Spelling Affordability With a K |
The AI investment phenomenon is getting old. It’s now into its fourth year. Could the next big thing be spelled with a K? US midterm elections are due in November, both main parties will be fighting them on the issue of affordability, and there could be an opportunity in growing inequality and the so-called K-shaped economy. It’s corroding social harmony and prompting a drastic response from the White House. But it might yet make money for stockpickers. The problem is to work out who will benefit. President Donald Trump made clear the importance of the issue with Wednesday’s dramatic post on Truth Social that he intended to bar investment groups from owning single-family homes: This is a move of utmost political significance and the stock market took it very seriously. Private equity and other buyers have made huge investments in housing, growing into major landlords. They can access credit more cheaply than the rest of us, and their behavior raises demand and pushes up prices. Acting against institutional landlords would attack the K-shaped economy in one fell swoop, hitting the privileged while while helping the poor. The mere fact of making this statement, which blindsided Wall Street, shows that we can expect concerted attempts to deal with affordability and inequality. The midterms will inevitably be difficult. George Pollack of Signum Global Advisors points out that incumbents have suffered defeat in 38 of 41 such elections since the Civil War, with an average loss of 36 House seats by second-term presidents. The Republicans’ current majority is one. But the affordability issue is particularly difficult. It felled the last administration, and as Beacon Research points out, any White House has a lack of levers to deal with it as prices take time to adjust. The Trump messaging can point to the lowest gasoline prices in four years, and will make a big deal of the tax cuts from the One Big Beautiful Bill that will soon make themselves felt. The housing announcement shows that the administration thinks it must go further. It is, as Beacon puts it, “a popular policy among voters with low odds of becoming a reality and a likely limited impact on prices even if it did,” Private-equity landlords are among the president’s most important donors, led by Blackstone Group, whose share price briefly tanked after the presidential post. It ended the day more than 5% down: Private equity tends to buy in bulk, preferring to stack up on newly built inventory directly from homebuilders. Their stocks also reacted very badly. After surging throughout 2023 and 2024, the sector has given up its gains and now stands at its lowest compared to the broader market in three years: But questions abound. Republicans in Congress will help write this into law, but producing a statute that passes constitutional muster and survives the efforts of the finance industry’s lobbyists and lawyers will be a challenge. It’s also not clear that Trump will press ahead once he has heard for Blackstone’s CEO Steve Schwarzman and others. For this reason, housing analyst Meredith Whitney told Bloomberg TV that this was a “trial balloon” that would prove short-lived — much like the previous proposal to offer 50-year mortgages. The Housing Market A further issue is that the problem of sharp housing inflation seems largely to have been resolved. There are different ways to measure this, and the official measure of shelter prices used in the consumer price index is arguably still too high. But whether looking at rents or home prices, the extreme inflation driven by Covid-19 is over: The problem is that the level of prices, whether according to the CPI or to the Case-Shiller index, remains far higher than before the pandemic. House prices tend not to go down, and the Global Financial Crisis demonstrated the problems that can happen when they do. So it’s hard going on impossible to imagine that houses will feel noticeably cheaper by the midterms: The most deadly problem is the combination of mortgage rates with house prices — the effective chunk of the average income that it takes to finance buying the average house became much greater when the Fed started hiking in early 2022 and hasn’t recovered. This measure from the National Association of Realtors attempts to gauge the affordability of the median home to someone on the median income at prevailing rates. Lower numbers mean houses are less affordable: Terrifyingly, this implies that housing is even further out of reach than at the top of the housing bubble that burst to cause the GFC. The Federal Reserve The most obvious lever the administration possesses is, of course, the central bank. Jerome Powell’s term running the Federal Reserve expires in a few months, and Trump gets to choose his successor. Usually, the presidential nominee has been announced by this time, and the nomination must surely come within the next few weeks. In classic reality-television fashion, Trump has ensured that the tension remains high, but has made it clear that the winning candidate will have to undertake to cut interest rates further. Numerous names have been raised, but at this point the prediction markets see it as a photo finish between the chairman of the Council of Economic Advisers, Kevin Hassett, and former Fed governor Kevin Warsh. Polymarket gives each a 40% shot:  But it grows more complicated. Both Kevins are viable candidates, and Warsh in particular commands respect in the market. Both have positioned themselves as more dovish than Powell. It’s not clear that either would play the role of inveterate dove and take fed funds down to 1% as Trump wishes. In any case, the administration cannot engineer a board of governors and regional presidents to vote for that. Trump’s attempt to fire Biden appointee Lisa Cook over mortgage fraud allegations is fizzling, with prediction markets now giving only 4% odds that she leaves this year. Beyond that, the Fed controls overnight money, not the much longer rates that determine mortgage pricing. Since September 2024, fed funds have come down by 1.75 percentage points, and yet the 30-year mortgage benchmark has risen slightly: The next few months will see much drama over the Fed. It’s unlikely to move the needle for people wanting to buy a house. The Labor Market Historically, affordability problems are resolved by rising incomes, rather than prices falling. This is a process that takes time and is very uneven, but it looks as though there is growth to support it. The latest ISM surveys of supply managers show an economy in decent health, even ahead of more attempts to stimulate it: The latest Job Openings and Labor Turnover Survey (JOLTS) shows vacancies back to pre-pandemic levels, giving employees a little negotiating leverage. Layoffs remain reasonably contained. Falling employment, with the next data due Friday, doesn’t help the prospect of big wage rises. Figures in this chart are in thousands: Inequality exacerbates these problems. Lower-income workers enjoyed a big catchup in the first years after the lockdowns, but that is over. Atlanta Fed data show wage growth for the lowest-paid 25% of workers badly lagging the raises for the best-paid. This is unusual, and means that the affordability problem is worse than it appears: Inequality Making the problem even more politically and socially toxic is the fact that prices of the goods bought by lower-income households are inflating faster. Bank of America’s consumer spending analysis shows that overall growth in discretionary spending comes from higher-income consumers. Lower earners, who spend more on necessities, are forced to pay an ever greater share of their income on shelter. The gap narrowed slightly last year, but inflation for the poorest is running higher than for the rest: In the stock market, this has played out in dramatic underperformance for consumer staples compared to discretionary companies, whose demand is buoyed by those who are better off: All else equal, if the Trump administration is as desperate to help the lower-paid as it appears, perhaps with stimulus checks, it should make sense for this to reverse and for staples to recover. The question is how hard the president will push. Luxury In such circumstances, buying luxury stocks seems illogical. But the resilience of higher-income households, as Vontobel’s David Souccar highlights, could offer fertile ground for investors. The K-shaped economy is helping them, and they stand to benefit further if desperate attempts to boost affordability cause the economy to overheat. Vontobel analysts predict luxury makers like Ferrari will deliver strong returns, even against popular tech giants. Here’s how Ferrari has compared to non-tech giants over the last decade: The company snapped its winning run late in 2025 after producing a cautious outlook, but it maintains strong performance, with margins exceeding 20%. Vontobel’s Markus Hansen argues that Ferrari’s strong pricing power and resilience as a luxury brand make it an interesting proposition: Not all luxury stocks are great. There are about 35 luxury companies. Most of them actually are not particularly good investments. The ones that do very well are at the top of the pyramid. Why? Because they tend to manage their growth. They deliberately recognize that demand exceeds supply, and they take a long-term view.
And indeed, most luxury stocks have lagged amid the AI excitement. S&P’s global index of luxury stocks has barely managed to outperform the MSCI equivalent index of consumer staples. Relative to the broader market, luxury stocks are lagging, although not as badly as staples. If AI excitement dwindles but desperate attempts to deal with affordability cause overheating, the luxury sector should benefit: With all the stops pulled out to help people in the lower arm of the K, it remains very possible that stocks catering to those in the upper arm will benefit more. — Richard Abbey | 
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