It’s been 60 days and we’re starting to see the beginning of the adjustment from higher rates. Average 30-year mortgage chart below.
Inventory is back at pre-COVID levels and prices are moving sideways. My feeling is the market is going to get cheaper.
This is a yield-based feeling.
Let’s look at the current yield curve.
A simple metric I use for vacation markets.
What is “one week rental” relative to capital value?
I priced two markets this past week. These are not Christmas or Holiday Weekend rates, but they are December to February high season weeks.
Jackson – $10,000 a week relative to $4-6 million capital value
Vail – $5,000 a week relative to $2-4 million capital value
This is where the Yield Curve is useful – the 6 mth (to 30-year) rate is ~3%
3% of $5 million is $150,000 per annum vs $10K a week to rent
For nearly all users, the secondary market has swung strongly in favor of rent vs buy.
Other impacts… the stock market ~19% off its peak, crypto down, commodities down, China property market under stress, hot war in Europe, US Fed in a tightening cycle…
These changes, combined, are making marginal buyers less wealthy.
All prices move at the margin.
What does this mean?
My #1 investment principle is to construct a life where I don’t need to be right.
If the Central Banks are done bailing out financial assets then it makes sense for the price of financial assets to fall. The free-money era pulled returns forward and some of that will need to go back into the future.
That said, the recent past shows a clear bias towards continuous financial bail outs.
Impossible to know what will happen.
A note on inflation, as I see it.
If you own financial assets then you’ve been “paid” in asset appreciation over the last few years – SP500 is up ~50% over last 5 years.
Going back further, say 2010, the owners of financial assets have grown accustomed to unearned wealth.
So the best hedge against the market (& inflation) was letting personal spending decline, as a percentage of family assets, across the run up.
If you didn’t own assets then, hopefully, you’re in a skilled profession where you’ve been able to increase your income faster than inflation. If not then your best investment is up-skilling yourself.
The recent past, and media, are skewing your perception of inflation.
What’s your best guess for the 10-year breakeven inflation rate?
It peaked at 3% in the spring, currently 2.4%
1.03 ^ 10 = 1.34, 34% price increase over last 10 years
If, like me, you were building a family then your core cost of living is up WAY more than 34%.
When I look at our family budget, I can see a big part of our increase is lifestyle inflation.
For many of us: the long bull market has driven lifestyle inflation well ahead of the price inflation we’ve experienced.
Again, the best hedge is either: (a) not ramping spending, or (b) staying variable so the family can cut spending quickly, if required.
For perspective compare 34% 10-year inflation to…
SP500 10-year total return => 175% increase
The 10-year price of wherever you happen to be living
Short-term price inflation is nothing compared to long-term asset value inflation.
Given the future is unknowable (bailouts, ZIRP and money creation):
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