answering that need. “A couple of years ago you created a store design and then rolled that store designs to 1,000 stores and every store experience was exactly the same. That can’t be retail anymore. Look where it’s gotten us? Retail must factor in specific markets. Conventional retail wisdom would say let’s do more of the same and make it successful. That one-size-fits-all approach is thing of the past,” she said.
Timberland is just one of many retailers wrestling with ways to reinvent physical stores to stay relevant as consumers spend more online, or in specialty format stores that reward their sense of treasure hunting. Abercrombie & Fitch, for example, is rolling out its A&F concept, which also highlights quick-changing seasonal capsule collections. And struggling Sears is toying with a store that sells only mattresses and appliances, two of its strongest categories.
Timberland’s new “flex retail” pop-up concept launched first in Bloomington, MN Mall of America as a pop-up store early in September, followed by locations in Atlanta, Detroit, Long Island and Queens, NY. “Our ‘flex retail’ stores are about being fast and light and being there for the consumer when they need us,” Kibler explained. “Flexible retail has been exceeding expectations since opening.”
Citations
- http://bit.ly/2xDdxGC – Forbes
- http://bit.ly/2x34af5 – MediaPost.com
The Good News Is . . .
- Orders for capital goods in August rose 1.7%. Core capital goods (nondefense ex-aircraft) jumped 0.9%. This points to a strengthening of business confidence and reflects a monthly upswing in civilian aircraft orders, up 45%. Motor vehicles which had been weakening showed a 1.5% gain for orders and a 1.9% rise in shipments. Communications equipment also jumped with orders up 4.0%. Other readings include a moderate 0.3% rise for both total shipments and inventories that keeps the inventory-to-shipments ratio steady at 1.69.
- Adobe Systems Inc., a leading provider of graphic design software and digital media, reported earnings of $1.10 per share, an increase of 46.7% over year-earlier earnings of $0.75 per share. The firm’s earnings topped the consensus estimate of analysts by $0.09. The company reported revenues of $1.84 billion, an increase of 26.0%. Management attributed the results to strength in its cloud based subscription and digital media segments.
- Germany’s Siemens AG and France’s Alstom SA have agreed to combine their rail divisions in a $8.7 billion deal designed to stave off competition from China. The merger will give Siemens just a little over 50% control of the combined group. It represents a major breakthrough in Franco-German industrial relations just as the two countries are attempting to form a cohesive position on European political leadership. The new firm will be renamed Siemens-Alstom and will be listed in Paris. The combined group is expected to have around $18 billion in annual sales and will be better positioned to compete with industry leader CRRC Corp. of China. The companies expect to realize cost savings of $553 million after four years.
Citations
- https://bloom.bg/2eVhfSb – Bloomberg
- http://cnb.cx/2lwnm3s – CNBC
- https://adobe.ly/2xLSzon – Adobe Systems Inc.
- http://bit.ly/2xDC6mJ – The Street
Planning Tips
Guide to Recession Resistant Industries for Your Portfolio
When the markets are volatile, some investors get nervous and start to sell. While some industries are very susceptible to economic changes, there are other industries that do well no matter what is happening with the economy. While no company is completely recession proof, the industries identified below typically see strong performance even when unemployment rises and consumer sentiment falls. There is never any guarantee of investment gains, but if you are looking to fortify your portfolio against a weak economy, these industries can provide some safety. You can minimize your risk by creating a diversified, well-rounded portfolio. Be sure to consult with your financial advisor to determine if this investment strategy is appropriate for your situation.
Consumer Staples – No matter what happens in the economy, people still need certain household items on a recurring basis. Toothpaste, soap, shampoo, laundry detergent, dish soap, toilet paper and paper towels are always in demand and are considered consumer staples. A small group of conglomerates produces the majority of these items. Major companies in this sector include Colgate-Palmolive Company, Proctor & Gamble Co. and Unilever N.V. If you look at the manufacturer of many items in your home, you will find these companies. They own more than 30 brands with revenues over $1 billion per year, as well as dozens more, smaller brands.
Grocery Stores & Discount Retailers – Consumer staples have to be purchased somewhere, and many of those purchases happen at grocery stores or large retail chains with locations around the world. The Kroger Company, Walmart Stores, Inc. and Costco Wholesale Corp. control the largest grocery chains in the United States. These powerhouse retail giants collectively bring in hundreds of billions.
Alcoholic Beverage Manufacturing – Beer, wine and distilled beverages are a high margin product that people want around the world. In recent years, a small group of companies have acquired many of the largest beer and spirit brands around the globe. The largest companies in this sector today include Anheuser Busch Inbev SA. Anheuser-Busch Inbev owns brands such as Budweiser, Corona, Stella Artois, Beck’s, Leffe and Hoegaarden. UK-based Diageo controls brands such as Smirnoff, Johnnie Walker, Tanqueray and many more. Research shows that people do tend to spend less on alcohol and other vices during a recession, but quantity increases as people buy more of less expensive products. If you are out for a night on the town or keep a stocked liquor cabinet at home, you are most likely a customer of these companies.
Cosmetics – Women, and some men, like to look good when going out with and when they head to work. A down economy does not change that. The largest cosmetics companies include Estee Lauder Companies Inc., a major licensed brand manufacturer. Both of these companies have non-cyclical product portfolios that do well in weak economic conditions, in addition to luxury brands, which thrive in a strong economy. Previously mentioned Procter & Gamble and Unilever are also strong members of the beauty industry.
Death and Funeral Services – As the popular saying goes, the only two things that are certain in life are death and taxes. While no one can buy stock in the Internal Revenue Service, investors can buy shares in companies that profit from death-related services. StoneMor Partners L.P., Carriage Services, Inc., Service Corporation International, and Matthews International Corp. are four companies that make their revenues from life’s inevitable end. These companies provide caskets and funeral related services that will always remain in demand.
Citations
- http://bit.ly/2hCJW9T – NASDAQ
- http://bit.ly/2kaokml – Dividend.com
- http://bit.ly/2xEemPC – Investopedia
- http://read.bi/2jICVAK – Business Insider
- http://bit.ly/2hD0bDL – Seeking Apha
