S2-18: Market Correcting, Housing Update & A Deep Dive on US Agriculture and Rising Food Prices

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On this week’s episode of Finance Explained, the market had its third consecutive down week this month and is now in correction mode and headed for bear market territory. I’ve got the latest on the housing market through March, as the spring selling season starts to pick up. And this week’s deep dive features a panel of 3 US agriculture experts to talk about what’s going on with farming, input prices, drought in the Western US, and the outlook for food prices in the US this year.

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Market Correction

Last week, the market finished down for the third consecutive week in a row, down -2.75% for the week, down -5.71% month-to-date, and now down -10.37% for 2022YTD. That puts it officially in market correction territory. The more volatile, tech-heavy NASDAQ is down further, -17.93% for the year, putting it very close to bear market territory. Day to day market movements continue to be more pronounced – an indication of the more volatile, uncertain economic and geopolitcal environment. Last week again saw multiple days with market moves exceeding 1% in either direction, while historically, only about 30% of trading days see market moves over +/-1%.

The stock market performance last week was a function both of the continued rise in interest rates, as well as the start of a somewhat disappointing Q1 earnings season, with big misses from major tech names, like Netflix. Mid-week last week, Fed Chair Jerome Powell also all but confirmed the Fed plans to increase the Fed Funds rate by 50bps at its May meeting, as they continue to aggressively reign in inflation and unwide their overly accomodating monetary policy position of the last 2+ years. The 10-year treasury rate ended last week at 2.91%, and hit its highest level since 2018.

Investors also continued to closely watch the overall yield curve for an inversion – or when longer-term rates have yields lower than shorter-term ones. This has historically been a fairly accurate predictor of recessions, and the curve did briefly invert earlier in the month. It has since flattened out again as rates continue to rise.

Housing Market Update

The housing market is typically seasonal, slowing down during the winter months, with activity resuming in the spring and summer. Over the last 2 weeks, we have gotten March data on existing home sales, housing starts, and new home sales all of which point to home prices remaining elevated, and inventory still not keeping pace with demand, in spite of mortgage rates hitting new highs weekly.

As the Fed steps back as a buyer in the Mortgage-Backed Security market and even begins to unwind their holdings as we head into the summer, mortgage rates are rising even faster than interest rates more broadly. Last week, the national average rate for a 30-year mortgage hit 5.11%, the highest rate seen since December 2009. This has led many to ask if higher mortgage rates will lead to a housing slowdown, as higher interest rates makes higher home prices less affordable.

So far, the data for March, doesn’t seem to show it.

For March, existing home sales were down -2.7% vs. February, but this is largely due to persistently low inventory levels. Inventory, homes listed for sale, is down 9.5% vs. March 2021 and currently represents just 2 months’ supply. A more normal market is considered to be 4-6 months supply: typically, below 4 months is a seller’s market with rising prices and above 6 months is a buyer’s market, with pricing pressure. Given limited inventory, existing home sale prices continue to rise: up +15.0% vs last year.

Regionally, there is some bifurcation in the market. The West and Northeast are starting to see slower price growth rates, back in the more historically normal mid-single digits, while the Midwest and the South are still experiencing double-digit price appreciation.

So how do we fix the lack of housing inventory? We need to build more homes.

And the good news there is housing starts are rising. Housing permits are up +6.6% vs 2021, housing starts were up +3.9% in March vs a year ago, but, due to labor and supply chain issues, completions continue to lag further and futher behind, down -13.0% vs. last year, and at an increasing lag to starts.

Why do we currently have such a shortage of housing inventory? After the Great Recession, just as builders likely overbuilt in the years leading up to it, they overreacted after and underbuilt for the last 10+ years. By my estimates, we likely underbuilt to the tune of 4.5 million homes during that time period. So while housing starts are finally increasing, it will take years of higher starts to compensate for both current demand and the accumulated shortfall.

As a result, just as in the existing home sales market, new home sales prices are up +21.4% vs. 2021. Also, given the rise in input costs, fewer and fewer new homes are being built and sold at the lower-end of the market, while a larger and larger percentage of new homes are being built and sold at $400K+.

Will higher mortgage rates have an impact this summer? Maybe at the lower-end of the market. Maybe it will make the market a little less competitive, and slow price appreciation from 20%+ to more normal single-digit growth rates. But unlike the Great Recession, there are not a bunch of bad, subprime, adjustable rate mortgages out there. Current outstanding mortgages are more traditional and to high credit quality borrowers, making a mass reset and wave of foreclosures highly unlikely. And given the fundamental higher demand vs. inventory shortfall, I continue to not forsee anything that would indicate a dramatic drop in home prices.

The Start of Q1 2022 Earnings Season

Last week, Q1 earnings season really got underway. So far, with 20% of S&P 500 companies reporting, more than 3/4s have beat earnings expectations. So why is earnings season putting downward pressure on the market? Because of what else is coming out of Q1 earnings – weaker outlooks.

Remember that the market trades off of earnings expectations going forward, and 2022 vs. 2021 shows a significant slowdown in earnings growth expectations for the market. Some of that was or should have been expected, given 2021 growth was fueled by weak 2020 comparisons.

However, as evidenced by Netflix’s earnings last week, some big winners during the pandemic, that saw huge increases in users, are now seeing user declines, something many big tech companies have never experienced before. After Netflix announced it’s earnings, the stock fell over 35% in a single day, and is now down over 63% in the last year. So far, 2 out of 3 S&P 500 companies issuing 2022 guidance, have given negative guidance for the second quarter, meaning they are guiding investor expectations down.

With lower growth expectations (and higher interest rates), comes lower valuation multiples too, magnifying the downward pressure on share prices. Valuation ratios have fallen significantly in recent weeks, with the current forward price to earnings ratio down to 18.6x, in line with the 5-year average, but still above the 10-year average of 16.8x.

A Deep Dive on US Agriculture & Why Food Prices are Rising

Today’s deep dive is all about agriculture and rising food prices – to help Family Finance Moms better understand what is behind their ever-increasing grocery bills. As of the recording, the March Consumer Price Index was up 8.5% over the last year, with food prices up even higher. So what’s behind those rising food prices?

To help explain, I’m joined by 3 agriculture experts to share their experiences around what farmers are actually living now, what’s happened over the last couple of years, and what they are anticipating in the year ahead.

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Coming up this week, look for the first estimate of Q1 2022 GDP, as well as likely more market volatility as the Q1 earnings season continues. Be sure to subscribe to Finance Explained wherever you get your podcasts to catch every episode. You are also welcome to reach out to me at any time on Twitter or Instagram, where I take questions LIVE every Monday and Wednesday at 9AM ET.

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