Friends of ResiShares -
It’s the most wonderful tiiiiiiiiime……of the year.
“Resi Wrap Top Ten Surprises! Oh my God!”
As we like to hold ourselves accountable, we first look back and see if we landed our desired 50% accuracy rate on last year’s predictions, as we did PERFECTLY in 2022 (Yup). Fewer than 5 right and we are wrong. More than 5 right and we’re too conservative. Without further ado:
1) The Fed will engineer a “soft landing”... And we’ll hate it.
We defined success here as a moderation of core CPI without causing a headline recession (2 consecutive quarters of GDP shrinkage). Well, GDP is ripping…
And inflation is rolling over hard enough for the Fed to start talking about cuts next year…
And we quite clearly hate it (though I suspect WE investors hate it for quite different reasons than the people surveyed in the referenced article). Feeling pretty proud to take this W on our most important call of the year, if I don’t mind saying so myself.
2) Rents will be higher on average nationwide by the end of the year, and housing prices will be up in certain markets.
If by “certain markets” we mean “everything outside of Austin and Boise,” then, as above, the data speaks for itself in both national rent…
And, just like that, we are 2 for 2.
3) Absolutely cheap will outperform relatively cheap.
In other words, nouveau riche COVID beneficiaries like Austin, Boise, and Miami would underperform truly affordable, growing enclaves in the southeast and midwest. Let’s go to the video tape:
For this exercise, I took Zillow ZVHI data and plotted YoY home price growth against Nov, 2023 absolute home price. The ZVHI lacks the precision of a paired sales index, but has the advantage of updating faster. What you’ll see on that chart is….
…not a whole lot. There is no real trended relationship between absolute price and performance in 2023. All the trendlines Excel would draw through that scatterplot have an r-squared less than 1%.
So I guess we failed this one?
…not so fast.
The WORST performing housing market in America’s top 50 is none other than:
Austin, TX, whose prices have fallen >6% in an overall US market that is up on the year. Out of the top 200 markets, only a small handful have price declines. Boise, ID, is also one of them.
So I give us a bonus half-point for this one, in that 2 of the 3 CBSAs we used as an example of what a loser could look like, were indeed some of the country’s biggest losers.
I should also mention that this is why we leave the actual forecasting at ResiShares to the actual forecasters, who build models with far more inputs than this simplistic, single-factor sound bite in Resi Wrap.
4) SFR cap rates stay below current (Jan, 2023) financing costs.
The asset-backed market most recently priced a deal from Tricon, a major institutional manager of single family rentals, at a 6.3% Weighted Average Yield, according to data from Finsight. which is slightly worse than the 5.7% Progress priced last February (closest to the release of last year’s Top Ten Surprise list), but significantly better than Pagaya’s deal in September. Either way, cap rates in tier 1 SFR markets are currently sitting in the 4.75 - 5.25 range at best, and this is a solid check mark for last year’s prediction.
So far, we’re 3.5 out of 4.
5) At least one modular building startup will attract an eye-watering Series B (or C or D) financing round
While “eye-watering” is in the eye of the beholder, there is very little to grasp onto that suggests construction tech had a particularly hot year. The large, late-stage venture investors spent most of 2023 licking their wounds and working out their upside-down investments, while the only valuations to moisten eyes were concentrated in the AI space, mostly early stage.
6) A record-setting water year in California will move most of the state out of “severe” drought conditions. The complacency this engenders will lead to devastating fires.
Record-setting water year: Yes
Devastating fire year: No
A GENEROUS half point (generous because we had already seen a great start to the water year when we wrote this post, and simply predicted more of the same).
4 out of 6 so far.
7) The Republican-controlled Congress will block an increase to the debt ceiling later this year, forcing the Treasury to mint high-denomination coins (or issue ultra-high-coupon bonds at a premium) to prevent a US sovereign debt default.
This was also a miss. It turns out that there are SOME limits to the self-destructive instincts of Congressional Republicans, and this was one of them.
8) A wave of CMBS maturations in distressed office and retail assets will force a repricing of CRE assets market-wide, resulting in robust transaction volume in the back half of 2023.
Nope. Not even close. CRE sale volume went sharply LOWER in 2023, and the wave of defaults never materialized.
9) Open AI will emerge as the single most disruptive business in history. By late 2023, new businesses will raise billions in seed capital to compete with it, build on top of it, exploit it, and educate people on using it.
This prediction worked out quite well. Generative AI funding has been through the roof.
“According to PitchBook data compiled for Bloomberg, the value of funding for AI companies climbed 27% globally in the third quarter compared to the year before. That’s even as overall deals for startups fell 31% from a year earlier to hit $73 billion worldwide.”
Also, that Sam Altman drama with the board is going to make a fantastic series on HBO, now that Succession is done.
10) The luxury real estate downturn will spread from the ultra-high-net-worth to the merely rich.
While there were signs that parts of the mass-luxury market indeed inflected lower, it’s tough to claim that this prediction worked out at a macro scale. According to Zillow, Sun Valley, ID (the example from our note) was indeed down 7% YoY through November, as was Breckenridge, CO, another high-end mountain Zoom Town. Atherton, CA, possibly the wealthiest town in America, was down as well (a modest 3%).
Having said that, Greenwich, CT, home of many a mid-level hedge fund employee, was actually one of the best-performing markets in the country, while wealthy Bay Area suburbs all grew prices as well.
Since we’re grading our own homework, we’ll take a half-point for nailing the vacation home example.
Overall score: 5.5 out of 10. Pretty darn close to our target of 5/10, though perhaps we should dial up the hot-takes machine just a touch for 2024.
So what of 2024 then? Here goes (as always, not the views of ResiShares, not investment advice, not legal advice, not advice of any kind, in fact).
1) The Fed will cut FEWER than their telegraphed 3 times (75 bps) in 2024, as economic data continues to surprise to the upside.
I was quite surprised when the Fed indicated last week that they were likely to cut 75 bps over the course of 2024. On the one hand, inflation has indeed retraced even faster than they had hoped. Supply chain issues were indeed transitory, and the tightness in housing is structural, not monetary. On the other hand, as my parents used to tell me, “just because you can, does not mean you should.”
GDP is roofing:
Unemployment is on the lows:
It just surprises me that Jerome Powell, having perhaps rescued his inflation-fighting legacy, would take the risk of cutting too soon, when there is no data to suggest they he needs to do so.
Then a colleague pointed out an interesting idea: What if the claim that the Fed is looking to cut 3 times in 2024 is not a policy statement, as much as a simple description of the Fed’s current dot plot.
As you can see, both the median and mode dot for 2024 is struck at 3 cuts from today’s rate. So if all JPow was doing is describing the dot plot, I will only point out that he might have done well to emphasize the uncertainty around that number. He might mention that only one fewer contributor to the dot plot thinks that 2 cuts is right. He might also mention that there are two contributors who think we get zero cuts. But he didn’t, so we are left speculating why he took such an apparently doveish stance.
I think January’s meeting will come and go with no change to interest rates. I think that unless the economy slows down, March does the same. I DO think we could start seeing some rate relief in the back half of 2024, possibly to the tune of one or two cuts, but that it mostly depends on non-US consumers and Chinese real estate continuing to unravel, exporting additional disinflation to the US.
2) After successfully nursing their 2023 post-COVID hangover, Austin, TX and Boise, ID housing markets will bottom.
Alongside Miami, FL, these two markets were the ultimate poster-children for the rapid influx of wealthy homebuyers moving from the coasts, and whose home prices rose unfathomably quickly. In 2023, they both crashed back down to earth, with Boise falling 2.7% in 2023 and 10% from its peak, and Austin down a whopping 8.9% in 2023 and nearly 20% from its peak, according to Zillow.
One thing these two cities have going for them is that, despite the whipsaw in prices, their populations are growing (in Boise’s case, quite rapidly, at a 7.4% net inflow, per John Burns). In 2024, home prices will find a stable floor, and possibly even begin growing again.
3) Miami’s home prices will stay high, even as the market continues to hemorrhage population.
Miami has been one of the best performing housing markets of the past 5 years. Of all the beneficiaries of COVID, Miami kept pace with its Zoomtown peers like Boise and Austin, but then actually ACCELLERATED out of the crisis, growing an additional 7%+ this year, according to Zillow. Curiously, this occurred even while Miami saw more than 10,500 more households move OUT of the area than move in.
I won’t go too deeply into why that can happen, because economist Kevin Erdmann did a much better job than I ever could in his substack article here. Miami has successfully transformed itself into South Manhattan, and it shows no signs of reversing. It seems somewhat likely that home price appreciation trends lower from here, thanks to rising insurance premia and the fact that the market is no longer cheap, but I also don’t see any force that will cause prices in the metro to go lower, as those fleeing the city are generally those with less purchasing power than those moving in.
4) SFR acquisitions will rise closer to historical levels by Q3.
According to data from Entera, SFR acquisitions through October, 2023 averaged approximately 500 per month, driven almost entirely by Progress Residential and Main Street Renewal. This makes sense, given that borrowing rates both short term and long term exceeded underwritten cap rates in the asset class, meaning acquirers must underwrite growth in order to expect to make money, and with the path of both interest rates and the economy highly uncertain in 2023, that growth was harder to assume.
In 2024, that negative leverage persists, but as home prices and rents continue to grind higher and the back end of the yield curve stays lower, the ability to safely underwrite the fundamental bullishness of the single family housing market will draw more players back into the market. It is unlikely that we see acquisitions climb back to the heady pace of 2021, but beating 500 per month seems highly likely.
5) A modular building startup will attract an eye-watering VC round.
We are re-upping this prediction with a slight alteration. I think that the “eye-watering” round is going to be in the Series B zone, rather than later stage. We got stung on last year’s prediction by the dire state of the late-stage private market, and I see nothing to suggest that changes in 2024. By contrast, I do think that there are enough Seed to A players in the construction tech space that someone will show enough traction to raise a large Series B at a 9-figure valuation. Furthermore, there are enough small players in this space in the process of going bankrupt that a roll up of dead assets could attract smart capital as well.
6) A “blue wave” election will leave the Democrats in charge of the presidency and congress, but they will lose the senate.
Democratic candidates have outperformed polling in every single race since 2018, with the systematically underpolled youth vote galvanized by opposition to Donald Trump and the overturning of Roe v. Wade. This continues in 2024. Anyone hanging on recent polling of Trump outperforming Biden in swing states would be advised to remember that the general campaign has not started yet, and most voters don’t pay attention to politics until just before the election, when they are getting hammered with TV ads. These TV ads are going to feature 4 years worth of clips, tweets, and “truths” that Trump has been sending into the non-election year void, that will be ringing in the ears of most disengaged voters for the first time.
Just because Democrats will outperform their polling does not mean they can outperform the current math of the US senate. The senate is currently tied. The Democrats have to defend Arizona, Montana, Ohio, and West Virginia (the latter without incumbent Joe Manchin on the ballot), while the Republicans need only defend Texas and Florida amongst “swingier” states (NB: Neither Texas nor Florida is a swing state, per se, but Ted Cruz and Rick Scott are apparently so uniquely objectionable to voters that pundits are claiming their seats are somewhat in play).
Perhaps yet another split legislature after an even more bitterly-fought campaign will convince us that each half of this country needs the other half to get anything done. I’m not holding my breath.
7) San Francisco office space demand will bottom, and vacancy rates will be lower at the end of the year than the beginning.
According to the latest report from CBRE, San Francisco office vacancy is at 34%. As staggering as that number is, it will probably get worse before it gets better. There are already green shoots, however. That same report points to a groundswell of demand from the tech industry, notably focused on AI. From such low levels of activity, the turnaround is likely to be gradual, then sudden.
8) Twitter/X will either be sold or declare bankruptcy
X is almost certainly already insolvent, and their missing a debt payment is a question of when, not if. This article quotes hedge fund managers unwilling to buy the senior secured bonds (approximately $10 BN) at 65c on the dollar, which implies that the additional $3 BN of unsecured paper is virtually worthless (to say nothing of the equity).
Furthermore, nothing in Elon Musk or Linda Yaccarino’s management of the firm suggests that there is any possibility for them to unlock additional value to earn their way out of their current struggles. By contrast, in the fickle world of social media, stopping their destruction of the brand early may prevent permanent damage, such that the enterprise value of the organization could be preserved at least above the outstanding debt amount. If this were anyone other than Elon Musk, the banks may have already pulled the trigger.
Elon, however, offers banks both a carrot and a stick that may make them tread more cautiously. The carrot is his immense wealth, notably from shares of Tesla and Space-X. A savvy banker would much rather convince Elon to put his ego ahead of his finances and shore up X’s balance sheet to stay in charge of the platform (thereby rescuing the loans). The stick is Elon’s enormous social media following, and capacity to expose his bankers to unnecessary headline risk if he’s angry with them.
Despite these pressures, we are going to make the bold call that the bankers will cry uncle and force a transaction before the end of 2024.
9) An AI will try to run for office, somewhere in the world
It probably won’t win. I doubt there are any jurisdictions in the world in which a non-person would even be ALLOWED to win and hold a public office, even if it got the most votes. But wouldn’t it be fun if somebody created a “Mayor Bot” or a “State Rep Bot” or a “Water District Board Of Overseers Bot” and tried to get it on the ballot somewhere?
10) Convenient strip-malls and high-amenity lifestyle centers will continue to drive a retail recovery.
Brick and mortar retail is not dead. A great deal of it, however, is obsolete. In 2024, we will continue to see the types of retail that consumers demand, such as convenient strip malls and upscale lifestyle centers perform well. Creative operators able to reposition underutilized shopping malls from the last generation into one of these categories will be richly rewarded.
T-RECS Of The Month: It’s the T-RECS College Football Playoff Showdown!
The ever-controversial college football playoff selection this year features storied football programs from each region of the country. We figured we would see which college town T-RECS predicts will see the best price growth over the next 3 years.
The bracket is as follows:
Round 1: Ann Arbor v. Tuscaloosa
It turns out, T-RECS LOVES both these towns. It ranks Ann Arbor #23 out of the top 200 markets. Unfortunately for the Wolverines, it likes Tuscaloosa even more, at #18. T-RECS calls an upset of the favored Wolverines (though I hesitate to call any SEC win an upset, least of all Alabama).
Round 1: Seattle v. Austin
This is a blowout. Seattle is one of T-RECS least favorite cities, expensive and focused on growth in tech jobs as it is. Austin has moved from being its absolute most hated city last year to actually becoming #40 on the list after its recent nearly 20% correction from the highs.
Championship: Tuscaloosa v. Austin
Both simple math and recent college football history give this to the Crimson Tide. As much as I hate to see a team with so much historical success continue their dominance, the dinosaur has spoken. Nick Saban will apparently win his 8th national championship. If it makes you feel better, Tallahassee (home of the unfairly denied Florida State) would lose to all but Seattle on the T-RECS faceoff.