It’s been a couple of months since we wrote about housing, but a nice take by the WSJ this week reminded us that we are overdue. Moreover, the screenshot below of the article’s primary exhibit requires one to do a double take--namely, existing home sales are running below the Global Financial Crisis in 2008-2009. Why? Well, in 2009 the issue was too many sellers, while the issue in 2023 is that there are too few sellers. Both periods happened because of poor Federal and monetary policy. In the 2009, money/loans was too easy. In 2023, money/loans were too expensive because inflation became too hot and because we were coming from a time period of unsustainably low interest rates, which set home prices high. As such, we will shift to the outlook.
The Bull case for housing in 2024 is that inflation breaks lower towards a near certain path to 2%. We show the Federal Reserve/FOMC projections in the table below. In the Bull scenario, which also includes GDP only rising a subdued +1.5% in 2024, the Fed Funds rate would be cut below the current 5.1% projected rate, and the 10- and 30-year Treasury rates would also decline.
In this scenario, Treasury issuances would also need to moderate from 2023’s high level as the current high level of issuances is pushing rates higher, with the 30-year fixed mortgage rate approaching 8%. (The situation in Israel is also pressing Treasuries higher.) If mortgage rates can drop 300 basis points, that would be a big unlock. Yes, that seems like a lot to ask; that’s why we entitled it the “Bull case.”
What about the Base case and what does that mean for consumer expenditure and retail? One dynamic of the Base versus Bull scenarios is that as moving isn’t taking up a lot of consumers’ time and money, they are putting that elsewhere, particularly in experiences. The shifting of spending from goods to experiences has been a constant theme across the broader commercial real estate and retail industry the past 18 months. And so, in the Base case, that dynamic would seem likely to extend. Do homeowners “upgrade in place”? To a degree, that has been happening given the expended high level of spending on furniture, furnishings, and consumer electronics. This can be seen in real personal consumption expenditures as shown in the table below. While furniture and furnishings and electronics retailers have had a difficult year, real expenditure on these categories is still up year-over-year and versus 2019. (Prices on the other hand are down a respective -2% and -8%, which is what’s been hard on the retailers.) One factor that is pushing these categories of expenditure higher than pre-pandemic is work-from-home. Work-from-home is also a driver of home report & remodel, as such, it’s a category that should have its share of expenditures permanently higher. Of importance to the repair & remodel market, home prices are the key factor. Thus far, home prices appear to be in a modestly upward trajectory.
Winnebago is an interesting parallel given the common financing/funding between big ticket housing remodels and Winnebago purchases. August quarter revenue for Winnebago was down -35%, with towables down -31%, motorcoaches down -43%, and boats (Chris Craft, Newmar, and Barletta) down -21%. However, compared to 2019, revenue, mix, and units remain up appreciably. For example, the average selling price (ASP) on motorcoach was $183K versus $93K in 2019. And so, for this industry apples-to-apples comparisons to pre-pandemic are difficult and so there is really a new normal.
As the Base case relates to home improvement retail, trends have decelerated since the summer as we show in Placer below. While surveys and commentary still point to relatively strong Pro backlogs, project sizes are declining. However, given the abnormality of the existing home sales activity, when the system becomes unglued, the surge is going to be abnormally large as well.