Political Calculations
Unexpectedly Intriguing!
30 June 2021

New home sale prices have reached record highs. Fueled by strong demand, you would think homebuilders are making record amounts of cash with home prices at their highest-ever levels.

So it might be surprising to learn the market capitalization of new homes sold in the U.S. peaked in December 2020, falling in the months since according to the latest updated data.

Trailing Twelve Month Average New Home Sales Market Capitalization, January 1976 - May 2021

New home sales have been negatively impacted by a decline in home construction, which saw its biggest dip since the pandemic hit in May 2021:

Despite a historic shortage of homes for sale, homebuilders are actually slowing production, handcuffed by skyrocketing commodity prices and shortages of land and skilled labor.

Single-family housing starts dropped more than 13% in April compared with March, the U.S. Census reported Tuesday. That’s the sharpest decrease since last April, when the pandemic shut down the economy.

“I have to blame the difficulty in procuring lumber and other products, along with labor issues for the miss, in addition to likely cancellations due to skyrocketing costs for single family starts,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

The rising prices homebuilders are having to pay for raw materials are being directly transferred to new home buyers:

Prices new and existing homes are at record levels, and the increases are accelerating at the fastest clip in over 15 years. Nearly half of all builders say they are adding escalation clauses to their sale prices because of rising material costs, according to a recent survey from the National Association of Home Builders.

“Escalation clauses specify that if building materials increase, by a certain percentage for example, the customer would be responsible for paying the higher cost. Including such a clause allows all parties to be on notice that the contract costs could change if materials prices change due to supply constraints outside the builder’s control,” according to a recent NAHB post.

Looking forward, lumber prices have peaked and have begun to fall as the available supply has begun to increase. Prices however are expected to remain at levels double their historical average for years to come according to an industry observer, meaning higher new home prices will be with us for some time to come.

For homebuilders, that positive development will be confirmed when the market cap for new home sales in the U.S. begins to rise, reversing its current trend.

References

U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [Excel Spreadsheet]. Accessed 24 June 2021.

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [Excel Spreadsheet]. Accessed 24 June 2021. 

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29 June 2021

Both median and average new home sale prices set new all-time records in May 2021. The initial estimates of median new home sale prices reached $374,400, while average new home prices reached $430,600. The first chart below shows the trend for both these data series during the 21st century to date:

U.S. Median and Average Monthly New Home Sale Prices, January 2000 - May 2021

Bill McBride describes the exceptional year-over-year change in these prices:

The average price in May 2021 was $430,600, up 17% year-over-year. The median price was $374,400, up 18% year-over-year.

In terms of relative affordability however, we do have some good news to report. Although new home prices continued to rise, May 2021 saw median household income in the U.S. rise outside the very narrow range in which it fell in the preceding year from April 2020 thorugh April 2021.

U.S. Trailing Year Averages of Median New Home Sale Prices vs Median Household Income, December 2000 - May 2021

Although the rising prices of new homes means their relative affordability continued to fall in May 2021, the increase in median household income means the rate at which new homes are becoming less affordable began to slow.

Relative Affordability of U.S. New Homes, Annual: 1967-2019, Monthly: December 2020 - May 2021

We'll officially release our estimate of median household income for May 2021 on 1 July 2021.

References

U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [Excel Spreadsheet]. Accessed 24 June 2021.

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28 June 2021

The Fed's minions hit the news streams hard this past week, with most selling the message that the surge of inflation is mostly transitory and won't require the Fed to start boosting U.S. short term interest rates before 2024. That message seemed to take hold among investors, with the S&P 500 (Index: SPX) returning to record high levels on the expectation that outlook will hold. At least for now.

In the meantime, we find the trajectory of the S&P 500 falling well within the range of the latest redzone forecast in the alternative futures chart, which is based on the assumption investors will mostly focus on the upcoming quarter of 2021-Q3 over the next several weeks.

We weren't kidding when we said the Fed's minions were out in force in front of the news media during the past week. Their outsized role in an otherwise slow news week is really apparent in our roundup of market-moving news headlines:

Monday, 21 June 2021
Tuesday, 22 June 2021
Wednesday, 23 June 2021
Thursday, 24 June 2021
Friday, 25 June 2021

Looking for more news? With Barry Ritholtz' weekly summary still on vacation, you might consider tapping Bloomberg's RSS business news feed to get a bigger picture than what we've focused upon in this edition!

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25 June 2021

Bitcoin made big news within the last several weeks, as El Salvador became the first nation to pass a law allowing the electronic currency to be accepted as legal tender within that country.

It became bigger news a little over a week later, when the World Bank declined to support El Salvador's use of the cryptocurrency.

All these actions raise some basic questions. Namely, what is Bitcoin and how exactly does it work? For the answer to those questions, we turned to Grant Sanderson's 26 minute 3Blue1Brown video to find out:

Meanwhile, if you want a real flash from the past, here's the first analysis we saw from an economist on the topic of bitcoin. Here's an excerpt from their recent e-mail on the topic of Bitcoin's adoption by El Salvador.

Bonus Update: What's the future for blockchain ledger transactions? It could be cryptographic proofs, which would be an interesting way to 'compress' Bitcoin ledger transactions into a more resource efficient process (HT: Tyler Cowen).

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24 June 2021

On 15 June 2021, the New York State Bar Association's Task Force on Nursing Homes and Long-Term Care published its report on COVID-19 deaths among nursing home residents in the state.

The report's biggest finding was to confirm the Cuomo administration's 25 March 2020 directive that forced nursing homes to blindly admit COVID-19 patients discharged from hospitals without testing to determine if they were still contagious directly contributed to the deaths of nursing home residents in New York.

The report's appendices contain facility-specific detail regarding the COVID deaths nursing homes reported during the coronavirus pandemic, including whether they died in or out of their facility. It also indicates whether the nursing homes were for-profit or non-profit.

We wondered what differences there might be based on the nursing home facility's for-or-non-profit status, so we did some back-of-the-envelope analysis. Here's what we found.

New York Nursing Home Beds and Number of COVID-19 Deaths, For-Profit vs Non-Profit Facilities

This first chart simply tallies up the number of beds and COVID deaths at both types of nursing home facilities that reported these deaths during the pandemic. In it, we see the share of beds and deaths by facility type are almost identical. That result indicates the type of facility in which nursing home residents died was not a significant factor for those that died from COVID-19.

But we did find a notable difference in the data, which is revealed in the next chart.

New York Nursing Home Beds and Number of COVID-19 Deaths, For-Profit vs Non-Profit Facilities

Here, we find that one-in-three for-profit nursing home residents were transferred out of their facility before they died. Meanwhile, one-in-four nursing home residents who lived in a non-profit facility were transferred out of the facility before they died from COVID-19.

The task force's report doesn't specifically identify that difference, but its data tables suggest the level of staffing at each type of facility is a factor. It's not well quantified, but the report uses "stars" to indicate staffing levels at individual facilties, with lower number of stars indicating lower relative staffing levels. Here, we find both for-profit nursing homes to make up the majority of low star ratings and corresponding higher levels of transferred patients, which generally accounts for the difference.

Reference

New York State Bar Association. Report and Recommendations of the Task Force on Nursing Homes and Long-Term Care. [PDF Document]. 15 June 2021.

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23 June 2021

When we last covered the state of the global economy, we found it had just begun rebounding after having entered a double-dip recession. Deeply impacted regions like North America and the Eurozone were showing signs of recovery, boosted by the arrival of COVID vaccines.

Two months ago, that recovery could be measured by the increasing rate at which carbon dioxide was being added to the Earth's atmosphere. Two months later we find that sign of improvement has reversed, indicating the global economy is experiencing a triple dip recession.

Trailing Twelve Month Average of Year-Over-Year Change in Parts per Million of Atmospheric Carbon Dioxide, January 1960 - May 2021

What happened to reverse the global economic recovery?

From the end of March 2021 through May 2021, the coronavirus pandemic reared its ugly head in India and several nations in South America, including Brazil, Argentina, and Colombia.

Daily Confirmed New Cases (7-Day Moving Average) - Outbreak evlotuion for the current most affected countries, 1 January 2020 - 18 June 2021

Of these countries, India suffered the most extreme spread of SARS-CoV-2 coronavirus infections in the period from March through May 2021, the severity of which hammered its economy. And by extension, the global economy because India has become the fifth largest national economy in the world.

Data for the changing concentration of carbon dioxide in the Earth's atmosphere indicates that negative impact on India's economy was very large. It more than fully offset the rate at which CO2 is being added to the Earth's air resulting by the other regions of the world whose economic recoveries are well underway.

References

Johns Hopkins Coronavirus Resource Center. Daily Confirmed New Cases (7-Day Moving Average) Outbreak Evolution for the Current Most Affected Countries. [Online Database]. Accessed 19 June 2021.

National Oceanographic and Atmospheric Administration. Earth System Research Laboratory. Mauna Loa Observatory CO2 Data. [Text File]. Updated 6 April 2020. Accessed 19 June 2021.

Previously on Political Calculations

Here is our series quantifying the negative impact of the coronavirus pandemic on the Earth's economy, presented in reverse chronological order.

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22 June 2021

Back on 18 November 2020, we described the stock of document storage giant Iron Mountain (NYSE: IRM) as a "COVID-19 play, or rather, a bet on the future for the coronavirus pandemic's real world impact on business activities".

By that, we recognized that the future for IRM's stock price would very much depend on the extent to which the global economy recovered from the coronavirus pandemic and Europe's economy in particular, since Iron Mountain was actively expanding its business in that region. We're following up that observation today, comparing how the stock price of IRM compares with the benchmark of the S&P 500 (Index: SPX). The following chart shows that comparison over the seven months from 18 November 2020 to 18 June 2021:

IRM vs S&P 500, 18 November 2020 - 18 June 2021

Nice to see the bet played out well. As for our coverage, unless we find Iron Mountain back in the kind of circumstances that originally drew our attention to it, we're closing out our short series on future prospects of the company's stock price today.

Previously on Political Calculations

Here are the two previous posts where we've discussed the prospects for Iron Mountain's stock price, presented below in chronological order:

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21 June 2021

We had two big Federal Reserve driven events during the third week of June 2021. The first was the Fed's two-day meeting ending on 16 June 2021, when the Fed officially responded to increased expectations of inflation by moving up the projected timing for increasing U.S. short term interest rates.

The second event came on 18 June 2021, when influential Federal Reserve minion James Bullard indicated he saw the Fed having to act to hike rates even earlier, which led investors to suddenly shift their forward-looking attention to the upcoming 2021-Q3 in a new Lévy flight event.

Alternative Futures - S&P 500 - 2021Q2 - Standard Model (m=-2.5 from 16 June 2021) - Snapshot on 18 Jun 2021

The first Fed-related event played out as a change in the value of the amplification factor built into the dividend futures-based model we use to project the future potential trajectories of the S&P 500 (Index: SPX), where we showing that value as set at -2.5 from Wednesday, 16 June 2021. The second change shows the characteristic quantum-like shift to the trajectory associated with investors focusing on the future quarter of 2021-Q3 on Friday, 18 June 2021.

Those were the big events of the week that was, but there were other market-moving headlines for investors to absorb as well. Here's our summary of those items:

Monday, 14 June 2021
Tuesday, 15 June 2021
Wednesday, 16 June 2021
Thursday, 17 June 2021
Friday, 18 June 2021

Barry Ritholtz' weekly succinct summary of the pluses and minuses he finds in the markets and economy news appears to be on summer hiatus. If you're interested in a substitute news source, we'll recommend Reuters Business News Headlines as a wide-ranging source.

We think the Fed's actions will have investors mostly focused on what will happen at the Federal Reserve's upcoming meeting near the end of 2021-Q3 throughout the quarter. As we're coming up on another period where the past volatility of the historic stock prices affects the accuracy of the dividend futures-based model's future projections, we have adapted the corresponding redzone forecast in the alternative futures spaghetti forecast chart to represent where the S&P 500 is likely to range as investors mostly focus their attention on 2021-Q3.

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18 June 2021

Inventions in Everything often features unusual inventions, but today we're featuring an innovation that has become so commonplace, our modern world would not exist without it.

That invention is defined in U.S. Patent 2,150,821, which was issued to George Dempster on 14 March 1939, which you may recognize immediately by its patent title, the Transporting and Dumping Vehicle. Here's Figure 1 from the patent illustrating the basic invention:

U.S. Patent 2,150,821 Figure 1

Don't recognize it yet? Perhaps the description of the invention will provide more clues about Dempster's innovation:

This invention relates to transporting and dumping vehicles provided with a container for the load to be transported. In many cases it is desirable to supply a number of containers to the end that while one container is being transported to the point of delivery, others may be filled and ready for transportation when the carrying vehicle returns. With this end in view, it is common in the art to mount on a vehicle, such as a truck, a track, or way provided with suitable means for raising and lowering the container down and releasing it from transporting means at the point where is to be loaded....

One of the objects of the present invention is to prvoide a transporting vehicle of the usual or any suitable type, and supply the same with a container which can be readily loaded at a decreased expense, in time and labor, and which can be readily dumped by the operator of the vehicle, the container being automatically returned to transporting position after the dumping operation.

The invention went on to become so successful that all such containers are known by the name that Dempster trademarked for his invention, which he branded as Dempster's "Dumpster", a portmanteau of his name and the function of his invention.

Meanwhile, George Dempster had quite a legacy:

George Dempster's 1964 obituary described him as one of Knoxville's "most controversial figures" who, in addition to hitting a "financial jack-pot" with his most famous invention, also served as mayor.

The Henley Bridge, sewer disposal system and certain city parks all owe thanks to George Dempster, the obituary said.

George Dempster was nearly 50 years old in 1935 when he came up with the Dempster Dumpster concept while working alongside his brothers for their very own construction company. The company built highways, railroads and water supply dams across the southeast, according to writings from Dempster in the Knox News archives.

The dumpster was designed to be used in rock quarries and in road construction. It wasn't until later on that the Dempster brothers realized it also could be used for trash.

Construction competitors took notice of the receptacles, even asking George Dempster to create similar devices for their jobs, according to the writings.

That's where most people encounter George Dempster's invention today, where versions the scene shown in the following short video of Dempster's concept in action plays out thousands of times a day all around the world:

For inventors, the ultimate success occurs when the branded name of their product becomes the generic name for similar products. For the Dumpster, that happened in 2014 when the trademark for his invention expired. When that happened, what had been the Dumpster simply became the dumpster, the everyday name for a thing that no longer needs to be capitalized according to U.S. copyright law.

If only all inventions were so successful enough for their names to become part of human language.

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17 June 2021

U.S. teens are leading the coronavirus pandemic recession job recovery. But why?

Conor Sen runs through a number of contributing factors that have led to this remarkable outcome:

What makes teenage employment useful to study right now is that teenagers are less affected by the factors holding back labor supply than any other demographic. If they lived at home with their parents, they weren’t eligible for economic impact payments. If they were full-time students, they’d be ineligible for unemployment insurance, making enhanced benefits a nonfactor. They’re unlikely to be parents squeezed out of the labor force by closed schools or a lack of child care. They’re obviously not older workers who may have accelerated retirement plans during the pandemic. And teens were less likely to get seriously ill from Covid-19, and so perhaps less likely to avoid working for health-related reasons.

Barry Ritholtz offers a competing theory:

In 2007, before the great financial crisis, the national minimum wage level was a paltry $5.15. This was not all that long ago. For a teenager with even the most modest withholding / FICA, their take-home is so small it’s not worth it to work. You can see that in the trends over the preceding decades. By most measures — productivity, profitability, inflation, exec comp — the minimum wage has lagged badly. Teens did the math, and said WTF, why bother?

But the minimum wage began to rise during the financial crisis despite skyrocketing unemployment. It was raised in 2008, and then in 2009, and again in 2010. Post GFC, it’s been $7.25 an hour.

Not coincidentally, at exactly that time, the labor participation rate of teenagers began trending upwards. Today, it’s even higher than it was before the pandemic began. Maybe it’s boredom, perhaps some teens just want out of the house where they’ve been stuck with mom and dad and their siblings during the past year.

Or just maybe, local employers are raising wages sufficiently to make summer jobs attractive to teens.

That is an interesting hypothesis and one we can easily investigate. Starting with the Bureau of Labor Statistics' 2020 report on the characteristics of minimum wage workers, which reports that 1,112,000 Americans earned the federal minimum wage or less in 2020. Of these, 222,000 were teens from Ages 16 through 19. Teens therefore accounted for nearly one in five minimum wage workers, the second largest group by age in the U.S.

The largest age group for minimum wage workers is young adults, Age 20 through 24. In 2020, they accounted for 307,000 minimum wage workers, or nearly 28% of the total. Together, teens and young adults represent just under 48% of all those earning the U.S. federal minimum wage or less.

If the hypothesis that local employers offering higher-than-federal minimum wage is what is drawing teens into the U.S. labor force holds, it stands to reason that young adults would be likewise motivated to enter or re-enter the job market for the exact same reason, since they make up a larger share of minimum wage workers. That would be especially true during the last several months when employers have responded to a shortage of labor by boosting wages.

The following chart reveals what happened during that time for both teens (Age 16-19) and young adults (Age 20-24). For good measure, we're showing the data from January 2007 through May 2021 to capture Barry's period of interest, which confirms the data for both groups generally follow the same patterns, but we'll be focusing on more recent months in our analysis.

Percentage of U.S. Population Employed, Age 16-19 and Age 20-24, January 2007 - May 2021

The employment-to-population ratio of teens and young adults peaked in February 2020, just ahead of the arrival of the coronavirus recession in the United States. The percentage of employed for both groups plunged before bottoming in April 2020, after which both saw a steady recovery through October 2020. The onset of the second wave of coronavirus infections through the end of 2020 saw that recovery stall, with overall employment-to-population ratios holding relatively steady during this period.

The data for both groups begins to diverge after January 2020, with the employed share of young adults holding steady while the employed share of teens has risen. Since this period coincides with increased demand for labor and rising wages, the absence of an increase in the share of young adults becoming employed in this period means we can reject the hypothesis that teens only sought jobs when entry level wages rose higher than the federal minimum wage.

As for what has led to this situation, we're afraid that employment data is subject to an abundance of confounding factors, which makes determining which factors are significant difficult to untangle. We think Conor Sen's analysis pointing to teens' ineligiblity for pandemic unemployment benefits deserves greater consideration, especially since teens and young adults aren't very different from one another with respect to the other factors he mentions.

We would also suggest investigating to what extent employers desperate to fill jobs may have lowered their standards for new hires. If we're talking about standards that favored previous experience, training, or education in hiring, then we may have a good candidate for explaining why teens and not young adults are leading the job recovery in 2021.

References

U.S. Bureau of Labor Statistics. Labor Force Statistics from the Current Population Survey. Employed persons and employment-population ratios by age. [Online Database]. Accessed 14 June 2021.

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16 June 2021

U.S. teens have become the first demographic group to fully recover their pre-coronavirus pandemic recession job levels as measured by percentage of the population employed.

That surprising result is visible in the following chart, we've tracked the non-seasonally adjusted employment-to-population ratio the various 5-year age group cohorts whose employment status is tracked through the Current Population Survey. The chart covers the period from January 2017 through May 2021, where February 2020 represents the last month before existing trends were broken by the negative employment impact of the coronavirus pandemic arriving in the United States.

Percentage of U.S. Population Employed by Age Group, January 2017 - May 2021

In the next chart, we're showing three separate snapshots in time, for February 2020 (before), April 2020 (the bottom), and May 2021 (the latest data at this writing). The chart makes it very easy to see that the employed share of the teen population has surpassed its pre-coronavirus level, unlike every other age demographic group.

Post-Coronavirus Recession Employment to Population Ratio Job Recovery by Age Group, Snapshots on February 2020, April 2020, and May 2021

With respect to all other age groups, teens are the least educated, least skilled, and least experienced segment of the U.S. labor force. And yet, this demographic group has the first to recover to its pre-coronavirus recession level of employment. We'll explore the possible reasons for that in an upcoming post.

References

U.S. Bureau of Labor Statistics. Labor Force Statistics from the Current Population Survey. Employed persons and employment-population ratios by age. [Online Database]. Accessed 14 June 2021.

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15 June 2021

We skipped it last month, but we have an updated snapshot of how much trade has been lost between the U.S. and China as a result of the coronavirus pandemic.

Combined Value of U.S. Exports to China and Imports from China, January 2008 - April 2021

With January 2020's 'Phase 1' trade deal, the volume of trade between the U.S. and China should have begun recovering in February following the truce in President Trump's tariff war with the country. Instead, it plunged through March 2020 with the coronavirus pandemic starting in China before beginning to recover. In April 2021, the volume of trade is $9.7 billion higher than April 2020. The gap between the trailing year average of trade between the two nations and a 'No Coronavirus Pandemic' counterfactual shrunk to $7.5 billion in April 2021. We estimate the cumulative loss is $116.8 billion.

Speaking of which, the Biden-Harris administration has bought into the tariffs on Chinese goods, claiming they saved U.S. jobs, which means they won't be going away anytime soon.

No economists were asked if they agree with the Biden-Harris administration's assessment, though one labor union that endorsed the Biden-Harris administration supports the tariffs.

The thing to watch during the rest of 2021 is how much the gap between the trajectory of the combined value of trade between the U.S. and China and the "no coronavirus pandemic" counterfactual trajectory narrows during the year. The gap between actual and "what if" peaked at $10.6 billion in October 2020 and has narrowed in each of the months since.

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14 June 2021

Inflation ruled the headlines in the trading week ending on Friday, 11 June 2021. But perhaps the most surprising outcome of the higher than expected inflation data that came out on Thursday, 10 June 2021 was its the effect of the report on U.S. stock prices. They rose to close at new record highs after the Bureau of Labor Statistics' Consumer Price Index report for May 2021 became public.

Alternative Futures - S&P 500 - 2021Q2 - Standard Model (m=-5.0 from 11 May 2021) - Snapshot on 11 Jun 2021

From our perspective, the S&P 500 (Index: SPX) appears to be behaving consistently with investors focusing on the current quarter of 2021-Q2. That assessment assumes the amplification factor of the dividend futures-based model is -5, which may no longer be true. We are closely watching for indications that value has changed in response to the inflation report, where we don't yet have enough information to confirm a change. We may be revisiting this initial assessment as early as next week, because we're also on the cusp of when the focus of investors will be forced to shift to another point of time in the future, if it hasn't already.

The May 2021 inflation report is significant enough that we've gathered a range of analysis from investing professionals related to the main question it raises: Is it a short-term "transitory" affair or will it have long-lasting legs? Here's a short roundup of analysis on the "transitory" side of the argument:

Here are several arguments favoring the interpretation higher inflation will be with us for an undetermined time to come:

And one last take, from RaboBank, which considers both possibilities:

And you thought it was going to be a dull summer! Let's close by rounding up the market-moving headlines of which we took note during the week that was....

Monday, 7 June 2021
Tuesday, 8 June 2021
Wednesday, 9 June 2021
Thursday, 10 June 2021
Friday, 11 June 2021

Normally, we'd point to Barry Ritholtz' weekly succinct summation of his list of positives and negatives for the economy and markets at this point. Alas, he presented none of either this week!

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