In December of last year, we made some predictions for 2023.
- Fed will keep raising rates (nailed it)
- Tech stocks will fall (missed- no one predicted AI)
- Stocks will bottom by middle of 2023 (March was the bottom)
- Full blown recession by middle of 2023 (nope-job market is still hot)
- Housing prices are not going down (nailed it)
- Rents will level off (nailed it—somewhat!!)
Tech stocks are doing pretty well. Seems like we’re back to the 90’s with the AI boom looking like the internet boom. NASDAQ is up about 31% from the beginning of the year.
What happened to the recession? Unemployment still stands at 3.6%. It would have to be at least 4.4% in order to have a recession. The yield curve is still sightly inverted. According to NY Times columnist and economist Paul Krugman, “Part of the answer may be that housing demand surged in 2021-22, largely as a result of the rise in remote work, and that this increase in demand has muted the usual negative impact of higher rates. This is especially true for multifamily housing, where high rents have given developers an incentive to keep building despite higher borrowing costs
Another reason could be that the Biden administration is providing subsidies for green energy and semiconductors which is leading to a boom in manufacturing.
On the real estate side, multifamily is still chugging along, although there have been some defaults, which we covered in previous articles. Hospitality is not doing well and office buildings are on the verge of collapse in certain markets.
The remainder of 2023, the stock market will keep moving up as will multifamily and housing. Rents have stabilized in certain parts of the country although they are averaging about 6% growth rather than 12-14%. Markets like Austin and Dallas are seeing declines in rent, mainly because rents increased so fast in those markets, that type of growth was not sustainable. I don’t see rents stabilizing to the 2% average nationwide due to the lack in housing. Until that catches up, rents will still grow at a slower pace, but not back to 2-3%. The housing shortage will continue for the rest of this year into next year.
As of today, inflation is at 3% but that might just be a summer hiccup and as the labor market stays resilient, the Fed will still keep tightening. They have indicated at least 2 more rate hikes this year. I don’t think they will start reducing rates until the middle of next year. The big culprit is M2 money supply which is all of the coin and currency including checking accounts, savings and mutual fund accounts. That had increased dramatically during COVID due to the Fed printing money and distributing it for free. The M2 money supply went from 15.4 trillion in Jan of 2020 to 21.7 trillion by July 2022. That’s a 41% increase in 2 years!! As of May 31, we are sitting at 20.81 trillion which is a 4% decrease. As consumers keep spending money that got for free and were just sitting on, savings and checking accounts will start getting depleted. As they have less money to spend, demand for goods will decrease and prices will start going down.
Conclusion:
The AI boom coupled with the semiconductor and green subsidies is giving the US economy a boost. As a result, unemployment is still low and there is a housing shortage. All of that points to inflation still being well above the Fed’s 2% target, which means monetary policy will continue to tighten. The X factor is M2 money supply which is decreasing and as that decreases, consumers will purchase less and inflation gets under control, assuming the AI boom doesn’t pickup more steam and unemployment keeps going further down. If that happens, all bets are off and the Fed will continue to tighten rates. However, hard assets will still keep appreciating in value.