By John Grace
Let me begin where I left off in my last article here. In the event of the market crash of our lifetime, now is the time to put your strategies in place to avoid being kicked in the assets.
The one-two punch you won’t forget is that the stock markets have been suffering a significant decline this year followed by a slow decline in U.S. home values due to rising interest rates, according to Dent Research.
As we have shown before, for the “It always comes back crowd,” it took more than 20 years (1929-1953) after the Great Depression for stocks to fully recover and about 40 years for New York residential real estate to come back to even. What may be even more significant is that the average age of death, according to the U.S. Census Bureau, in the early 1900s was 57. So if we were adults at that time we must acknowledge neither stocks nor New York real estate returned to their high water marks while we were on this side of the grass.
To this observer, that sounds like a lot of regrets to live with until going to heaven. Perhaps we can learn from history, instead of blindly repeating the past.
After dropping for the first 5 ½ months of the year, the S&P 500 has rebounded 8.5% since June 16 and 4.7% since July 26, the day before the Federal Reserve raised interest rates. Investors have turned enthusiastic toward stocks partly because Fed Chairman Jerome Powell said after the rate hike that the Central Bank will eventually slow its rate hike campaign.
Don’t take the sucker punch.
July was the best month for stocks since November 2020 thanks to better financial results from a number of America’s largest companies and hopes that the Federal Reserve can diminish a policy of restraining the economy sooner than thought, according to the New York Times.
But rebounding stocks may not be a good thing. The S&P 500 remains down 14% year to date. As of July 22, the forward 12-month price-earnings ratio for the index was 16.7, barely below the 10-year average of 17. And the last 10 years was a period when the S&P 500 surged 11.38% annualized, according to Alphonso Peccatiello at MarketWatch.
If there is one thing we have learned since 1979, it’s that the pundits and most of the public never see financial bubbles until after they burst.
Thanks to Dent Research we know that housing prices normally rise with inflation at a rate of 2% or 3% a year. But since 2000, prices have gotten completely out of hand.
In 2000, the average U.S. home price was $118,600 and today the median price has more than tripled to about $428,000. Average U.S. household incomes, on average, have only increased 1.6 times. If that isn’t a complete disconnect, I don’t know what is.
When it comes to homes, everyone agrees that the problem is a lack of inventory. That helps too many folks believe the road to riches is through owning lots of homes.
According to me, Americans don’t learn from history because we are too busy repeating it. Some never learn: 60% of experts say housing is not in a bubble according to Zillow.com research. But I am most fond of Gen. George Patton’s quote, “If every person is thinking alike then somebody isn’t thinking.”
All that inexpensive Fed helicopter money in the recent past keeping interest rates super low and greed has contributed to housing prices standing at nose bleed levels. But we all know that bubbles have historically burst. The last housing crash was about 34% from 2006 to 2012.
Dent Research is of the opinion that if you want to see where the future is headed go back and look at your home price in 2012. It seems that when bubbles burst, prices revert to where the bubble was formed.
The recent 57% crash in lumber prices provides evidence of how quickly new homebuilding has declined, now that demand is collapsing from high prices and there are few sellers of existing homes.
No one can see the future but we do know now that the average age of death in the U.S. is 76.6. Beginning in January, 76 million Americans born from 1946 to 1964 will range in age from 59 to 77. The Census Bureau also informs us that the average age Americans sell their homes is 78.
Here come 24% of the population moving out on their own or on a stretcher. People dying will simply outpace people buying.
Either you want to be part of the cattle herd, so to speak, (where the view and the smell don’t change) or you do what you can to stay ahead of the pack. We want you well prepared for the good, the bad and the unforeseen. Because we are in unprecedented territory.
John Grace is a registered representative with LPL Financial. His On the Money column runs monthly in The Wave. The opinions expressed here for general information only and are not intended to provide specific advice or recommendations for any individual.