Well, nobody wants to hear this. A year ago I began saying that home construction was about to begin its multi-year decline (and it did) and that home prices would then begin to fall several months later (and it appears to be already in process) and that these events would portend future falling stock prices followed by a faltering economy that even the “always late to the party” Federal Reserve would eventually be able to identify, in hindsight.
Q3 hedge fund letters, conference, scoops etc
HOME PRICES have now gotten too high and over-priced for their own good (chart courtesy of Charles Schwab via Ned Davis Research):
Hoya Capital Real Estate is now showing that, because of these too high prices, renting a home is currently a better option than is buying:
The Economic Cycle Research Institute just released this chart of their Leading Home Price Index suggesting that home prices have now peaked and are likely already rolling over into a new multi-year down-trend (snippet taken off of a CNBC video):
A snippet taken from CNBC on October 9, 2018:
Followed a few hours later by this headline:
From Reuters on October 16, 2018:
And another headline two days later on October 18, 2018:
And then this headline on October 19, 2018:
HOME CONSTRUCTION is moving in a downward trend direction (chart as of October 19, 2018 when even the bearish trend line failed to hold, confirming the severity of the trend… I first showed this chart over 6 months ago):
And the 7 year long bullish trend-line in home construction has broken down as of October 19, 2018:
Because of falling home construction, LUMBER PRICES are also collapsing:
To repeat, United States HOME SALES appear to be rolling over now, like a roller-coaster past its peak (see chart below). Global residential property prices will likely fall as we get closer to global recession. Commercial properties will likely follow the downward trend of home sales, but a bit later and to a much lesser extent. In the normal market cycle, this home price drop occurs many months before stocks begin to top and then fall.
U.S. home sales will continue to fall as mortgage rates continue to rise. On this chart, pending home sales (shown as a BLUE line) will naturally follow along down the path of (the inverse of) mortgage interest rates (shown as the RED line):
Although INTEREST RATES will temporarily fall again during the next recession, this very long term chart is telling us that the incredibly long 36 YEAR period of chronically falling interest rates and rising bond prices is now over (see RED circle) and investors need to be aware of this. Going forward, during bull markets, Treasury (and foreign Sovereign) bonds will offer very little downside protection for portfolios and investment advisors now need to be smart about how and when they use them. This is one reason why, although it has worked for the past 36 years, “buy-&-hold” portfolios will not work in the future… bonds will often prove to now be a drag on portfolios rather than a stabilizing asset. Importantly, yields may gyrate higher into late Spring of 2019 before the Federal Reserve finally suffers from regret and stabilizes (and then eventually lowers) rates once again to possibly 2.5% on the 10-year.
Plus there’s this:
TO RECAP: Just as when I was repeating it a few years before the big 2006-2010 home price collapse, nobody wants to hear it but prices now appear to, once again, be slightly past their top. In my opinion, home prices may fall and then not bottom for another 3 years.
In the United States, the problem usually begins on the coasts and then spreads toward the middle, like a rotting tomato. In other parts of the world it appears to have just begun too. And when the United States finally goes into recession, then all real estate prices across the globe are likely to temporarily decline in unison, perhaps by 20%. But nobody wants to hear that they should perhaps “wait-a-bit” with the biggest investment of their lives.
According to the recently released Warburg Real Estate Report, on much of the East & West Coasts of the United States, offers are already coming in at 20-25% below asking prices. Home owners are getting single rather than multiple offers and their listings are staying on the market for a minimum of 5 months (rather than a maximum of 5 days). Rental prices are also on the decline. Yes, there does appear to be a new trend direction for prices.
PREDICTION: In my opinion, by around 2021, United States home prices might have dropped 15% lower before recovering strongly. My study of secular, inflation and real estate cycles suggests that around 2027, there will be the start of yet another multi-year (and slightly larger) price drop, but originating from higher price levels.
With all investments, including home purchases, please remember this:
- Timing is everything.
- Buy low and sell high.
- Patience is a virtue.
MARKET SUMMARY: U.S. stocks are still the strongest hand and we remain in a strong bull market despite any pullbacks or a higher volatility range. The Calculated recession chance 2 months out is at less than 1% and this is crazy low. As I’ve been saying, mostly to clients in private emails, October is normally a difficult month for stocks and market volatility could easily continue until after the U.S. elections in early November. Right now, the stock market is busy pricing in expected lower corporate earnings in 2019 because earnings right now are sky high and thus will be too difficult to maintain at this rarefied level. But in most years, the six strongest months for the stock market begin in November, so that may create a bullish-boost to offset reduced corporate earnings. Regardless, this bull market appears to want to eventually head higher, especially with no recession anywhere in sight.
MAJOR BULLISH IMPETUS: Since the start of this stock bull market, initially because of low interest rates and now because of low taxes, corporations listed in the S&P-500 (meaning United States corporations) have purchased over $4-TRILLION ($4,250,000,000,000) worth of their own stock on the open market. This naturally and strongly drives up the worth of the entire U.S. stock market and there is no sign of this abating any time soon.
TRADE WAR: President Trump’s trade war with the rest of the planet has resulted in a generalized weakening of China and this seems to be the main goal. Recent agreements will increase U.S. milk sales to Canada by a whopping 0.25% and it will increase U.S. located production by U.S. car companies (rather than U.S. cars being built in Mexico) but it also will decrease U.S. located production by overseas companies, so that is sort of a wash-out. Or is it? Apparently not. This snippet is from Yahoo News on October 9, 2018; Ford laying off U.S. workers.
INFLATION: The cost of goods bought by Americans is going up quickly; one day 20% price jumps are now common. In the United States, we will get a tax cut worth a few $-hundred and our cost of living will increase by a few $-hundred… so that is also a wash-out for the vast majority of Americans that are not in the top tax bracket. But the deficit is now soaring beyond anything that could ever be paid back and Congress will soon start picking away at our social safety net of public schools, Medicaid, Medicare and Social Security, even while increasing our weapon expenditures.
DEFICIT: The U.S. deficit is increasing rapidly due to the latest tax cuts coupled with newly increased spending, because we all know that the less money you take in, the more you should spend. United States’ extreme debt problems will come home to roost in 10 years; enjoy the party until then.
WHIPLASH?
STOCK MARKET: This next chart shows the S&P-500 over the past nine years (as of October 19, 2018), shown after the normal and routine market drop and still showing our target at #5 (although the date may be moved up or back as time and conditions change). Investors need to learn to not panic because it only creates losses in one’s investment account. Political leaders must also learn to not panic because they so strongly influence their flock.
The S&P-500 over the past year… still holding its short-term trend-line as of October 19, 2018:
So, my general advice for investors: Delay gratification; save now; invest now.
Right now, life is still good for most Americans. Enjoying my pre-historic BMW (made in America and still runs and looks brand new) in my driveway with the grand-kids at the wheel:
Thanks for reading! Spread the word… no one knows about us unless you tell them!!
Article by Stephen Aust, MarketCycle Wealth Management
