Year-Over-Year Apartment Building Sales Plummet by 74%. Healthcare Industry Struggling with Monopolization.

Central Banks Warn Businesses That Use Inflation As cover For Price Gauging.

Here is what we will be getting into today:

1. Dramatic Drop in Apartment Building Sales From High Interest Rates & Slowing Rent Growth.

2. Vertical Integration and Monopolization in Healthcare: The Conflict of Interest Between Payers and Providers.

3. Central Banks Warn Against Companies Using High Inflation as an Excuse for Profiteering.

Let's Dive In!

1. Apartment Building Sales Drop 74%

Sales of apartment buildings are declining at their fastest rate since the subprime-mortgage crisis due to higher interest rates, turmoil at regional banks, and slowing rent growth. Preliminary data from CoStar Group shows that investors purchased approximately $14 billion of apartment buildings in the first quarter of this year, a decline in sales of 74% from the same quarter last year. This drop could be the largest annual sales decline for any quarter going back to a 77% drop in Q1 2009.

The recent drop in building sales follows a stretch of record-setting transactions that peaked in late 2021 when the multifamily sector was a top performer in commercial real estate. However, the combination of factors noted above means that the math for buying an apartment building doesn't pencil out in many cases, as the cost to refinance purchases has jumped along with interest rates. In some major metro areas, rents are also flat or declining after record increases.

The remaining balance of many floating-rate loans will come due this year, and borrowers whose buildings aren't bringing in enough cash every month might have to sell their buildings to pay off their debts. Brokers and investors aren't expecting building sales to pick up anytime soon, in part because of a backlog of nearly 500,000 new units that are slated to be delivered this year, the most in almost 40 years.

2. Vertical Integration and Monopolization in Healthcare

The American healthcare system has experienced a decline over the past 15 years, with monopolistic healthcare conglomerates contributing significantly to the problem. Despite the Affordable Care Act (ACA) aiming to expand health insurance coverage, the industry has seen increased vertical integration and monopolization, leading to higher prices for consumers and conflicts of interest between payers and providers.

The ACA's Medical Loss Ratio provision, which capped insurer profits, initially appeared to work. However, insurance companies pursued strategies to increase profits, such as focusing on Medicare Advantage plans and attempting horizontal mergers. When these were blocked by antitrust divisions, insurers turned to vertical mergers, acquiring or being acquired by entities they negotiate with for services. This has led to a dangerous business model that prioritizes profit over patient care.

One example of this conflict of interest is CVS Health's acquisition of Signify Health, the largest provider of in-home health evaluations for Medicare Advantage patients. This allows CVS to collect sensitive data and potentially hinder competition from smaller Medicare Advantage plans. There is hope for change as regulators and politicians begin to address these issues and consider re-imposing structural prohibitions on the industry.

3. Central Bank Warns Businesses Using Inflation to Drive Profits

Central banks are warning companies against using high inflation as an excuse to boost their profit margins, as this could trigger persistent cost pressures. Research by economists at the University of Massachusetts Amherst found that US companies' profit margins hit their highest level since the aftermath of World War II in 2022, while Eurozone businesses have enjoyed the biggest expansion in profitability since the 2008 financial crisis.

The pandemic led to pent-up demand, making people less price-sensitive as they emerged from lockdowns, allowing companies to take advantage of high inflation to boost profits. Policymakers are now shifting their focus to fatter profit margins, marking a departure from concerns about 1970s-style wage-price spirals.

The European Central Bank (ECB) has added a reference to the impact of rising profit margins on inflation to its monetary policy statement for the first time. ECB executive board member Isabel Schnabel said that part of the high inflationary pressure may be due to greater market power of companies. The general secretary of the European Trade Union Confederation, said that she was pleased that central banks were finally waking up to the fact that inflation is being driven by profits and not wages.

The Bank of England governor, Andrew Bailey, urged companies to refrain from price rises that could perpetuate high inflation just as its original causes began to fade. Unions seized on his comments, with Sharon Graham, general secretary of Unite, saying that the UK is in the grip of a profiteering epidemic. However, data published by the Office for National Statistics last month showed that, once oil and gas producers were excluded, the profitability of UK manufacturing and service companies fell between the first and third quarters of 2022.

In Germany, Volkswagen, BMW and Daimler have reported record profits over the past year, showing how supply bottlenecks, coupled with resilient demand, have allowed companies to boost their margins. With semiconductor chips in short supply, companies focused on producing larger cars, as well as more electric vehicles, which are more expensive and profitable, as they can be sold to richer, less price-sensitive consumers. Germanys Big Three automakers have also been able to boost their margins by forcing makers of their components to absorb some of their higher costs for raw materials and transportation.

The big question now is how long businesses will continue to raise their prices by large increments as energy costs and the price of other feedstocks fall back. There are some signs that they are adjusting to lower demand caused by higher interest rates and the depletion of excess savings built up during the pandemic. BMW had said this month that it expected price rises to taper off, as orders had started to soften slightly in Europe this year. This is a signal that high profit margins are likely to be squeezed by weaker demand. China’s economy ending its zero-Covid policy should also boost competition to these companies in the marketplace. Other economists are more skeptical that companies in sectors with just a few big players will be able to resist the urge to use high inflation to boost their profits.

For more in depth analysis of these topics, check out these articles:

1. https://www.zerohedge.com/economics/multi-tenant-apartment-building-sales-drop-74-most-2008

2. https://mattstoller.substack.com/p/how-obamacare-created-big-medicine

3. https://www.ft.com/content/a35d1da4-60f6-4b34-9c04-a5c4f3b4d2cc

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