Welcome to Location Strategy Chartbook, Texas’ only weekly newsletter dedicated to the homebuilding and land development industries. We will keep you updated on the economic news you need to know. If this is your first issue or someone has forwarded it to you, I’d encourage you to subscribe and to keep reading. We won’t put you on a marketing list, and our newsletter is always free.

For a brief introduction to our readers, Scott Davis is the president of Location Strategy LLC. We provide fast, smart, and affordable Texas-based consulting solutions for real estate clients.

LOCATION STRATEGY CHARTBOOK

I was going to have this farther down this week until we all saw Chairman Powell’s capitulation this week. How does the 10-yr Treasury yield perform after 1st rate cut with or without a recession? Looks like without a recession there is a sharper and more sustained downtrend in 10-yr yield."

30 year mortgage rates are about 98% correlated with the 10 year Treasury. This chart suggests that historically if there is no recession at the time of the first Fed rate cut, 10 -year yields are lower, which should result in lower mortgage rates. Recession forecasts are still on the board, but if we actually achieve a “soft landing” it’s possible that rates could go lower than we expect. Not ZIRP low, but lower than today.

This is a followup to last week’s initial post. The chart below shows large and small bank cash reserves - the blue and red lines show the difference in small bank cash reserves with and without the Fed’s BTFP, clearly indicating the BTFP is what’s keeping small banks above reserve thresholds. This is the problem we demonstrated last week - and part of the presssure on cutting rates. The main problem with the BFTP is that it expires in March - the next of dates to look for movement.

Does it seem like I’m always beating a dead horse about the Fed, inflation and housing prices? The chart below breaking down the CPI’s components is why. 44% of CPI are housing costs, and the BLS’s (and the Federal Reserve’s) metric of choice for housing costs is not a measure of actual transactions but a survey of homeowners guessing what their houses would rent for. Every time I hear an interview about quantative analysis influencing the Fed’s decision making, I think “except for the one place it matters” - which is in their calculation of the very thing they are supposed to regulate - inflation.

CPI shows rent increases spurring inflation, yet the indices that actually measure transactions show rent going down. Core CPI is shown going up, driven by rising rent cost components; yet indices showing actual transactions show rent going down. How can you look at these charts and conclude 1) BLS OER opinion survey data is better or 2) the Fed is making data-dependent decisions at all?

Why is OER going up when actual transactions show rents going down?

Here’s a quick illustration of how all of these factors work to affect supply, demand and pricing for housing.

Over the long run, demographics will put downward pressure on inflation.

Prime-age labor force participation remains strong.

What would job growth look like without healthcare and leisure/hospitality?

More Americans with full-time jobs are moonlighting.

This eye-popping chart comes from UBS’s Jonathan Golub. It shows how economists’ forecasts for GDP growth in 2023 evolved over the past two years.

“The GDP chart below highlights the improvement in economic growth that we've experienced over the course of 2023,“ he wrote on Monday. The second chart shows that many Americans’ opinions of the economy are worse than actual conditions. But when the chart below is the best forecasting on offer, can you blame them?

More firms will be boosting wages in the months ahead.

BofA data shows that discretionary spending remains resilient.

Maybe schools are less important