Thoughts From The Divide – Global Problems and Housing’s Temperature

Limited Spillover

While our coverage of supply chain problems, logistical issues, and inflationary pressures has tended to focus on the US, they certainly aren’t localized phenomenon. Case in point, the apple cart that is Chile’s copper industry appears to be under threat of upset. The industry is facing several potential problems, including union strikes, higher tax burdens, and the writing of a new constitution that could impose stricter regulations on the industry. Its next-door neighbor is also experiencing some trade turbulence. One of Argentina’s main grains ports is tackling a backlog after workers went on strike, demanding they be “classified as ‘essential’, in order to qualify for coronavirus vaccines”. Port workers have threatened further strikes if “the government does not adequately address their concerns”. Even China is not immune to disruptions. Though the SCMP had previously posited that “China inflation risks remain low despite unexpected surge in US”, the rise in commodity prices appears to have spooked policy makers. China announced this week that it will “step up adjustments on the trade and stockpiling of commodities and reinforce inspections on both the spot and futures markets”. Chinese policymakers also announced plans to “strengthen its management of commodity supply and demand”, though some analysts believe these moves “will likely have only a temporary impact”. In contrast, despite “rising energy prices”, Japan’s Core CPI data saw a 0.1% drop in April. This is perhaps worth taking with more than just a grain of salt as the drop was led by a 26.5% YoY decrease in “mobile phone fees”. An echo of the “huge decline in cell telephone service plan prices” that stymied Janet Yellen in 2017?

“Maximum Temperature”

The U.S. housing market, which has often appeared in these pages for its red-hot price dynamics and cattywampus supply-demand (mis)match, may be “reaching its peak”. As this article from Housing Wire discusses, yes, “nearly 50% of homes sold for more than their list price during the four weeks ending May 16”. Yes, home prices hit a record high and were up 24% YoY. And yes, bidding wars are leading to tears. But there are signs that “some buyers would rather spend their money on… other things they have held back on for the past year”. Mortgage Applications for Purchase cooled last week, which may be in part due to the “spike” in mortgage rates acting as a deterrent. But while Redfin’s Chief Economist Daryl Fairweather, says, “make no mistake, the housing market is still very hot and will remain hot for the rest of the year”, there are signs that “the market has reached its maximum temperature”.

P.S. Owners’ Equivalent Rent, one of the most significant components of CPI at a roughly 20% weighting, is often a headscratcher, seeming to move independently of the housing market. In an oped for Bloomberg, Brian Chappatta stops “short of calling this calculation completely bogus” in chronicling its origin and explains why this metric “should receive extra scrutiny as the U.S. embarks on an unprecedented and untested economic recovery”.