05/25/16   The Glacial Housing Shift

Editor’s Corner

Ron Rowland

The last economic recession was marked by an upheaval in the employment landscape, and the seven years of “recovery” have yet to undo all of the damage that was done. Millions of people still need a job, and millions of others are now earning far less than they previously were. Despite these depressing facts, history is likely to show that the glacial shift in housing may eventually become the distinguishing feature of the Great Recession.

In April, new home sales posted their best month since January 2008. According to the Department of Commerce, this finest result in more than eight years places the seasonally adjusted rate at 619,000 units per year. Before you get too excited, that’s about the same annual rate as January 1994, July 1984, July 1973, and February 1964. In other words, it’s been at this level in every one of the past five decades. Additionally, it was never lower than its current rate of 619,000 units at any time during the nearly 13-year stretch between April 1995 and January 2008. If that is not depressing enough, new home sales still have to climb another 124% to get back to their July 2005 level of 1.4 million.

Homeownership rates peaked at 69.1% in 2005. The year-end 2015 rate of 63.7% is the lowest in 49 years. The quantity of rental units stayed in a tight range of 33.0 million to 35.2 million for the 20-year period spanning from 1988 to 2007. Since then, they have marched higher each of the past eight years and now stand at 42.6 million—a 20% jump from 2007. Meanwhile, the quantity of owner-occupied housing units has decreased from 75.2 million to 74.7 million during the same period.

These statistics are based on units—not on population. I am of the belief that population-based housing statistics would show an even larger shift. The percentage of the population still living at home with their parents has increased substantially. This not only reduces the need to build additional rental units, but it also increases the population living in “owned” housing units, even though it is owned by their parents.

On that subject, the Pew Research Center today released its analysis of recent census data. The report highlights broad demographic shifts and their implications for one of the most basic elements in the lives of young adults: where they call home. According to Pew, for the first time in more than 130 years, adults between the ages of 18 and 34 were more likely to be living in their parents’ home than any other living arrangement.

Granted, this statement is somewhat misleading because the percentage of people in this age group living with their parents was actually slightly higher from about 1920 to 1940—during the era of the Great Depression and up until World War II. That figure was 35% in 1940, and today it stands at 32%. Higher “than any other living arrangement” is the qualifier in the original proclamation that allows it to stand. Today, living at home is the largest category at 32.1%. The category of married or cohabitating in their own household is next at 31.6%. The category of living alone, being a single parent, and other heads of households comes in at 14%; and other living arrangements is at 22%.

In 1940, the big difference was that the category of married or cohabitating in their own household stood at 46%, relegating the 35% living with parents to second place. Yes, marriage patterns have changed over the years, but today’s 32% of young adults still living at home is a significant change from the 20% in this category in 1960. Employment conditions are a huge factor, as the median wage for males aged 18 to 34 has dropped nearly a third (from about $23,000 to $15,000) in the past 10 years. You can read the complete Pew Research Center report here.

I’m not convinced the trend in “non-ownership” will end anytime soon. Before it does, I believe the above-noted shifts will become even more pronounced. The housing bubble led to the housing collapse, which is now causing a shift in ownership versus rental data, which will lead to history’s remembrance of the distinguishing features of the Great Recession.

Investor Heat Map 5/25/16

Sectors

Energy and Materials still control the top, but the remainder of the sector rankings are a jumble this week. Financials jumped from eighth to third, apparently liking the fact that a Fed interest-rate hike is back on the table for June. Industrials regained some of the relative strength it recently relinquished and climbed two spots to fifth. Health Care was also among the upside movers, improving its former ninth-place position by two. However, Technology is the success story of the week. It posted the best one-week gain, shed its negative momentum reading, jumped out of last place, and positioned itself to move into the upper half. All of these sector gains means there were an equal number of losses on a relative basis, and the higher-yielding defensive sectors took the brunt of the negative action. Utilities lost a large amount of momentum, but it was able to hang on to its fourth-place spot. However, its former substantial margin has now all but disappeared. Real Estate dropped three spots to sixth, Telecom fell four places to eighth, and Consumer Staples gave up four positions to land in 10th. Consumer Discretionary slipped one place, and now it is on the bottom and slightly in the red.

Styles

Mid-Cap Value extended its stay at the top, a position it has held for 11 of the past dozen weeks. Despite this appearance of stability at the top, all 10 of the remaining style categories changed their ranking positions this week. Small-capitalization categories were the winners with Small-Cap Value climbing two spots to second, Small-Cap Blend jumping four places higher to fifth, Micro-Cap improving by three, and Small-Cap Growth moving off the bottom. The gains for Micro-Cap and Small-Cap Growth pushed them back into the green, and all 11 of the style categories are now registering positive momentum. Relative strength is a zero-sum game, which means there were plenty of downside movers also. Large-Cap Value, Mid-Cap Blend, and Mid-Cap Growth all gave up one position. Mega-Cap and Large-Cap Growth both lost three spots, and Large-Cap Growth now occupies last place.

Global

The dramatic declines of Latin America and Pacific ex-Japan highlight the global action of the past week. Following a 10-week stint at the top, Latin America eased down into second place last week and then plunged to ninth today. Latin America is now technically in a correction because it has declined 11% from its April peak. Its intermediate-term momentum has turned negative, making it the fourth global category to move into the red. Pacific ex-Japan had been displaying above-average relative strength for 15 weeks, but it slipped four places into the lower half today, and its momentum reading is barely above zero. Aided by a strengthening currency, the U.K. posted big gains and surged from seventh to second. World Equity improved one position, and EAFE jumped three spots higher. Emerging Markets and China are still on the bottom. With Latin America now joining them in the red, the trio of developing-market categories is likely to be the laggards for a while.

 

Note:

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

 


“ In all commodities, the pendulum swings hard in both directions. ”

Justin Reiter, an Iowa corn and cattle farmer


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