Centerfin Collective Weekly

Weekly Update May 31, 2024

Is Gen AI going to eat the world? Housing market refreshed/update

Is Gen AI going to eat the world?

Salesforce reported earnings this week and missed on both the top and bottom line. The stock was down as much as 21%, the worst single day price action in 20 years. Revenues still grew at almost 11% in the quarter but the guidance was for 7% for the current quarter. Growth is clearly slowing and this is consistent with results from other enterprise software businesses.

  • A few things going on here, some cyclical and we think some is secular.
  • As companies are cutting headcount they need less software licenses
  • Companies are also investing a lot of capex in to their Gen AI strategies and some of this could be at the cost of their software budget
  • The secular trend we think may be more important
  • In 2011 Marc Andreessen said “Software is eating the world”
  • This was very prescient and has been the dominant trend for over a decade
  • Software is a good solution for businesses to help their employees perform certain tasks easier and faster
  • Rather than building their own tech, most companies will use software that they buy on a license basis from companies like Salesforce
  • However, Gen AI has the ability to replicate or replace some of this software very easily
  • Klarna, the large BNPL company from Sweden, revealed this week that they were able to cut their marketing budget by $10mm annually using Gen AI
  • As this trend continues to take hold across other industries, this may completely change the trend in the software industry

Housing market refresher/update

This week we got some data that shows the housing market may be showing signs of cooling.  Pending home sales fell 7.7% in April from the prior month, which is usually a leading indicator of existing home sales. Additionally, Redfin reported that the percentage of homes with price cuts rose to 6.4% last week, the highest by a margin in the last few years. This is as we go into the strongest seasonal period for home sales, and historic levels of new construction coming online.

  • Real estate has sensitivity to interest rates
  • As we have gone from very low interest rates for over a decade, to relatively high interest rates over the last few years, you would have thought that housing prices would come down
  • Instead, house prices have remained at very high levels
  • This has brought housing affordability to its lowest level in 20 years
  • This dynamic is an unintended consequence of the very rapid increase in rates
  • When people are looking to buy a home, they don’t buy based on the value of the home, but based on the monthly payment they can afford
  • As mortgage rates have gone from under 3% during the pandemic to over 7% today; the interest portion of that monthly payment has gone up dramatically
  • Combined with higher values, this has put homeownership out of reach for millions of people
  • In order for more people to be able to afford to buy a home 2 things need to happen; the price of the home needs to come down and/or interest rates need to come down
  • Neither has happened yet
  • Rates are partially controlled by the Fed and the Fed has been squarely in the higher for longer regime
  • The value of homes is susceptible to supply and demand dynamics
  • The less supply there is the more pressure higher on prices
  • As people have been waiting to sell their homes for rates to come down, the supply of homes for sale has decreased to 4 months, a very low level relative to history
  • As people accept that rates may remain higher for longer, we may be at a turning point for the values of existing homes
  • Given their home represents the bulk of many people's wealth, this will have knock-on effects on the economy
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