NEWS PAGE 2

Economic Outlook

Elliot Eisenberg, Ph.D. is an internationally acclaimed economist and public speaker specializing in making economics fun, relevant and educational. Dr. Eisenberg earned a B.A. in economics with first class honors from McGill University in Montreal, as well as a Master and Ph.D. in public administration from Syracuse University. Eisenberg is the Chief Economist for GraphsandLaughs, LLC, a Miami-based economic consultancy that serves a variety of clients across the United States. He writes a syndicated column and authors a daily 70-word commentary on the economy that is available at www.econ70.com.

Pending Problem
Pending home sales slipped 5.5% M-o-M in December and slid 5% Y-o-Y. This isn’t surprising, given the nearly one percentage point rise in 30-year mortgage rates since the recent low of 6.08% for the week ending 9-26-24. Moreover, absent seasonal adjustment, the Pending Homes Sales Index is at its lowest since 2001 when the NAR began reporting pending sales. Absent lower rates, sales will continue struggling.

Astonishing Alexa
The Friday File: In 1983, Alexa was the 745th most popular name with about 200 girls receiving it. It then steadily rose, peaking in 2006 at 39th most popular, with over 6,100 girls given the name. By 2014, when Amazon introduced Alexa, it was the given name of 4,000 girls. It oddly spiked to 6,000 in 2015 but has since slid, and in 2024 just 490 girls were named Alexa.

Retail Reset
January retail sales were down a substantial 0.9%, the biggest monthly decline in almost two years and well worse than the expected 0.2% decline. Car sales fell, as did sales at most stores. There have been occasional blooper months since 2020, but they have never been a harbinger of anything. More importantly, last month was the coldest January since 1988, and there were also the fires in CA.

Tariff Talk
By reducing US demand for imports, tariffs reduce the supply of dollars flowing to foreigners. That reduced supply raises the foreign exchange value of the dollar. While a stronger dollar reduces inflation, it makes US exports more expensive. This partly offsets some of the benefits of the tariffs. To reduce imports but boost exports a nation could devalue their currency. That would, however, boost inflation.

Employment Enigma
January net job growth was a decent 143,000, Nov/Dec were upwardly revised by 100,000, and the unemployment rate fell to 4%, its best level since 5/24. But the workweek slid to 34.1 hours, the lowest reading since 3/20, and quite surprisingly, wages rose a very strong 0.5%. I suspect the Fed keys in on the falling unemployment rate and rising wage growth number and holds tight for the near term.

Receding Rate
While the Fed’s favorite inflation measure came in at 0.2% for December (the unrounded number was 0.156%), the six-month rate is running at 2.3%, and the three-month at 2.2%, very close to the Fed’s 2% target. Better yet, while labor compensation was up 0.9% Q-o-Q, and 3.8% Y-o-Y, with productivity growing at about 2%, compensation minus productivity, the underlying inflation rate, is up a benign 1.8%! Inflation continues to soften.

Bad Budget
In the first four months of FY25, the budget deficit totaled $838 billion; $306 billion more Y-o-Y. Revenues were $11 billion higher, outlays were $317 billion higher. But some of the increase was due to calendar effects. Absent them the deficit would have been $750 billion. Despite the large rise, the CBO still projects the CY25 deficit will be $1.9 trillion, unchanged from CY24, and in my opinion, inexcusably high.

Terrible Tariffs
While US exports to Canada and Mexico are both about 1% of GDP, or $315 billion/year, do not be dismissive. Canada accounts for 60% of all US crude oil imports, about 3.8 million bbl/day. As for Mexico, they account for 23% of total US food imports. This includes 63% of vegetables, and 47% of fruits and nuts. Collectively Canada and Mexico represent 30% of all US imports. The 2024 election offers both upside and downside risks for housing and home building, given both the scale and scope of policy change now underway in Washington, D.C. Regulatory reform and cost reduction offer the most upside risk for the persistent problems that plague the housing market, namely growing construction costs and poor housing affordability due to limited inventory. Extension of the 2017 tax cuts would also be a net positive for home builders and remodelers.

However, negative risks for residential construction include tariffs on imported building materials, concerns regarding immigration and workforce availability, and general policy uncertainty given the daily headlines of proposals and executive orders. The bond market also has long-run concerns over inflation and long-term government deficits.

As a result, home builder sentiment fell after a post-election gain. The NAHB/Wells Fargo HMI was 42 in February, down five points from January and the lowest level in five months. While builders hold out hope for pro-development policies, particularly for regulatory reform, policy uncertainty and cost factors created a reset for builders’ 2025 outlook. Uncertainty on the tariff front helped push builders’ expectations for future sales volume down to the lowest level since December 2023.

Similarly, the NAHB Multifamily Production Index (MPI) remains below the break-even level of 50, although it did show signs of improvement at the end of 2024 by increasing seven points to a level of 48. The MPI is pointing to eventual stabilization of the multifamily construction market in 2025.

Reflecting the sentiment indicators, single-family starts in January decreased 8.4% to a 993,000 seasonally adjusted annual rate; 1.8% lower than a year ago. Multifamily starts decreased 13.5% to an annualized 373,000 pace. There were 669,000 multifamily completions in January, up 11% from January 2024. For each apartment starting construction, there are 1.8 apartments completing the construction process.

Higher construction financing costs and elevated mortgage interest rates continue to hold back the housing market, and the future of interest rates will depend on inflation data and policy change. During the past 12 months, on a non-seasonally adjusted basis, the Consumer Price Index rose by 3.0% in January. This was higher than the 2.9% rate recorded in December and is a warning that policies that increase costs on the supply side of the market, like tariffs, may push inflation higher in 2025 and keep the Federal Reserve on an extended hold.

Texas Housing Shortage Getting Worse

BY JOSHUA FECHTER

Texas’ housing shortage is getting worse, report says Texas builds more homes than other states but hundreds of thousands more are still needed, the report said, contributing to higher housing costs.

Texas has a deep housing shortage that’s driving up home prices and rents. And it’s getting worse.

In 2022, Texas needed about 320,000 more homes than it had, up from about 306,000 the previous year, according to an estimate released Wednesday by housing policy organization Up For Growth.

That shortage illustrates how Texas, which builds more homes than any other state, has struggled in the last decade to build enough homes to meet demand amid its economic boom. The problem undergirds the state’s housing affordability woes. Home prices and rents in the state’s major metropolitan regions have skyrocketed owing to increased competition for a limited supply of homes.

“While Texas has been building a lot of housing overall, in many places, it just has not been enough to keep up with demand in the state and people moving in from out of state,” said David Garcia, Up For Growth’s policy director.

Texas isn’t alone. A nationwide shortage of homes has driven up housing costs across the U.S. and has been discussed heavily in this year’s presidential race. In its latest report, Up For Growth said the country needs 3.8 million homes to ease its housing affordability problem, slightly less than in previous years.

In many of Texas’ biggest urban areas, the shortage worsened. It grew in the Houston, Dallas-Fort Worth, San Antonio and McAllen regions, according to Up For Growth — even as many those places greenlit the construction of more homes than they did prior to the COVID-19 pandemic.

Much of that housing growth came in the form of building more detached single-family homes in outlying suburban areas, Garcia noted —the way Texas has traditionally managed to keep housing costs at bay. But the limits of that approach have become increasingly apparent amid the state’s high population growth, he said.

“In many places in Texas, you see the limits of how only outward expansion cannot meet the full demands of the housing market,” Garcia said.

Other places in Texas, like El Paso, saw their housing shortage ease.

An apartment construction boom in the Austin-Round Rock region helped the region beat back its housing shortage by nearly a third. The boom injected tens of thousands of new apartments into the market, forcing rents to fall for 16 months straight. The region still needs nearly 24,000 homes, the report found — about 11,000 less than it needed the previous year.

Though the nation’s housing shortage eased in 2022, that trend likely won’t persist for long, Garcia said. For one, apartment builders have scaled back new projects amid higher financing costs, despite strong housing demand. The effects of that decline — namely higher housing costs thanks to a tighter market — will be felt after the last of the apartments that broke ground during the boom open their doors.

https://www.texastribune.org/2024/10/30/texas-housi-shortage-report/

Housing Market Predictions for 2025

When Will Home Prices Drop?

As 2025 begins, the housing market remains as unpredictable as ever. Mortgage rates hover closer to 7% than 6%—far from what most economists and analysts forecasted and above the rates we saw in the first week of 2024. Record-high home prices also continue their ascent in many areas of the country.

However, recent indicators suggest there’s hope for relief in 2025. The surge in home prices has slowed and even declined in some markets, thanks to increasing inventory and softer demand due to affordability challenges. Experts project this price deceleration to persist in 2025.

Yet, even as many would-be buyers are holding out for better conditions in in this new year, pending sales remarkably continue to rally. This indicates more prospective buyers may be resigned to the current reality and re-entering the market.

U.S. home prices posted a 3.9% annual gain in September—down from 4.2% annual growth in August, according to the latest S&P CoreLogic Case-Shiller Home Price Index, which tracks single-family home values. This latest data represents the sixth consecutive month of annualized price deceleration after national home price growth peaked at 6.5% in February and March.