Jan-01 Oct-01 Jul-02 Apr-03 Jan-0 Oct-0 Jul-05 Apr-0 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jul-1 Apr-15 Jan-1 Oct-1 Jul-17 Apr-18 U.S. Housing Decelerating August 27, 2018 The sustained rise in U.S. home prices has put a dent in home affordability. Meanwhile, recent existing home sales data has been sluggish. Is the U.S. housing market beginning to recalibrate? At approximately 15%-20% of the U.S. economy, housing should have an effect on how economist view GDP in the coming quarters. Existing Home Activity Slowing; Affordability In Question After enjoying a long post-crisis recovery, it appears the U.S. housing market is slowing just a bit as higher home prices and higher mortgage rates chip away at affordability. In line with rising mortgage rates through much of 2018, the pace of home price gains has slowed since February and existing home sales figures have turned lower. Lately, more media reports have surfaced indicating buyers have begun to balk at steep price tags in the most high-demand metro areas. In some metros such Seattle, San Francisco and Denver, data indicates prices have moved well-above those in the housing heyday of the mid 2000 s. Many of these regions are heavily influenced by growth in technology-related businesses. Other metros like Miami, D.C. and Las Vegas have still not reached their previous price highs; yet values have been on a steady recovery. While still not at its historical worst, home buyer affordability has deteriorated to lows last seen in 2008. The absolute bottom in affordability occurred in 200 (See Figure 3). In relation to the deteriorating affordability, home inventory levels seemingly bottomed in December 2017 and have been on a slight rise since; indicating demand is beginning to wane just a bit. Figure 1: S&P CoreLogic Case Shiller Home Price Indices By Key Metro Area Source: S&P / Case Shiller 300 250 200 150 100 Bower Hill Capital Management LLC (BHCM) is an independent investment management and research firm that offers outsourced chief investment officer services for financial advisory practices. BHCM also manages a distinctive asset allocation methodology which emphasizes participating in up markets while protecting capital against sustained asset price declines. 50 New Home Activity Trends Unbroken 2008 Seattle SanFran Denver Miami Wash D.C. Las Vergas While the market for existing homes appears to be adjusting, new home activity data remains rather robust (Figure 2) as building permits, new home sales, and housing starts continue to be on the rise. The post-crisis fall PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS 1
Dec-03 Aug-0 Apr-05 Dec-05 Aug-0 Apr-07 Dec-07 Aug-08 Apr-09 Dec-09 Aug-10 Apr-11 Dec-11 Aug-12 Apr-13 Dec-13 Aug-1 Apr-15 Dec-15 Aug-1 Apr-17 Dec-17 in new home activity was perhaps more severe versus existing homes, and the recovery has been more gradual. New homes sales and housing starts are only approximately 50% of what they were at the previous housing peak. Figure 2: U.S. Existing and New Home Sales Existing sales in millions of units (LHS); New sales in thousands of units (RHS) 12m MA = 12-month moving average Source: National Association of Realtors; U.S. Census Bureau The trajectory of existing home sales has begun to weaken, while new home sales trends still remain rather strong. 7.5 7.5 5.5 5.5 3.5 3 100 100 1200 1000 800 00 00 200 0 Existing (LHS) New (RHS) Existing 12m MA New 12m MA Home Affordability Nearing Pre-Crisis Lows Since 2012, the recovery in home prices has been a steady drag on home affordability; pushing the Home Affordability Index below its long-term average of 150.9 (Figure 3). While the home price recovery has been good news economically, the sustained rise (back to pre-crisis levels) has begun to weigh on demand. Over the last six years, buyers have had the benefit of low mortgage rates to aid home purchase buying power. Now that mortgage rates and home prices have moved up in tandem it has begun to take some of the steam out of the housing market. Median home prices, median income, and mortgage rates are components of the Homebuyer Affordability Index (Figure 3). While home prices present a clear negative relationship to affordability, the sustainable impact of mortgage rates since 2000 has been more imprecise. However, rapid and material increases in mortgage rates do cause an immediate degradation in affordability (Figure 3). We witnessed this during the 2013 taper tantrum and the subsequent interest rate increase. Most recently, the latest rise in mortgage rates has caused affordability to move sharply lower. The current combined impact of rates and prices is the culprit in pushing affordability back near pre-crisis lows; a condition that has caused some early economic concern. Meanwhile, tight home inventory has helped push up home prices for an extended period and contributed to the lack of affordability. However, after reaching new multi-year lows, inventory may be showing early signs of correcting (Figure ). The potential emerging inventory correction, combined with pressures in affordability, and a bias to higher mortgage PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS 2
Jul-18 Dec-17 May-17 Oct-1 Mar-1 Aug-15 Jan-15 Jun-1 Nov-13 Apr-13 Sep-12 Feb-12 Jul-11 Dec-10 May-10 Oct-09 Mar-09 Aug-08 Jan-08 Jun-07 Nov-0 Apr-0 Sep-05 Feb-05 Jul-0 Dec-03 May-03 Oct-02 Mar-02 Aug-01 Jan-01 Dec-00 Sep-01 Jun-02 Mar-03 Dec-03 Sep-0 Jun-05 Mar-0 Dec-0 Sep-07 Jun-08 Mar-09 Dec-09 Sep-10 Jun-11 Mar-12 Dec-12 Sep-13 Jun-1 Mar-15 Dec-15 Sep-1 Jun-17 Mar-18 rates may contribute to a further ease in existing home sales. This development raises the likelihood of an eventual ease in the pace of home price appreciation overall. This is why some concern over the trajectory of the housing market has come up in the recent financial press. Figure 3: Affordability Index, National Home Price Index & Mortgage Rates Source: S&P / Case Shiller; Bankrate.com; National Association of Realtors Clearly home prices and affordability have historically trended in opposite directions. The impact of mortgage rates, however, is less precise. 230 210 190 170 150 130 110 90 70 50 8 7 5 3 2 30-yr Fix Mtg % (RHS) Afford Index (LHS) Home Price Index Figure : Months Supply of U.S. Home Inventory Source: National Association of Realtors Inventory levels have just broken the trend pattern of lower highs and lower lows. The potential for a firm reversal in the prevailing trend is something we are watching closely. 12 10 8 In our view, a firm reversal could put some pressure on the recent home price trajectory (see dashed line in Figure 3). 2 Something To Watch In our view, current housing conditions are far removed from the excesses of the mid-2000s. However, a directional change in home prices and housing should be important to economists and investors. Real Estate and related industries account for approximately 15% to 20% of the U.S. economy, and sentiment in the space goes a long way in effecting how consumers and investors feel about underlying economics. To further the point, ongoing signs of deceleration in housing and/or an outright PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS 3
downturn should be expected to negatively effect U.S. GDP forecasts in the out quarters. As part of our work, we will maintain our watch of these and other U.S. housing developments and their potential effects on the market and the economy. Questions? Please contact us should you need further detail on this analysis and/or our general market view. We will be glad to have a discussion as to how these and other circumstances may effect your asset allocation or portfolio strategy. Risks Investors should be aware of the risks associated with all portfolio strategies, and variable market conditions. Monetary policy changes, military activity abroad, the level and change in market interest rates, corporate earnings, domestic and foreign governmental policies, global economic data, and other geopolitical events can have a substantial effect on portfolio performance, our macroeconomic theories, and the effectiveness of strategic and tactical portfolio approaches. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS
Important Disclosures: This material is not intended as and should not be used to provide investment advice and is not an offer to sell a security o r a recommendation, to buy a security. This summary is based exclusively on an analysis of general market conditions and does not speak to the suitability of any specific proposed securities transaction. All opinions and views mentioned in this report constitute our judgments as of the date of writing and are subject to change at any time. We will not advise you as to any change in figures or views found in this report. Our judgement or recommendations may differ materially from what may be presented in a long-term investment plan. Investors should consult with an investment advisor to determine the appropriate investment strategy and investment vehicle. Investment decisions should be made based on the investor s specific financial needs and objectives, goals, time horizon and risk tolerance. Security information, portfolio management strategies and tactical decision processes are opinions of Bower Hill Capital Management LLC and the performance results of such recommendations are subject to risks and uncertainties. Except for the historical information contained in this report, certain matters are forward-looking statements or projections that are dependent upon risks and uncertainties, including but not limited to such factors and considerations such as general market volatility, global economic risk, geopolitical risk, currency risk and other country-specific factors, fiscal and monetary policy, the level of interest rates, security-specific risks, and historical market segment or sector performance relationships as they relate to the business and economic cycle. Bower Hill Capital Management LLC is registered as an investment advisor with the Commonwealth of Pennsylvania. Registration does not constitute an endorsement of the firm by the Commonwealth of Pennsylvania nor does it indicate that the Advisor has attained a particular level of skill or training. Bower Hill Capital Management LLC 5131 Carnoustie Ct Presto, PA 1512 12.278.1527 info@bowerhillcapital.com www.bowerhillcapital.com PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS 5