CAMS Weekly View from the Corner – Week ending 9/24/21
September 27, 2021
In our previous edition we presented a valuation context for the stock market as viewed through the S&P 500 Index price. An asset price tells us very little in-and-of-itself. Placing price in both a historical context as well as relative to various measures begins to inform us how the asset is currently valued. When selling or buying a business valuing the entity is a natural process for any participant in the process in order to get context of what it is worth. Can we do this with the broad housing market? Sharing from personal experience I feel compelled to share my analytical motive here. It has come organically if you will as an overwhelming collective conclusion, consistently shared with me, with confident certainty I might add from a broad spectrum of people on the socioeconomic scale, regardless of age category or even political affiliation (collective agreement regardless of political affiliation – how is that possible?) that housing prices are ridiculously priced and will crash any time now. This has been presented to me in earnest over the previous year plus, in casual conversation, far removed from some analytical asset market discussion. Any day now those housing prices were certain to crash and to date they have not. When the collective is guaranteeing a particular outcome be careful with your mental/emotional buy in. Conversely, when the collective seemingly doesn’t give a hoot about an obvious issue prepare for consequences. (More on this below.) A Different Housing Value Measure If we erase the endless variables in the housing arena which includes regional as well as municipality views and think of the housing market nationally we can bundle it with a simple question: How do our general wages stack up relative to the collective median price for the broad housing market? This straight forward macro process takes out other variables as well such as interest rate levels and trends etc. Simply, typical cost of a home relative to typical wages.
The above chart dates back to 1964 to help us with broad time perspective. The national median price of a new home is looked at relative to the average hourly wage rate of production workers. This currently stands at $25.99 per hour which is up 4.8% from this time last year while the median new home price is $390,000 which is up 20.1% from this time last year. Want a big picture aside point that should stop you in your tracks? Read the previous two sentences again. As offered and sprinkled in endless editions there stands yet another metric of how the everyday economy (wage growth rates in this case) pale in comparison to asset price growth rates. (Asset price growth rates, in the previous 20 years have dwarfed the rate of growth of wages or any everyday economic measure. In that timeframe, the Federal Reserve has increased their money printing by 13 times. Are we ready to conclude money printing doesn’t help the everyday economy as much as it does asset prices? Are we ready to conclude it adds tremendously to wealth disparity by pumping up asset prices far beyond that of general economic growth rates and through this brings with it societal discontent?) Are They Cheap or Dancing With Price Insanity? Remember the epic housing bubble of the mid-2000’s that led to the then labeled “Great Recession”? The peak of that bubble is identified by where our red horizontal line begins. Following that red line to its conclusion we see we are currently dancing with those price levels when we use this basic valuation measure of hourly wages relative to new home prices. With history telling her story, the price levels of over a decade ago are easily labeled as price insanity. At the time though, it was hard pressed to find any collective group that would share that view. It became obvious after the cliff-dive. The ole collective “what were we thinking realization.” With the above are home prices now cheap? What!? Per the above valuation chart new home prices are now back to where they were in the well recognized bubble years. How can we even ask the question if they are cheap!? Here is where “market life” gets interesting if you will. That is, what is known as relative market analysis. This is when we bring two different asset classes together and compare them, i.e. looking at their relative value. Recall these lines from above: When the collective is guaranteeing a particular outcome be careful with your mental/emotional buy in. Conversely, when the collective seemingly doesn’t give a hoot about an obvious issue prepare for consequences. In our previous edition we applied the same analysis above to the stock market. Unlike the housing chart above, which has worked its way back to previous highs via this valuation measure, the stock market valuation measure has gone straight up stratospheric moon shot style! Relatively, new home price valuation levels are “reasonable” while stock prices are beyond valuation description. Interestingly, I can walk into nearly any environment and bring up home prices and be showered in guarantees how their fall is imminent. Conversely, if I want to watch a group of people glaze over and start to yawn I merely need to bring up the topic of how stock prices are valued to the moon! Yep, but they may be on their way to Jupiter…you may retort. Sure feels like the mid-to-latter 2000’s housing market environment again only it is stocks this time around that is at the epicenter of the collective love fest. Timing? As offered consistently, valuation measures are horrible market timing tools but they are important measures to know in any particular asset market. Triple underline this when the masses are not the least bit interested or concerned with the valuation topic. Up for a prediction? At some point housing prices will go down while their reduction in price pales in comparison to the reduction in price of the overall stock market. That is relative market analysis. Both move in a similar trend direction but one incurs much more pain than the other. I wish you well…Ken Reinhart
Director, Market Research & Portfolio Analysis
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.