Today's Home Price To Income Ratio Is Worse Than During The Global Financial Crisis Housing Bubble [2006-2008] | (12.5.22)
"I'm only rich because I know when I'm wrong. I basically have survived by recognizing my mistakes." - George Soros
What You Need To Know Today:
• This morning we received an updated reading of 56.5 for the Institute for Supply Management (ISM) Purchasing Managers' Index (PMI).1 The ISM PMI surveys purchasing managers and measures the relative level of business conditions including employment, production, new orders, prices, supplier deliveries, and inventories. It serves as a leading indicator for economic health in the U.S. because businesses react very quickly to changing market conditions and purchasing managers are among those with the most up-to-date insight as to a company’s view of the economy. When interpreting this index keep in mind that a reading above 50.0 indicates expansion, whereas below 50.0 indicates industry contraction. Today’s reading of 56.5 beat the pre-release market expectation of 53.4 and is 2.1 points higher than the last report.
TL;DR — U.S. service sector business activity expanded in Nov despite a worsening economic backdrop.
• According to Altos Research, available home inventory was down ~2.6% week-over-week to ~549,000 on December 2 from ~564,000 the week prior.2 To put this into context, compared to the same week in 2021, inventory is up 56.7%. Further, when compared to the same week in 2020 inventory is up 14.2%. Meanwhile, if we look back to pre-COVID-19 pandemic levels in 2019, today’s inventory is down 34.1% for the same week.
TL;DR — Home inventory is up significantly compared to 2020 & 2021, but still below 2019.
• The Fed’s next meeting will begin a week from tomorrow and wrap up in the afternoon the following day (12/14). This will be the final meeting for 2022. As of now, the market continues to price in a 50bps (0.50%) Federal Funds Rate hike following this meeting, which would put the Federal Funds Rate between 4.00-4.50% and another step closer to the terminal rate target of 5.00-7.00% (according to recent comments from members of the Fed). Additionally, a 50bps rate hike would be significant because it would break the streak of 75bps hikes — ultimately showing that the Fed is prepared to start a slightly less aggressive approach to tightening monetary policy. Thus, implying they believe their prior policy decisions have been effective in beginning to curb inflation. This could be great news for any bullish optimists as so far this year the aggressive policy has sent a shock through the financial markets. To illustrate, here are year-to-date (YTD) returns for a few notable asset classes:3
TL;DR — Fed to have final meeting of 2022 next week — 50bps rate hike expected. Potentially bullish — could imply Fed to be less aggressively tight on monetary policy going forward while still curbing inflation.
Chart Of The Day:
Over the last 70 years the average house in the United States cost ~5x the annual household income — meaning that the ratio of U.S. home price to median income had been ~5.0. Leading up to the Global Financial Crisis (GFC) of 2008, this ratio peaked at ~7.0. Where do we sit now? As you can see on the below graph, we have eclipsed the previous all-time high and are now at a ratio of ~7.61. Now, before you panic, it is worth noting that interest rates play a HUGE role in this ratio. When interest rates go down, the affordability of homes goes up because capital becomes more accessible. As result, people spend more money on homes. Let’s keep in mind that we saw the absolute lowest average 30-year fixed rate mortgage rate (~2.65%) in January 2021 whereas in 2006 interest rates were still between 6.15% - 6.80% for the year. Hence, while this ratio is absolutely something that we should be paying attention to it is important to understand what it does and does not account for — the cost of capital being the important missing piece in this case…
Ratio of U.S. Home Price to Median Household Income (Home Price / Income)4
TL;DR — Median home price/household income ratio is the highest on record. Generally, this is bad, but let’s maintain perspective as to how important the cost of capital is for this ratio and how different 2020-2022 was from 2006-2008 regarding rates.
Source: Institute for Supply Management.
Source: Altos Research.
Source: BlackRock Investment Institute, with data from Refinitiv Datastream, 1 December 2022. Note, data shows annual index total returns (income or dividends reinvested) in U.S. dollars, indices are unmanaged and therefore not subject to fees. 2022 shows year to 30 November 2022. Indexes or prices used are: U.S. equities - MSCI USA Index, High yield - Bloomberg Barclays Global High Yield Index, IG credit - Barclays Global Corporate Credit Index, and REITs - S&P Global Real Estate Investment Trust (REIT) Index. Digital Asset data via CoinGecko.
Source: Federal Reserve Bank of St. Louis: S&P/Case-Shiller U.S. National Home Price Index, Federal Reserve Bank of St. Louis: Median Income since 1983. Chart by Longtermtrends.