briefcase | invest smarter | Issue #114
🧑💼👩💼 Surplus Elites?
Last week we discussed the end of ZIRP and the mentality of free money. And, as long as we're all practicing a little real estate stoicism, this too shall pass!
But, alongside these trends, we have another one that isn't discussed enough in mainstream media: the white-collar recession. This is opposed to blue-collar industries, which seem to be doing just fine.
But the guy above...He's in some serious trouble.
We've seen significant layoffs in white-collar professions over the past 12 months. In tech alone, over 100,000 layoffs occurred in 2022, and the finance and mortgage world sees daily mass layoffs as a result of rising rates. To start off 2023, we've seen 30,000 layoffs in the tech sector.
In the tech world, Sam Leith of the Spectator describes these newly unemployed professionals as surplus elites:
These ex-Goldmanites are, reportedly, harbingers of a new community in the workforce described as the ‘surplus elites’. More and more, big companies are discovering that there’s a giant bounce to be had from getting rid of a whole swathe of well-paid executives...A cull of surplus elites may look attractive to those of us who aren’t those surplus elites ourselves, but it has longer term implications. Robots and AI are increasingly good at filling the production side of the economy, but they’re hopeless as consumers. Who’s going to buy all those pelotons, wine aerators and brushed-chrome kitchen surfaces if people in useless but high-earning jobs are all suddenly out of work?
The prospect of lower corporate profits has caused this, amidst a drying up of venture capital funding and rising costs (inflation) as corporate leaders batten down the hatches for a possible recession.
TLDR: Companies are now shifting focus to doing more with less (executives).
Whether or not we had a surplus of what some are calling 'elites' to begin with is debatable. But, what we do know for sure is that this will impact real estate in a significant way.
Urban Flight
Most of the tech companies are based in more expensive urban markets. As people get laid off, they may be tempted to move to more mid-market or affordable locations particularly given the staying power of remote work.
This will put downward pressure on housing prices in tech-centric metros, whereas will be a tailwind for more affordable ones. For instance, Seattle and San Francisco home values dropped 9% between May and August 2022.
Even without layoffs, job uncertainty typically means consumers spend less on housing. And, as fewer IPOs and more layoffs continue well into 2023, there will be a squeeze on homebuying activity.
Real Estate Purchases
As higher-paid folks lose their jobs, they will cut back on spending. This includes big-ticket items like homes, renovations, and investment properties.
Already we are seeing a massive drop (46%!) in investment property purchases in the U.S.
According to a survey of global C-Suite leaders, 2023 will continue to show lackluster performance.
Things don't look like they'll get better any time soon. Although the economy seems to be doing well, that means the fight against inflation isn't.
This portends more interest rate hikes, which squeezes corporate profits, and means more 'surplus elites' may be on the chopping block.
So What? Because the industries typically employed by blue-collar workers appear to be doing better, lower-priced tiers of real estate will outperform those at the higher end of the price spectrum, those typically purchased by white-collar workers.
Keep an eye out for this trend, and watch for your exposure. Now...move out of the way.
Weekly Real Estate News
🥶 Cool like 1995: Homebuyer demand cools to lowest level since 1995 as rates rebound — MBA
🚫 Nahhhh: CoStar will not acquire portal Realtor.com after all — Inman
👩💼 Speaking of Cold: According to Gary Keller it's a "do or die" moment for Realtors given the current market (👇) — Inman
📉 2 Trilly: $2.3 trillion in real estate value has been wiped out since the top of the market — Forbes
🏢 (Lots of) Office Space: The national office vacancy rate hit a record high of 12.5% — NAR
🙏 Thank God(s): The savagely unhealthy housing market is over — Logan Mohtashami
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