Weekly Update

The Housing Market Stumbles


Published October 28, 2022

Below we share a good summary of the housing market. As with the stock market, the woes experienced recently are really only reversing the crazy gains of the prior year. Compared to pre-pandemic, we would guess that most homeowners remain in very good shape and sitting on better-than-average appreciation (aka: inflation) in their assets.

“The Covid pandemic created significant market distortions. The economic shutdown and reopening process with the 42% increase in money supply is being unwound in the equity markets currently.

It is also being unwound in the housing market. The housing market tends to bottom years after the equity market finds its low.

The Covid stay-at-home behavior change combined with historically low interest rates and a huge injection of government cash into consumer hands stimulated a home buying frenzy. Just as we saw record high stock market index levels, we saw record home price increases. This trend has reversed and may be stuck in reverse for years to come.

September existing home sales declined by 23.8% year-over-year.

Home Sales

Prices are falling across the country.

Median sale price %

Homebuyer mortgage payments are rising rapidly as rates have more than doubled.

Mortgage rates

In California, the average 30-year fixed mortgage rate is 7.64% if the credit score is between 700-719 and the buyer makes a 20% down payment on a loan amount of $300,000. Given the Fed’s current statements about further rate hikes, we expect to see mortgage rates rise above 8% in the near-term, up from 2.5%-3% a year ago.

For many home buyers, the equity market is the source of the down payment. With the S&P 500 down by over 20% and the NASDAQ down by over 30% year-to-date, an important source of funds for a down payment has depreciated materially.

The final shoe to drop on the housing market will be a deterioration in the labor market during a recession. Unemployment will rise and wage growth will slow.

Much like what the equity markets have done, the housing market may end up giving back all of its Covid gains. Because the pace of transactions in the home market is much slower than in the stock market, the price correction process takes years. During the Great Financial Crisis (GFC) which began with a housing price and lending bubble, the stock market hit its low in 2009 while the housing market reached its low in 2011.

If you are a new home buyer, this is good news. If you are an existing homeowner, there is a high likelihood you own your home with very attractive loan terms. For the sake of both the stock and housing markets, we look forward to putting Covid in the rear-view mirror.”


Market Update

Investors entered the week focused on a solid menu of earnings from the tech/consumer heavyweights. Monday continued the recent move higher for stocks with a +1.2% lift. This came despite a significant plunge in shares of Chinese-based companies, whose shares reacted negatively to a further consolidation of power under Premier Xi Jinping. Tuesday brought a pullback in interest rates which spurred a broad-based rally in stocks, with the strongest gains in interest-sensitive sectors like real estate and utilities. Rates are pulling back after a torrid 12-week stretch. After the close, earnings from Microsoft and Alphabet (Google) disappointed investors sending those shares lower to open Wednesday’s trading session. The bellwether Nasdaq stocks sent that index tumbling -2% while the loss was contained to -0.7% for the broader market. Shares of Meta Platforms (formerly Facebook) plunged Thursday after the company continued its string of slowing growth and disappointing results. The -20% drop in the company’s stock sent the Nasdaq down another almost -2% while the broad market again held up better. Positive earnings from Caterpillar and Honeywell helped keep a bid under industrial companies while interest rates fell for a 3rd straight day. Friday brought a slew of earnings with a miss from Amazon the only real negative in the group. A solid report from Apple kept tech/consumer stocks firm despite Amazon’s miss while continued strong results from energy leaders Exxon and Chevron rewarded investors in the year’s best performing sector. Interest rates ticked a touch higher on the latest inflation report, but remained down for the week, key to the stock market’s health.

This week was a victory for the bulls. Despite the biggest stocks in the market struggling as tech earnings generally disappointed against expensive valuations, the broad market (SPY) found its way higher for the week by almost +4%. Even the Nasdaq (QQQ), dominated by those big tech companies, came away with a +2% gain. Smallcap stocks (IWM) showed the market’s underlying strength leading the way with a +6% lift. It was the fourth straight week higher for the Dow Industrials putting that index right at overhead resistance, a level that has turned back rallies all year, so we will see if that resistance holds again next week.

Warm wishes and until next week.