7 minute read
Good morning,
I hope all is well.
It's that time again for another Saturday Morning Pour, where I’m going to take you on a 'Deep Dive' into three headlines I found interesting this week in the financial world.
And as always, I’m going to share with you what wasn't written and why that's what truly matters.
So, sit back, enjoy your morning drink of choice, and savor this edition of the Morning Pour.
As always, if you have any comments or thoughts, please feel free to reply to this email.
Adem Tumerkan
Editor, Morning Pour
1. China’s Commercial Real Estate Economy Is Sinking Fast – So Who’s Holding The Bag?
- Vacancies are climbing at many logistics and industrial parks as the e-commerce slowdown and company offshoring hit landlords hard.
- Average vacancy rates at logistics properties in East and North China are nearing 20%, the highest in years, according to real estate consultancies – yet new warehouse construction is making things worse.
What you need to know: Throughout many parts of China, warehouses and industrial parks - once magnets for international investors and businesses - are now grappling with a “surprising” slowdown in business activity.
Logistics hubs built for an expected boom in e-commerce, manufacturing, and food storage are losing tenants at a rapid rate. As a result, building owners are slashing rents and shortening lease terms to try and invite demand. Because of this, shares of real estate investment trusts owning these properties have plummeted, with managers expecting further declines in rental income.
Why it matters: The deterioration has disappointed property owners who were counting on an economic rebound in China this year. Over the past decade, global institutions have collectively invested more than $100 billion in Chinese commercial real estate, including warehouses, industrial buildings, and office towers, according to Bloomberg and MSCI Real Capital Analytics1. Now many of these investors, banks, and businesses are sitting on mounting losses.
Now the Dunham Deep Dive: Well, as China (and any other economy) should know by now, a bust seems to always follow a boom. China was the golden goose for capital inflows post-2008, with expectations of dominating the global economy.
Alas, that euphoric rise is now reversing as economic realities set in. In short, China is facing its own version of the 2008 property and banking crisis.
But making matters worse, the softening in the logistics and industrial sectors (as detailed above) coincides with an office and residential property slump in major cities like Beijing and Shanghai. Both downturns are partly due to overbuilding, fueled by significant investments in commercial real estate during periods of low interest rates, borrowing, and construction costs.
Or put simply, there’s now too much supply (capacity) relative to demand.
And I believe it’s only going to get worse as China continues over-investing in manufacturing to try and export their way out of this crisis at a time when the consumer is anemic (I’ve written about this in more detail back in March – you can read here). They’re essentially adding fuel to the fire at this point.
Beijing has some tough choices ahead.
But in the meantime, expect property owners, landlords, banks, and investors to feel continued pain.
2. Feeling The Bite: U.S. New Home Sales Drop to Lowest Levels Since November
- May new-home sales in the U.S. slumped to their slowest pace since November 2023.
- This decline was driven by persistently high home prices and elevated mortgage rates, which continued to challenge affordability and dampen buyer demand in the housing market.
What you need to know: In May, new single-family home sales dropped by 11.3% to a pace of 619,000 annually, marking the slowest rate since November. This data, released Wednesday by the government2, was below expectations from economists surveyed by Bloomberg and reflected declines across all four major U.S. regions.
Interestingly, while high prices have deterred many buyers, a surge in inventory is improving affordability to some extent. In May, the median sale price of a new home dropped by 0.9% from a year earlier to $417,400. Concurrently, the supply of available homes rose to 481,000 - the highest since 2008.
Why it matters: The sales pace now sits at the lower end of the range observed over the past year - indicating sluggish momentum due to affordability challenges. Although mortgage rates dipped below 7% in mid-June for the first time since late March, they remain more than double their levels from the end of 2021.
The housing market seems to be stalled out – which may pose a big problem for many households that depend on their property as their main asset.
Now the Dunham Deep Dive: The U.S. housing market is showing signs of weakness as the “affordability” crisis deepens.
- In fact, Americans’ ability to afford a typical home in 2023 deteriorated to its worst level in nearly 40 years, according to housing economists3.
Many would-be home buyers are squeezed between elevated home prices and higher interest rates – indicating that they have to put a bigger payment down and that the mortgage costs are excessive.
See, in economics, usually prices and interest rates work in the inverse of each other – meaning if the home price is higher, rates are lower (and vice versa). Thus, when the Fed wanted to cool down the housing market post-2020, they raised rates.
But that hasn’t helped – if anything it’s made it worse (clearly with affordability at a 40-year low).
Why did this happen?
Well, long story short, homeowners who locked in record-low mortgage rates of 3% or less during the pandemic have been hesitant to sell now – which has created a “golden handcuff” effect – further constraining supply and limiting options for eager would-be buyers.
- A sub-3% mortgage in this market is a huge asset – and one many sellers don’t want to lose.
This has created a housing shortage – meaning there’s not enough supply relative to demand. Thus, keeping prices higher.
A slowdown in housing activity will only make this worse as there are fewer sellers and buyers. But now with the supply of available homes rising to 481,000 - the highest since 2008 – this may be enough to tip prices lower and kick start some activity.
Time will tell.
3. U.S. May Retail Sales Data Misses – Continues To Show Weaker Trend
- Retail sales in May saw a slower-than-expected increase, as consumers grappled with high interest rates and persistent inflation pressures.
- Retail sales increased just 0.1% month-over-month, less than the 0.3% economists had expected.
What you need to know: In May, US retail sales showed anemic growth4, with previous months also revised downward, indicating the increased financial strain among consumers. These figures highlight a notable slowdown in consumer spending following stronger readings earlier in the year. Beware this cautious spending pace to compound as Americans deal with persistent inflation, a cooling job market, and emerging signs of financial pressure (such as debt delinquencies surging).
Why this matters: Given that expenditures on services had been a key driver of consumption growth, the drop observed during the month, which encompassed the Memorial Day Holiday, indicates consumers are experiencing the impact of tighter budgets and diminishing purchasing power – implying that the U.S. economy further weakened in Q2-2024.
Now the Dunham Deep Dive: The U.S. consumer – the cornerstone of the economy – is showing continued signs of stress as retail sales deteriorate.
Well, are you surprised?
Households are strangled between inflation, higher interest rates, weaker wage growth, and too much debt.
Now, you may be thinking, “But haven’t we heard the U.S. consumer was weak before, yet things didn’t slow down?”
While that’s true – I believe things were only delayed.
See, after 2020, households were juiced up on stimulus (courtesy of the government and Fed pumping money and credit into the system). They had excess savings, lower debt payments, and balances, and wages were rising.
But now – these three things are in reverse: debt has exploded, interest rates have soared, and wages have been eaten away by inflation.
And unfortunately, these things seem to have finally caught up.
So, while the mainstream media focuses on the nominal retail sales data – I think the more damning evidence is when we look at the “real” (inflation-adjusted) retail sales5. . .
- Looking at it in these real terms (which is what matters), retail sales were actually negative 0.9% in May year-over-year (vs. 2% increase in nominal terms).
Real retail sales have, in fact, been declining for the past three years, remaining essentially flat (see chart below).
Interestingly (but not surprisingly), during the last two recessions in 2001 and 2008, real retail sales also plateaued before economic conditions deteriorated.
This is just something to think about as we consider the current economic trends.
Anyways, who knows what will happen? Maybe this is just noisy data.
As usual, just some food for thought.
Have a great rest of your weekend.
Sources:
- A $100 Billion Bet on China’s Economy Sours as Warehouses Empty - Bloomberg
- US New-Home Sales Slump to Slowest Pace Since November - Bloomberg
- Home affordability in 2023 tanked to lowest level in 40 years (yahoo.com)
- Retail sales increase less than expected in May (yahoo.com)
- Advance Real Retail and Food Services Sales (RRSFS) | FRED | St. Louis Fed (stlouisfed.org)
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