Market Commentary: Tiny Towns

by Gayl Mileszko

Tiny Towns

The movement may have begun with Henry David Thoreau but it took off in the 1970’s. Yet the decision on the part of millions to simplify, downsize, and live with less during inflationary and recessionary times could not have been more different from the McMansion building trend that took the U.S. by storm in the 1980’s. The average size of a new home in 1973 was 1,660 square feet and, over time, it increased to 1,755 in 1985, 2,045 in 1995, 2,420 in 2005, and 2,687 in 2015. Since that peak, the average square footage of a single family home has dropped to about 2,273 according to the U.S. Census. But for those who are part of the tiny house, or micro-house, movement, the decline is much more dramatic. Tiny architecture typically has a footprint of only 300 to 600 square feet yet, with clever designs, can feature such things as lofts, greenhouses, roof decks, health monitors, soaking tubs, high tech security, wheels or cement foundations, and associations with community amenities.

Tiny Homes Have Growing Appeal to the 50-Plus Crowd

The tiny house lifestyle is being adopted by empty-nesters, those looking for cheaper or eco- friendly housing, more self-sufficiency, or a major re-alignment of life priorities. It may soon become a larger part of rural and suburban communities or life plan communities looking to expand affordable independent living and assisted living options. Some states place any home under 1,000 square feet into this category, but dwellings of this size — typically intended as a primary residence, but also offered as a backyard “granny pod”, temporary home for adult children, home office, or guest house — can run afoul of local zoning laws. Spur, Texas claims to be the first town to have changed its laws to welcome micro dwellings, but other communities in Colorado, South Carolina, Ohio, Florida and California have since followed suit. This type of living has worldwide appeal with an estimated 40% of homeowners being over 50 years of age. Unit prices are attractive at a time when housing is still seen as being in a multi-year bubble. Home Depot just rolled out a one bedroom and bathroom 540-square-foot steel frame structure for under $44,000 including delivery, with financing available, and sells twenty other tiny home building kits.

A Tiny Pause in Official Rate Hikes

On June 15, the Federal Open Market Committee announced what may turn out to be only a tiny pause in its aggressive rate hike series, holding its target rate in the 5.00% to 5.25% range. But this hiatus is only expected to last for 30 days. Futures trading reflects the market’s expectation for another 25 basis point increase at the July 26 meeting. In the Fed’s quarterly summary of economic projections, no voting member of the policy committee saw the prospect of a cut in rates in 2023. This upset many traders who had been forecasting a rate reduction before year end, attributed either to bank liquidity issues, a record-setting Treasury auction schedule, or political fallout from a possible policy-induced recession leading to job losses, corporate bankruptcies, stagflation, and fiscal stress across all levels of government and households.

Major Spotlight Remains on The Fed and Data Heading into July

If you thought you would be getting a tiny break from Fed talk after last week, you would be wrong. Chair Jay Powell testifies this week before the House and Senate banking committees with jurisdiction. His semi-annual monetary policy report was filed on Friday. There are also a dozen other Fed officials on the speaking circuit here and around the world. Monitoring and digesting all the cross talk will occupy a good percentage of investor time this week. Other potential market movers impacting rates include the results of eight major Treasury auctions, existing housing and housing starts data, the release of leading indicators, and response to the statements being made by the U.S. Secretary of State from China on Taiwan, Cuba, and the Ukraine. At this writing, the peak of the Treasury curve is the 6-month yield at 5.40%. The 2-year Treasury yield stands at 4.71%, the 10-year at 3.75% and the 30-year at 3.84%. The difference between the 2 year and 10-year yields at 97 basis points has reached a four decade high, a four-alarm warning of a recession, perhaps the most forecasted in history, that has not yet happened.  The Dow at 34,053, the S&P 500 at 4,388 and Nasdaq at 13,667 are all down since Friday on sudden fears that markets valuations are too high and concerns that inflation overseas continues to rage.

Recession Fears Wane In Spite of Major Warning Signs

Small business surveys and manufacturing data point to a nation already in recession. U.S. Leading indicators also seem to reflect an America in deep recession. But jobs numbers and consumer demand are showing a real disconnect. A recent University of Chicago/Financial Times poll found that more economists see a recession hitting the United States in 2024, not 2023. Given the temporary resolution of the debt ceiling crisis, resilient consumer demand, low unemployment and high level of job openings, the majority of chief executives surveyed for the CEO Confidence Index in June forecast that conditions will be unchanged for the next 12 months and see a low chance of a deep or lengthy recession. The latest New York Fed model nevertheless predicts a 71% chance of a recession in the next 12 months.

Little Market Volatility in a Wait-See Period

Since the agreement on the debt ceiling suspension was announced, stock market volatility has dropped well below 30-year averages. The VIX, often referred to as the “Fear Index”, is at a year-long low at 13.54 at this writing. Bond market volatility as measured by the MOVE Index at 114.19 is well below the 2023 average of 129.79. Financial markets are adjusting to the Fed narrative of rates higher for longer, digesting overseas developments, monitoring the New York Fed report pointing to consumer credit card debt at $988 billion heading to $1 trillion, weighing the impact of recent Russian-originated cyberattacks on federal and state agencies as well as academic institutions and Microsoft users. Economic data are mixed. CPI for May showed a year over year deceleration while PPI is trailing the consensus and weekly jobless claims came in higher than anticipated. Building permits and housing starts in May came in well above estimates. Thirty-year fixed rate mortgage rates slipped a bit to 6.73% and mortgage applications to purchase a home are 32% lower than they were one year ago.

Tiny Bank Deposit Rates

Banks have barely raised deposit rates in more than a decade. The Federal Deposit Insurance Corporation reported that the national savings and checking deposit rate was last reported at 0.40%. Despite the Fed raising short term rates more rapidly than in the history of the central banks, banks have not kept up. Depositors are withdrawing funds from checking and savings accounts and transferring them to Treasury bills or money market funds, with taxable yields currently exceeding 5.00%. Money market fund assets have ballooned by $1 trillion in the past year to $5.45 trillion.

Tax-Exempt Investors See Huge Municipal Redemptions and Interest this Summer

Traders and bankers examining and projecting conditions out the next 30 days see only about $10 billion of municipal bond issuance. On the other hand, called and maturing bonds plus coupon interest due tallies $51.91 billion this month and $47.9 billion in July. The net negative supply situation, seen as favorable to bond buyers, is expected to continue through the end of August. Municipal bond fund investors have been adding to long term mutual funds with a net of $1.2 billion so far this year. High yield muni funds have taken in a net of $268 million.  Tax-exempt money market fund assets stand at $113.3 billion. As of the close of Friday, non-rated municipal bond index returns are up 1.03% in June and 4.17% so far this year. Taxable muni index returns are up 4.78% so far in 2023.

Current Municipal Bond Yields and Offers

At this writing the 7-year SIFMA municipal swap index yield stands at 3.23%, well above the 1-year AAA MMD  benchmark yield at 3.03%, higher than  the 10-year yield at 2.55%, and only just below the 30-year yield at 3.48%. The AAA municipal bond yield curve has been inverted on the short end since December. The difference between the 1-year and 30-year yield is only 45 basis points.  High yield investors are still being presented with very limited options in the primary market, and high yield muni funds and ETFs have extremely limited options to purchase new issues. Last week, the Florida Development Finance Corporation sold $120 million of non-rated sold waste disposal bonds subject to the alternative minimum tax at par with a yield of 6.125%. This week, the Capital Trust Agency of Florida offers $79 million of BB rated refunding bonds for Southeastern University, a private Christian institution in Lakeland. And the Philadelphia Industrial Development Authority is selling $31.9 million of B+ rated revenue bonds for Tacony Academy, a K-12 charter school led by the non-profit education management organization, American Paradigm Schools.

Summer is Here!

The HJ Sims family welcomes the arrival of summer and all of the reunions and celebrations in store. Time spent with family and friends is precious. News involving weddings, divorces, births, graduations, retirements, moves, travels, and everything else along the life continuum should spur conversations with your HJ Sims representative on any new goals, capital needs, risk tolerance, or recommendations on what to do with uninvested cash. For our banking clients at mid-year, we welcome you to contact us for a review of financing needs and portfolio holdings.

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