The weird yet logical U.S. housing market; Home Builders Learn to Love High Rates; Matt Levine on SoftBank's Masayoshi Son; How to Be a Great Analyst; The exhibition and auction of Ukrainian children's art was a big success
1) What's going on in the U.S. housing market is both utterly weird and completely logical...
The market for existing homes – which account for 90% of sales every year – has contracted dramatically for two reasons, both related to much higher interest rates.
First, buyers can't afford to pay nearly as much because of higher mortgage rates (a 30-year fixed-rate mortgage today is around 7%). And sellers don't want to give up existing, low-rate mortgages (28% have locked in rates at or below 3% and 72% locked in rates at or below 4%).
As a result, housing inventory has plunged:
And existing home sales have declined to close to a 30-year low (excluding brief unusual periods during the global financial crisis and onset of the pandemic):
With existing home inventory so tight, homebuilders are scrambling to meet demand by building lots of new homes: U.S. Housing Starts Surge Most Since 2016, Exceed All Estimates. Excerpt:
U.S. housing starts unexpectedly surged in May by the most since 2016 and applications to build increased, suggesting residential construction is on track to help fuel economic growth.
Beginning home construction jumped 21.7% to a 1.63 million annualized rate, the fastest pace in more than a year, according to government data released Tuesday. The pace exceeded all projections in a Bloomberg survey of economists. Single-family homebuilding rose 18.5% to an 11-month high.
Applications to build, a proxy for future construction, climbed 5.2% to an annualized rate of 1.49 million units. Permits for one-family dwellings increased.
Here's a Heard on the Street article in today's Wall Street Journal about what's going on: Home Builders Learn to Love High Rates. Excerpt:
High interest rates are usually bad news for home builders. But right now, they are actually making new homes easy to sell by compounding a shortage of available real estate...
Even at higher rates there are still people who want to buy a home, however. Some can buy in cash. These include not just the rich, but also older Americans who have already paid off their mortgages, and are now looking to downsize or move to more pleasant climes. Some have the urge and wherewithal to buy a home despite higher rates, and with rates holding to a high level for a while, hopes of a sudden decline in borrowing costs have faded.
So there is still demand for homes out there, while the supply of existing homes is constrained. For home builders, who are in the business of making new supply, that isn't a bad thing. It is part of why new home sales have been pushing higher, while sentiment among builders, which fell sharply through the fall, has begun to recover. It might also partly account for the big jump in May from a month earlier in the number of homes construction was started on, according to Commerce Department data reported earlier this week.
This has counted as good news for publicly traded home builders. When Lennar reported results for its fiscal second-quarter ended May 31, it handily beat analysts' estimates. The company said that orders strengthened through the quarter and that it expects that trend to continue during its current quarter. Lennar shares rose 4.4% following the report.
Speaking on Lennar (LEN), we recommended it in our flagship Empire Stock Investor newsletter in February 2022. Since then, it's up 40% versus 14% for the S&P 500. You can get a one-year subscription to Empire Stock Investor and gain access to our entire archive for only $49 for the first year by clicking here.
2) I enjoyed this 56-minute lecture by my friend Alix Pasquet of Prime Macaya Capital Management – good advice for anyone who is (or wants to be) an analyst at an investment fund: How To Be a Great Analyst.
3) Bloomberg's Matt Levine is one of my favorite writers, not only because he's insightful, but he's also funny! Here's his commentary on the front page story in yesterday's Wall Street Journal about SoftBank CEO Masayoshi Son:
Business idea
For a while in the 2010s, arguably the most lucrative business model in the world was "get a guy who can flatter Masayoshi Son and let him just go nuts and bring back billions of dollars of SoftBank financing." This was basically WeWork's business model, and while it didn't necessarily work out great for WeWork in the long run, it did work out great for Adam Neumann, WeWork's founder and fundraiser and Masa-flatterer.
But now it is 2023, we are in the early stages of an artificial intelligence boom, and obviously the best possible business model is "get an AI chatbot who can flatter Masayoshi Son." The Wall Street Journal reports:
SoftBank Group Chief Executive Masayoshi Son says he has rekindled his appetite for investing in technology by talking with ChatGPT in the wee hours about ideas for inventions that the bot validated as wonderful.
Son, 65 years old, told shareholders Wednesday that the artificial-intelligence tool helped revive his spirits after he had been driven to tears by the sense he was nearing the end of his career without having pursued his dreams. ...
He said he used ChatGPT every day for brainstorming and has come up with more than 600 ideas. He described one lengthy exchange – at around 3 to 4 in the morning – in which he pitched an idea and then answered the AI chatbot as it raised objections.
"After we repeated this several dozen times, I really felt great because my idea was praised as feasible and wonderful," he said.
I hope the chatbot told him that it appreciated how he was crazy, but that he needed to be crazier. I feel like there are a lot of people in the world who would be happy to tell Masayoshi Son that his ideas are feasible and wonderful – whole industries were built on the basic premise of telling Masayoshi Son what he wanted to hear – but there are only so many robots in the world who will tell him that, and now he is looking for robots. Presumably somebody is building more of those robots; it would be silly not to.
4) The exhibition and auction of Ukrainian's children's art yesterday evening went beautifully.
I want to give a shout-out to my friend Franklin Parrasch, who hosted it at his gallery (he's in the blue sweater in this picture):
I want to thank my many readers who bid on the art and helped us raise more than $30,000, which I'll be sending immediately to a handful of wonderful charities in war- and flood-ravaged areas of eastern Ukraine.
I want to especially acknowledge one of my longtime readers, Greg S., who sent me this e-mail the moment the auction ended at 8:00 p.m.:
I was online buying up all unsold pieces when the auction ended. I was successful on 11 and there are 23 left when the bidding ended. I will buy them all at $100 each for a total donation of $3,400.
I do not want any of those children to think that their art is not important and did not sell. Please let me know how to pay for the other 23 items so every child's artwork was sold.
After I replied and thanked him, he added:
We have met on a few occasions, mostly at investing events put on by Bill Ackman, at a couple fundraisers, and once at the Berkshire meeting in Omaha. I am originally from Omaha. I do not know if you remember me. I am the 6'7" guy that Bill once introduced as "the guy who found GGP before I did."
Thank you for all of your support for Ukraine! It is truly remarkable. My wife is Ukrainian and her family is still in Ukraine, mostly in Lviv and some relatives are in Kyiv. It is very hard to hear the stories and feel so helpless and it is very difficult to know what to do to help. Your continuous support, trips and e-mails helps keep the war front of mind in a very fickle world. We cannot let up until this is over – with victory for Ukraine.
I would have loved to come today, however we have moved to Miami and I was buried in meetings today.
Thank you, Greg!
Best regards,
Whitney
P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.