Rents and housing demand drop … watching absolute prices rather than just inflation statistics … record-high household debt … more rate hikes are coming

For the first time in nearly two years, apartment rents are falling.

It’s not an earth-shattering drop, but it’s a start.

Here’s The Wall Street Journal with more:

August apartment asking rents nationally fell 0.1% from July, according to a report from property data company CoStar Group. It was the first monthly decline in rent since December 2020, the company said. 

Other surveys also showed rent declines of various degrees.

Apartment-listing website Rent.com showed a 2.8% decrease in rent for one-bedroom apartments during the same month. A third measure, by the listings website Realtor.com, also noted a slight monthly decline in rent this August…

Higher rents have been a significant contributor to the record high inflation rates of the last several months. So, the market has been waiting for signs of easing.

Now, before you pop the champagne bottle, the WSJ is quick to temper the good news:

Last month’s rent declines are modest compared with the 23% overall increase in rent since August 2020, according to Realtor.com, and there is no guarantee that rents won’t move up again.

Meanwhile, we saw similar green shoots in the housing market with the July S&P Case-Shiller Index reading that came out yesterday.

Here’s CNBC with those details:

U.S. home prices cooled in July at the fastest rate in the history of the S&P CoreLogic Case-Shiller Index, according to a report released Tuesday.

Home prices in July were still higher than they were a year ago, but cooled significantly from June gains.

Prices nationally rose 15.8% over July 2021, well below the 18.1% increase in the previous month, according to the report.

It’s great to see cooling data with both rents and home prices, and we should be encouraged, but let’s factor in a point we’ve stressed in recent Digests

Cooling inflation numbers are all-but-certain at this point since the starting comparison values from one year ago were sky-high themselves.

But smaller inflation readings don’t mean anything to a consumer who’s still paying exorbitant prices. After all, we live in a world of absolute prices, not inflation percentage changes.

On that note, here’s the WSJ getting real about what matters, after quoting some experts who were celebrating the softer numbers:

Still, apartment rent in most of the country is much higher than it was a year ago, even if prices are now slipping below their peak.

Renters facing lease renewals, or who are now searching for new apartments, can generally expect to pay more than they now pay. 

So, while cooling inflation is certainly a good thing – and we should celebrate it – it’s not the most important thing.

Instead, we need to look directly at the elevated absolute costs consumers still face, and how such costs are impacting Main Street budgets and Wall Street earnings.

On that note, yesterday we learned that U.S. consumer debt just notched a record high

Here’s Bloomberg:

Most Americans are more indebted than ever, underscoring a persistent and widening wealth divide in the US.

Consumer debt, including credit cards, rose to an all-time high for the 118 million US households among the bottom 90%, according to the Federal Reserve’s latest data on the distribution of household wealth.

The group’s debt soared by $300 billion over the last year — the largest annual gain on record — as households deal with higher prices for everything from food to clothing and rents.

Meanwhile, consumer debt among the top 10% of households is virtually unchanged over the past year, the Fed’s data show.

Let’s not race past this point.

Inflation is not an equal offender. It is far more devastating to lower income Americans.

As just one illustration, take credit cards.

The wealthy might use credit cards for convenience, but they don’t hold significant balances on them that are subject to interest.

But as the Bloomberg article just pointed out, lower-income Americans are now turning to credit cards to finance everyday living expenses.

And what’s the cost of that?

Well, as the Fed has hiked rates, average credit card interest rates have exploded to 21.59% according to LendingTree. This is the highest annual percentage yield since the company began tracking them.

Plus, rates are going higher as the Fed continues with its tightening policy. More on that in a moment.

But first, how much is the average American carrying on their credit card?

According to Wallet Hub, the average household owes $8,942.

So, at 21.59% APY, this average household debt amount is racking up yearly interest costs of more than $1,900.

For some perspective, back in January, CNBC found that 56% of Americans couldn’t afford to pay a $1,000 unexpected expense from savings.

In the midst of this, the Fed is going to keep hiking rates, which will intensify the financial pain for millions of Americans

For more on this, let’s turn to legendary investor Louis Navellier. From yesterday’s issue of Accelerated Profits:

The reality is recession fears are rising fast after the Federal Open Market Committee (FOMC) statement last week.

Fed Chairman Jerome Powell stated, “Inflation is running too hot,” and he noted that the FOMC remains committed to its “meaningful, restrictive stance of policy and staying there until we feel confident that inflation is coming down.” Yikes!

Personally, I had hoped that Powell would use some dovish language like “near neutral” or “data dependent,” but these terms were conspicuously absent.

As a result, the Fed is now more hawkish, and I anticipate a 0.75% rate hike in November and a 0.5% increase in December. The Fed Funds rate is expected to reach 4.25% by the end of the year.

And so, in the midst of inflation, a surging dollar, record-high home prices, record-high consumer debt, slashed earnings forecasts, and a weakening consumer, we’re headed to 4%+ interest rates.

Morgan Stanley equity strategist Michael Wilson puts it this way:

If there was ever a time to be on the lookout for something to break, this would be it.

To what extent is the source of today’s economic danger shifting?

Yes, we’re still struggling with inflation, and this will continue to be a challenge through the end of the year. But as we noted at the top of this Digest, there are green shoots popping up.

But now, we have to consider the growing threat of a Fed that goes too far.

Is it becoming the greater danger?

If we continue the analogy of “green shoots,” you might imagine Fed Chairman Jerome Powell walking around a yard, attacking weeds with herbicide…yet also spraying the green shoots popping up amidst the weeds with the same herbicide.  

He will kill the weeds, but some of those green shoots are going to die as well.

When does the herbicide kill too many green shoots?

As we detailed in a recent Digest, to what extent might the Fed actually want to kill those green shoots?

To track all this, we’ll be keeping our eyes on absolute prices (not CPI percentage changes). This will help us monitor how well the herbicide is killing off those weeds.

And we’ll be watching the health of the American consumer and corporate bottom lines. This will give us clues about how well those green shoots are surviving the herbicide.

We’ll keep you updated here in the Digest.

Have a good evening,

Jeff Remsburg