The Economy is Okay so the Stock Market Will Be Okay 5/9/23

By Jeffrey Marcus | May 10, 2023

The Economy is Okay so the Stock Market Will Be Okay

If the economy is your worry, it seems you can stop worrying about 2 large parts of it – employment and home prices.

Employment

It seems that employment strength is here to stay. Regardless of what type of grenade gest lobbed in its path, employment has remained strong. The list of possible problems for the economy and employment are incredibly long, but some of them are:

  • A doubling of interest rates in about a year
  • The highest inflation in 50 years
  • 2 of the largest bank failures in U.S. history
  • A steady chant of TECH layoffs

In spite of these factors, which would normally derail an economy, the most recent numbers that came out last week were not only strong on the surface, they were also showed some very positive trends. The economy added 253,000 jobs last month and the unemployment rate was 3.4% (still near a 50-year low). In addition:

  • The unemployment was the lowest ever for the Prime age working ages (25-54).
  • Highest prime age worker participation rate since 2008, the start of the great recession.
  • The unemployment rate for black people was 4.7% – the lowest in history

Home Prices Will Not Decline

In spite of hand-wringing over a potential house price bubble, home prices will not decline. There is one simple reason why home prices cannot go down – there are not enough homes. I did not have to get my degree in economics to know that a lot of people have to sell for the price of anything to go down. The problem is still that there are too many buyers and not enough sellers.

Rates going up used to be bad for house prices, but that is not the case now that a multi-million home shortage exists. The current shortage is the result of homebuilders not building in the 10 years after the housing bubble burst. The table below shows a deficit assuming the 35-year average home building of 1.55 million homes per year. Anything more than that number is a surplus, while any year with housing starts lower than that average is a deficit.

, The Economy is Okay so the Stock Market Will Be Okay 5/9/23
, The Economy is Okay so the Stock Market Will Be Okay 5/9/23
, The Economy is Okay so the Stock Market Will Be Okay 5/9/23

The huge increase in mortgage rates over the past 12 months actually means that far fewer homes are on the market for three reasons:

  1. Affordability – It is now harder for buyers to afford a home. The doubling of mortgage rates over the past year means that the monthly payment for the median single-family home in the U.S. now costs $340 more per month or an increase of 19%. (Realtor.com).
  2. Sellers’ dilemma – Higher rates are also bad for would-be sellers that will still need to refinance their next home (mostly everybody). Someone with a 3.5% mortgage will find it very difficult to justify losing that rate and taking on a 7% mortgage for 30 years.
  3. Cost of building – Finally, higher rates make it more expensive for builders to build homes.

Here is the latest from Realtor.com:

“Housing inventory levels remain stuck below pre-pandemic levels as fewer sellers are opting to list their homes and new house construction remains enervated.

According to the latest Monthly Housing Trends Report published by Realtor.com, active inventory growth slowed for the second straight month as the number of newly listed homes fell 21.3% year-over-year. And while active listings are 48.3 % higher than one year ago, they were also 50.5% below the pre-pandemic April 2019 level.”

“A lack of new sellers and homes for sale continues to limit buyers’ choices and home sales. Many sellers are likely future buyers too, which may be why a majority of would-be sellers report feeling ‘locked in’ to their current home because of a low mortgage rate, especially younger homeowners,” said Danielle Hale, chief economist for Realtor.com.

The charts below show the current situation in sharp relief.

Home sales were actually rebounding during Covid, but saw a historic decline as interest rates rose.

, The Economy is Okay so the Stock Market Will Be Okay 5/9/23




Homebuilders did start to build more homes from 2020-2022 and Housing Starts actually rose briefly above the long-term average. As rates rose, however, home starts fell off a cliff.

, The Economy is Okay so the Stock Market Will Be Okay 5/9/23

Home prices dipped briefly when rates rose as fears of affordability worried sellers, but reality has kicked in and prices are rising again. The “reality” is that there are so few homes available that sellers do not have to lower prices to sell. Home prices have fallen, but remain in a longer-term uptrend.

, The Economy is Okay so the Stock Market Will Be Okay 5/9/23

The real problem with all of this is that there is no short-term solution. We have been explaining to clients since 2019 that the deficit of homes in the U.S., using long-term trends, is about 7 million. The table presented earlier in this report shows that we are only on pace to build 1.4 million homes this year. That number is below the long-term average of 1.55 million and, therefore, not only does nothing to alleviate the housing shortage, but will actually exacerbate the problem.  As we wrote in the Real Estate Edge report on 4/4/23 entitled Strategies to Ease the Housing Shortage, only new regulations, like changing zoning laws or a revolutionary change in how we perceive and build homes will fix the problem. Of course, those solutions are unlikely or will take many years to unfold. Meanwhile, the housing market will remain a sellers’ market.

, The Economy is Okay so the Stock Market Will Be Okay 5/9/23

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Jeff Marcus founded Turning Point Analytics (TPA) in 2009 after 25 years on trading desks and 13 years as a head trader to provide strategic and technical research to institutional clients. Turning Point Analytics (TPA) provides a unique strategy that works as an overlay to clients’ good fundamental analysis. After 10 years of serving only large institutions, TPA now offers its research services to mid and small managers, RIA’s, and wealthy sophisticated individuals looking for a way to increase their returns and outperform their peers.

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