10 charts and themes from the past week that tell an interesting story in markets and investing…
1) The Housing Market Downturn Is Here
The mountain of evidence pointing to a housing market downturn continues to build…
–Housing Starts hit a 17-month low in July, down 8% year-over-year.
-The US Housing Market Index (a measure of homebuilder confidence) fell for the 8th straight month, moving back below 50 for the first time since May 2020.
-New Home Sales hit a 6-year low in July, down over 50% from their 2020 high.
–Existing Home Sales continue to plummet, down 20% over the last year and at their lowest levels since June 2020.
Here’s the breakdown in existing home sales by price range, which is now showing declines in transactions across the board (from low end to high end).
2) First Sales, Then Prices
The housing market is not like the stock market, where rapid price adjustments can happen in a matter of days.
Due to much lower liquidity, higher emotional anchoring, and a dearth of forced sellers, housing prices generally take much longer to move.
What you tend to see first is a sharp decline in transactions, as buyers go on strike and sellers are reluctant to cut prices enough to meet this shift lower in demand. The new and existing home sales numbers illustrate that we are well into this phase, with a collapse in transactions at a rate that we haven’t seen since the pandemic recession in 2020.
We’re now entering the second phase, where sellers are starting to face the reality of the situation and cut prices in response. The roughly 8% of listings with price drops in the past 4 weeks is the highest we’ve seen on record with data going back to 2015.
Sale prices, in turn, are starting to move lower as well. The median sales price is now down over 5% since the peak in June (from $395k to $374k). During the same period last year prices rose.
3) The Biggest Factor
The biggest factor driving demand and prices lower is the lack of affordability, with the Housing Affordability Index at its lowest level in 33 years. This is now below the July 2006 low which was at the peak of the last housing bubble. Back then, national home prices subsequently fell 25% to their low in Dec 2011. Today, the price declines have just begun.
4) How the Story Changes
In nominal terms, US Retail Sales still appear to be strong, hitting another all-time high in July, up 3.6% over the last 6 months. But after adjusting for inflation, the story changes. Real Retail Sales peaked back in April 2021 and are down 1.1% over the last 6 months.
After adjusting for inflation, e-commerce retail sales fell 2% over the last year. With data going back to 2000, the only other time we’ve seen negative real e-commerce sales was during the 2008-09 recession.
5) Still Far Behind the Curve
Inflation in the UK moved above 10% for the first time, its highest level since records began in 1989. Meanwhile, the Bank of England remains far behind the curve with an interest rate of 1.75%.
Here’s a look at the latest inflation rates around the globe…
6) More Than a Decade of US Domination
The Ratio of Emerging Markets to US stocks is now at its lowest level since 2001. Over the last 12 years, Emerging Market stocks are up 28% while US equities have more than quadrupled.
7) Gasoline Down, Natural Gas Up
Gasoline prices in the US have moved down to $3.90/gallon (national average), $1.12 (22%) below their all-time high in mid-June and at their lowest levels in over 5 months.
Meanwhile, Natural Gas continues to move in the other direction, hitting its highest levels since 2008 and more than quadrupling over the last two years. This is hugely important as Nat Gas is the largest source of electricity generation (38%) and home heating (68%) in the US.
8) The Most Mean Reverting Series in Finance
After hitting a record high in Q2 2021 at 13.5%, S&P 500 profit margins have moved down to 10.9% this year as sales growth has slowed and companies are having a more difficult time passing on rising costs to their customers.
The move downward towards the historical average brings to mind Jeremy Grantham’s words: “profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism.”
9) How to Mitigate the Impact of Higher Inflation
There’s not a lot you can do to mitigate the impact of high inflation, but one way is to try to find a job with higher pay. Workers who switched jobs received wage increases of 6.7% over the last year vs. 4.9% for those who stayed at their jobs. With data going back to 1997, this is the widest gap we’ve ever seen.
10) Streaming Takes the Lead
Americans spent more time watching streaming services than Cable or Broadcast TV in July, the first time that’s ever happened (WSJ).
And that’s it for this week.
Have a great week everyone!
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