I hope you had a good week.
It’s been cold and gray in New York, but the flowers are blooming and next week looks better. I’d say the same about the recent data: a bit grim, but there are (mostly) brighter days ahead. The highlight of my week was speaking to clients of Urban Digs about inflation, the Fed, mortgage rates—and how all of those are affecting the US housing market. You can watch my presentation here ◎ (my bit starts at 9:40).

This is the first edition of The Week in Review. Every Saturday, I’ll recap the three top news developments and what we think about them. Plus, some other stuff I came across and liked, and thought you might too.

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News: Home construction tanked
Views: Multifamily completions will remain high, starts will range between 275-325k for the next few quarters

Builders of single homes are behaving differently from those who build apartment buildings (“multifamily”). In single family, activity at the various stages of construction (permits, starts, construction, completion) is declining towards 2019 levels. This has been happening gradually, but lurched downwards in the latest data (covering March). The multifamily cycle looks like a snake that just ate a goat: a skinny stream of permits and starts (far below 2019 levels), and a massive bulge of pandemic-delayed units passing through the construction-to-completion pipeline.

We expect the construction industry to continue its gradual return to normalcy. In the single-family sector, this translates to a moderate decrease in permits, starts, construction, and completions. Meanwhile, the multifamily sector is likely to experience a decline in construction from its current exceptionally high levels, although completions will remain elevated in the near term. Unfortunately, this influx of new buildings entering the market is putting downward pressure on rents—bad news for landlords. However, there is reason for optimism on the horizon: leading indicators suggest that the current low levels of permits and starts are likely to persist for several more quarters. As a result, once construction has fully transitioned into completions, the supply/demand balance will become more favorable for operators.

We wrote about high multifamily completions depressing rents, here ◉
We use architectural billings to forecast multifamily starts, here ◉
Census Bureau home starts press release, here ◎
Full analysis of the construction data, in our report ◉

News: Home sales dropped, but only a little
Views: Demographics trump economics—sales should rise this year

In March, existing home sales fell 4.3% from the prior month to a seasonally adjusted annualized rate of 4.19 million homes. This was below consensus expectations. It was the largest drop in over a year. Sales remain mired far below pre-pandemic levels, although still higher than the nadir reached last October. There were other signs of softness: inventory inched slightly (but remains very low) and prices dipped 0.5% (seasonally adjusted, as reported by Goldman Sachs).

The jump in mortgage rates surely played a part in lower home sales. We think declining inflation will allow the Fed to cut 1-2 times this year, bringing down mortgage rates to 6% or below by year-end. This should unlock homes, alleviate financing costs, and boost home sales. Weekly mortgage applications (which lead sales by a month) suggest next month’s sales number should improve. Moreover: younger Millennials are a huge generation. They are rapidly forming households. Most have at least one child. These are prime home buyers. Sales should rise.

Our presentation about home affordability is here ◎
Demographics trump economics. Some evidence, here ◉

News: Treasury yields—and mortgage rates—surged (again)
Views: Inflation should subside, the Fed should cut, and rates should fall

Last week’s surprisingly strong CPI data showed the Fed continues to struggle with the last mile problem with prices. They just won’t fall, at least not in any stable, consistent way. But there are two good reasons inflation is far more likely to fall than rise: shelter inflation will subside, and services inflation should drop as decelerating wages filter through to prices.

If that happens, then the door reopens to substantial rate cuts (from the inflation side, not to mention growth weakening). Most people think this is unlikely, but most people also underestimate how quickly things can move (after all, rate cuts were priced out quickly—is it unreasonable to think they can be back on the table again soon?). 6% remains my end of year 30-year mortgage rate target.

I talked about this extensively this week with Noah and John at Urban Digs, a New York-focused real estate analytics company.

We published our updated view on mortgages rates here ◉
Watch my presentation about inflation, rates, and housing here ◎

Phew. You made it. This is the good part.

• AI is the real deal. Since I started using an AI “co-pilot” to help me code, my entire view of the world has changed. I’m obsessed. You should be too (even if you are not a coder). At the very least, check out perplexity.ai—it’s a web search engine like Google, but with AI. I have it doing some very useful things for me, like reading the New York Times, Bloomberg, and the Financial Times, and summarizing all the housing news they’ve reported, organized by theme, with specific quotes from the articles.

• If you don’t believe me, listen to this. Ezra Klein has been doing some great interviews with leading AI experts. If you’re a nerd, listen to the CEO of Anthropic, a leading AI company, talking about how Artificial General Intelligence is 3 months away: NYT link here ◎, Spotify link here ◎. If you just want to know how you can use AI in your daily work and life, listen to Ezra’s interview with professor Ethan Mollick: NYT link here ◎, Spotify link here ◎.

• How should I be using AI to analyze the housing market? I would be happy to talk your ear off about how I’m using it. Schedule a one-on-one call with me, here ◉.

• Other stuff (all ◎). Ramy Youssef’s SNL opening monologue here. A guy made a video about Wikipedia, here. Australian economists Cameron Murray and Tim Helm talk about why housing is so unaffordable, here. The most accurate tweet about what it’s like to work at an investment bank these days, here. The Democratic Party’s evolution on economic policy helps explain partisan realignment by education, here. People agree with me on Twitter about what’s missing in housing market analysis, here. Why are American roads so dangerous?, here.