Market Trends December 2021
The recent persistent spike in inflation is now expected to last longer than first forecast, according to several leading economists and the Fed. What was once viewed as transitory and expected to fade to 2% or less by the end of 2021 is now forecast to persist well into 2022, thanks to supply chain logjams, shortages of products, materials and labor and very robust consumer demand fueled by rising wages and pandemic savings. The Fed cautioned that their use of the word “transitory” only means that the factors behind the increase in consumer prices are not expected to become permanent nor to leave long-lasting scars on the economy. Nevertheless, the level of inflation the US is dealing with now is not consistent with price stability. The Fed noted it is too soon to raise interest rates but the end of the Fed bond purchasing program will give the central bank more flexibility. It’s also clear that interest rates could start heading up by the end of 2022; many economists expect two interest rate hikes next year. Prices have risen 4.4% over the past year.
Materials Prices Continue to Climb
Even though contractors’ bid prices soared in October they did not go up as much as the year over year increase in construction input costs, according to analysis from Associated General Contractors. There were double- or even triple-digit percentage increases year over year (y/y) in prices for numerous inputs: steel mill products, up 4.8% for the month and 142% y/y; diesel fuel, up 12% and 100%, respectively; aluminum mill shapes, up 1.4% and 37%; plastic construction products, up 2.5% and 30%; gypsum products, up 1.8% and 25%; insulation materials, down -1.3% for the month but up 17% y/y; truck transportation of freight, up 2.5% and 16%; asphalt felt and coatings, up 0.2% and 16%; and architectural coatings, up 0.7% and 12%. There were also smaller but still significant increases for glass, construction machinery and equipment, concrete products and brick and structural clay tile.
Infrastructure Bill Addresses Supply Chain and the Digital Divide
President Biden signed a $1.2 trillion bipartisan infrastructure bill into law in mid-November. Altogether, the bill provides up to $78 billion over five years to beef up the interconnected system that moves freight across the country, according to the Coalition for America's Gateways and Trade Corridors that advocates for the nation's freight infrastructure. The new investment would provide a 40% increase to two key federal freight infrastructure programs as well as additional money for new programs.
Today's supply chain crisis largely stems from the pandemic, which caused major changes in Americans' buying habits. Consumers stuck at home started spending more on goods than services and the sudden spike in purchasing combined with a shortage of workers, especially truck drivers, was enough to topple the delicate system. As a result, shipping costs skyrocketed, contributing to a big spike in consumer prices and inflation. However, industry experts say the problems existed long before the pandemic made everyone painfully aware of what happens when the supply chain is broken.
In addition to billions for traditional infrastructure, the bill will also provide $65 billion earmarked for the nation’s broadband structure to close the digital divide that leaves millions of people without access to the internet. It also aims to help lower the price households pay for internet service by requiring federal funding recipients to offer a low-cost affordable plan, creating price transparency and boosting competition in areas where existing providers aren't providing adequate service. It will also create a permanent federal program to help more low-income households access the internet.
The Fed’s timetable for reducing monthly bond purchases will affect mortgage rates going forward. The bond purchases have helped keep rates at ultra-low levels over the past 18 months. The yield on 10-year Treasury notes has been rising steadily. Home loan rates, which tend to track Treasury notes, have also been moving higher. Housing analysts believe long-term mortgage rates will average between 3% and 4% over the next 12 months. The Mortgage Bankers Association (MBA) expects 30-year fixed-rate mortgages to end the year at 3.1% and rise to 4% by the end of 2022. The National Association of Realtors expects rates to hit 3.5% by mid-2022. Even with higher rates, the MBA expects primary mortgages to increase 9% in 2022 to a record $1.73 trillion.
Bidding Wars Pricing Out Buyers
For only the third time in the history of NAHB’s Housing Trends Report, getting outbid is the top reason buyers are struggling to buy a home, cited by 45% of respondents. For reference, in the first quarter of 2018, only 18% of prospective buyers indicated that bidding wars were an issue in their home-buying process. Affordability remains a big concern (36%), along with finding a home in the right neighborhood with the features the buyer is looking for. Nearly half of buyers (49%) indicated that even if they are unable to find a home in the next few months they will continue searching for the “right” home in the same location. Almost 30% said they would also be willing to buy a smaller or older home, up from 24% the previous quarter, which could give a boost to the renovation and remodeling market, which has also been booming.
Home Appreciation Expected to Slow
Home price appreciation will slow down next year, according to several housing analysts. Zillow’s senior economist, Jeff Tucker expects prices to rise between 7% and 9% next year compared to the 11.7% growth recorded from August 2020 through August 2021. Price gains will be even slower in expensive West Coast markets, with many plateauing. Redfin Chief Economist Daryl Fairweathers sees national home price appreciation between 3% and 5% in 2022.Some economists believe that rising interest rates could actually cause home prices to drop in 2023, as the current shortage of inventory is keeping prices inflated.
Holiday Shopping Changes in Habits and Attitudes
The National Retail Federation is forecasting a record holiday shopping season, with sales for November and December expected to grow between 8.5% and 10.5%, reaching between $843.4 billion and $859 billion, excluding restaurants, gas stations and auto dealers. Retail analysts say that if retailers can keep products on shelves, it will be a record-breaking holiday season.
Ecommerce is expected to continue to be important, with Adobe forecasting record online holiday sales of $207 billion between November 1 and December 31. Ecommerce sales through the second quarter were up 57% from two years ago.
Adobe also found that traditional days like Cyber Monday and Black Friday are becoming less important to shoppers, who now expect deals almost continuously and have also been urged to shop early to avoid disappointment.
People are returning to stores and to weekday shopping, as consumers make the most of more flexible and remote work schedules to shop when they think it will be less busy.
About 42% of Americans had already started holiday shopping in October. And by the end of the month, those early birds had completed about 38% of their shopping.
Average household holiday spending will rise 5% to $1,463, according to Deloitte’s most recent holiday survey, with most of the gains coming from upper-income households. Upper-income households are expected to spend five times as much as lower-income households, averaging $2,624 per household compared to lower-income households who plan to spend 22% less, or about $536 per household.
Retailers Compete for Holiday Business
Amazon, Target and Walmart are among the retailers pulling out all the stops to try and make sure customers spend their holiday shopping dollars with them. Target reports enormous growth in same-day services and is offering even more flexible delivery options for the holidays. One new service called Shopping Partner allows customers to send someone else to pick up their drive up or pick up order from the store. Customers can also select backup items for food and beverages so if something is out of stock the store will automatically substitute the second choice. They’ve also assigned more spaces for curbside pickup and expanded the assortment and selection available for same-day delivery. In addition, Target has tripled the number of employees in store fulfilment roles. Walmart is offering extended delivery hours, with drivers delivering to people’s homes until 10 p.m., which means customers can order as late as 6 p.m. for same-day delivery. Walmart has also added the option of choosing an alternate delivery service (Spark Driver) if the time slot someone wants is already filled. Walmart+ members will continue to have access to unlimited free deliveries all season long and can pay extra to get their order in two hours or less. Walmart has also expanded the items available for local delivery and added more than 2,800 oversized items.
Own Your Own Warehouse
The 25 largest US retailers acquired about 38 million rentable square feet in new industrial space last year, according to commercial real estate data source CoStar Group. That’s the highest total in at least 10 years. Some businesses are buying their own storage space in an effort to alleviate the inventory squeeze being caused by supply chain bottlenecks and shortages. Many retailers want as much inventory in stores or immediately at hand as possible so they can take advantage of strong consumer demand. In addition, many retailers are flush with cash and see acquiring their own fulfilment and distribution centers as a good investment. Some retailers are beefing up their West Coast space in an effort to better handle shipments from Asia.
Women Leave the Workforce
The US workforce fell by about 3.5 million women during the pandemic as women absorbed the bulk of the responsibility for child care and home-schooling kids. So far only about one million of them have returned to work. Analysts speculate that the difficulty and expense of finding reliable childcare is keeping some women at home; others discovered that juggling jobs and family just wasn’t worth it. One former executive said, “Once you leave the corporate treadmill you can actually catch your breath. That changes things.” Many of the women on extended breaks from work have spouses earning good incomes and can afford to take the time off, creating a situation that strangely mirrors the 1950s, when women ran the home and men were the principle breadwinners.
Quantum Computing Leaps Forward
Amazon is officially entering the race to develop a quantum computer. The quantum team will be based at Amazon’s new center on the campus of Caltech in Pasadena, California. There is growing corporate interest in quantum computers, which are still in the early stages of development. The hope is that these incredibly advanced computers will be able to solve problems current computers can’t, from removing carbon dioxide from the atmosphere to finding new chemical compounds to treat diseases. Google claims to have already achieved quantum abilities, saying that their quantum computer took less than three and a half minutes to perform a calculation that would take the most powerful traditional computer 10,000 years to complete. In addition to being extremely powerful, Qubits, quantum units of data that are both powerful and flexible, are also very finicky and can stop functioning at a disturbance as slight as a minor change in temperature. Both Caltech and Amazon said it will be a mutually beneficial venture that could produce huge leaps forward for everyone.
© Robert Bosch Tool Corporation. All rights reserved, no copying or reproducing is permitted without prior written approval.