Most of our articles are fundamental assessments on the drivers of equity prices. In late-October 2018, it’s specifically pertinent to bring this up because there has been increased downside volatility in U.S. equities. Corrections are tests to see if the economy is about to fall into a recession. It’s difficult to time corrections, but since the fundamentals always drive prices, we believe proper analysis can determine the probability of a recession and bear market. Most corrections end quickly as the bull market keeps going, but that’s not enough to justify buying stocks heavily after they fall about 10%.
Back To The Housing Market
Weakness in the housing market isn’t the only catalyst of the correction in stocks, but the size of this asset on the consumer’s balance sheet makes it pivotal. We don’t have to go back far to show an example of the damage the housing market can do to the economy. While another 2008 financial crisis is unlikely because lending standards have improved, we’re mentioning it to show the power of housing. When prices go up, consumers are more willing to spend money because their wealth has increased. Underwater mortgages, which is when the value of the home is less than the value of the mortgage, are terrible for consumers. Luckily, the number of underwater mortgages is falling. As of Q4 2017, the rate of underwater mortgages fell to 9.1% which is the lowest since the financial crisis.
New Buyer’s Market Coming?
The current problem isn’t underwater mortgages; it’s housing affordability. According to a Zillow survey of real estate economists, the housing market won’t shift to a buyer’s market until at least 2020. 43% said it would shift in 2020 and only 25% said it had shifted already or would shift by 2019. This survey is referring to the national market. Some people believe by the time a realtor or economist is warning homeowners that a buyer’s market is coming soon, the buyer’s market is already there, meaning the experts are behind the curve.
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