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Bob’s Journal for 4/28/22

Published on: Apr 27 2022

Analyzing Housing Market and Rising Interest Rates

U.S. home prices hit a record in March, according to the National Association of Realtors. The median price for an existing home rose by 15% in March to $375,300.

But sales of homes were lower than 12 months earlier, and there are strong headwinds for the housing market.

Higher prices themselves make housing less affordable, causing many potential buyers to drop out of the market.

Mortgage interest rates have been rising and recently hit their highest level since 2011. That also reduces the affordability of home ownership.

Affordability of homes is at its lowest level in decades, according to some measures.

The question is how will reduced affordability affect the housing market? Will sales decline sharply, as in the years following 2007? Will prices decline?

The current housing market doesn’t resemble the bubble market that preceded 2008.

First, there still are strong supports for home buying and recent prices. Household incomes and wages continue to rise. Though they’re rising at lower rates than inflation, they’re rising enough to give confidence to many potential buyers.

Strength in household balance sheets also supports home purchases and prices. Many households paid down debt and otherwise improved their balance sheets during the pandemic. The sharp increases in home prices that we’ve seen give existing homeowners the ability and incentive to shop for larger homes.

Perhaps most important is that we don’t have the speculative overbuilding of homes that we saw in past housing booms. In fact, home sales declined over the last year because there aren’t enough homes available for sale.

Monthly data has indicated for some time that the inventory of homes available for sale is near record lows and well below average.

In addition, fewer homes than normal were built in the years following the financial crisis and building continues to be below the pre-financial crisis average.

There are far fewer homes available to buy than there are people who’d like to buy them. Demand exceeding supply keeps the number of sales down but supports prices.

Higher prices and higher interest rates will reduce demand for houses somewhat. That could reduce price increases and perhaps cause some price reductions. But it will take a recession to cause a bear market in housing.

The Past Leaders are Taking Stock Markets Lower

Headlines are filled with data about falling stock indexes, but they tell only part of the story.

The S&P 500 and most other widely followed indexes are capitalization weighted. That means the stocks with the largest capitalizations are a higher percentage of the indexes than other stocks.

Even after recent declines, the 10 largest stocks are 28% of the S&P 500. Their share of the index was higher in 2021, when the large growth stocks still were appreciating.

Apple is almost 7% of the S&P 500 by itself. Microsoft is 5.7%. Amazon is 3.5%, and Tesla is 2.3%.

Even large companies are small percentages of the indexes compared to those mega-cap stocks. Small and mid-size companies are tiny percentages of the index and have little or no effect on its movements.

But capitalization-weighted indexes aren’t the only investment option. An equal-weighted version of the index lets companies other than the largest ones have a meaningful effect on returns.

For example, the Invesco S&P 500 Equal Weight ETF (RSP) has only 3% of its portfolio in the 10 largest positions. Most of the stocks have weightings of 0.25% to 0.30% of the fund. It is unlikely only a few stocks will determine returns for the fund.

More importantly, the equal-weighted index will do better during periods when the largest growth companies are in corrections or bear markets. That’s what’s been happening in 2022.

The S&P 500 is down 9.50% so far in 2020 and 5.34% over the last four weeks.

RSP is down only 5.69% for the year to date and 3.27% over four weeks.

As Bespoke Investment Group pointed out recently, the eight largest stocks in the Russell 1000 were down an average of more than 8% for the first 20 days of April while the average of all other stocks in the Russell 1000 was down only 0.08%.

Some of the large company growth stocks that were big winners the last few years are down so much in 2022 that they no longer are among the 10 largest positions in the major indexes.

Trend following and riding the hottest stocks is very profitable until the markets turn. Investors learned that after the tech stock bubble burst in 2000 and the market decline in 2008 and might be learning it again in 2022.

Age is a State of Mind

“You’re as young as you feel” and other sayings often are used to encourage people to change their attitudes about life and growing older.

A new book says there’s a lot of truth in those sayings and people should take them to heart as they age.

Becca Levy’s “Breaking the Age Code: How Your Beliefs About Aging Determine How Long and Well You Live” combines research and anecdotes to make the case.

In one study, Levy used data from the Ohio Longitudinal Study on Aging and Retirement and other data from the National Death Index to gauge how attitudes about aging affect life spans. Levy’s conclusion is that people with the most positive views about aging outlived those with the most negative views by 7.5 years.

Other studies show that memory lapses don’t have to be a part of aging. Those with positive attitudes about aging outperform others on memory tests.

Levy concludes that positive attitudes about aging improve health, disagreeing with those who believe that seniors with positive attitudes about aging are those who’ve been fortunate enough to have better health as they aged.

The Data

The PMI Composite Flash Index for the economy fell to 55.1 in mid-April from 57.7 at the end of March. The mid-April level is the lowest in three months.

The services component declined to 54.7 from 58.0 in March. That also is a three-month low for the services component.

The manufacturing component, on the other hand, increased to 59.7 (from 58.8 at the end of March) and was at a seven-month high.

New unemployment claims declined by 2,000 to 184,000 in the latest week. Continuing claims declined to 1.417 million from 1.475 million.

Home prices continued to surge in February. The S&P Corelogic Case-Shiller Home Price Index increased another 2.4% in February, bringing its 12-month climb to 20.2%.

The February increase was the highest monthly increase for this index, which has data beginning in 1975.

The FHFA House Price Index reported similar numbers. There was a 2.1% price increase in February. In the past 12 months, the HPI increased 19.4%.

New home sales in March were 8.6% lower than in February. March’s sales were 12.6% lower than 12 months earlier.

Pending sales of existing homes declined another 1.2% in March, after falling 4.0% in February, according to the National Association of Realtors (NAR).

That makes five consecutive months of declines for pending home sales. Over 12 months, pending sales are down 8.2%.

The manufacturing growth in Texas slowed in April. The General Activity Index, compiled from the Dallas Fed Manufacturing Survey, fell to 1.1 from 8.7 in March. The Production Index was 10.8 in April, down from 13.2 in March.

The Philadelphia Fed Manufacturing Index declined to 17.6 in April from 27.6 in March. The April decline brings the index back to February’s level but still indicates strong growth in the sector.

The prices paid index derived from the Philadelphia Fed survey of manufacturers increased to its highest level since June 1979. The prices received index also increased a bit from March’s level.

The Richmond Fed Manufacturing Index increased to 14 in April from 13 in March.

Durable Goods Orders increased 0.8% in March, bouncing back from a 1.7% decline in February. Excluding transportation, orders increased 1.1% in March and were down only 0.5% in February.

Core capital goods orders, considered a good measure of business investment, increased 1.0% in March after a 0.3% decline in February.

Consumer Confidence, as measured by The Conference Board, declined a little to 107.3 in April from 107.6 in March.

The Leading Economic Indicators index from The Conference Board increased 0.3% in March to 119.8. This follows a 0.6% increase in February and gives the index a 1.9% increase over the last six months.

The Conference Board announced the results indicate economic growth will continue at least through the end of 2022 and the 12-month growth rate for gross domestic product (GDP) in 2022 is likely to be 3.0%.

The Markets

The S&P 500 lost 6.50% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 1.03%. The Russell 2000 tumbled 6.86%. The All-Country World Index (excluding U.S. stocks) decreased 5.64%. Emerging market equities declined 4.56%.

Long-term treasuries gained 2.65% for the week. Investment-grade bonds increased 0.91%. Treasury Inflation-Protected Securities (TIPS) added 0.88%. High-yield bonds fell 0.72%.

On the currency front, the U.S. dollar gained 1.30%.

Energy-based commodities lost 0.89%. Broader-based commodities fell 2.27%. Gold declined 2.43%.

Bob’s News & Updates

My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It tells you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.

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A recent five-star review of my book on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.

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