In The News...
How valuable is real estate exactly?
Like anything else, real estate is only as valuable as what someone else will pay for it. I mention this because I am helping a client of ours value their business, and in doing so, discussed the value of real estate in 5 to 10 years time (when they plan to sell their business). These business owners rent their building space, which they think could prevent them from getting top-dollar upon sale.
Hold on, I said. That may not be a bad thing. If they owned the property they would struggle to find a buyer to pay 100 cents on the dollar for it, as it is commercial space and the purchasing company would likely integrate them into their existing operations, conducted elsewhere. That was my initial reaction. My second reaction relates to this:
Yes, that is a vending machine mounted into what used to be a department store entrance inside of a shopping mall. More and more retail spaces are vacating as consumers purchase online (Amazon, etc.). Our client does not operate within a mall, nor do they own a retail store. But that may not matter. Property owners will feel the impact as online expansion has a trickle-down effect. If you have heard the phrase "a rising tide lifts all ships", this is the opposite. Commercial real estate growth will slow as brick and mortar businesses shrink their collective footprint.
As a result, owning the property might present greater challenges to our client in the event of a sale, particularly if they have debt attached to it. So not only would they struggle to get full value for the property, but their equity at-sale would be further reduced by any residual mortgage debt (if present).
Seattle real estate leads the nation (again): Residential real estate holds steady. The latest Case-Shiller housing report shows home prices were up nearly +6% year-over-year, as of January-end. Seattle was tops among major U.S. cities, up an impressive +11.3% annually, which nearly doubled the national average. Take a look at the price breakdown by major market:
Where have all the homeowners gone? Despite the nice rebound in housing prices since the 2011 bottom, homeownership has not recovered with it. This next chart is confounding, as it shows the decline in homeowners, which started over a decade ago:
Only 64% of Americans own homes, down -6% since 2005 and rivaling lows not seen since the 1960s. I discuss why this might be in the Opinion section below.
In The Market...
The S&P 500 fell -0.2% last week. Let's look under the hood:
Since I didn't send out a weekly recap last week, I didn't get a chance to talk about quarter-end. The previous Friday was both March-end and the end of Q1. The first quarter was strong for stocks. Here are some highlights/takeaways from the first three months of 2017:
- S&P 500 climbed nearly +6.0% in the first three months of 2017 (including dividends)
- Nine of the 10 major stock sectors were positive in Q1 (Energy was negative)
- Technology was the best-performing sector, up +10.7% (XLK)
- Tech-heavy Nasdaq-100 index rose +12.0%, outperforming the S&P index
- 79% of S&P 500 stocks were above their 200-day average price at quarter-end, which is bullish
- Bonds were positive across the board, led by high-yield bonds and preferred stock
- S&P was essentially flat in March, meaning all of the quarterly gains occurred in Jan/Feb.
That last point is important. A few weeks back I mentioned that the overall market might flatten out for a period of time and that is exactly what we have seen. Take a look at this chart of the S&P index and notice that since touching a value of 2,400 back on March 1st, the S&P 500 has not returned there since.
More importantly, Relative Strength (RSI, the upper chart) has been falling. This is often a good leading indicator of future price. In this case, if RSI falls much further below 50.0 we likely will see stocks slide further in the near future. The long-term picture still looks bullish though, when looking out weeks and months. That is important because I believe it means investors are in "buy the dip" mode rather than "sell the rally" mode.
At the end of the quarter our primary stock holding is a Consumer Discretionary fund (XLY). We had previously held a Materials sector fund (XLB) up until two weeks ago. As a result, we hold a cash position across most accounts that we will look to reinvest in the near future.
In Our Opinion...
Continuing my earlier thoughts on real estate, how is it that home prices are rising but homeownership is not? Here a few reasons to consider:
- We are evolving into a society of "renters" as much as "owners", whether by choice or by force. For example, 31% of people lease cars rather than buy them. This is up from 25% a few years prior.
- The average worker changes jobs more frequently than ever, an average of 10 to 15 times in their career. This makes buying a home less appealing if the job change requires a geographical move.
- Real estate prices have outpaced wage growth, making it more difficult to keep pace with home prices.
- However, many prospective buyers simply have not saved enough to accommodate a 20% down payment, or an amount close to that.
- Some people are still reluctant to buy due to fear that another housing crisis looms.
- The average person gets married in their late-20s, as compared to Baby Boomers who wed in their early 20s. Marriage is the most common life event that precedes buying a home, which means there is a large pool of working 20-somethings who have yet to buy.
I'd be curious to know what you all think explains the rise in home prices and subsequent decline in ownership.
In Our Portfolios...
Stocks: We sold our Materials fund (XLB), which was owned within most client accounts. We will use the proceeds to most likely buy a Utilities fund (XLU) or a Nasdaq-100 index fund (QQQ).
Bonds: We sold a high-yield bond fund (ANGL) within accounts that owned it. We still own another high-yield bond fund (HYG) across certain accounts.
Q&A / Financial Planning...
This is your last week to make IRA contributions for 2016. If you wait past tax day you will lose the ability to contribute for last year, which matters if you want to deposit more than the following annual limits:
Under age 50: $5,500
Age 50 or older: $6,500
The annual limit applies across all IRAs you own, so while a 40-year-old could contribute $2,000 to one IRA and $3,500 to another, their combined contributions cannot exceed $5,500. However, if you already participate in a retirement plan through work beware of the tax deduction restrictions if you earn above a certain level. Contact Gale or myself if you have questions.
What's New With Us?
We will begin migrating accounts from Scottrade to TD Ameritrade this week. We will be in touch regarding the forms required. My hope is to make this a quick, seamless process. Again, I view this as a positive move for both you as clients and our firm as a whole.
Have a great week,
Brian E Betz, CFP®