Home is where the start isn't
Good morning,
Merlin, a happy-go-lucky duck from Mexico City, became a World Cup mascot after images of him waddling around in a Mexican national team jersey went viral. A fowl, but no card. In today’s letter:
- Homebuilding hits a six-year low
- The most AI-pilled states, charted
- The hawkish dot plot thickens
- Why tokens are meaningless
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The housing shortage of 2027 is already being built — or rather, not built
Home is where the start isn’t. U.S. housing starts plunged more than 15% in May from April, unexpectedly sinking new homebuilding to a six-year low (economists polled by The Wall Street Journal projected just a 2.4% decline). It was largely driven by a 40% drop in multifamily constructions like apartments and condos.
- Housing starts are a leading indicator of economic activity, partly because new construction takes time: builders make decisions to start work (or not) based on what they expect demand and the economy to look like a year to 18 months from now.
America’s white picket fence problem: Estimates for the housing shortage vary widely, but the problem is clear: the U.S. is short on millions of roofs, and has been for decades (the pandemic only made it worse). Yesterday, the Senate advanced a bipartisan bill that would limit private equity purchases of single-family homes. The goal: boost supply and make housing more affordable.
Homeownership, a cornerstone of personal wealth building, is increasingly out of reach for many Americans. With residential construction declining and rates poised to rise, the challenges could get worse.
As elevated mortgage rates and inflation continue to weigh on demand, builders are pulling the reins on new construction, cutting prices, and offering incentives — not because demand isn’t there, but because costs are a blocker.
- Lennar, America’s second-largest homebuilder, slightly lowered its annual home deliveries target this month. But CEO Stuart Miller said that “demand is real, deferred, and building,” noting that the gap between home prices and income is narrowing. We’ll get more signals today when KB Home reports.
The bottom line:
Homebuilding is an economic foundation. And while strong, it’s showing some cracks. Residential investment makes up 3.7% of GDP, and spending on housing services (utilities, rents) makes up over 12%. The homebuilding industry employees millions of construction workers, not to mention the downstream effects that home buying triggers in sectors related to furnishing and maintaining a home. A 15% drop in residential starts today means fewer available new units — and everything that comes along with those — in 2027.
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Watercooler Data: 50 states of AI
The state famous for LLCs should be famous for LLMs.
Delaware (aka: “The First State,” since it was the first American colony to ratify the Constitution) is also first on the list of AI-pilled states, leading in the share of AI-adopting businesses.
At 72% adoption, the corporate capital of the world has about a 10 percentage-point lead over AI hubs like California and New York, according to the Ramp AI Index.
Over 65% of Fortune 500 companies and more than half of all U.S. publicly traded companies are incorporated in Delaware.
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Rate Radar: the dot plot thickens
Earlier this month, we covered rising rate hike odds ahead of the Fed’s meeting and said that if May CPI came in hot (it did), that could lock in odds of a hike this year. Fast-forward to the central bank’s meeting last week, and the hawkish dot plot has thickened.
The Fed’s easing bias has all but vanished, and nearly half of FOMC members project at least one hike this year, even after the U.S.-Iran deal sent oil prices tumbling. The central bank held rates steady (no surprise there) but:
- Nine of 19 officials expect at least one rate bump by the end of the year, up from zero in March. Only one projected a cut, down from 12.
- Traders are pricing in an almost 90% chance of a hike of at least 25 bps in December. Odds of a hike at next month’s meeting climbed to 36%. That could shift on Thursday with the release of the PCE price index (the Fed’s favorite inflation gauge).
Chairman Kevin Warsh refrained from giving dot plot projections, but vowed that “this committee will deliver price stability.”
Higher rates could depress lofty tech valuations as the discounted cash flow equation gets more discounted. But so far, AI companies have been outliers.
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AI Edge: how to get more bang for your LLM buck
This visual tells you how many tokens $100K buys you, but it doesn’t tell you what value it buys you. How much useful work will these tokens actually result in?
Ramp engineers dive into the nitty-gritty of how to get AI spending under controlwhile boosting ROI. It’s all about:
- Measuring in tasks, not tokens
- Setting smarter defaults
- Knowing when to spend more
“A big AI bill doesn’t mean you’re using too much AI. It means you’re buying it wrong… and probably not using it enough.”
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Signals Shortlist
- Chevron strikes power deal with Microsoft for massive Texas AI data center (The Wall Street Journal)
- The U.S. and Iran agree to a 'road map' for a final deal, mediators say (NPR)
- Workday must face California lawsuit over AI bias in job screening tools (Reuters)
- SpaceX stock drops 16% on Monday, wiping out most post-IPO gains (CNBC)
- Apple to raise prices due to memory chip crunch, Tim Cook says (CNN)
- Hollywood is having its best box office since before the pandemic (The Wall Street Journal)
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🗓️ Leading Events:
Tuesday, June 23: Earnings expected from FedEx, Carnival Corp, and KB Home
Wednesday, June 24: New home sales. Earnings expected from Micron, Paychex, and Darden Restaurants (owner of Olive Garden)
Thursday, June 25: PCE. GDP (3rd estimate). Initial jobless claims. Earnings expected from McCormick
Friday, June 26: Michigan consumer sentiment.
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