Reality Has a Well Known Smithian Bias

As a starting note, if we are indeed in “The Turn” then am I am fairly confident that I will be the only economist to have correctly called in real time all the following:

• Start of the Recession: I announced in Jan of 08 “The US is now in recession” missing NBER by one month
• The Global Financial Crisis: I predicted a looming “Japanese scenario” in early 2008
• The end of the Recession: I announced in July of 2009: “The US is no longer in recession” hitting NBER on the nose.
• The Turn: I predicted a pick-up beginning in autos and spreading to multifamily and the rest of the economy in the Summer of 2011.

 

Now to the data.

The obvious releases. ADP forecasts roughly 325K new private sector jobs in Dec., which if it holds under revision would make it the strongest ADP report ever.

New Claims for Unemployment Insurance falling to 372K, well into growth territory.

Here there has been much talk about the Seasonal Adjustment so lets just glance at the Non Adjusted Numbers.

Here is the last 10 years

Now here is the last year plus, that will be a little more helpful in seeing the seasonal patterns.

The mini-spike we just passed corresponds to the first mini spike on the left. As you can see we are about 50K below it.

Perhaps more promising is that the huge spike on the left should be occurring for us starting this week and peaking two weeks from now. We’d have to add an additional nearly 300K new filing to meet that peak and we are not nearly on pace to do that.

This means its likely that the we will be well ahead of last year in terms of new claims. Finally, we can look at raw year over year change to get a sense of the pace of the fall.

We are running about 40K clams les than a year ago, which at this level is a bit more than a 10% improvement.

We also got some descent news out Challenger and Grey though that rarely update my priors very much. Its not bad data, it just doesn’t contain much new information.

What I really care about is the RIES data. This is what matters. All this other junk is ultimately backwards looking. I want to know what the marginal productivity of capital in the United States is and the potential for investment going forward.

And, remember capital and buildings are largely two different words for the same thing. And, what do most of our buildings do? They are a place where families sleep and eat breakfast.

RIES has data on apartment vacancies:

Straight down like a bullet.

Not only are we likely to see an increase in the number of folks looking for an apartment this year, but we will have a record – yes record – low number of new apartment buildings coming online this year.

I need to spend some quality time with this data series but I am pretty sure that we can be confident that 2012 will give us the tightest year of apartment vacancies in recorded history. Yes, the tightest year in recorded history.

I will see how much time I can devote to this data over the weekend and give an update next week.

This in turn means higher rents.

Higher rents do several things.

1) They make building new complexes more profitable and importantly an easier sell to the bank. I should do a whole post on this, but there is this important phenomenon where its very hard to sell a bank on the potential of low vacancies but very easy to sell the bank on actual low vacancies.

I think this stems from the fact that its always in the borrowers interest to lie. In any case what it means is that for financing reasons you can have big overshoots in massive construction projects like offices and apartment building. Too few before the boom, too many afterwards. We are in the way too few stage.

2) This make single family rental conversion more profitable. I was actually in this business for a while. It’s a pain in the ass. It really is. You can see why almost all single family is owner-occupied. However, there are times when the profits are just too juicy to pass up.

There are times when the current rent – current rent – will pay your mortgage, taxes, insurance, maintenance plus a buffer on a property This means you need no rent increases to make this deal work and the property could literally be worthless when the mortgage is up and you still would have made money.

You can’t walk away from it. Investors won’t walk away from that. Its too juicy. Even if it does mean 4am calls about a domestic dispute that wound up smashing your windows and now the kids are freezing.

3) They make buying make more sense. Folks have to live somewhere. You look at rents and they are screaming higher. Then you look at a potential mortgage lots of young couples will say – who cares about the property value – the mortgage alone makes it worth it.

Don’t underestimate the ability of wide-eyed young couples to do this. I had a family member just buy a home in what we affectionately call “the hood.” Her and her husband have solidly middle class jobs. The mortgage, however, was lower than their rent.  When you are young and feel like you can handle the neighborhood, whether it is full of foreclosed homes or folks engaging in off-label pharmaceutical sales, you will take it.

All of those things are positive for recovery.

What we really are looking for now though are multifamily starts. Apartment buildings. I am not calling for a million SAAR on multifamily, but I am already saying that this is not crazy. And, it would represent a transformative boom.

A boom that will not only pull America out of the slump but change the way our cities look. If our cities will have them. I’ll outsource that conversation to Ryan Avent and Matt Yglesias.