This post was authored by Adem Tumerkan, Dunham's Content Writer. If you have questions concerning today's topic, please call us at (858) 964 - 0500. Hold us to higher standards.

1. The U.S. Multifamily Housing Surge: Could Soaring Completions Signal Relief for Renters?

• In August, the number of completed multifamily housing units reached its highest level since 1974.
  
• More supply has the potential to drive rents lower, offering a much-needed reprieve for households struggling with housing affordability.

What you need to know: U.S. multifamily housing completions hit a 50-year high in August, potentially easing pressure on rising rents. Builders completed an annualized 759,000 buildings with two or more units - the highest since July 1974, according to the recent U.S. Census Bureau data¹. The surge represented a nearly 39% increase from the previous month, driven largely by a near doubling of completions in the South, which alone saw 502,000 units come online.

Why it matters: This surge in multifamily housing completions could help rebalance the supply-demand equation, offering much-needed relief in the rental market. With more units available, landlords may be forced to lower rents to attract tenants. Housing affordability, a persistent challenge for many, could finally see improvement, making this a welcome shift for renters across the country.

Now the Dunham Deep Dive: This could be a major turning point for renters, potentially driving rents lower.

Remember that rent has become a significant burden for many households since the pandemic.

• For instance, more than half of renter households, which is over 22 million, are considered "cost-burdened” – aka spending more than 30% of their income on housing. Twelve million of these spend over half their income on rent. And for homeowners, 20 million face similar burdens with their monthly payments. Note that all of these figures represent record highs².

But, with a surge in newly completed apartments - the highest in over fifty years - landlords may be forced to lower rents to fill all these empty units.

This increase in supply could help ease housing costs, which have been a major driver of inflation and worsening rent affordability. It also would strengthen the Fed's case for further interest rate cuts.

But - on the flip side - more supply could further bring down commercial real estate prices of multifamily homes, impacting builders and landlords (those who own the properties).

I’ll keep a close watch on this trend.

Figure 1: St. Louis Federal Reserve, September 2024

2. Switching Gears: The Fed Is Now Cutting Interest Rates – Here’s What To Know

• The U.S. Federal Reserve slashed its benchmark rate by 0.5%, marking its first cut in four years and signaling the start of an easing cycle.
  
• While inflation has slowed, concerns about a weakening labor market may be driving the Fed's aggressive actions.

What you need to know: The U.S. Federal Reserve slashed its benchmark interest rate by half a percentage point on Wednesday³ - marking its first cut in over four years. This bold move signals the start of a new easing cycle, aimed at boosting the deteriorating labor market.

Why it matters: The federal funds rate, which influences borrowing costs across the U.S. and globally, is the Fed's primary tool to stimulate the labor market and boost demand by making credit more accessible. While the Fed celebrates inflation slowing enough to justify lowering rates, this sharp cut might signal deeper concerns. It suggests the Fed may be more worried about the economy's health than they’ve previously let on.

Now the Dunham Deep Dive: The Federal Reserve has finally started cutting rates, marking the end of the tightening cycle.

Inflation has slowed since its multi-decade high in mid-2022, but it still remains above pre-pandemic levels, particularly when excluding food and energy prices (aka core inflation).

For instance, inflation as measured by the CPI jumped 21.8% between Q1 2020 and August 2024. In comparison, the CPI rose only 19.6% during the entire decade from 2010 to Q4 2019.

So, while inflation is now slowing, it’s still compounding every month.

However, the Fed's focus has shifted to the softening labor market, which has seen major data revisions – the most since 2009 – and coupled with a steadily rising unemployment rate.

Here’s a quick look at the Good, Bad, and Ugly. . .

The Good: Inflation is decelerating, offering some relief and stability after years of brutal price increases. Meanwhile, the Fed's cutting rates - and lower interest rates can help households with their debt burdens and lift asset prices.

The Bad: Falling prices could be a sign of declining spending, but the bigger issue is the weakening labor market. For instance, job cut announcements surged by 193% in the last month, according to a report from Challenger⁴. The Sahm Rule, which tracks unemployment, is flashing warning signs and has a strong history of predicting recessions. And job openings are also declining sharply.

The Ugly: With inflation easing and the labor market weakening more than expected, the Fed’s 0.5% rate cut - labeled "aggressive" seems to signal underlying economic weakness, rather than confidence. And if there's one thing Wall Street despises, it's a lack of confidence. 

Keep in mind that the Fed has historically been behind the curve, as the chart below illustrates. They failed to act swiftly during the inflationary spiral that began in Q1 2021. So, there's a strong chance they're behind the curve again, making it more likely they’ll cut rates faster than expected.

Just something to think about. 

Figure 2: Financial Times, September 2024

 3. All Eyes on Beijing: China Faces Mounting Deflation and Sluggish Growth 

• Deflation in China is deepening, with shrinking incomes and stagnant price growth outside of rising food costs, sparking concerns over an economic crisis and calls for immediate policy action.
  
• With falling prices, corporate revenues and asset values are at risk, creating a deflationary spiral that will likely worsen China's economic slowdown.
  

What you need to know: Deflation, which has been haunting China since last year, is now deepening and could worsen the outlook for the world’s second-largest economy. Recent data showed that apart from rising food prices, consumer price growth is barely visible, and worse, incomes continue to shrink⁵. Because of this, calls for immediate policy action are growing louder to try and prevent an economic crisis.

Why this matters: Falling prices could trigger a downward spiral as households, facing shrinking incomes, cut spending or delay purchases, expecting prices to drop further. This could hurt corporate revenues, leading to reduced investments and hiring, salary cuts, and then layoffs. And drag down asset prices – therefore reinforcing the “deflationary loop” in China that has caused economic malaise, which looks to be getting worse.

Now the Dunham Deep Dive: Signs of China’s worsening economic situation are already visible, with some entry-level salaries falling from their peak two years ago. The crisis of confidence has also hit Chinese stock markets, with the CSI 300 Index sinking to its lowest level since early 2019⁶.

This shouldn’t come as a surprise - I’ve been discussing this major macro-economic trend with you for months (you can read more about it here and here).

But what’s new is that Chinese leader Xi Jinping has publicly urged officials to meet growth targets.

Remember, Beijing sets these arbitrary growth targets, and it's up to provinces and local governments to achieve them. Historically, they’ve done this by taking on huge debt loads and overbuilt infrastructure and homes, fueling jobs and demand.

But this time, the problem is different. They’ve oversaturated the economy with too much supply and non-profitable assets, thus leading to falling prices – aka too much supply chasing too little demand. Now, deflation and sluggish growth are the main threats.

While authorities avoid saying the word "deflation," former Central Bank Governor Yi Gang has made it clear that tackling this issue must be a priority.

So, all eyes are on China - the world’s second-largest economy - to see how Beijing will respond and how it will impact global markets (more stimulus to spur growth, or not).

Time will tell. 

Figure 3: Bloomberg, September 2024

Anyways, who knows what will happen? Maybe this is just noisy data.

As usual, just some food for thought.

Sources:

1. US Multifamily Housing Completions Surge in Good Sign for Rents - Bloomberg
2. Housing affordability deteriorates as prices, mortgage rates stay high (cnbc.com)
3. Federal Reserve goes big with half-point interest rate cut, its first since 2020 (nbcnews.com)
4. The Challenger Report | Challenger, Gray & Christmas, Inc. (challengergray.com)
5. China’s Deflationary Spiral Is Now Entering Dangerous New Stage - Bloomberg
6. China Stock Selloff Pushes Benchmark to Lowest Since Early 2019 - Bloomberg

Disclosures:

This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance. All examples are hypothetical and are for illustrative purposes only.

Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This document is provided for information purposes only and should not be considered as investment advice.

Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.