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Friday Market Update: May 27th 2022 with BRIAN MANNING

Happy Friday! Brian Manning here with the weekly update. So much to talk about this week, action packed. Let’s get right to it. So, Monday this week, let’s just talk about stocks from Monday. So… certainly, seeing some corrections in the stock market. You’re seeing stocks down from some of their highs down by like 10%. You know, some of them pushing bear market territory.

Bear market is when stocks are down 20% or more. Something we really like to pay attention here to is really the S&P 500. So… the S&P 500 makes up 83% of the stock market. What’s interesting is that five stocks alone in the S&P 500 make up 20% of the S&P. So, definitely not hard to see a lot of movement there when those stocks do move. And this certainly has an impact on the housing market. There’s this thing called the negative wealth effect. And when you have people that are looking at their financial portfolios, whether it’s a taxable account or 401K, when they see those numbers going down, it creates a negative wealth effect and certainly puts an impact on the home buying process. Even if you have a 401K that you’re not going to use right now, if you’re watching that value drop 10%, it certainly makes someone nervous and think, oh, maybe I shouldn’t spend money. Maybe I shouldn’t buy a house right now. So, certainly, some of the impacts in the housing market right now would definitely say are from the negative wealth effect.

Tuesday this week, we’ve got new home sales. New home sales were down 16%. That was definitely a market mover. You know, this is coming off some pretty high numbers. Something to… a couple of items to pay attention to a new home sales is there was really only 444,000 new home sales available, but of those, only 38% were able to be moved into a certainty. And I can tell you from the buyers that we’re working with, when we have buyers looking at new home sales and it’s really what’s called the dirt start. So, the home hasn’t even been started yet.

There’s a lot of uncertainty around that. And when you have interest rates that have moved up the way that they have over the last several months, we’re starting to see that some new home sales are making buyers nervous, because if the home hasn’t even started yet and maybe it’s going to be done in twelve months based on supply chain issues, it makes people nervous. And I’m definitely seeing having the market slightly impacted. There are new home sales from the rising interest rates. And that person that maybe was looking at a new home sale might look more at a resale right now. So, not really a surprise to see a little bit of a slowdown there in new home sales.

We also got Fed minutes released this week. You know, something I want to talk about the Federal Reserve is you’re starting to see a little bit of backpedaling. And one thing we want to be very aware of is that unanimously when the Federal Reserve starts to use the word pause in what they’re talking about. So looking at rate hikes right now, but when they start to say we might put a pause on rate hikes, definitely markets are going to react. You’re going to see stock markets react favorably for that. It’s not going to happen right now. The first Fed member just came out and used that word recently is something we’re going to want to pay close attention to because it’s definitely going to be impactful going forward.

Thursday this week, we’ve got pending home sales. Pending home sales were down 3.9% on a month-over-month basis, 9% on a year-over-year basis. If you looked at the media, MSNBC, they just had a field day with the negativity surrounding this. We’re going to look at some charts here in a minute just to give you some more feedback and color associated with the housing market and pending home sales. You got to watch the media though, because the negativity that surrounds this report right now is pretty bad. And it’s definitely, you know, media is always impactful. So, we’ll look a little bit more at that in a second.

And then Friday this week, we had a PCE. So, today, we got what’s called the personal consumption expenditure. This is the Federal Reserve’s favorite gauge of inflation. We don’t fully agree this is the best one. We really put a lot more weight in the CPI. The reason why we say this is because the PCE report does not include out-of-pocket expenses for medical or housing. So, it doesn’t really give the full impact or the full picture on inflation across the US. So, certainly, saw some inflationary pressures ease there. We had the PCE move from 6.6% to 6.3% on the headline number.

The core number that removes volatile items such as food and energy went from 5.2% to 4.9%. You know, we might see a little bit of low here coming into the summer months because this is replacing inflationary numbers from last year. And we had a little bit of low there as well. The question is going to be, you know, do these numbers stay low or are they going to rise a little bit coming into the fall? Another unknown right now is going to be fuel costs. You know, you have West Texas barrels at 113 at barrel, and the anticipation is the prices are going to go up. So, if you continue to see fuel prices go up, there might be an impact on PCE there as well. Another important item that we got today out of this PCE report was wages. So, private sector wages are up 12.7%. There’s a lot of talk right now that housing market, you know, prices have gone up, interest rates have gone up, and homes are becoming unaffordable.

But… you know, if you did a comparison of, say, 2016 to 2022, and you looked at the rise of home prices, you look at the rise of interest rates. If you also look at the rise of incomes and this 12.7% is a great example, you know, certainly, incomes have been keeping up with the rises in pricing as well. So… So, that’s probably one of the reasons why we’re not so worried about it. Let’s take a little look at a couple charts that I have here and just some feedback of what we’re seeing in the housing market right now. So, after the pending home sales report came out, this was a press release put out by National Association of Realtors Chief Economist. You know, he says home prices are really in no danger of any meaningful decline. Decline, excuse me. That there’s an ongoing housing shortage and any home listed properly is still selling swiftly.

And I 100% agree with that, as would most realtors in the marketplace right now. He also continues to say that with mortgage rates rising, they expect to see sales wane by 9% in 2022. Not shocking because we’re just coming off some extremely high home sale numbers after the post Covid boom. So, this is not really surprising to see. And expect home appreciation to moderate at 5% by year’s end. What does 5% mean? So, if we took a $750,000 home, if you bought that today and you put down 20%, if your home appreciated at 5% over seven years, this home is worth just over a million dollars. And at the end of seven years, if you buy a home, you pay closing cost to purchase it, your accumulative appreciation after your closing cost is about $301,000. And based on that 20% down, your return on investment is 201%. So, we’ve been saying this for a while.

We’re not really upset about seeing the markets calm down. I would love to see less appreciation. I would love to see calming of the bidding war. Certainly, moving into home appreciation that’s anywhere at 5 or 7% is not problematic. These numbers are still incredible and they’re appealing. Anyone that’s looking at buying a home looked at these numbers carefully and says, oh, that’s really not that bad. Some other items to pay close attention to is going to be housing inventory. So, there’s a lot of misnomers to fly around this.

So, you look at the media this week and there’s all this stuff about, oh, my gosh, inventory is increasing. MSNBC puts out this report of, you know, sellers trying to sell before they miss the market. But if we take a look at this, this is a chart on US housing home inventory. The first thing to pay attention to is that inventory always includes pending home sales. So, it’s not the most accurate. You know, with pending home sales right now, I don’t know the exact number, but I would say about 80% of homes that go under contract actually close. They’re not all going to close. 100% don’t close, but most will. So, if we look at our inventory levels from our low in February, because you always hit a low in the winter, we’re only up 180,000 homes in February.

But look at this, every single year… this goes back to 2017, spring housing buying market bump in inventory, 2021 bump in inventory, 2020 bumping inventory. Every single year at this time of year, you always get a bump in inventory. The challenge is that we’re not seeing the bump right now that we’d normally see and… I don’t think we’re going to get up to these numbers where we were last year. I think inventory is still going to stay really low. And if you look at active listings right now that are available in the United States compared to February, active listings right now are only up by 330,000. So, if you look at last year, we had a bigger bump of spring inventory last year than we’re having right now.

I don’t think we’re going to see the inventory levels this year like we did last year. So… You know, you have to be very careful with what you read about and what you see in the media because the media really doesn’t look at the whole picture. They’re not giving you data and details like this which we think are really important and something to pay close attention to. I’m around all weekend. I know it’s Memorial Day weekend. I hope everybody has an amazing holiday weekend. I’ll be available. If you have any questions, give me a call. If you have a buyer that needs to get pre-approved or you want to go through the pre-approval process, call me anytime, text me on myself phone. Happy Friday. Have a great day.

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