With interest rates low, stimulus money and with COVID showing that workers can live anywhere, we have a housing boom ladies and gentlemen!

A California home received 122 offers in a single weekend amid a skyrocketing US real estate market.

The 1,400-square-foot home—located in Citrus Heights, California, a suburb of Sacramento—was listed at $399,900. It spans 1,400 square feet and has three bedrooms, two bathrooms, and a swimming pool, according to a report from KTXL, the local Fox affiliate.

The house received 122 offers in two days, including one above $500,000, and has since been sold for an undisclosed amount—KTXL reports the selling price was “in the mid-$400,000 range.”

How do we know this is a bubble?  Average wages support home prices and when there is a big gap between the two, we call that the “affordability gap”.  See charts below:

 

 

 

 

Here is a chart showing the supply of homes for sale:

 

 

COVID shut down home construction for several months so we have low supply and large demand. Material shortages were a factor, too, particular lumber. I remember buying plywood sheets for under $10. It was still in that range as recently as 2018. Last Saturday a friend was telling me about expanding his garage in New Orleans. He is paying $87.50 for a 4 x 8 sheet of 5/8 inch plywood. Ouch! Lumber prices have tripled from just a few years ago, if you can get it. This all pushes construction costs higher, which further reduces supply.

 

 

What we are watching are mortgage rates.  They are creeping higher.

 

 

If the home price to CPI, to rent and to wage ratios ever did mean revert back to normal, which Bob Farrell’s Rule #1 says they will, we would be talking about a 20% decline in average home prices nationwide. Maybe the catalyst will come from bond yields to mortgage rates, as was the case the last time around.

 

US Economy

 

  • The ISM Services PMI surged in March, hitting a record high.
  • Service firms increased hiring, a trend we saw in March the employment report.
  • The index measuring prices paid hit the highest level since 2008.
  • Factory orders declined in February for the first time in ten months. Based on the PMI reports, we should see a rebound in March.
  • Residential construction spending pulled back from the highs in February. Nonresidential expenditures have been shrinking.
  • Historically, nominal GDP growth has declined as government debt increased.

 

 

  • US COVID-related deaths are at the lowest level since the start of the pandemic.

 

 

  • The Beveridge curve’s current dislocation suggests that there is a skills gap and/or some unemployed Americans are unable or unwilling to return to work.
  • As the pandemic eases, businesses will need to boost wages to attract and retain staff.
  • A third of young workers plan to look for a new job.
  • Morgan Stanley’s index suggests that we should see a sharp increase in retail sales.
  • Money supply growth is now similar to other periods of high inflation.

 

 

  • The number of US corporate bonds trading at distressed levels has been drifting lower.
  • Bankruptcies in advanced economies fell last year, in sharp contrast to past recessions.
  • The share of US delinquent subprime auto borrowers keeps climbing.
  • The US delinquency rate on first-lien mortgages remains elevated.
  • US box office revenue surged over the holiday weekend.
  • Consumer credit expanded more than expected in February.
  • Credit card debt ticked higher but is still down 11% on a year-over-year basis.
  • Nonrevolving credit (mostly auto loans and student debt) is now almost 77% of total consumer debt.
  • Credit card rates remain near 15%, and consumers want (and many are now able) to keep balances low.
  • 2020 saw the strongest home price growth of any year since 2005, driven by low mortgage rates and inventory shortages.
  • But higher mortgage rates appear to be taking a toll on house purchase mortgage applications, which are now at 2019 levels.
  • Refi applications continue to slide.
  • But mortgage rates seem to have stabilized.
  • Vehicle inventories are running low.
  • And used-car dealers are ecstatic as sales soar.
  • US trade deficit hit a new record in February as the economy heats up.
  • US manufacturing exports are falling again.
  • Vaccine supply constraints are easing.
  • Milk prices are going higher

 

 

  • Americans are saving/investing more of their stimulus cash.
  • Bank of America is predicting an 11% jump in retail sales for March.
  • Initial unemployment claims continue to drift lower and are now below one million per week.
  • Consumer confidence is recovering.
  • US population growth hit a record low.
  • Metro office leases are rebounding, driven by bargain rates.
  • The March PPI report topped economists’ forecasts.
  • Retailers’ inventories-to-sales ratio hit a new low.
  • US steel prices are soaring.

 

Russia

 

The Russian economy, while smaller than many think, is important for both geopolitical reasons and its energy/commodities influence.

Key Points:

  • Russian government funding comes mostly from the energy sector but the amount fell sharply in 2020. Yet the economy was unexpectedly resilient.
  • One reason was the large informal economy, which kept operating and even thrived during lockdowns.
  • Policies devaluing the ruble also helped sustain government revenue, but at the cost of higher consumer prices and lower living standards.
  • Russia has a giant poverty gap, with almost half of children living below the poverty line.
  • This encourages more people to work in the informal economy, depriving the government of tax revenue and not contributing to long-term growth.

Between internal problems and the threat of Western sanctions, the relatively stable Russian economy has significant vulnerabilities. The solution is to become less dependent on energy exports, improve productivity and raise wages. How any of that could actually happen in unclear. But with the long-term global trends pointing away from fossil fuels, Russia is running out of time.

 

Global, Minimum Corporate Tax

 

As the spring meetings of the IMF and World Bank begin in a virtual format, U.S. Treasury Secretary Janet Yellen had a message for governments across the globe. “It is important to work with other countries to end the pressures of tax competition and corporate tax base erosion… to make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations,” she said in her first major speech on international economic policy. Yellen is specifically advocating for the adoption of a global minimum levy for corporations in order to avoid a “race to the bottom” on taxation.

President Biden has proposed hiking the U.S. corporate tax rate to 28% from 21%, partially undoing the Trump administration’s cut from 35% in its 2017 tax legislation. Biden also wants to set a minimum U.S. tax on overseas corporate income to make it harder for companies to shift earnings offshore. A minimum global corporate income tax could partially offset any consequences that may arise from the U.S. corporate tax hike and would help pay for the White House’s ambitious $2.3T infrastructure plan.

Will nations (or Congress) agree to the tax? What will the level be? And will it include enforcement mechanisms or be effective enough to eliminate tax havens or low tax jurisdictions?

While many countries have endorsed a minimum tax (there’s been talk at the OECD for years), others may not embrace one unless they can claim a bigger stake in the profits of U.S. tech companies. The debate also touches on the ongoing friction in international taxation: whether to tax companies based on the location of their income or the location of their headquarters. The U.S. didn’t have a pure system before or after the 2017 tax act, which leaned toward taxes based on where revenues are generated, though the Biden administration appears to be focusing more on the latter.

How much could corporate taxes rise?

 

 

What would be the impact of tax hikes on earnings?

 

 

Investors are becoming concerned about higher corporate taxes.

 

 

Vaccine Passports

 

“Anything is on the table. Anything is possible, of course,” Dr. Anthony Fauci had said in January regarding a U.S. vaccine passport, though he dispelled the notion in a Politico Dispatch podcast on Monday. “I doubt that the federal government will be the main mover of a vaccine passport concept,” he declared. “They may be involved in making sure things are done fairly and equitably, but I doubt if the federal government is going to be the leading element of that.”

What may happen instead? Businesses, schools or hospitals could require vaccine documentation to enter buildings, or orders may be implemented at the state or local level. “I’m not saying that they should or that they would, but I’m saying you could foresee how an independent entity might say, ‘well, we can’t be dealing with you unless we know you’re vaccinated,’ but it’s not going to be mandated from the federal government.”

Vaccine passports could speed up travel or economic reopenings, but the idea of requiring the documents has become a point of political contention, while legal issues are still being debated. Florida Gov. Ron DeSantis issued an executive order on Friday prohibiting businesses from requiring customers to show proof they have received a coronavirus vaccine and prevented the state government from issuing such passports. “It is necessary to protect the fundamental rights and privacies of Floridians and the free flow of commerce in the state,” he announced, saying requiring immunization credentials “would create two classes of citizens.”

 

Thought of the Week

 

“I have a tip that can take 5 strokes off anyone’s game… It’s called an eraser”

-Arnold Palmer

 

Picture of the Week

 

 

 

 

All content is the opinion of Brian J. Decker