By Jeffrey Cohen Investment Advisor Principal US Advanced Computing Infrastructure, Inc. January 24, 2025 312.515.7333 - Cell (inquiries) We are in a transitional period in real estate. The median asking rent is $2,000 per month, and depending on the data, this is based on the some very modest rental inflation YoY (maybe 2%), and a book of luxury apartments. We are bouncing off the historic lows for home buying, with a shift towards luxury homes and childless, and unmarried affluent home buyers. The last three months are slightly better after two years of crashing volumes. The hot spots seem to be in focusing on luxury homes ($750 - $1M, and over $1M), but there are only so many of those homes and buyers. The rest of the market is flat. Primary Residence: RentalsWe start with rent of primary residences in the US. Summary of the Summary: Median asking rent is unchanged at $2000 / month in December 2024 vs December 2023, but government price index data suggests rents are up ~4.5% YoY. Summary: The Rent is Too Damn High (McMillan), with urban rent indices reported by the Federal Reserve Bank of St. Louis (a.k.a. FRED) having risen between 3.5% and 5% in 2024, for a median asking rent of $2,000 in December 2024, or a median US average rent of $24,000 per year. A family with two incomes should be able to cover that. However, this is still rising faster than US CPU-U (inflation). The one dissenting data piece is from Zillow, which has visibility into 601k rentals through their system. They see median rents flat for 2024 (zero percent increase), although rents were ~8% higher in August and so the disconnect could be partially due to smoothing and seasonality adjustments. Zillow is quite precise in their data, giving an absolute median rent figure of $2000 for 12/23 and $2000 for 12/24. No, it isn't that easy. The data is reported from various sources, and is conflicting. Consumer Price Index for All Urban Consumers: Rent of Primary Residence in U.S. City Average (CUUR0000SEHA) is a data set provided by the Federal Reserve Bank of St. Louis. They show rent rose 0.5% in December. This is a 6% annualized rate. It actually rose 4.3% YoY (divide this December by last December). Consumer Price Index for All Urban Consumers: Rent of Primary Residence in U.S. City Average (CUSR0000SEHA) is a very similar data set. This is also up 4.3% YoY, but is only up ~0.3% in December, or an annualized rate of ~3.6%. Zillow Rentals in the USA show a median rent of $2000. This is unchanged from a year ago. Zero inflation in rent on Zillow. It is very seasonal, so expect rents to rise 8% by July/August, then to fall into Christmas. It is also very skewed with strong kurtosis. There are more units for rent over $5000/month than there are in any other category of rent. There are 601,018 rental units available in the USA right now. Demand is typical. Their market temperature rating is "warm." Consumer Price Index for All Urban Consumers: Owners' Equivalent Rent of Residences in U.S. City Average (CUSR0000SEHC) Fed FRED publishes an 'owner equivalent' dataset that is pretty new. It is up 4.8% YoY, and ~0.3% in December from November. This is in-line with rents. If I had to guess, the LA fires will increase insurance costs, higher UST 10-year note interest rates will increase mortgages and HELOC rates (and ARM resets), and property taxes are not really falling anytime soon (our opinion). Housing sale prices are inconclusive in our analysis so far. We would expect owner equivalent rents to accelerate in 2025, but there were pretty flat (up around 5% this year). It is obvious to people 'in the business' but maybe not to those reading this blogpost. Rents vary across the top 50 largest metropolitan areas. The lowest three cities are Birmingham, Cleveland and Detroit. The top three are Boston, New York City and San Francisco. Rental growth rates will also vary by city. We read in an article by Nerd Wallet analyzing Zillow data, and they said in the past year, single-family home rentals are up 4.4% through December 2024, which is consistent with the above data. We took a break to respond to some Tweets. Lots of different interpretations of the same data. Home affordability is worse, prices are way up, and home prices rose in all of the top 50 metro areas in December. This is heady stuff. One valuable and trusted tweeter suggested the lack of housing supply (inventory) was the reason for price increases. Another random poster suggested that home construction remains lower than demand (# of units we presume), and that is why prices are higher. They are suggesting a bidding war for new homes. We don't see that in the data. Primary Residence: BuyersSummary of the summary:
The quantity of homes bought/sold and built is up since October 2024, but only a little, and we are still very close to the bottom. A stock trader's technical analysis would say 'higher lows' and would likely be bullish into 2025. Why is it low? Everything that goes into home ownership is more expensive, so we see more affluent people buying them. They are buying luxury homes ($750k and up) but there aren't that many of those. The typical home buyer used to be a married couple with children (or hopes for them). Now, half the buyers are unmarried and many don't have children (nor plans for them). Finally, we cannot figure out at this point whether the same homes are selling for more (true inflation), or if rising median home purchase prices are due to a mix shift towards luxury homes. Summary: Very few homes are being bought, sold and built as compared to years ago. However, we might have just passed the bottom in September 2024 and have seen three months of growth off that low base. The new demographic of singles, unmarried couples, and childless home owners has grown from 25% of buyers to 50% of buyers in a short period of time. (I keep thinking double income no kids or DINKS). Transaction volumes have moved into the higher priced homes, with massive growth in $750,000 and up. I see no readily available evidence that the same home sells for more each year. Anecdotally, I am hearing that people are not getting their asking price, and it is taking 35 days, which is longer to buy/sell a home. All the other costs that go into a home are higher, including energy, cost of money, insurance, services, and property taxes. Finally, those that are buying homes are wealthier and have higher incomes. ************************************************************************ We are very fortunate that the National Association of Realtors (NAR) publishes data every month on home buying volumes and median prices. Today, we saw new data that we analyzed for this blogpost. Thank you NAR! A quick backdrop on housing. Everything outside the cost of the house seems higher. Insurance, heat/gas/electricity, cost of money, property taxes, repairs, appliances, and services needed. Cost of money has been above 6% for four months. Since September 2024, 30-year conforming, fixed rate mortgages have been over 6%, and for about a third of that time have been above 7%. Not everyone needs a mortgage, but this is a reasonable 'cost of money' metric. Property taxes are up from a median US bill of $2,480 in 2019 to $3,045 in 2023, or about 6% CAGR, according to a NAR blogpost, found here. Although the article was written in December 2024, they only had access to data through 2023. One NAR report indicated that the percentage of traditional, married couples with children is dramatically lower, being replaced by unmarried owners (single or unmarried couples) without children under 18. The statistics were dramatic. We also see an increase in cash buyers, and higher incomes and net worth levels for buyers. This either means that our economy is doing great, or that there are fewer home buyers who self select based on greater wealth to weather the risk storms of home ownership. Not sure of the causality. What about the cost of the house? The simple answer is that the median cost of all homes purchased in the United States is higher, and higher than inflation, over the past year. However, it is very seasonal, and a home purchased in the winter will be ~10% less expensive than a home purchased in the summer. The simple statistics from NAR show peak to trough in 2024 was $45,000, on a base of around $400,000 purchase price. Well, this is something to tell our kids. Buy a home in the worst, coldest, and most miserable conditions and you will save money the whole time you live there. I realize that I bought in February and the sellers were so miserable that they didn't show up for the showing nor the closing. They didn't realize I was a 'suit and tie' guy and thought I was a 'retiree' guy, and gave it away. Back to the analysis: NAR breaks down the United States into four geographic regions (Northeast, Midwest, South and West). They are very different existing single family home buying markets. The prices in the West are the highest (37% under $500k), followed by the Northeast (57% under $500k), the South (73% under $500k) and the Midwest (85% under $500k). Median days on market for homes sold in December 2024 (holidays, cold weather, vacations and family): around 30 days. Seems reasonable and in-range. Price change: The data does not compare apples to apples, but compares barrels to barrels. a. many fewer homes under $250k were sold in December 2024. b. many more homes over $500k were sold in December 2024. c. more homes in the $250k to $500k range were sold. What we don't know is whether the market has shifted to more expensive homes (like it did with luxury cars over affordable ones). Maybe homebuyers got rich on bitcoin, stocks, or just holding down two remote WFH jobs. No idea why, but the most expensive homes sold faster than last year. The mix changed. This is for existing homes only. A few hypotheses of why mix could change in December 2024: - The wealthy all fled to Canada, Mexico and parts unknown to flee a Trump presidency? - The illegal immigrants brought bags of cash (cartel cash?) and bought up homes? - Private investors moving up the home value curve? - Hedge funds and private equity REITS buying larger homes (fewer at the low end to buy)? - Incomes for the most wealthy rose faster...allowing expansion of consumption? - Wealthy moved more frequently for work or other reasons (e.g., companies moving to Texas)? Regardless, the increase in median home prices might not be due to inflation as much as mix shift. What else can we divine from the data? Overall, fewer homes are being bought and sold each year since a peak at the end of 2021. At that time, 6.4 million homes were being bought and sold annually. In 2022, the volume of transactions fell, and we have been in a holding pattern of around 4.3 million homes a year since January 2023. Home sale transactions are up 2.2% in December vs. November, pending sales are also up 2.2% (looking good for January 2025), and are up almost 10% from a year ago. We may be seeing higher lows in the data. According to the December 2024 NAR data, there are 1.15 million existing homes for sale (inventory) which equates to 3.3 months of non-seasonally adjusted supply, or 3.8 months of supply seasonally adjusted (which feels more normal to us). The typical home that sold in December remained on the market for 35 days. A year ago it was 29 days. This is a slow-down in home sales. We don't know why...it could have taken longer to find that 'perfect home' and 'perfect buyer' or the holidays were just busier and the weather was worse. No clue. Median home price for a single family home was $407,500. All these metrics are in the normal range, exhibiting a flattish fluctuation since 2023. We believe the median home price rise was most likely mix-related as opposed to housing price inflation. New home housing starts were 1.5 million in December 2024. That is a bump higher from November's 1.3 million housing starts , and is equal to the building permits received in November 2024 (so that is confirming data). Source: NAR (Thank you again).
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By Jeffrey Cohen 1/3/2025 - in anticipation of earnings a week from now (Jan 10, 2025 at 7am ET) Conclusion: Looking for a strong earnings release Physician and other medical services are growing 2x the US PCE rate, and Walgreens has made strategic investments into those areas that may start to show signs of paying off. They should show growth and profitability in this segment. Pharmacy sales (prescription and OTC) are growing faster than overall economy for the quarter (6.7% vs. 5.4%) and should be bullish for Walgreens. This trajectory slowed to PCE growth rates in November. Retail (front of store) will be a drag on growth. It grew more slowly than overall PCE. We are looking at the December 2024 publication of November 2024 Personal Consumption Expenditure information (also called Powell's favorite metric, and PCE). We highlight in a spreadsheet (which we download from the US Government data source), all of the rows of things that Walgreens provides. We compare that for a few periods (e.g., prior three months vs. same prior three months a year ago; prior month vs. prior month a year ago; and sometimes we go back a few years). Overall PCE (or Expenditures) are up 5.43% Year on Year for the quarter (3 months). Expenditures are up 5.45% for just November Year on Year. That sets the baseline. If pharmaceutical sales are up more than 5.44% (the average), then they are growing faster than the retail economy and the profits should be 'rolling in.' In this analysis we are ignoring the size of each category, but it does matter and things like pharmaceutical sales are more important than newspapers and we keep that in mind. 1. Pharmaceutical products (including prescription and non-prescription drugs) is up 6.7% for the quarter YoY, and 5.3% for November YoY. This will be a strong quarter for the pharmacy and OTC drug sales areas. Quarter YoY growth rates on consumable products: Food and non-alcoholic beverages purchased for off-premise consumption 3% Games 6% Film 5% Cleaning products 4% Paper products 3% Personal Care Products 4% Tobacco (4%) minus 4% Magazines 6% Photo Processing (the service) 1% Quarter YoY growth rates on Health Care Services: Physician services 9% Medical Labs 9% Other professional medical service3s 11% Implications: Walgreens should show a strong quarter, with faster than overall economic growth, in their US pharmacy department. They should also show strong growth in their Village MD and other doctor, lab services, and clinical trial services. Those areas are growing twice the US average, and should be a large tail-wind. The retail store is flat to slower growth than the overall economy. Non-alcoholic beverages and tobacco were especially weak. Given the push to highlight and grow physician and other medical services, and the economic growth moving into those areas, this is bullish for Walgreens strategy and financial results to be reported next Friday, January 10, 2025 at 7am ET. Link to Walgreens Notice here: We know there are is a huge short position against Walgreens, and the stock was the worst performer in the S&P 500 in 2024. Good luck to all.
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Stock Market BLOGJeffrey CohenPresident and Investment Advisor Representative Archives
January 2025
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