Housing Boom to Continue - First Trust Advisors

Monday Morning Outlook

Housing Boom to Continue To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 4/12/2021

Housing prices have soared in the past year. The national Case-Shiller index is up 11.2% in the past twelve months, the largest gain since 2005-06. The FHFA index is up 12.0% in the past twelve months, the largest on record (going back to 1991).

Given these gains, some are wondering whether housing is back in a 2000s-type bubble. But a deep dive into the data suggests we are not.

To assess home prices we use the market value of all owner-occupied homes calculated by the Federal Reserve. We then compare that to the "imputed" rent calculated by the Commerce Department for the GDP report. (Imputed rent means what people would pay to rent their homes if they rented them from someone else.) In the past 40 years, home values have typically been 16.4 times annual rent. At the peak of the bubble in 2005, they were 21.4 times annual rent, or 33% above normal. Now, home prices are 17.8 times annual rent, about 11% above normal.

We also compare home prices to the Fed's measure of replacement cost. In the past 40 years, home prices have typically been 1.59 times replacement cost. In 2005, they peaked at 1.94 times replacement cost, a premium of 22.5%. Now homes are selling for 1.63 times replacement cost, only 2.5% above normal, which is minimal.

Does this mean housing is at risk? We don't think so. The recent price surge is based on fundamentals and the housing market should continue to boom.

The primary problem is a lack of homes. Based on population growth and scrappage (voluntary knockdowns, fires, floods, hurricanes, tornadoes...etc.), we would normally expect housing starts of 1.5 million per year. But in the past twenty years (March 2001 through February 2021), builders have only started 1.256 million per year. Builders haven't started more than 1.5 million homes in a calendar year since 2006.

No wonder the inventory of homes for sale is so low! Single-family existing home inventories are at rock bottom levels, with only 870,000 for sale in February. To put this in perspective, the lowest inventory for any February on record from 1982 through 2016 was 1.55 million. Meanwhile, there are only 40,000 completed new homes for sale, versus 77,000 a year ago and an average of 87,000 in the past twenty years.

Two other factors are likely at work. One issue is that there's a moratorium on evictions, so some tenants are paying less in rent than they normally would, which is temporarily holding down rental values versus home prices (therefore elevating the price-to-rent ratio). This is also holding down the housing component of the Consumer Price Index, which is calculated using rents, not home prices.

Another factor is that people have moved away from places where renting is popular to places where home ownership is popular. If you leave New York City or San Francisco for Nashville or Boise, there's a good chance you went from renting to owning. This helps boost home prices as well.

Yes, home prices are up and, yes, they look somewhat expensive relative to normal, but this is more about the unprecedented events of the past decade, not some problem with the market. With the Fed so easy, and the stock of housing constrained, prices will continue to rise. The housing boom will continue.

This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

August 2020 Newsletter – Coming out of the Pandemic (3 of 3)

When initially talking with Russel and Katia about this series and our desire to provide a message with some tangible action items, we thought we would be on a road to recovery and the pandemic figured out. We could not be more wrong about the pandemic and partially right about the recovery. As of writing this the first week of August, we have a lot of data from Q2 and what it looks like under the hood of the economy.

Below are some statistics:

  • Retail sales have rebounded sharply, rising 18.2% in May and 7.5% in June. Amazingly, retail sales are now 1.1% higher than a year ago, during a time where unemployment has climbed from 3.7% to 11.1%.
  • Government transfer payments made up 30.6% of all personal income in April and 26.4% in May.
  • Personal savings hit 32.2% in April, the highest level on record – by far – going back to at least 1959.
  • Real GDP was 9.5% lower in Q2 than it was in Q1 – If this continued for four quarters, you would get an annualized GDP decline of 32.9%
  • 68% of people on unemployment were receiving more money unemployed that at their jobs.
  • Some estimates are coming in and the economy is growing at a rate of 3.6% faster in Q3 than in Q2….or 15% real GDP growth for the year.  
  • Private sector wages fell by 27.4% annual rate in Q2
  • Small business income fell at 43.1% annual rate in Q2

What is being shown to us now? You can’t spend your way out of a virus. We can’t stop a virus, there are many examples in the world today that show us that countries like Japan, Germany, Australia all put in place very strict orders and reduced the early spread, but when they opened back up things spread exactly as it has in other countries.
We all have to be aware of the overabundance of negative news that we get every day, almost always the focus is on the negative numbers.
The Positive
Treating the virus has gotten MUCH better since March. About 1% treated in the hospital die from the virus. This was a lot different in March and April – 6-7% were dying in hospitals with Covid.
The state of the Nation & GDP – 18 states are experiencing rising Covid cases. The GDP in these states account for 29.9% of total US GDP. That means there is 70% of the rest of the GDP total that is not confronting rising cases in the country.
Almost all data points on the high frequency data is in an increasing trend. Seen HERE
While I looked forward to a more upbeat outlook for our part 3, I wasn’t sure really where we would be at. The uncertainty to me is actually increasing as it relates to the upcoming 12 months. As I have mentioned to many of you, taking a more conservative approach to upcoming decisions is likely a good thing.

There is an election in a few months, government benefits are stopping, businesses will soon run out of PPP and ultimately the rubber must meet the road in terms of whether businesses will survive or not given the prolonged pandemic. From an investment perspective, our strategy remains the same – Diversified, head down and even more meticulous that we identify clear objectives.

There are a few things that I want to continue to get out:
  1. Save more and cut back as many expenses as you can while you have every excuse to do so.
  2. Do not get caught flat footed and take the changes in the economy for granted. You will be passed up.
  3. Life is different now and it will never go back to normal, life will continue to move forward. Accept that and some anxiety should be released.
  4. It is possible to turn the pandemic into an opportunity. I have talked with many of you, and many feel that those who can navigate and make adjustments can likely come out of the pandemic leading the next decade.
  5. Identifying what is important to you is something we all need to do.
  6. Life is difficult, talk to people you trust. Form relationships with people that have an honest interest in your success.
  7. Take some time for yourself.

Some things are changing and it might not be such a bad thing. I’m starting to come up with some new idea around financial planning and the fact that many of you might want to have a different work/life balance.

Expect some updates as the month progresses. The baby countdown is happening with our due date 9/2 coming up!




Survey Results: CV19 & How you are feeling (Infographic)

Three weeks ago we created a brief 9 question survey that could be completed in 2 minutes. This survey was sent out to about 350 people on our email newsletter list. Over the course of two weeks we tallied up the anonymous results and wanted to share them in a visual representation. The goal really to show others what "we're are in this together" means and how each of us are feeling curing the pandemic. Emotions run far and wide, but as you can see, there are a lot of similarities.

If you would like to join our monthly newsletter, please plug your email into the form below the infographic.

Infographic showing how those are feeling that filled out our CV19 survey

DFA - Under the Macroscope: When Stocks and the Economy Diverge

Do you find it puzzling when a bleak economic report emerges from the press, only to be accompanied by a positive surge in the stock market? You’re not alone. The last few weeks have produced many examples of a stark contrast between stock market performance and economic indicators. So why the apparent disconnect?

Markets are forward-looking, meaning current asset prices reflect market participants’ aggregate expectations. Those expectations include whatever future economic developments are anticipated and their potential impact on cash flows, which are key to a stock’s value. For example, if the market expects the economic environment to weaken company cash flows, stock markets may react well in advance of when we observe the impact on cash flows, as expectations are embedded in prices. And the eventual direction of the stock market will depend on how the economic outcome compares to expectations. If things aren’t as bad as expected, poor economic news can be greeted with a positive stock reaction.

Looking Ahead

We can see this anticipatory nature of markets in action by looking at the relation between US gross domestic product (GDP) growth and equity premiums, or stock market returns in excess of one-month US Treasury bills. When annual US equity premiums are plotted against GDP growth for the same year (top panel of Exhibit 1), there is no discernible relation between the two. Changes in GDP have not been strongly related to simultaneous stock market returns.

It’s important to note that this result does not imply financial markets ignore macroeconomic data. After all, GDP encompasses several measures of the economy, not just corporate profits. However, while GDP may be an imprecise representation of the activities that ultimately drive stock prices, further analysis shows that is not the sole cause for the lack of relation between GDP growth and simultaneous equity premiums.

Plotting GDP growth against the previous year’s equity premium (bottom panel of Exhibit 1) reveals a noticeable relation. The positive trend in the data suggests market prices have in fact reacted to changes in GDP but have done so in advance of these economic developments coming to fruition. This result is consistent with markets pricing in their expectation of economic growth.


Dot Plot, US equity premium vs. GDP growth, 1930—2019Dot Plot, US equity premium vs. GDP growth, 1930—2019

Past performance is not a guarantee of future results.

That brings us to the latest news headline worrying some investors: the eventual fallout from increasingly large US government expenditures designed to ease the economic burden of the COVID-19 pandemic. Will these efforts ultimately create a financial burden for the US government that affects future stock returns?

The results in Exhibit 2 should help allay concerns over the debt level impacting equity market performance. When we sort countries each year on their debt-to-GDP for the prior year (top panel), average annual equity premiums have been slightly higher for high-debt countries than low-debt countries in both developed and emerging markets. However, the return differences’ small t-statistics—a measure of the precision of a value’s estimate – suggest these averages are not reliably different from one another.1

The top panel uses prior year debt-to-GDP data to sort countries into the high/low groups. But investors may be more focused on where they expect the debt to end up, rather than on where it’s been. In the bottom panel of Exhibit 2, we rank countries on debt-to-GDP at the end of the current year, assuming perfect foresight of end-of-year debt levels. Again, average equity premiums have been similar for high- and low-debt countries. Like the results for GDP growth, these results imply that markets have generally priced in expectations for future government debt.


Past performance is not a guarantee of future results.

Markets at Work

Macroeconomic variables and investment decisions are like frozen turkeys and deep fryers—caution should be exercised when combining the two. The results presented here are consistent with markets aggregating and processing vast sets of macroeconomic indicators and expectations for those indicators. By incorporating this information into market prices, we believe public capital markets effectively become the best available leading macroeconomic indicator.




1Researchers often cite a t-statistic value of 2.0 as the threshold for statistical reliability.


Macroeconomic data: Data used to measure the output of an economy, such as employment or production.

Gross domestic product: The total value of goods and services produced by, for example, a country over a set period of time.

Debt-to-GDP: The ratio of a company’s debt to its gross domestic product.

Fama/French Total US Market Research Index: The value-weighed US market index is constructed every month, using all issues listed on the NYSE, AMEX, or Nasdaq with available outstanding shares and valid prices for that month and the month before. Exclusions: American depository receipts. Sources: CRSP for value-weighted US market return. Rebalancing: Monthly. Dividends: Reinvested in the paying company until the portfolio is rebalanced.


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