One of the most dangerous phrases that an investment manager can often say is that “things seem different this time around”. It is a phrase meant to cast a shadow on the belief that risks seem largely minimal within the economy, or a segment of the economy, based on observable trends that in the past would otherwise tell a different story. Those trends are often retrospective examples of amplified risk that may have resulted in weak capital markets and elongated economic drawdowns. One such example that bares significance in today’s environment is the housing boom that the nation is experiencing, which resembles trends that led to the eventual financial crisis in 2008. Many investors are rightfully asking whether the trends are sustainable and what the implications will be in the event of a housing market drawdown (if the conditions support it). To gauge whether a comparison of the two periods makes sense, let us first explore the objective data behind the current trends and then build an actionable conclusion. What we will find is that the reality of the current housing market highly substantiates the observable excitement.
One stark reality of the past 18 months has been the lack of systematic economic and consumer concerns. If you are reading that and scratching your head, let me explain. Prior to the self-induced COVID lockdowns in early 2020, which caused tremendous supply chain issues and highly disrupted the labor market, the global economic environment was not headed for an impending recession. Retail sales were healthy, labor remained tight, monetary policy was behaving appropriately, the banking system was highly capitalized, and consumers remained fiscally healthy, as based on disposable income relative to total debt. The data set to support the lack of prudential and systematic issues was quite extensive and it is all information we have covered in depth across various commentaries since last year. Such objective information is a main reason why we strongly favored equity market participation during the depths of the bear market – the losses did not validate the true reality. What we also witnessed amidst the chaos was that the COVID downturn failed to truly pause the gains in the housing market (excluding data from the first quarter of 2020) and appeared to add rocket fuel to the fire after March 2020. In retrospect, we should not be surprised. For starters, the labor market downturn that we have witnessed since last year has not been a historically accurate reflection of true economic risk. We know that the job losses were disproportionate to leisure and service industries and we also know that most Americans, and businesses, continued to thrive on the ‘work from home’ economy. From a fiscal health standpoint, those consumers that were planning on buying a home before the pandemic were still in the market for a home during the pandemic. Their financial situation did not change much. In fact, it notably improved from the added stimulus efforts by the government. Our March 12th commentary focused on the $2 trillion sitting across U.S. savings accounts, a figure that is astronomical by any measure, and a figure that should dwindle lower over the coming months in the form of consumer spending. As a result, we believe that the housing supply crunch pre-pandemic was only amplified during the pandemic and we believe it is likely to feel added pressure post-pandemic. This remains positive, in our view.
For those investors still questioning whether the housing trend will end badly, there is more positive news in the pipeline. The National Association of Realtors recently reported that down payments for first time home buyers are approximately 53% higher than they were in 2008. Not only is the data showing that homebuyers are fiscally healthy prior to buying a home, but the data also reveals a careful approach to excess debt. The Federal Reserve reported that U.S. household debt, relative to disposable income, remains nearly 30% lower than the peak in December 2007 while America’s average credit score rose to 711, the highest on record, as reported by FICO®. The main point here is that the housing boom is a healthy response to a healthy consumer base within an economy that is likely to start its next secular growth cycle. We look forward to further developments.
We would objectively argue at this point that any potential issues in the housing market are likely to rise from the supply side, not the consumer side. The threat of rising costs for raw materials is very real and has been an observed factor since 2018. Inflation fears are often associated with such a trend, as is the notion of rising interest rates. I urge caution for those investors using inflation as a fear factor for either exiting equity market participation or expecting future economic issues. Higher inflation, relative to current levels, should be welcomed (in the arena of 2.5-3%) because it can have a meaningful positive impact to aggregate growth and consumption. For more information on inflationary trends, please reference our commentary library on our website.
Edison Byzyka, CFA – Chief Investment Officer – Credent Wealth Management
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.
All return data sourced from Bloomberg.
All other data soured from Bloomberg, through the release of monthly figures from the Department of Labor, Bureau of Economic/Labor Statistics, U.S. Census Bureau, or from the Federal Reserve and any of its affiliated regional locations.
Small Business Optimism sourced through NFIB. Small business hiring plans sourced through NFIB. Consumer sentiment sourced through the University of Michigan.
Earnings data sourced through Bloomberg Intelligence and through Bloomberg’ earnings analysis composites. Interest rate cut/rise probabilities are sourced from Bloomberg’s tracking of futures contracts tied to the Federal Funds interest rate.
Manufacturing data – Markit PMI – Bloomberg
Economic Policy Uncertainty data sourced from Bloomberg via The Baker, Bloom, and Davis Index.
FICO® is a data analytics company focused on credit scoring services.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changed in the aggregate market value of 500 stocks representing all major industries.