Housing: Driver of Average Wealth

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Dear fellow investors,

We have been in many discussions with our investors, people in the media and the investment management industry on where housing is today. While certain investors had taken a practical approach to housing, some have voiced objections around the price movement we’ve seen in housing since the lockdowns ended in the spring of 2020. Looking at price movements out of context could plausibly make anything sound insane. However, the question is whether we are at an extreme relative to the past. Below is a chart that we put together from St. Louis Federal Reserve data. The chart is US home equity as a percentage of household net worth.

The first thing you can take away from this chart is that we are nowhere near an extreme of net worth sitting in housing today. Prior extremes were 1985: the average boomer then was at a home buying age of 25 or greater. Followed by 2005: boomers thought they needed a second or third home, but there were far fewer Generation Xers buying homes to create an encore.

The other way to look at this chart is to think about housing priced in net worth. Why did we go to an intense low on housing relative to net worth? Stocks and bonds did very well as interest rates went to the floor, while housing languished from the bottom in 2008-2009. The other assets households owned did far better than the houses themselves and have continued their historical strength relative to housing.

We continue to warn investor investors of the likelihood of stock market failure over the next 10 years. There are a few reasons for this: the percentage of household net worth in stocks (all-time high), the effects of interest rates on stock investors decisions (buy the dip) and the psychology of financial euphoria that is present today. In our opinion, these are the S&P 500’s failures. At some point, the bond market has to deal with inflation and interest rates.

The chart also explains that when housing does well and stocks don’t, housing soars in net worth. Housing didn’t appreciate like the stock market did during the 1960’s, so it found a low during that decade. Stocks and bonds were a train wreck in the 1970’s. Housing didn’t have this train wreck. We explained how housing beat inflation during the worst period in US history (1968-1981) in our recent piece, Inflation: It’s Just the Start. In our minds, housing has an uncanny opportunity cost relative to stocks today like the 1960’s to 1970’s.

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