It All Comes Back to Housing
An article in today’s Financial Times talks about the equity market’s incessant need to call a bottom and outlines the pro/con arguments. Nothing you haven’t heard before if you’ve been paying attention but after hundreds of words, the article boils it all down to one factor: the housing market.
A quick personal story: my rental lease expires in 2 months so we went house-shopping. My value-investing tendencies extend to all areas of my life so we scoured all categories: new housing developments, REOs, overbuilt condos, less-desirable surburban existing homes, fixer-uppers, multi-family units, etc. I concluded the market here in Sacramento, CA still needs further correction (by at least 10-20% of current values).
Now, I know I’m in one of the ground-zero regions for the housing bust but we started falling earlier and harder than most other regions so that may not invalidate my observations. We’re also starting to see the fall-out locally in an economic sense as the local governments struggle with revenues and layoffs and vacant commercial properties abound.
If the current market rally is truly dependent on the housing market, I wouldn’t get too comfortable (or antsy to jump into stocks that feel like they’re slipping away). I pick stocks on a fundamental basis and there are a few on my watchlist that were getting real close to the buying zone but for the most part, I didn’t get the sense that stocks were so plentifully cheap that I couldn’t decide which ones to buy.
One final point on today’s rally: big numbers in the indices but Treasurys are selling off, finally, as opposed to last week when equities rallied along with Treasurys. The yield on the 10-year note is up 19 bp today which is a big move for that market. This pressures long-term mortgage rates, which track the 10-year note, and complicates plans to rescue the housing market via lower financing costs as opposed to lower home values.
It strikes me as a typical comic-book scenario with the villain threatening your mother in one hand and the rest of the world in the other, except in this case, our villain has many hands. Maybe the Fed can save the equity markets. Maybe (a big maybe) it can save the housing market. Maybe it can save the dollar. Maybe it can fight inflation. But how is it going to accomplish all of these objectives?
Count me skeptical.
Addendum: I keep hearing reports on financial as well as general news media about the increase in existing home sales for February. This is misleading. Go read Barry Ritholtz’s reality check here.
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