The Two Markets Evolve Unevenly Across Districts, but the City Average Remains Stable or Rising, Making Housing Access Difficult for Many Citizens

Author: Antonio Iruzubieta
Source: Zonavalue

The real estate market is a crucial pillar of the economy; its evolution impacts many other sectors, affects millions of jobs, the strength of the GDP, business profits…

The American real estate sector continues to correct excesses, and activity has significantly cooled. Prices are falling, and demand is absent. As a result, housing inventories are rising sharply; as noted in a recent post, they have exceeded 10 months (of average demand), and when this happens, it often signals a recession.

Moreover, increases in inventories often precede stock market behavior by about 6 months. The surge in inventories over the past few weeks has been meteoric and the fastest in 60 years, serving as a warning for investors who rely on the “buy the dip” strategy whenever the market falls.

NEW HOUSING INVENTORIES vs S&P 500

New housing inventories have skyrocketed because sales are dropping sharply, and it is estimated that they will continue to decline at least until the end of the year.

HOUSING SALES USA

According to Goldman Sachs analysts, the imbalances between supply and demand in the real estate sector will put downward pressure on prices at least for the next two quarters, after which they will stagnate throughout 2023:

“Our model suggests that home price growth will slow sharply in the next couple of quarters… as the imbalance between supply and demand continues to shrink, mostly through lower demand. Thereafter, we expect home price growth to stall completely, averaging 0% in 2023.”

According to Moody’s, nearly half of the major regional real estate markets in the US (numbering 413) are overvalued by more than 25%. Inventories have reached levels not seen since the subprime crisis due to falling demand and because many homeowners are trying to sell their properties due to the burden of rising mortgage rates that many cannot afford.

If a recession occurs, Moody’s estimates that the average home price in the most overvalued regions (half of the total) will fall by 20%. If a recession is avoided, prices will still decline, though by between 10% and 15%.

The relationship between inventory trends and employment is evident. As inventories are a leading indicator, it is likely that unemployment will start to rise sharply in the coming months.

The stock markets still need to factor in the above issues: rising unemployment, declining consumption, recession, and the consequent drop in corporate profits.

Remember the message from Powell in his speech at Jackson Hole:

“There will very likely be some softening of labor market conditions, while higher interest rates, slower growth, and softer labor market conditions will bring down inflation. They will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation.”

Earnings Per Share (EPS) are set to correct for various reasons, including rising input costs, cooling demand, increased debt costs, and difficulties in accessing financing, as estimated by FactSet, Morgan Stanley, and Bloomberg:

The activity in the low-quality debt market, junk bonds, or high-yield bonds, has been the lowest in 10 years this year. The rising risk aversion and the general “Risk Off” mode in the markets/investors have become a problem for less solvent companies, precisely those that need liquidity the most when the cycle changes. Many zombie companies will succumb.

Stock markets have corrected significantly since the peaks of December 2021/January of this year but remain overvalued and have not factored in the expected decline in EPS.

DOW JONES, Daily Chart

After a significant technical rebound or summer rally (June 15 to August 16), which led the index to a confluence of key technical references such as the Fibo 61.8% retracement of the first semester’s declines or the 200-day moving average that repelled the rebound…

DOW JONES, Weekly Chart

…and now that it has fallen nearly 10% in 13 sessions and lost the 50-day moving average, the threat is that it will break the trendline (blue line) originating from the March 2020 lows and continue to correct, heading toward the significant 200-week moving average, currently at 29,667.

An autumn of great interest in the markets is anticipated. Prudence will be as essential as discipline to capitalize on the expected volatility.

As the saying goes, “In troubled waters, fishermen gain,” but it is not so simple.

It is necessary to approach the market well-equipped with knowledge, tools, experience, and the difficult combination of boldness and prudence to seek the most suitable opportunity environments (return-risk) that allow making the saying a reality.

Here are two interesting examples of how to approach such opportunity moments that markets often offer, with minimal risk and through very simple strategies: one during the summer rally (+42.8%) and the other in the decline since August 16 (+9%), real returns achieved by our readers, in addition to many others leveraged during the current year with even higher returns.