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A healthy dose of Fear

| August 22, 2023

Like I said last week, a little bit of fear in the markets will shake out the loose hands. Those that maybe shouldn’t have been invested in the stock market to begin with, or maybe are perhaps overleveraged and think the market only goes one way. Well, how do you hear me now, says Mr. Market?

Here’s the updated AAII survey.  Quite a change from a week ago.

And here’s what a different market is saying. Highest mortgage rates since 2000.

In case you were wondering why home inventory is so low, it’s largely because nobody who bought (or refinanced) in the last 15 years wants to trade in their sub-4% mortgage for a new 7.48% mortgage. See the home sales headline for July sales.

Check this data out on housing affordability.

I know, it’s a bit on the small side (click on it to blow it up), but let me point out some things. Because of the law of supply and demand, you are still seeing the median home price go up over the last year. And because of higher interest rates, affordability has come down by over 10%. Here’s some clarification on what these numbers mean.

So, with 20% down, and only 25% of monthly income used for mortgage payments, those of us on the West Coast can only afford 64% of the median home price. Now, it’s fair to say that there are a lot of people making more than the “median” income on the West Coast. Of course, by definition, that also means that half of the people make less than the median income. So what is the median income? $81,575 for a household. But wait, there’s more.  As we can see in the table above, the West Coast is not using 25% of their income, they are using 39% of their income to qualify for a loan. I’m no mortgage expert, but I think the maximum is 40% which seems really close to 39%. I know, I said there would be no math!

So, housing prices are going up again, while mortgage rates are going up, at the same time that many are locked into a house with a very low interest rate that they won’t sell because they don’t want to trade that mortgage for a 7.5% mortgage. And of course, housing is the most unaffordable in 40 years!

Meanwhile, did you get your invitation to Jackson Hole where the FED is holding their annual Economic Policy Symposium, this year titled “Structural Shifts in the Global Economy”? Yeah, me neither. Tough to wake up to this view in the morning. I wish them well as they try to sort out the nation’s financial woes. As for me, I’ll be taking advantage of Brown Bear’s free car wash day instead (Thursday, in case you’re interested…might be a more valuable use of your time!).

If you don’t want a free car wash and do want to hurry down for the “fun,” we could still get there in time. Anyone have a NetJets card? Looks like there might be rooms available, for the mere price of about 40 “Beary Best” car washes. Think we could hobnob with the rich and famous (infamous)?

Ok, enough of that! Let’s get back to work, they will let us know how to live our lives when they are done patting themselves on the back.

One thing we were remiss about last week was sending our thoughts and prayers to those affected by the tragic fire in Lahaina. Having been there many times, walked down those streets and into most of the shops, it’s devastating to see the destruction. Lahaina was hit especially hard after COVID, as many shops never reopened. There were perhaps a third of all shops still vacant last time I was there. Not that this is any comparison to the lives lost, but if you’ve ever been in Fleetwood’s on Front Street (owned by Mick Fleetwood from Fleetwood Mac), it was a joy to walk through the old memorabilia of the Beatles, Janis Joplin, CSN&Y. And sadly, much of that was irreplaceable. Lahaina will rebuild, but some of those buildings date back to the 1600s. Like during most tragedies, people come together and help each other get through and I have no doubt that will happen in this case. But it doesn’t make it easy!

I hope you have a great week and please let us know if you have any questions.