Not All Housing Cycles Are Created Equal

VIPs

• Per the BLS, real estate managers saw paychecks grow at 15% YoY in September, five times the 3% norm and echoing the post-GFC escape of the early 2010s; meanwhile, workers saw 6.5% YoY growth vs. the 3.4% norm, besting the 4.6% YoY print for all nonfarm employees

• Since topping in May at 24% YoY, the NAR’s median sales price index cooled to a 13% print in October; similarly, the MBA’s average home purchase loan size hit 28% YoY in April before falling to 10% YoY in November, signaling that price appreciation has peaked

• Existing home sales rose to a 6.34 million SAAR in October, beating all but 6 of 57 guesses in Bloomberg’s survey; the acceleration in sales aligns with a record sellers’ market as well as an inversion in the 5s30s curve, suggesting housing may be more late-cycle than mid-cycle

Benjamin Franklin Gates: “I’m gonna steal it.”

Riley Poole: “What?”

Benjamin Franklin Gates: “I’m gonna steal the Declaration of Independence.”

“In Congress, July 4, 1776. The unanimous Declaration of the thirteen United States of America, when in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation. We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”

You would think that 2004’s National Treasure is Dr. Gates’s number one favorite film of all time. Close. It’s top five. Today, the Declaration of Independence was recruited to communicate today’s topic of housing.

Not all realtors are created equal. Some are movers and shakers, others make a decent living and then there are the managers, who can also be owner operators. Real estate managers make roughly $50 an hour, twice that of the average wage of the workers in their agencies. Moreover, the average manager rakes in about $1,900 a week, more commonly known as paychecks, more than twice that of the worker bees whose weekly paychecks are closer to $800. To contextualize this against the workforce as a whole, average hourly earnings and average weekly earnings for all private nonfarm employees are closer to $31 per hour, and $1,100 per week.

Not all paychecks are created equal, nor do they grow at equivalent rates as the left chart illustrates. The year 2021 has been quite fruitful for the top real estate earners. Managers enjoyed double-digit annual paycheck growth in the first nine months (orange line). The latest available month of September expanded at a 15.0% year-over-year (YoY) pace. Such heat only compares to the escape velocity after the Great Recession from late 2011 to early 2013 and is five times the 3% norm.

The acceleration in post-pandemic residential housing activity has generated good, but not great, growth in worker paychecks. In the 12 months ended September, workers saw a 6.5% YoY rate (light blue line), which was about twice the 3.4% longer run trend. All nonfarm employees saw weekly earnings expand at 4.6% YoY, roughly one-and-a-half times the 2.8% long-run average.

The fattening phase for real estate paychecks is behind us (the same goes for Thanksgiving turkeys.) Peak home price appreciation was evident in the leveling of the producer price index (PPI) for real estate agents. Since July, this metric was cruising at an annual altitude in the 13% range. More definitive peaks were noticeable in the National Association of Realtors (NAR) median sales price for existing homes and the Mortgage Bankers Association (MBA) average home purchase loan size, a weekly proxy for home price trends. The former topped in May around 24% YoY and downshifted to 13% YoY in October, while the latter crested near 28% YoY in April and fell back to 10% YoY in the second week of November.

Cuts in hours also translate to a cooling in take-home pay in the real estate industry. By the looks of it, real estate workers are taking the brunt of this and have seen a full normalization in their workweek. Average weekly hours for this cohort fell to 32.7 in September from the recent high of 33.8 in May – seasonally adjusted – and was three-tenths of an hour below the pre-COVID mark of 33.0 hours in February 2020.

Real estate managers, on the other hand, are working longer, clocking 37.9-hour workweeks in September, two hours longer than the 35.9 hours that prevailed in pre-pandemic February 2020. Could it be they are the ones capitalizing on the recent run up in existing home sales from May’s low of 5.78 million seasonally adjusted annual rate (SAAR) to October’s 6.34 million pace that beat all but six of 57 estimates in the Bloomberg survey (green line)?

The reacceleration in housing turnover from the spring to the fall likely is more a function of sellers (homeowners) selling than buyers buying. Household home selling conditions hit a record high in August, and have retained high levels, while home buying conditions collapsed over the summer and have shown no signs of recovery. The upshot: the largest inversion of the home buying-selling conditions curve on record (red line).

Late cycle signal? Previous inversions in the buying-selling curve coincided with inversions in the nominal Treasury curve or low points in the flattening impulse (blue line), such as that witnessed in the last economic expansion. Incredibly to the eye, the inflation curve (yellow line) in the Treasury market mimics the inversion in the buying-selling curve. The confluence of these factors suggests the housing market may be more late-cycle than mid-cycle.

Realtors can never declare independence from the housing market. Consider the indicator of lofty earnings for real estate managers and workers an additional guide for the glide path of housing as it transitions from pandemic oscillations to a more fundamentally driven market driven by those stodgy old forces of supply and demand.