Todays ‘Crises’ - Housing, Inflation and a Market Correction
by Thomas Quinn on Aug 27, 2021
Reading Time: c.6 mins
We hear this a lot, that we’re rolling from one ‘crises’ to the next; Covid-19 global shutdown, Presidential election, Reddit/Gamestop market manipulation and the end of the financial markets as we know them, inflation, stock market overvaluation, wildfires largest on record, US debt, housing bubble. And these are just within the last 18 months!
This week I’ll focus on the three we hear the most on Zooms with Brits across the US and I’ll share our perspective on each.
Our clients frequently tell us about moving out of big cities, downsizing as they’re coming into retirement or working in real estate in pockets like Florida. During these conversations, I’ve heard A LOT of stories in the last 12 months about US real estate. The one that sticks out the most is a home in San Francisco on the market for $1.1m that sold for 100% over asking, a whopping $2.2m. This certainly isn’t normal, but is it something that should concern us? Notably, the 2008 housing crisis wasn’t pretty and took a number of years to recover from.
How did we get to this ‘bubble’? Here’s the quick and dirty version: the Fed lowered interest rates; they also printed more money to lend to businesses and citizens; priorities changed for more space at home for remote workforces; supply chains for raw materials slowed housing development; and consumer confidence grew as the Covid-19 shutdown didn’t hurt the markets as much as expected.
In the last 12 months, single family homes jumped on average 23%, compared to 13% growth in the year on year data leading up to 2008 housing crash. Lumber prices have fallen but there’s still supply issues and first-time buyers struggle to get on the market, interest rates are still low and remote working is being built into the processes of big business.
Supply inflation V demand inflation
The difference with housing inflation today compared with 2008 is this is being driven by a weakness in supply; there’s not enough houses for people wanting to buy them. In ‘08 it was demand driving the growth in the market as banks were lending out 105% mortgages to ensure moving costs were covered. These mortgages were packaged up and sold and once fraud was discovered in these packaged loans house prices fell and home owners were left in negative equity positions with multiple homes and the rest is history.
Inflation is still rising, hitting 13-year highs of 5.4% for the 12 months ending July 2021. This has been expected for some time, I wrote on the topic in May - Rising Inflation What Should You Do
But at what point do higher sustained inflation rates matter? Earlier this month, Mark Dow suggested that in the 1990’s inflation began to impact business decisions and peoples spending habits when inflation was between 6 and 8 percent. The difference this time around is that we’ve had a decade of not hitting a 2 percent with regularity so temporary inflation in this range could likely be sustained for a period of time before consumers and business panic, and then but if they do, you know what happens next, the markets fall.
The Fed’s job is to manage this now. Jerome Powell acknowledged the risks of rising inflation but the Fed believe these will eventually ease. They are now waiting for more unemployment data to show the economy can handle rising interest rates (which means rising costs for borrowers) in a world where Covid variants still play havoc.
Let’s not forget though that inflation is a positive sign for the economy, and as we get inflation that generally means business revenues increase as costs are passed down to you and me. This results in company stock prices rising and as long as you have a significant weighting to equities in your portfolio then Bobs your uncle, you have a hedge against rising inflation.
This is probably the number one concern clients have, and rightfully so, the stock market is out of your control, it’s not often an area you’ve practiced in for your career and it’s where you’ve put the majority of your savings which will pay you throughout retirement. That’s a recipe for a couple of sleepless nights after some worrisome headlines from the 10pm news (I’m aware that the BBC 10pm news ritual is a distant memory for most reading this!).
So we get it and if you have concerns the very best thing is to speak to your financial adviser, air these as they may be totally legitimate and ones worth working through.
Corrections and the US stock market;
- How often do they happen? Generally every 12 months
- What causes corrections? Generally consumers’ and businesses’ loss in confidence leading to panic selling of investments
- What generally happens to the stock market? It falls between 10%-20% from its recent highs
- Does the market bounce back? Yes, it’s always bounced back
- How quickly? Within 3-4 months usually
- What should I do during a correction? Speak to your adviser if concerned, check your plan, rarely is it a good idea to sell investments
- How can I protect myself from a correction? More money has been lost trying to predict corrections than by corrections themselves. Come to terms that they’re unavoidable if you want your investments to grow
- What happens if a correction happens just before I retire? Plan ahead of time to have 3-4 years of living expenses in cash, CDs, money market and/or short term bonds
- What is the difference between a correction and a bear market? Bear market is a fall of 20% or more while a correction is a drop under 20%
- Should I still worry about them? Yes, that’s completely natural
In a world of 7 billion people and waning revenues for media companies, it’s inevitable that the bad events will shine strongest in the media. If we want to achieve long term sustainable returns, we must use our blinkers to not get dragged into this weeks ‘breaking news’. Selling investments in a declining market is the undoing of years of hard work and future time in retirement to spend on the activities you love with your loved ones.
Work with an adviser you trust, counsel with them when you’re concerned, have a great plan that factors in market bubbles, inflationary periods and stock market corrections and keep putting as much money away as you can afford.
By all means, please be in touch with any and all questions and concerns. In the meantime, thank you—as always—for being clients of Taylor & Taylor USA.
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