If US (or global) growth is projected to be up by, say, 3% this year and inflation is running at 7%, does this mean that all assets (land, real estate, clothes, etc., etc.) will be worth less next year (*oir just cost more in terms of native currencies)?
Jeff
If US (or global) growth is projected to be up by, say, 3% this year and inflation is running at 7%, does this mean that all assets (land, real estate, clothes, etc., etc.) will be worth less next year (*oir just cost more in terms of native currencies)?
Estimates and time series of GDP growth are usually inflation adjusted, real GDP. For example:
www.fortuneindia.com/macro/oecd-slashes-indias-gdp-growth-fo…
India’s real GDP is projected to grow by 6.9% in fiscal year FY 2022-23…
www.bea.gov/data/gdp/gross-domestic-product
US real gross domestic product (GDP) decreased at an annual rate of 1.5 percent in the first quarter of 2022…
DB2
If US (or global) growth is projected to be up by, say, 3% this year and inflation is running at 7%, does this mean that all assets (land, real estate, clothes, etc., etc.) will be worth less next year (*oir just cost more in terms of native currencies)?
Jeff,
Prices will fall for move-up middle-class real estate, mid-range automobiles, pret-a-porter fashion, and discretionary items that are usually financed, purchased on credit cards, or are department or specialty store “affordable luxury.”
Prices may remain stable for well-located high-end real estate, “ultra-luxury” automobiles, hand crafted or made-to-order fashion, auction house “big name” art, elite-level jewelry, or rare items that are purchased with cash by those with elite-level wealth (say $35 million or more in assets). OTOH, prices for yachts and private jets will fall as the “reverse wealth effect” pinches.
Expect prices to remain high or rise for essentials - things that a large segment of the population uses or needs - such as fuel, commodities, food, and rental housing.
Even though wage inflation will be stubbornly persistent (especially in low-end service industries), I expect non-tech mid-range salaries to moderate.
We are likely to experience at least 1 to 2 years of what would have in the past been defined as “stagflation.” If corporations are downsizing employees as some have already done, we may even see a return of the “misery index.”
https://www.investopedia.com/terms/m/miseryindex.asp
Central banks and governments will increasingly come under fire from large swaths of the voting public if they only discuss inflation “ex-food & energy” - seemingly ignoring the pain felt by most of the population.
Food and energy (along with housing) are the most painful and obvious areas in which the vast majority of the population feel the pain of inflation, higher interest rates, and inadequate wages.
Of course, I could be completely wrong. I often am.
Prices will fall for move-up middle-class real estate, mid-range automobiles, pret-a-porter fashion, and discretionary items that are usually financed, purchased on credit cards, or are department or specialty store “affordable luxury.”
Prices may remain stable for well-located high-end real estate,
Speaking of RE, had a conversation with my neighbor, who is on the condo board, yesterday. He is having an apoplectic fit about the upcomming maintenance expenses in this 40 year old complex. He is talking about special assessments of $40,000/unit in the next few years.
So, I looked at my alternatives.
No-one builds small condos, 1,000sqft or so, around here anymore. New build 1,500-2,000sqft is $400-$500,000. Smaller places, like I have now, are $160-$200,000, but they are the same age as mine, and doubtless have the same maintenance issues. And new build tends to be krap. My uncle bought a new build condo in 99. Had to replace the furnace and windows in less than ten years, and I discovered why it was so stuffy in rooms at the ends of the place: there were no return air ducts, so the air near the furnace went around and around, while the air at the ends of the place stagnated.
Apartments? Rents for a 2 bedroom in a decent looking complex in this area are $1,500-$1,600/mo. That is so far above what I pay in condo fees that I would pay that extra $40,000 in rent in three years, and have nothing to show for it.
Geezer apartment? If I moved into a geezer apartment while I’m still able to do for myself, I would be paying thousands extra per month in rent, covering that $40,000 in one year.
I don’t see middle class housing falling in price, due to limited supply. New build is all mcmansions. As has been reported, a lot of middle class housing is being bought up and converted to multi-thousand/month rentals. Even though the bylaws at my condo say the units are supposed to be owner-occupied, a third of the units are now rentals.
Steve
Jeff,
In the global numbers there is a huge wrinkle. The USD is appreciating and that will continue based on the FED’s actions and our tight fiscal policies.
The tight fiscal policies will need to change somewhat going forward to increase our GDP growth.
A loose US monetary policy will trigger more inflation in the US.
Your investments will do well longer term based on fiscal policies that reward increasing US productivity. Including increasing US consumer consumption and saving…ie paying off college debts…
If US (or global) growth is projected to be up by, say, 3% this year and inflation is running at 7%, does this mean that all assets (land, real estate, clothes, etc., etc.) will be worth less next year (*oir just cost more in terms of native currencies)?
When they report GDP numbers, they generally are reporting real GDP numbers. So a GDP growth number of 3% and inflation of 7% means that nominal GDP grew by about 10%.
Assets will be worth what they are worth. If a property was worth $1M last year, and is worth $1.1M this year, then it grew by 10% nominally and by 3% in real terms (with inflation at 7%).
Speaking of RE, had a conversation with my neighbor, who is on the condo board, yesterday. He is having an apoplectic fit about the upcomming maintenance expenses in this 40 year old complex. He is talking about special assessments of $40,000/unit in the next few years.
This is turning into a big problem in many places, including here in Florida. There are all sorts of new regulations in the wake of the Surfside condo collapse that will cost a LOT of money. Most notably, condos will be required to HAVE the money needed for regular maintenance in advance, so they have to collect the money over the years and save it in an account in preparation of big expenses (inspections, new roof, windows, etc) and then when the big expense comes they have the money to pay for it without having to hassle all the owners for months to collect the money.
These added expenses will force many people out of this kind of housing, and into more “senior living” types of places. They are generally less expensive but are smaller and not nearly as nice as a typical condo building.
No-one builds small condos, 1,000sqft or so, around here anymore.
There’s a really good reason for that. Because they can’t make enough money on those types of units. Same reason why there are so few new small cars being built.
As an aside, the special assessment of $40k doesn’t really have a bearing on your decision anymore. That’s because you either pay the $40k or sell the place for $40k less (because the new owner has to pony up the $40k after buying it).
This is turning into a big problem in many places, including here in Florida.
Irony department: the board member I was talking with has bought a place in Florida, though I don’t know if it’s a house or a condo. He anticipates moving permanently in five years.
These added expenses will force many people out of this kind of housing, and into more “senior living” types of places. They are generally less expensive but are smaller and not nearly as nice as a typical condo building.
Geezer apartments can be staggeringly expensive. My aunt moved into a nice one when she sold her house, around age 84. She had to pay an endowment of somewhere between $100K and $150K, plus she was paying over $3,000/month in rent, for a two bedroom apartment. Yes, it had housekeeping, and meal service, assisted living and nursing home units, and they wouldn’t toss you out if you ran out of money, but they have actuarial tables too. And those prices are from 15 years ago.
Before going into the geezer place, my aunt had an apartment “in town” in a senior complex without all the amenities, just for winters, as the house at the lake had a tendency to get snowed in. That complex currently offers a two bedroom for under $900, but that is in a burb of Kalamazoo. Senior apartments where I live, in the far burbs of Detroit, don’t even want to publish their rates.
That’s because you either pay the $40k or sell the place for $40k less (because the new owner has to pony up the $40k after buying it).
Those assessments have not been officially assessed, yet. They are a combination of new siding, new paving in the parking lots, a new lawn sprinkler system for the complex, new fire alarm system for the complex, removal of overgrown trees, and by the time they are done with that, it will be time for a new roof again.
There’s a really good reason for that. Because they can’t make enough money on those types of units. Same reason why there are so few new small cars being built.
Is that a matter of “can’t make any money” on normal size homes, or that they can make more building mcmansions? The automakers are making it clear they are dropping their lower priced models and pushing the prices up on what is left, to make more profit per unit, chasing ever higher ATP, as noted on this board before. The concept of a “fair” profit has been replaced with “maximizing” profit.
Steve
Geezer apartments can be staggeringly expensive. My aunt moved into a nice one when she sold her house, around age 84. She had to pay an endowment of somewhere between $100K and $150K, plus she was paying over $3,000/month in rent, for a two bedroom apartment. Yes, it had housekeeping, and meal service, assisted living and nursing home units, and they wouldn’t toss you out if you ran out of money, but they have actuarial tables too. And those prices are from 15 years ago.
I’m not talking about places with assisted living, housekeeping, or meal service. Just plain old cheap apartments in 55+ communities. There’s a HUGE place here called Century Village (my dad, who is in his 80s, calls it Cemetery Village), there are actually 4 of them each with thousands of apartments, that are pretty reasonable. About 25 years ago, my dad, my uncle, and I bought one for my grandparents for $32k. Then 20 years ago they needed a ground floor closer to shopping, so we bought one for $56k. And then 15 years ago, after my grandfather passed, my grandmother wanted one even closer, so bought one for $120k. Today they are probably $150-250k depending on location and size. And the monthly is just a few hundred to cover pools, clubhouse, shows, maintenance, etc.
Apparently there are still some under $150k - https://www.zillow.com/homedetails/456-Southampton-C-West-Pa…
Is that a matter of “can’t make any money” on normal size homes, or that they can make more building mcmansions? The automakers are making it clear they are dropping their lower priced models and pushing the prices up on what is left, to make more profit per unit, chasing ever higher ATP, as noted on this board before. The concept of a “fair” profit has been replaced with “maximizing” profit.
No, it’s always been a combination of taking a fair profit PER UNIT SOLD and maximizing profit across the product line. The problem right now is that there is demand for 1000 small units and 1000 large units, but they only have materials and manpower to build 1000 units. So which 1000 should they choose to build right now while they are constrained as such? Not only that, but a lot of the people who, when polled, say they want a smaller unit, but when push comes to shove, they won’t buy a smaller unit, they really want the bigger unit. And then there is pricing, an 800 sq ft unit will NOT cost half of a 1600 sq ft unit, not even close. That’s because the kitchen is by far the most expensive room in any home, and both require a kitchen. Bedrooms are the least expensive rooms because they are mostly just open space with some additional framing and wallboard. But people don’t understand this concept - they think that of the 1600 sq ft unit costs $300,000, that the 800 sq ft unit should cost around $150,000. Just look how all the real estate sites show price per sq ft (Zillow, etc)! But that is essentially BS. The cost of the 800 sq ft unit is MUCH HIGHER per sq ft because permitting costs almost the same, infrastructure almost the same, electrical almost the same, plumbing nearly same except if one less bathroom maybe a little less, kitchen costs almost the same, etc. A smaller den/living room, one less bedroom, and no eat in kitchen space isn’t going to cut the price by all that much. So it ends up being harder to sell the smaller places, and the people don’t really want to buy the smaller places (at a higher “per sq ft” price), so why bother building them?
The problem right now is that there is demand for 1000 small units and 1000 large units, but they only have materials and manpower to build 1000 units.
I follow the auto industry more closely. What the auto industry is talking about is a permanent discontinuation of their lower priced models, not a temporary situation due to “shortage”.
VW to scrap models and focus on premium market -CFO tells FT
“The key target is not growth,” Arno Antlitz told the Financial Times newspaper. “We are (more focused) on quality and on margins, rather than on volume and market share.”
Antlitz said VW would reduce its range of petrol and diesel cars, consisting of at least 100 models spread across several brands, by 60% in Europe over the next eight years.
https://www.reuters.com/business/autos-transportation/vw-scr…
Same thing is happening in several companies. They are cherry picking the most profitable products, in the most profitable markets, and anyone else that might want to buy a car from them is told to pound sand. When asked about affordability, management sniffs “let them buy used”. That attitude worked so well for Marie Antoinette.
That’s because the kitchen is by far the most expensive room in any home, and both require a kitchen.
There is some leeway in kitchens. My kitchen has simple wood cabinets with particle board drawers with a formica countertop, simple, white, appliances, and vinyl floor. Get into a new, big, expen$ive condo and you get fancier cabinets, granite countertops, huge, stainless steel, appliances and tile floor…Mish had granite counter tops, which lead to a hilarious “household tip” about how not to seal the granite. Same thing in bathrooms. Fancy place may have soak tub, shower, commode, bidet, two sinks and more granite. I have a tub, commode, one sink, and more particle board and formica. My aunt’s condo, the one that was so cheaply built it didn’t have return air ducts, had 2 1/2 baths. I have 1 1/2 baths, but I have return air ducts!
Steve
I follow the auto industry more closely. What the auto industry is talking about is a permanent discontinuation of their lower priced models, not a temporary situation due to “shortage”.
That’s been going on for much longer than the recent supply chain issues. And it has a very simple reason - complexity. Cars today require all sorts of things that have mostly fixed cost regardless of the size of the car. For example, ABS, airbags, flat screen display, infotainment system, electric windows, sensors out the wazoo, rear view camera, safety stuff, etc. All those things cost money, a LOT of money, and are required in the small $25k sedan and in the large $50k SUV. I’ve read that electronics comprise nearly $5k of cost now and is rising rapidly.
So, if the cost of a small car is -
$15k metals/materials/subassemblies + 5k electronics = $20k, can sell for $25k, that’s a 20% gross margin, but is either not profitable or minimally profitable all in (after G&A and other expenses). And very few people option up a small car like this, so there isn’t much upsell of options with nice higher gross margins.
The cost of a large SUV is -
$30k metals/materials/subassemblies + 5k electronics = $35k, can sell for $50k, that’s a 30% gross margin, so after G&A and other expenses, it can make the company a fair profit. Sometimes, when people buy the optioned up ones, because the options have a higher gross margin, those optioned up models can provide a handsome profit.
So in the end because of the “base” cost of stuff we expect in a car nowadays, small cars can’t really be made profitably anymore. In Europe they still manage some small cars, but that’s mostly because they can charge a lot for them due to demand … because gasoline is SO expensive there, there is much higher demand for smaller cars than for bigger cars. There are hardly any SUVs on the road in Europe because filling them up would cost $270 a pop ($9/gal * 30 gal) and they get much lower mileage than the smaller cars that are so popular and in demand.
And this isn’t going to get better anytime soon. Put aside any of your feelings regarding climate change and what to do about it. The facts are that people worldwide are electing representatives that are slowly “forcing” a move away from ICE to electric, and that will just increase what I described above. The “base” costs of stuff that is required in a car will go up, and not just $25k models will be cancelled (because there’s no reasonable profit in them), but $30k models will also be cancelled. It’s similar to the condo issue - as more “base requirements” get added (safety, maintenance funds, etc), the more expensive they will become, and the less profitable small ones become. So few will build small ones anymore.
There is some leeway in kitchens.
There is (trust me I know, I remodeled mine 20 years ago!) lots of leeway. But it’s still relatively small differences, the kitchen is and always will be the most expensive room by far to construct in an apartment. And when building an 80 unit condo, they aren’t going to bring in 2 kitchen suppliers, one for cheap ones and one for nice ones. For two reasons, one because it increases costs and management expenses, and two, because when they show the apartments, everyone will want the nicer kitchens and the units with the “crappy” kitchens will languish on the market and cause “end of sales period” to last an extra year or more. That means you need to keep an office on site for an extra year, lawyers on call, back office, etc…
That’s been going on for much longer than the recent supply chain issues.
Yes it has. Ford and GM started a major cull of lower priced models in 2018.
Cars today require all sorts of things that have mostly fixed cost
That has always been the case. For a century, every car has had an engine, and a transmission, and brakes, and steering.
Greater volume helps amortize the development and tooling costs. Read the VW CFO’s comments again. They don’t care about volume. If they lose customers because they no longer offer, in the words of Sloan, “a car for every purse and purpose”, they don’t care. He clearly says, they only care about inflating GP.
And when building an 80 unit condo, they aren’t going to bring in 2 kitchen suppliers, one for cheap ones and one for nice ones.
Of course not. Build an expensive condo complex in one place, and an affordable complex elsewhere.
Henry Ford made a vast fortune building the lowest price car possible. VW broke in to the US market the same way. Toyota did the same thing. It’s probably only a matter of time before am Indian or Chinese company breaks into the US market the same way, and the established auto makers go crying to the government for protection, just like they did in the early 80s.
Steve
<>
That has always been the case. For a century, every car has had an engine, and a transmission, and brakes, and steering.
Not the same as what I am describing. Small cars have smaller, cheaper engines. Small cars have smaller, cheaper transmissions (3 speed instead of 5 or 6 for example). Bigger, heavier cars need bigger more expensive brakes. Etc.
But the infotainment system needs to be the same roughly (very expensive) as higher end models. Because if it doesn’t support carplay and/or Android auto, then nobody will buy it, and if it has a puny 7 inch display nobody will buy it. And the rear view camera (which is mandated since 2018) needs a display of some sort in all cases. So no models anymore without a display (the cheapest of the cheap cars has no display until 2018) anymore … by law.
Didn’t you see the examples I gave? They are pretty real world examples. While the frame, subassemblies, etc might be proportional costwise from small cars to big cars, the electronics are not proportional. And as electronics become a bigger percentage of cost, the tilt against small cheap cars will get worse and worse.
Of course not. Build an expensive condo complex in one place, and an affordable complex elsewhere.
They exist! You gave one example (and mentioned that you don’t want to live so far out), and I gave an example here in Florida of a place with cheap condos (after I posted, I even found some in that development that are under $100k!)
Most of the time, the issue is that “elsewhere” isn’t where you want to live. But that’s how prices work in the real world - more desirable areas tend to have the higher prices, and less desirable areas tend to have the lower prices.
Henry Ford made a vast fortune building the lowest price car possible. VW broke in to the US market the same way. Toyota did the same thing. It’s probably only a matter of time before am Indian or Chinese company breaks into the US market the same way, and the established auto makers go crying to the government for protection, just like they did in the early 80s.
It’s definitely possible. That’s the way capitalism works, if someone can find a niche that isn’t being filled, and they can find a way to fill it while earning a profit, then it will happen. There is no doubt about that at all. Especially during major transitions as we are experiencing over the next decade or two. The transition from “mostly ICE” to “mostly EV” may open up the market dramatically to those companies that find ways to provide reasonably priced vehicles.