Today’s weak level of existing home sales (4 million/year) are similar to the 2008 real estate bust.
History shows that weak housing eventually leads to weaker economic activity.
Existing home sales are actually one of the largest components in our SP500 earnings model.
- Housing suggests that earnings should be declining significantly
- However, earnings have actually been moving higher in 2023
Divergences between SP500 earnings and home sales like this have occurred in the past, but they are often brief.
Eventually, either home sales will catch up to earnings, or earnings will catch down to home sales.
This article delves into that question.
Factors Contributing to Low Home Sales:
1. Housing Affordability Crisis: Housing is now the least affordable in 35 years.
- Mortgage rates have skyrocketed to over 7.6%. The median home price, adjusted for inflation, stands at a staggering $394,000
- Housing affordability is unlikely to improve unless a recession hits
Recessions can be healthy for the economy as they flush out excesses in the system. As the Fed cuts rates it will allow people to take on mortgages at cheaper rates.
We expect a recession to hit the U.S. by the 1st-half of 2024. That would be a much needed reset for the housing market.
2. Housing Inventory Scarcity
We’re witnessing the lowest inventory in 40 years. Why?
- Homebuilders were traumatized during the 2008 housing crisis, so they haven’t built enough homes
- Around 60% of homeowners locked in mortgage rates below 4%. They don’t want to sell now that rates are much higher
Factors Helping Households
- Excess Savings:
- We’ve previously discussed that excess savings from the pandemic helped people keep spending over the last year driving stock market earnings higher
- We believe those savings are gone now, but others estimate that plenty of savings remain
- Record mortgage refinancing during the pandemic: This made people wealthier in 2 ways:
- It lowered their mortgage payments
- It allowed people to get cash in exchange for a larger mortgage
- We estimate that in total this provided around $430 billion of extra cash to households. This likely enabled people to maintain their spending over the past year
Outlook: Earnings to Catch Down to Housing
There are no signs of a housing recovery yet, savings from the pandemic have been depleted, and the labor market is weakening.
- Trucking employment level collapsed. This is an industry very sensitive to the business cycle
- Trucking jobs systematically plunge before the rest of the job market. This is may be a warning for the rest of the private sector
We believe it’s more likely that earnings catch down to housing in the coming months in this environment.
Consumer-sensitive Stocks Are Confirming:
The equal-weight Consumer Discretionary stocks ETF (RSPD) broke down recently:
- This ETF contains stocks sensitive to consumer spending (AMZN, HD, NKE, BKNG,..)
- A “death cross” formed last week suggesting more downside may be coming. The prior death cross saw the ETF decline by around 30% in 4 months
Conclusion: We Still Don’t Like Stocks
Putting everything together, we remain of the view that the risk-reward for stocks looks poor today.
However, stocks can still get more expensive.
But if we take the following factors into consideration:
- Housing market weakness
- Leading signs of labor market weakness
- Steepening of the yield curve (anticipating a potential recession)
- High stock valuations compared to cash yields
We don’t think investors are getting paid to make a big bet on stocks today. If the factors mentioned above improve, we will shift to a more positive outlook on stocks.
Bitcoin, however, is becoming an interesting bet:
- It recently broke out of an important price channel resistance with lots of conviction
- It appears to be breaking its correlation with the stock market, offering diversification and increasing the likelihood of institutional adoption
Institutional adoption of Bitcoin could boost its value as investors see its diversification benefits.
With the recent technical improvement, we will be keeping an eye out for future Bitcoin opportunities.
Please let us know if you found this memo useful. We look forward to your feedback!
In upcoming research we’ll explore USD dominance, looking at how likely the USD is to lose its reserve status.