CAMS Weekly Views from the Corner – Week Ending 9/29/2017
October 2, 2017
Builders say they would like to build more affordable homes but cannot because the math doesn’t work. The costs of land, labor, materials and regulatory compliance are just too high. “Buying conditions, in theory, are great right now: Jobs and incomes are growing, and rock-bottom mortgage interest rates are helping keep financing costs low. What’s missing from the equation is a lack of homes actually available to buy at a price point that’s reasonable for most buyers.” https://www.cnbc.com/2017/09/26/stop-sugarcoating-the-housing-market-economist-warns-that-buyers-face-increasing-troubles.html
The stock market and the housing market are beginning to speak the same language relative to wages and incomes experienced by the everyday citizen.
Since the 2008-09 Financial Crisis the average hourly earnings growth rate here in the U.S. has been in the 1 ½% to 2 ½% range. At the same time price inflation has been in the 1% to 3% range. When we place these numbers together they reflect a real world experience whereby the everyday person finds themselves unable to “get ahead” to put a phrase to this collective experience.
More technically this is known as the lack of real wage growth which accounts for wage growth rates after factoring in inflation.
Specific to the housing market the S&P/Case-Shiller U.S. National Home Price Index has grown at a rate of 5% to as high as 10% since latter 2012 when home price increases kicked into gear post Financial Crisis. These housing percentage price increases dwarf the aforementioned income growth rates that ultimately support them.
Interestingly it appears we are seeing the logical follow-on of the above disparities and that is a cooling of the housing market generally. Our header quote offers pricing issues are beginning to play a role.
Existing home sales peaked in March of this year and with the most recent report reflected near 0% growth in sales compared to the previous year. New Home sales have been even lower as sales also peaked in March with the most recent report reflecting a reduction in sales of 1.2% compared to the previous year.
With the most recent update from Ron Griess over at the Chart Store (www.thechartstore.com) we also see average earnings are not keeping up with stock price percentage growth. The above chart dates back to 1964 and since that time we have not seen such a disparity of stock prices when compared to Average Hourly Earnings.
It now takes 112 hours of work to buy the S&P 500 – the highest we’ve seen in this chart dating back 53 years.
Ultimately something has to give in that we either see a significant increase in wage growth (2% range will not cut it) or a significant lessening (or worse an actual decrease) in the price growth rates on the National Home Price Index. Home prices growing 5% and higher annually with simultaneous 10% stock market growth against a 2% wage growth backdrop (i.e. near 0% when factoring in inflation) walks us into a massively overextended pricing backdrop for both markets.
Price extending from economic reality: We’ve been here before right. The question is have we already attained the overextended levels realizing the above percentage stories have largely been playing out for several years or more?
Realizing the Federal Reserve’s historic money printing policies post 2008-09 Financial Crisis played a significant role in pumping up all markets – known as the reflation trade – and now as of September 20th they have informed us they will begin the un-printing process. All told this is a recipe for pricing issues unless wages and economic growth increase significantly!
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
Portfolio Manager, CAMS Spectrum Portfolio
Footnote:
H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.
This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.
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