Housing Pandemonium

This article is a follow-up to my first post on the housing market. In the last article I showed the long-term home price index for the U.S. For the purposes of this article, I will begin by discussing the Home Price / Income ratio for the U.S. (red line) which is courtesy of the OECD:

OECD (2024), Housing prices (indicator). doi: 10.1787/63008438-en (Accessed on 19 February 2024)

What catalyzed this blog post is the fact that my wife and I are in the process of putting our house on the market. Don't say I never take my own advice. We've lived in the same house for 28 years in the Maryland suburbs of Washington D.C. We raised our kids in this house and we bought it from my wife's parents so my wife has lived in the same house almost continuously for 50 years. Needless to say there is sentimental value. Nevertheless, we bought a condo in Sarasota Florida last year and that's where we are planning to retire. So it was time to sell.

We've had many discussions about why are we selling now versus waiting a few more years to benefit from more appreciation. I am told by almost everyone that home prices can only keep going up from here. It appears that the lessons of 2007 have long since been forgotten. I am informed that there is "no subprime" in these markets. Actually, subprime is merely a category of credit rating, so there is always subprime in markets. However, in 2007 Wall Street had found a way to package subprime loans into ticking time bombs that were AAA rated by Moody's and S&P. This time we have subprime-style debt risk in the student loan market, the imploding regional bank sector, in the commercial real estate sector, in the EM debt market, in the Crypto Ponzi market, in the 3x leveraged Magnificent 7 ETF market, in the Reddit-manipulated options market. All of which will simultaneously explode without warning. Aside from everyone knowing about it.

What we see in the chart above is that the U.S. home prices / income ratio has round-tripped back to the 2007 highs. And we see (circled) that the pandemic had everything to do with it. Prior to the pandemic, post-2008 home prices had been recovering on a slow and steady trajectory. Many pundits have been stymied as to why home prices continue to levitate for this long into the Fed's rate hiking cycle. Historically, that has not been the case. In my last post on housing I discussed "rate lock" - the propensity to suppress home sale volumes due to sellers being reluctant to sell because they would be forced to refinance at higher interest rates. This was due to mass refinancing during the pandemic at rock bottom rates. But there is a more important factor at work and that is of course the economy.

In the lower pane of the price/income chart above, we see the unemployment rate. There is a clear (negative) correlation between the unemployment rate and the housing market, as one would expect. One of the impacts of the pandemic is that it catalyzed Boomer retirement on a massive scale. Two million people "retired" in March 2020 meaning they were laid off and gave up looking for another job. In addition, subsequently, even more people have retired. The net effect of all of this retirement is that the job market has remained stronger than it would have normally at this point in the cycle. For that we can thank the booming stock market. This article appeared in Barron's on Friday:

"How much does the historically low unemployment rate owe to the record-high stock market? That would seem to put the economic horse before the cart. A fully employed labor market typically is the result of a robust economy, which in turn is reflected in the equity market, according to all of our college textbooks"

But it seems that strong gains in asset prices have lifted the wealth of many older workers sufficiently to allow them to attain their goal of retirement"

FR: Ass backwards, and yet they too agree that it's happening - The stock market is driving the economy via the wealth effect which I discussed in my end of week blog post.

"Investors are totally oblivious to the fact that they are now caught in a feedback loop between hyper-levitating markets and the economy"

Late this past week we learned that consumer sentiment rose again. In the chart below there is a clear correlation between consumer sentiment and the stock market (see blue vertical dotted lines). This effect has grown even more pronounced over the past two years. It's clear that every dip in stocks leads to a dip in consumer sentiment and/or vice versa. This is the highest consumer sentiment since Gamestop circa February 2021 which coincided with COVID vaccinations and preparations to re-open the economy. It was also the peak for the IPO market and retail trading FOMO. In the lower pane we see it was the peak for Nasdaq new highs, and now it's the second lower peak. And of course this is a lower peak in consumer sentiment. Meanwhile, the market cap weighted indexes are making new highs. It's a massive divergence between fantasy and reality.

That's the good news. But that doesn't mean that everyone is sharing equally in the bounty. The booming stock market drives low unemployment which drives a still booming housing market. Someone has to pay the price. In the chart below (bottom pane) we see that personal interest payments relative to wage CPI have sky-rocketed because most of the new jobs being created are low paying jobs while most of the people retiring had high paying jobs. Which means that the financial strain on the active workforce is rising steadily.

In conclusion, it's fair to say that consumer sentiment WAS strong when that survey was taken many weeks ago. However, sentiment surveys are a lagged indicator. This week we got retail sales for January which came in weak. Of course that had to be construed as good news.

"Stocks found support on Thursday’s weaker-than-expected retail sales and manufacturing production reports, which were dovish for Fed policy and knocked bond yields lower"

Per Hendry's Iron Law of Monetary Euthanasia: bad news is good news, and low rates are good for "stocks", right up until it all explodes without warning.