DECEMBER 27, 2023 – As I posted last February, on a percentage basis, population growth is 75% lower than it was in the 1980’s (Baby Boomers). Last week, I saw a stat showing the demand for houses by Millennials in the prime age group of 25 to 44 years old is over 80% lower than when Baby Boomers were at the same age.
Combine this with the fact that spec activity on the part of homebuilders is 1/3 higher than before 2020 and has only been exceeded by the years 2005 thru 2008!!!!
Please explain to me how we have a housing shortage when we have almost no demand for new houses and an insane number of new houses being built at the same time. Not to mention the 10 million or so vacant houses we have in the country.
You have to hand it to NAR and NAHB on perpetuating the false rhetoric that we need more housing. Need more affordable housing. And so on. I guess we can adapt that old joke to NAR and NAHB as to when you know they are lying…
Here’s to a great 2024 for everyone!
Shalom,
The Mann
All posts by George Mann
RECESSION PREDICTORS THAT HAVE FAILED
UPDATE JANUARY 11, 2024 – The latest Bloomberg survey of economists shows 50% of them expect a recession this year. Based on the stock market being at all-time highs, it is saying there is zero chance of a recession in the next 6 months. I won’t use 0% in my forecasts. But, as part of my goal to provide precise measurable forecasts, I will say there is a 1% chance of a recession (Two consecutive negative GDP quarters) occurring in the first half of 2024. As the odds of the 2nd Quarter being negative are low, I place a chance of a recession starting by the end of the 3rd Quarter (would require negative GDP in 2nd and 3rd Quarters) at 5%. I just as well place a percentage on a recession occurring in 2024 as a whole. My estimate is that is only about 10% at this time. There is no doubt GDP growth in 2024 will be lower than 2023. But, that does not mean we will have a recession. We have had very strong economic growth for 6 quarters since the early 2022 recession ended. I will update these percentages as new information warrants such.
DECEMBER 19, 2023 – With so many recession indicators being wrong over the past 2 years, I thought it would be good to compile a list. Although they have failed, this doesn’t mean that in 20 years we won’t look back and say this indicator has predicted 4 of the last 5 recessions. But, for now, these indicators have simply been wrong. I will continue to update this list as I encounter such (erroneous) indicators. Many of these I have never followed or heard of. But, as I am made aware of them predicting a recession that hasn’t, and isn’t, going to occur, I will add them to this list.
1. The (Mis)Leading Economic Indicator turned negative in early 2022 and been consistently forecasting a recession for over 18+ months.
2. M-2 Money Supply is the most negative it has been since The Great Depression.
3. Inverted Yield Curve – The yield curve turned negative in July 2022. It forecasts a recession 11-13 months from that event – which was June to August 2023. This indicator had been a perfect 8-for-8 since WWII. Make that 8 out of 9 now.
4. Empire State Manufacturing Backlogs – The last two readings have been -23.2% and -24%. The only two times this has occurred was in 2001 and The Great Recession. It is doubtful the current decline will coincide with a recession.
5. The University of Michigan’s Consumer Sentiment Index has been below 75 for 29 consecutive months. That has surpassed the prior record from February 2008 to May 2010.
6. The National Association of Credit Management’s (NACM) Credit Manager’s Index (CMI) registered 54.6 and 54.2 in the 3rd and 4th Quarters of 2023, respectively. It did not fall below 55 during the 2010’s expansion and the last time it fell below 55 for two consecutive quarters was in 2008 (this excludes the spike low in the pandemic).
7. The American Institute of Architects Architecture Billings Index (ABI) has dropped to 44.8. Previous drops below 45 signaled a recession in 2001’s first quarter and 2008’s first quarter. HOWEVER, Architects have a lead time of 9-12 months on commercial building activity. Thus, this indicator might be signaling a recession at the very end of 2024 and into 2025 – which I have mentioned in prior posts as a possibility. Especially, since that occurs after the Presidential Election. So, I might move this indicator from this list to the small list of indicators that are still accurate in predicting recessions. But, I wanted to place it here in the interim so you could be aware of what it is saying.
8. Wholesale Sales excluding Autos and Oil turned negative (-2.8% YOY) in 2023. Besides the Pandemic, this indicator coincided with recessions in 2001 and 2007-2009. It also was negative in 2015-2016, which was termed an industrial recession.
9. Banks Reporting Stronger Demand for C&I Loans bottomed at around -60% at the end of the recessions in 2001 and 2007-2009. It bottomed at -54.5% in the 2nd Quarter of 2023 (one year after the recession I say occurred in the first half of 2022). At any rate, no recession occurred in 2023 and one is highly unlikely in 2024. The index has rebounded to -23.7% in the First Quarter of 2024. Still weak. But, improving.
MORE GREAT NEWS FOR PLANTS
DECEMBER 19, 2023 – It doesn’t get any better than this for plants in America. The USA is now producing more oil than any country in history!!! Congrats to us for overcoming the leftist climate change hoaxers! It would be nice if one of these days they simply admitted defeat and went away to be quiet forever. You would think when you have been soundly defeated you would shut the heck up. We can only hope.
Those who don’t fall for ESG, climate change lies, et al, enjoy this wonderful article.
https://www.aol.com/finance/united-states-producing-more-oil-220032456.html
Happy Holidays and Shalom,
The Mann
Those who don’t fall for ESG, climate change lies, et al, enjoy this wonderful article.
https://www.aol.com/finance/united-states-producing-more-oil-220032456.html
Happy Holidays and Shalom,
The Mann
R.I.P. RECESSION PREDICTORS – YOU WERE DEAD WRONG!
DECEMBER 15, 2023 – First off, happy birthday to my dear wife.
Back in April and June, I mentioned that the wave theory I follow showed a strong rally ahead. It would require us breaking through the all-time highs by a wide margin. This week the Dow 30 achieved new highs and is above 37,000 for the first time ever. 40k and possibly 44k in 2024 are on the table. They have been for over 6 months.
With the information below it is time to 100% emphatically declare anyone that has forecast a recession for the past 18 months and into 2024 dead wrong. Their analysis is totally in error. Just fess up and admit with hat in hand you have no clue what you were talking about. You will feel better:) On to where the data stands and what it is telling us.
BANKS – To date, we have had two bank closures that I am aware of. One was strange as it was not FDIC-insured. We will be ending the year much closer to my forecast of 0-10 closures than the 176-200 closures forecast by many people. I think we will be able to say the same next December.
As for CRE loan defaults, I have dealt with about 5 bad loans. There has been no consistency as to why the loans went south. I am seeing nothing that indicates a lot of foreclosures nor anything specific to a property type.
Amazingly, the Regional Bank Index (KRE) is up 58% from its yearly low and is back above where it was before the SVB/SBNY closings. Remember, buy when there is blood in the streets. It worked again.
To reiterate, the market is saying that it does not believe there will be a CRE loan debacle for banks. Either not many CRE loans will default and/or banks are well prepared and capitalized to handle the defaults.
HOUSING – Home prices have been up all year and the rate of appreciation is increasing. It isn’t much. That is a good sign as it can be sustained into 2024.
The Homebuilders Stock Index was up over 5% one day this week and is now up an incredible 62% (!)from last year’s lows. On top of that, this is an all-time high.
Those who forecast a crash in the housing market continue to be way off the mark. As I said all along, 7% interest rates are nothing to worry about.
INTEREST RATES – Bonds bottomed on October 23rd. A strong rally has dropped rates by about 100bp already. A minor correction should start soon. Then after the new year, we will continue the decline in interest rates. The target is about 25-125bp lower than we are today.
INFLATION – The December report came in at 3.1%, well below my forecast of 3.6%. The 3-month annualized inflation rate is 0.0%. The 6-month annualized inflation rate is 1.9%. These figures are lower than the annualized rate (3.1%) and thus indicate the annual CPI should drift lower. However, continue reading.
Based on the data, my prediction for next month’s figure is 3.5%-3.6%. The January report should show annual CPI for 2023 to be around 3.5%. Then from the February report on into the Summer, the CPI should crumble towards 2%.
SUMMARY – With the Dow 30, bank, and housing stocks at their highs, the markets are saying all should be well through the first half of 2024. The economy is supposed to be looking good in an Election Year. That looks to be the case again.
I will reprint this statement from a post a few months ago: I put this hidden little sentence out there to refer back to in 12-18 months – The chance of a recession occurring looks to be 4th Quarter 2024 into 2025. The first year of the president cycle often sees an economic downturn. I suspect that a year from now the broken-clock recession mongers will have given up and admitted the economy is strong, et al. Just in time to be wrong again:)
Happy Hannukah, Merry Christmas, and Happy New Year!
Shalom,
The Mann
APPRAISER SELECTION PROCESS
NOVEMBER 26, 2023 – I received the following question from a staff appraiser with a bank. My answer follows his email.
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I am looking for direction/clarification on the regulations that discuss how an appraiser should be selected (specifically for commercial FRT’s). I work in the appraisal department of a bank and I need to prepare some internal policies/procedures/discussions on selecting an appraiser to engage. Many lenders feel they should be provided three choices and allow them or their customers to select the appraiser based on the lowest fee or the quickest turn time for the appraisal. They think that all that should be done is to not disclose the appraiser names and everything will be okay. However, my interpretation is that the appraiser should be selected based on their experience with the property type and the location in which the property is located. The regulations never appear to be direct enough, or all in one document to show how allowing lenders or borrower to participate in the selection would be viewed by bank examiners and regulatory agencies.
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We start with the following requirement from the 2010 Interagency Appraisal and Evaluation Guidelines (IAEG):
An institution’s selection process should ensure that a qualified, competent and
independent person is selected to perform a valuation assignment. An institution should
maintain documentation to demonstrate that the appraiser or person performing an evaluation is competent, independent, and has the relevant experience and knowledge for the market, location, and type of real property being valued. Further, the person who selects or oversees the selection of appraisers or persons providing evaluation services should be independent from the loan production area.
The other pertinent quote follows:
Moreover, the Guidelines stress that an institution should not select a valuation method or tool solely because it provides the highest value, the lowest cost, or the fastest response or
turnaround time.
Besides independence, the next most important item is to select an appraiser (or evaluator) that is competent in regard to the property type and subject market. That much is a given. There is no gray area.
So, the question becomes how can we BOTH select a competent appraiser AND allow the loan officer (and usually the borrower) to select from among several fee quotes?
Financial institutions accomplish this by bidding assignments to a group of competent appraisers. For example, the subject is a basic 5,000 SF, owner-occupied warehouse in a city of 100,000 people. It is likely the financial institution has 3 or 5 or more appraisers on their approved list that are competent to appraise this property in this market. So, we send out an RFP to three appraisers. All are equally competent to perform this assignment. We get the following bids:
Appraiser A – $2,500 / 3 Weeks
Appraiser B – $3,000 / 2 Weeks
Appraiser C – $2,000 / 4 Weeks
Over the past 3 decades, 95%+ of the banks and credit unions I have worked with forward the quotes exactly as shown above to the loan officer. The key is to not disclose the appraiser names. Borrowers and loan officers cannot suggest appraisers to use or not use. But, examiners and regulators are ok with them choosing from the anonymous quotes shown above.
Have we met the requirement of engaging a competent appraiser? Yes.
Have we helped the loan officer (and borrower) have enough information to make a time and price decision? Yes.
Are the examiners and regulators ok with this process? In my 30+ years of being involved in the appraisal process with financial institutions, I have not heard of a single objection.
There are two keys to making this acceptable:
- You can show that you only bid the assignment to competent appraisers; and,
- You do not disclose the appraiser names when sharing the bid information with the loan officer.
Maybe you are asking what the other 5% of financial institutions do. It may be less than that actually. This small group includes how I did things when I was Chief Appraiser. The appraisal department selected the best bid to go with. When requesting an appraisal to be ordered, the loan officer would let us know if time or cost was more important. This method speeds up the process and also allows us to spread the work around to the approved appraisers. The appraisal time is delayed when the loan officer/borrower make the selection. I have seen delays of weeks or longer. Also, through the blind selection process one appraiser may get too many assignments at once. Some appraisers have a habit of always bidding low and quick, even when swamped with work and knowing they cannot meet their deadlines.
As usual, feel free to send me follow-up questions. Or suggestions to add to this post or clarify something I said. My email is GeorgeRMann@Aol.Com.
The Mann
(MIS)LEADING ECONOMIC INDICATOR & MORE
SEPTEMBER 25, 2023 – Most importantly, only 3 months to Christmas:) And I am sure you have seen all of the Christmas stuff in the stores already. Next year it will be out in July. Ridiculous.
Two more recession indicators are wrong this time around. The (Mis)Leading Economic Indicator has declined for 17 straight months. I assume its purpose is to forecast a recession to occur within a few months after several negative readings. It has been wrong for over a year. Maybe this is where the broken record (look it up youngsters) recession mongers get their reasoning for thinking a recession is about to occur. Just fyi, the only other times it had this long of a streak was 1973-1975 and 2007-2009. The two worst recessions since The Great Depression.
The third indicator that has been wrong is M-2 Money Supply. It is more negative than it was in The Great Depression! Yet, no recession. In fact, it is looking like 3rd Quarter GDP may show an acceleration in growth to over 2%. However, I will say that is not a lock as I have seen forecasts from 0.5% to over 5.5% (Fed Atlanta). This quarter will be very unpredictable. But, it should definitely be positive and thus we can officially close the case on there being no recession in 2023.
Let me bring something up for the first time. I think I will be harping on this for the next few years. I believe the reason many prominent indicators are wrong this go around is due to what has happened since the pandemic. Almost all indicators soared to extreme high readings never seen before. And many are falling to record lows. What I am seeing is if you draw a straight line from say 2010 or 2015 through 2023, these indicators are exactly where they should be. i.e. The lows are evening out the highs and overall we are reverting to the mean.
I saw this recently in national retail sales. Adjusted for inflation, retail sales have been flat for the past 18-24 months. However, they increased significantly after the pandemic. If you apply the 2010-2019 compound annual growth rate to 2019 sales, you will be exactly where we are at in 2023. I will discuss more examples and provide more specific information as I encounter graphs showing this occurrence.
FED FUND RATES – The Fed did what it was told to do and held rates the same in September. Also, they went ahead and said what the market has forecast for a long time and that is another rate hike lies ahead. The 100% trend of the Fed following the market continues.
HOUSING – As I noted in a prior blog, the market is signaling weakness in the housing market after forecasting the strength we have seen all year. The homebuilder stock index has declined 10% from its July top. We need to continue to watch this play out. It is telling us we should see weakness next Spring. What will slow the accelerating strength in the housing market? Maybe 8%+ rates on 30-year mortgages? About the only thing I can think of. But, it doesn’t matter. The market just says it will happen. The price trend in the 4th Quarter will tell us if the Spring slowdown is just that or the start of a more significant downturn like we had in the second half of 2022.
REGIONAL BANKS – These stocks have declined a significant 15% from their July highs. Basically, they declined some more after the SVP failure, then soared over 40%, and now down 15% – in the end, they have gone nowhere since the Monday after the SVP failure. What is the market telling us? It definitely says not to expect the 250-400+ bank failures that so many people are predicting. Those people expected such to occur by now, in fact. As far as I know, the number remains at one small bank in Kansas. In regard to CRE loans, banks have been refinancing these all year long at higher interest rates. I haven’t heard of any significant issues. The problems have occurred in the CMBS market – gotta hand it to the supposed smartest lenders and investors in real estate:)
INTEREST RATES – Treasury Bonds have broken below last October’s low. This means interest rates are at new highs for this downturn. As I write this, I see a headline saying they are at the highest level since 2007. However, we are now on the clock to look for a final bottom in this multi-year downturn in prices (increases in yields). That doesn’t mean it will occur next week. I am thinking it is several months away. Maybe around the beginning of the year. Too early to give a reasonable forecast re timing and price (yield). The 4th Quarter price action will get us much closer to predicting when the bottom is in. What should follow will be a strong bond rally back to the range of the Summer 2022 and April 2023 highs (lows in yields). First things first. Let’s have the current downturn play out and get a bottom in place. Bottomline, mortgage rates will not be going down the remainder of the year. And they might head over 8% on the 30-year mortgage.
Well, that was a lot to cover. I will probably post again once we get the October inflation reading.
Til then, Happy Fall.
Shalom,
The Mann
THE MARKET AND THE FED FUNDS RATE
AUGUST 31, 2023 – As we end August, a quick look at what the market is telling the Fed to do at its September 19-20th meeting. 3-month and 6-month Treasury Bills are yielding 5.56%-5.58%. The Fed Funds Rate is at 5.25%-5.5%. That is saying not to raise the rate. However, it wouldn’t take much for those rates to get to a point where the market says to raise rates by another 25bp.
For awhile the market has said no change in September and a 25bp increase in December. That seems to still be the case. We will see if anything changes over the next few weeks.
Have a great Labor Day weekend.
And good riddance to July and August!
Shalom,
The Mann
RITE-AID FILES BANKRUPTCY
AUGUST 26, 2023 – Hopefully, it is a full liquidation bankruptcy and its 2300+ stores are closed down. For 30+ years, I have wondered why shareholders didn’t complain about the drugstore chains paying 500%-1000%+ too much for their real estate. The excuse that the business profits would make up for the real estate losses was BS.
I am aware of a situation about 25 years ago where one of the chains wanted a rural site that was worth about $100,000. They gave the site selector instructions to buy at any cost. The farmer that owned it didn’t want to sell and turned down offers of $3 million, then $4 million, on up to $10 million!!!! The market turned down and they ended up not buying any site in the area. But, to be willing to pay ANYTHING for a $100,000 piece of property was insane.
This bankruptcy may be due to the opioid lawsuits. But, it is needed just for the stupidity of real estate purchases over the past 30+ years.
There are modern day companies doing the same. Some pay too much and others land lease at obscene rates. A few years ago I reviewed an appraisal report where one big-name c-store leased a parcel of land that was just bought for $800,000. The capped land rental was $6mm!!!!! Again, why pay a rental rate that is 7.5x market!?!?!? I probably won’t be around to see these companies go bankrupt.
Call me insane for thinking you can buy your real estate at market AND have a profitable business.
Lastly, I hope all the appraisers that use 0% Vacancy for these national tenant leases realize how stupid that is. As I have said for decades, large companies have the best lawyers and can get out of leases easier than local tenants can. Divide the number of store closures over the past 20 years by the number of stores in the country and you probably have a good vacancy factor to use for these leases.
One of the reasons big-time investors have consistently overpaid for real estate by about 20% for the past 30+ years is assuming no vacancy loss. The other two items they underestimate in their assumptions are expenses and cap rates.
If appraisers really wanted to ‘reflect the market,’ they would come in 20% below the purchase prices for national tenant properties. Easy to do by using a realistic 5%-10% vacancy and 100bp higher cap rate.
Alas, it won’t happen. Market Price is what the market wants and what appraisers provide. At least we know for this property type, Market Value is 20% lower.
Shalom,
The Mann
CRE LOANS AND SMALL BANKS
AUGUST 23, 2023 – I will just give the link to an article on this subject. It supports my argument that CRE loans are not a worry for the overall banking industry. However, I am sure there are other articles with other data that suggest otherwise.
Between the stats in this article and my posts showing that higher interest rates can easily be absorbed as CRE loans are refinanced, there just isn’t solid evidence that 200+ banks are going to go under by yearend. Or even in 2024. The count is at one small bank in Kansas so far.
It looks like the ones being hurt by CRE loans this cycle are the so-call sophisticated investors – CMBS lenders and REITs. Apparently, they outsmarted themselves:)
https://www.washingtonpost.com/business/2023/08/14/no-small-banks-aren-t-holding-the-bag-on-half-empty-office-towers/87080ff4-3a92-11ee-aefd-40c039a855ba_story.html
Shalom,
The Mann
(FORMERLY PERFECT) RECESSION INDICATOR
UPDATE AUGUST 27, 2023 – Although forecasters are often wrong, current data shows an expectation for GDP to grow 1.9% (up from previous forecasts around 0.6%!!!) in the 3rd Quarter and 1.2% in the 4th Quarter. This would result in over a 2.0% growth rate for all of 2023. How wrong can those recession mongers be!!! Remember, listen to what the stock market is forecasting and not to what the economists are saying.
For 2024, current estimates are +1.3% for the year with each quarter being in the +1.0-1.5% range. It is too early to much faith in those figures. They will certainly change by yearend. But, they have been going up, not down. And no quarters are forecast to be negative. Much less the required two consecutive negative quarters. Keep putting pressure on those people calling for a recession now in 2024, after they admitted being wrong about 2023.
AUGUST 23, 2023 – Most people are aware of the inverted yield curve indicator predicting a recession. Duke professor and Canadian economist Campbell Harvey is credited with ‘inventing’ this indicator. I question that, but it doesn’t matter. The indicator has a perfect 8-for-8 record predicting recessions since World War II.
What doesn’t get much attention is the indicator PRECEDES recessions. If you see a graph, you will clearly see that the inverted yield curve comes before a recession occurs. Mr. Harvey says a recession has started on average 11-13 months after the yield curve becomes inverted. That is easy to see. It is fact. No argument from me about this lead time.
BUT, what I notice from the historical graph is the yield curve has always been at +100bp and up to +200bp by the time a recession starts. This gives us a long lead time to deal with a recession. It takes a long while and is a major move for the yield curve to go from the current -0.68% up to +1.00%-+2.00%. Until we see significant movement towards positive territory, no worries about a recession starting soon.
If you want to see what Mr. Harvey says and see the historical graph I am referring to, cut and paste the following link:
https://finance.yahoo.com/news/professor-behind-recession-indicator-with-a-perfect-track-record-says-it-remains-way-too-early-to-call-off-a-us-economic-downturn-093049502.html
Also, a sales pitch for a neat item I bought several months ago – The Tidbyt. Go to https://tidbyt.com/ to look at it and purchase one. It would make a nice gift.
Instead of having the Fake News Media on all day, I have a Tidbyt across the room from me. I have programmed it to give me current and future weather, info on tropical storms/hurricanes or other serious weather nearby, news headlines from various sources, the price of Bitcoin, and in the evenings the current 10-Year Treasury Bond yield and the difference between it and the 2-Year Treasury Bill. Right now, those are 4.34% and -0.68%. I will be aware of this moving towards zero well in advance. I do believe recently it was over -0.90%.
FYI, the yield curve stayed negative in July 2022. Thus, 11-13 months out is June to August 2023. Obviously, we are not in a recession. I believe I posted previously that this indicator would break its streak of accurate predictions. Mr. Harvey is saying be patient. He says ‘it is way too early’ to say the indicator is wrong. The stopped clock concept might make this indicator 9-for-9 one year. But, in my opinion, it is now wrong and is 8-for-9.
As there is no chance of a recession this year and the earliest it could possibly be would be the first two quarters of 2024, that would put us 18+ months out from when the yield curve went and stayed negative. Not unprecedented. But, certainly well beyond the norm.
I will wait to see +100bp to see if at that very moment we are in a recession. Remember, that will be a coincidence signal. It won’t be giving any lead time.
As I always say, we shall see.
Shaom,
The Mann