“With an estimated value of $200 trillion, across the globe, homes are collectively worth about 3X as much as all publicly traded stocks.”
This per the Economist magazine. And they have a great interactive graphic you can play with. Check it out: https://www.economist.com/blogs/graphicdetail/2018/02/daily-chart-5 (you may have to ‘copy’ and then paste this link into your browser … for some reason I can’t get the URL to remain a URL.)
When is the best time to buy a house?
My advice: Go by a house. Don’t wait.
Welcome to this week’s Steak House Index update.
If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/
According to the IMF (the ‘International Monetary Fund’), the world’s annual GDP is almost $80 trillion today.
During the calendar year 2017, US nominal GDP increased by $833 billion … by an amount approximately equal to the market capitalization of Apple. At the end of 2017, US ‘current dollar’ GDP was about $19.749 trillion — about 25% of the global total. Other than China — a distant second at around $11 trillion — no other country is close.
The objective of the SHI10 and this blog is simple: To predict US GDP movement ahead of official economic releases — an important objective since BEA (the ‘Bureau of Economic Analysis’) gross domestic product data is outdated the day it’s released.
Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of the total. In fact, the majority of all US GDP increases (or declines) usually result from (increases or decreases in) consumer spending. This is clearly an important metric. The Steak House Index focuses right here … on the “consumer spending” metric.
I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been. Thereby giving us the ability to take action early.
If the SHI index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.
I’m not just talking about here in the US, either. Globally, in all ‘developed economies,’ home prices are on a tear. So much, in fact, that that same Economist blog claims,
“…house prices appear to be on an unsustainable path in Australia, Canada and New Zealand. Ten years ago they reached similarly dizzying heights against rents and incomes in Spain, Ireland and some American cities, only to endure a brutal collapse….”
US home prices, at least in “real prices” (remember, “real” means adjusted for inflation), have yet to recover from their prior peak in Q2, 2006. In fact, as you can see below, they remain about 13% or 14% lower than peak values:
Of course, this chart uses national data, sourced from the Organization of Economic Co-operation and Development (OECD). Values in many geographic areas — especially here on the west coast — are much higher than their prior peak. But home values in many other areas have not yet recovered.
So, should you buy a house? And if yes, where?
Yes. Buy a house. I like to buy local. And I prefer to live in my house.
But if one wants an investment property, an argument can easily be made one should first identify areas where home values remain depressed and then, within this sub-set, pick one where (1) you feel the area will see economic and population growth over the next 10 or more years, and (2) where you can effectively manage income property. It’s a bit dated, but perhaps this URL may help you get started: http://www.lao.ca.gov/reports/2015/finance/housing-costs/housing-costs.aspx
Why buy a house? Here are a few reasons.
Yep, we need more houses. But they probably won’t be built. The reasons have more to do with regulation, building standards, land use restrictions, and fees. The problem is really not economic.
At least not in the traditional sense. Think about the problem this way: Suppose you wanted to build a typical, traditional house. You prepare your plans and submit them to the local building authority. Only to hear, “Sorry, your application to build a home is denied.” Why you ask? What did I do wrong? “Well,” the representative replies, “all new homes in our city must be built with gold bricks. Concrete is not permitted.”
Absurd, right? But as absurd as this metaphor is, it’s not that far off. Building standards here in California have added thousands of dollars to new home construction. Google “what’s the cost” of California Title 24 and you’ll get sense of what I’m talking about. Throw in land use restrictions, minimum square footage requirements, local fees, impact fees, school fees, etc., etc., etc., and you have a very expensive marketplace in which to build a new home. Gold bricks might be cheaper.
I’m not suggesting the regulations and/or fees are a bad idea or unnecessary. I’m only suggesting we shouldn’t be surprised by the outcome. And the outcome is fewer single family homes are being built due to exceedingly high construction costs. Here’s a great chart courtesy of John Burns Real Estate Consulting:
Note the blue bar represents single-family residences and the beige bar, apartment or multi-family (5+ units.) It’s interesting to see that new home construction peaked in 2005. Just about a year before home values peaked.
And since the Great Recession, new home construction has been far below the level of new household formation. According the the US Census Bureau, US household formation averaged 944,000 per year for the past 10 years. In six of those 10 years, new households were formed at the rate of about 1.1 million or more. Yet the number of new homes or apartments built was far below that number. And this doesn’t take into account the number of homes lost each year due to floods, fire, obsolescence, etc. We have a housing shortage. And it’s getting worse every year.
Here’s an interesting chart, courtesy of Yardeni:
It looks like home ownership is back in vogue … and renter demand may be declining. Hmmm….
Time for a steak. The Valentine’s Day effect is definitely over. This week, the SHI10 is a negative (52). Cattle herds around the world are breathing a sigh of relief. Here’s this weeks chart:
Seattle, our long-running leader in ‘Filet’ sales slipped (presumably on butter) this week. (I couldn’t help myself; I know, a bad pun.) The “hot” market: Miami, with an SHI of positive 19. And Las Vegas, once again, had a weak SHI showing. Here’s our longer term trend:
On other economic news, the FED released their January 30th ‘minutes’ earlier today. I’ve edited their comments below, and given you a succinct version that I believe summarizes the key comments:
Inflation Analysis and Forecasting
Staff Review of the Economic Situation
Staff Review of the Financial Situation
Staff Economic Outlook
The bottom line? Our US economy is strong, GDP is in the mid-2’s and possibly higher due to the tax cuts; inflation expectations should keep our inflation rate below 2% until 2019 or 2020. No recession in sight, folks. Deficits, yes. But no recession.
One final comment on housing. Long term, the growth in home values will continue irrespective of the general US economic cycle. Sure, one day we’ll see another recession. And home values may dip or flatten for a while. But long term, they’re heading higher. Go buy a house.