Morning Report: Is real estate really an inflation hedge?

Vital Statistics:

S&P futures4,1911.8
Oil (WTI)65.73-0.47
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.13%

Stocks are flattish this morning on no real news. Bonds and MBS are down.

The second estimate for Q1 GDP was unchanged at 6.4%. On the other hand, personal consumption was revised upward from 10.7% to 11.3%. The personal consumption expenditures index (the preferred inflation index by the Fed) rose 3.7% in the first quarter. Ex-food and energy, it rose 2.5%. This is above the Fed’s 2% target.

Corporate profits were flat in the first quarter. Note the stock market was up 9% over the quarter while the 10-year bond picked up 83 basis points in yield during the same period. The stock market looks like it is over its skis a little

Initial Jobless Claims came in at 406,000 last week. While the number is going in the right direction, it is still almost double where we were pre-COVID. These sorts of numbers were what we saw in the bad old days of 2009-2010

Durable goods orders fell 1.3% in April. Ex-transportation they rose 1%. Core capital goods (a proxy for business capital investment) rose 2.3%.

Luxury builder Toll Brothers reported a 21% increase in revenues in its second quarter earnings. EPS rose 71% while backlog hit a record. Higher input prices are evidently not a factor as gross margins increased and the company is guiding for them to increase further.

Newco-spelled-backwards bought a $48 billion servicing portfolio from Amerihome which was recently bought by Western Alliance.

Is real estate really an inflation hedge? Investors are piling into real estate right now, at least on the residential side. Academic studies have looked at the 1970s as kind of a test for this hypothesis. During the 70s, stocks languished while real estate rose in price. The big question however concerns rent growth and that is a tougher issue. Apartment REITs have struggled to raise rents over the past year, however that is certainly COVID-19 related.

The 1970s also corresponded to the baby-boom’s first housing purchases, while the inflation of the 1970s was pretty much unrelated to demographics (OPEC and declining productivity was the culprit in the 70s).

Investors IMO are buying SFR real estate because the cap rates (mid-single digits) are attractive enough in this low interest rate environment, and when you add in double-digit home price appreciation, you have an outsized return compared to the other asset classes out there. Multi-fam is probably less attractive, given the current political environment.

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