Multifamily Starts Rise 37.4% In October, Largest Increase In 2017 (West Declines 3.70% As Lonzo Ball Forgets How To Shoot)

Housing starts rose 13.7% MoM in October to 1,290K units SAAR (or 1.29 million). However, the largest share of housing starts were in the 5+ unit (multifamily) category. Multifamily units grew at a rate of 37.4% MoM.


October was the highest growth in 5+ unit starts in 2017.


1-unit (detached) housing starts grew at 5.28% MoM, also the best month in 2017. You can clearly see the housing construction bubble that peaked in early 2006.


The biggest gainer? The Northeast US at 42.16% MoM. The South grew at only 17.17% while the West actually declined at -3.70%.

This is the Lonzo Ball Effect. This is where your starting point guard goes 1 for 9 from the floor, 0 for 6 from the 3-point line for a dismal 2 points and the opponent doesn’t even bother the foul him.  A clear sign of stagnation in the West.


Perhaps Lonzo Ball should consider changing the name of his basketball shoe company name from Big Baller to Small Baller.



Retail Inferno! America’s ‘Retail Apocalypse’ Is Really Just Beginning

That headline from Bloomberg sounds suspiciously like the line from the Brendan Fraser flick The Mummy, “Death is only the beginning.”

As an example, CNN reported that Toys ‘R’ Us declared bankrupty. While Toys ‘R’ US will keep their stores open for the Holiday season, they will likely be forced to shutter underperforming stores next year.

According to Bloomberg, In the U.S., more than 3,000 stores did open in the first three quarters of this year. But almost 6,800 closed. And this comes when there’s sky-high consumer confidence, unemployment is historically low and the U.S. economy keeps growing. Those are normally all ingredients for a retail boom, yet more chains are filing for bankruptcy and rated distressed than during the financial crisis. That’s caused an increase in the number of delinquent loan payments by malls and shopping centers.


The debt coming due, along with America’s over-stored suburbs and the continued gains of online shopping, has all the makings of a disaster. The spillover will likely flow far and wide across the U.S. economy. There will be displaced low-income workers, shrinking local tax bases and investor losses on stocks, bonds and real estate. If today is considered a retail apocalypse, then what’s coming next could truly be scary.

Until this year, struggling retailers have largely been able to avoid bankruptcy by refinancing to buy more time. But the market has shifted, with the negative view on retail pushing investors to reconsider lending to them. Toys “R” Us Inc. served as an early sign of what might lie ahead. It surprised investors in September by filing for bankruptcy—the third-largest retail bankruptcy in U.S. history—after struggling to refinance just $400 million of its $5 billion in debt. And its results were mostly stable, with profitability increasing amid a small drop in sales.


Yes, this map looks  very much like a map of the “subprime” residential mortgage crisis.

Let’s focus on Pittsburgh as an example. Watchlisted Commercial Real Estate Loans in the Pittsburgh, PA are include all property types. not just retail. So it is more than just the Amazon effect (on-line retail) causing the closure of retail space. In short, US commercial real estate developers built too much inventory.


One of the causes of CRE overbuilding? The Fed’s zero interest rate policy!


Yes, it is a retail inferno.

Is The US Housing Market In A Bubble? Hot, Hot, Hot or Not, Not, Not?

One of the more interesting questions is whether the US housing market is in a bubble or not. The answer is (drum roll) …. it depends.

Consider the S&P CoreLogic Case-Shiller 20 Metro Home price index as a ratio of US median  family income. As you can see, the US have reached a price-to-income ratio that is higher than the peak of the housing bubble around 2005. So, it looks like the US housing market is in a broad-based bubble.


But in real terms (extracting inflation), the US housing market is below the housing bubble peak indicating that the US housing market is NOT in a bubble.


While the San Francisco housing market is feeling hot, hot, hot, the Case-Shiller index for San Francisco home prices as a ratio of median household income is rising but well below the housing bubble peak. Credit the rising income to flourishing tech companies like Apple, Google, Nvidia and many others.


Even Washington DC home prices (as a ratio of Arlington, Virginia has no evidence of a housing bubble.


This is not to say that housing prices in San Francisco, Washington DC and other cities are “affordable.”  It is just that most indicators, when adjusted by median income for the area, don’t indicate a house price bubble.

So rising home prices in the US doesn’t mean that home prices are hot, hot, hot.  But it sure feels that way.


US Q3 GDP Grows At 3.0% Despite 2nd Consecutive Quarter of Negative Residential Investment Growth (Lowest Since 2010)

Q3 GDP was released this morning and QoQ Real GDP (annualized) grew at a 3% pace. This follows a 3.1% QoQ growth rate in Q2.


But Q3 represents the 2nd consecutive quarter of negative growth in Gross Private Domestic Investment: Residential. The worst growth rate since 2010.


Yes, the lowest growth rate in residential Gross Private Domestic Investment since 2010.



Trump’s Fed Chair Problem (How Do We Awaken Dorothy From Her Monetary Oz?)

President Trump has a problem. And it is who to select as The Federal Reserve Chair by November 3rd. Of course, he can always keep mega-dove Janet Yellen. Or he choose someone new like National Economic Council Director Gary Cohn, Fed Board Governor Jerome Powell, former Fed Governor Kevin Warsh or Stanford University economist John Taylor.

I like the “Bay Area Brawl.” Berkeley’s Yellen versus Stanford’s Taylor. That is, if Taylor is actually going to follow his own Taylor Rule. And then it depends of who estimates the Taylor Rule.

For example, Glenn Rudebusch at the San Francisco Fed’s specification of the Taylor Rule says that the Fed Funds Target Rate should be 5.73% (compared to the actual rate of 1.25%).

Charles Evans of the Chicago Fed, on the other hand, has a Taylor Rule specification that indicates that the Fed Funds Target Rate should be 0.49%, BELOW the current target rate of 1.25%.

Yellen would be closer to dovish Evans while Taylor would be closer to Rubebusch.

But regardless of who Trump selects, it should be someone that actually follows a rule of some kind (whether Taylor’s rule or a complex rule) THAT IS PUBLICLY ACCESSIBLE.

In the following chart, I compare the baseline Taylor Rule (white line) with the actual Fed Funds Target Rate. Before January 2009, the actual Fed Funds Target Rate followed the baseline Taylor Rule (even though the actual target rate went from “too high” to “too low” during the 2000s. Then Chair Ben Bernanke looks like he was following a Taylor Rule UNTIL late 2008. Rather than allowing the Fed Funds Target Rate to go negaitve, he added the infamous quantitative easing (QE) in order to push down the 10 year Treasury yield. Thus, it was Bernanke that threw away the Taylor Rule (and Yellen after him). We are now in land of Monetary Oz (a dreamworld with Emerald Cities and flying monkeys), but no rule to speak of.

But what we do have in the US economy is asset bubbles.

Of course, slowly raising rates and unwinding the $4.4 trillion Fed Balance Sheet is likely the correct approach. There are no ruby slippers that the new Fed Chair can tap to return to monetary normality. But what prevents this same Monetary Oz fantasy from happening again?

Perhaps Trump should ask the candidates about what they would do as Fed Chair, while they are dancing.

US Housing Starts And Permits Plunge In September As Fed Raises Rates

The housing construction numbers for September were not great. 1-unit detached starts declined -4.60% while 5+ unit starts (multifamily) declined -6.23%.


Permits were off for 5+ unit (multifamily) at -17.43% while 1 unit permits rose 2.38% in September.

As a reminder, The Federal Reserve dropped their target rate as a result of the 2001 recession and 1-unit starts took off. Construction was so hot that The Fed had to raise their start rate to cool-off the construction bubble. Rather than cool-off the construction bubble, The Fed sent it into deep freeze.


Alas, there wasn’t a Fed Funds rate reaction during the housing bubble, but there appears to be a negative reaction to multifamily (5+ unit) starts since The Fed began jacking up their target rate.


And with an 84% implied probability of a December rate hike, we should watch starts and permits carefully over the next couple of months.


And here is the path of future rate hikes (forward curve). As Samuel L Jackson said in Jurassic Park, “Hold on to your butts.”


The International Bubble Team in action!


Goin’ Down! UK Banks Suffer Credit Collapse (Similar to USA)

As New Jersey rocker Bruce Springsteen crooned, we’re Goin’ Down.

According to the Bank of England, household unsecured credit availabilty sank to its lowest level in 10 years.


While household secured credit availability was also in negative territory, it was not as bad a unsecured credit availabilty. The reason? Consumer lending curb to slowdown a hot market.

The US bank credit market is slowing as well.


The USA does have some similarities with the UK other than clocks.