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

In case you haven’t noticed, we’ve now reached the “gaslight Americans into blaming themselves” phase of the inflation discourse.

Despite “choosing” inflation, Americans saw their disposable income decline in 2022 by more than in any of the seven preceding years.

Inflation figures show signs of easing, some analysts caution that it may be premature to claim success in the fight against inflation.

The revised inflation expectations data from the University of Michigan highlight consumers’ concerns about inflation resurgence.

Inflation concerns have moderated, and Americans are increasingly concerned about interest rates, at least as expressed in the Fed Beige Book.

Goldman expects the Fed to cut rates in Q4 of next year and then continue toward a neutral rate of 3.5%-3.75%, which is higher than the previous cycle.

FOMC policy makers are highly uncertain about their economic projections post-COVID, compared to be overly certain pre-COVID. That’s probably a good thing since part of what caused the COVID financial mess was a surfeit of policy certainty.

Where we are going may not be where we have been. A seemingly strong assumption repeatedly reiterated by the bond market (and equities too) is that we are headed back to a pre-Covid world of low rates and low inflation that pervaded most of the last 20+years. However, looking at economies over the very long run shows that it’s the last several decades that are the outlier, and it may not be a given we are going back to that environment. Exhibit 17 shows US inflation and inflation volatility since 1775, and remarkably the period since the mid-1980s has recorded the most stable (and since 1990 close to 2%) inflation in 250 years. For the record, Location Strategy’s forecast for rates are 6.5% by year end 2024 and 5.5% by year end 2025.

The labor market is still relatively tight.

Here is a look at the proportion of job losses each state has recovered since the onset of the pandemic. If you can’t read it, Texas is at 174%, meaning 100% of jobs have been recovered and the economy increased another 75%.

According to the Census Bureau, "There were 37.9 million one-person households, 29% of all U.S. households in 2022. In 1960, single-person households represented only 13% of all households." (There are about 132 million households in the U.S.)

The Census Bureau also reported that 46.4% of U.S. adults are single--that's 117.6 million unmarried Americans, "nearly every other adult aged 18 and over. This includes those who are divorced or widowed as well as those who have never married." About 11% of these one-person households are 65 years of age or older, or about 14.65 million people.

Not so active adults: over half of those 65 and over have not moved since 1989.

This is partly responsible for Americans’ declining mobility:

The US currently requires about 1.5mm houses per year (1.3mm of household formation + 250k of demolitions). From 2003-09, the US overbuilt by about 2mm houses. Since then, it has underbuilt by about 6mm cumulatively. This year, the US is on pace to complete 1.5mm homes.

One thing slowing new lot development: U.S. Banks are now facing unrealized losses of roughly $685 billion (updated as of Q3)

This seasonally adjusted chart shows the breakdown by stage of construction. Completed & sold is the largest category, which should bring inventories down. Backlog )”Not started, sold”) has risen slightly but not significantly.

The average loan size has been trending lower.

And the median new home price dropped sharply, …

Which in turn has allowed builders to reduce incentives.

Here is the rate lock count.

New home sales softened last month but held well above 2022 levels.

Case Shiller. September Case-Shiller data shows home prices rose for the 7th straight month, increasing by 0.7% MoM (vs. +0.8% est) to 3.9% YoY (highest annual gain since December 2022).

The strength in home prices means there are very few distressed sales in the market place.

Generative AI is expected to boost labor productivity, especially after a significant reduction in development costs and continuous product upgrades in recent years.