2 For the Bulls & 2 For the Bears

2/4/2016

By Michael McKeown, CFA, CPA - Chief Investment Officer

Let’s dive into some important charts.

Leading up to the past two recessions, people dramatically stopped looking for houses.  It began slowing down two years before, as people worry about making a big purchase on credit.  That is not the case today.  Consumers are looking for houses. The National Association of Home Builders shows sales and foot traffic increasing steadily for four straight years. 

There is a ton of noise in investor surveys and not clear signals.  At extremes though, the data gets more interesting.  Only in 2008-09, 2011, and briefly in 2015 have bearish advisors outnumbered bullish advisors.  This is typically a contrarian signal, as when too many people get bearish, there is not anyone left to sell and push prices lower.  Stock prices today are near the same level as the lows of August 2015 when bears outnumbered bulls, but it is important nonetheless for those with bullish outlooks.

It is a bloodbath in the energy sector.  Total asset writedowns for oil and gas companies hit a quarterly record.  The corporate bond market is telling us that energy today is as bad as the telecom bust in 2001 and the financial sector meltdown in 2008.  Will it feed into other sectors that require credit?  That is the bigger question now.

Both large and small banks tightened credit standards for commercial and industrial loans during the last two quarters of 2015.  This was the first consecutive drop during this economic expansion.  Demand for loans also fell in the last Federal Reserve survey of Senior Loan Officers.  This is certainly partly related to the energy fall, but could feed into other areas.  Tighter credit standards and a drop in demand for funds preceded the last two recessions. 

Stay tuned for more charts as we follow the evolving economy and markets.

 

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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Big Changes to Accredited Investor Definition & Crowdfunding

1/27/2016

By Michael McKeown, CFA, CPA - Chief Investment Officer

When Congress passed the Dodd-Frank Act, there was a provision that said the SEC would examine the accredited investor definition every four years.  Why does this matter?  Per the report (with our emphasis):

“The “accredited investor” definition is a central component of Regulation D.  It is
“intended to encompass those persons whose financial sophistication and ability to sustain the
risk of loss of investment or ability to fend for themselves render the protections of the Securities
Act’s registration process unnecessary.”  Qualifying as an accredited investor is significant
because accredited investors may, under Commission rules, participate in investment
opportunities that are generally not available to non-accredited investors, such as investments in
private companies and offerings by hedge funds, private equity funds and venture capital funds. 

Issuers of unregistered structured finance products and debt securities also may rely on
Regulation D.

The exemptions in Regulation D are the most widely used transactional
exemptions for securities offerings by issuers.  Issuers using these exemptions raised over $1.3
trillion in 2014 alone
, an amount comparable to what was raised in registered offerings."

The definition change also matters because of the ease of investing in private offerings via crowdfunding using online platforms today.  Many sites popped up offering access deals from real estate to technology startup companies and much more.

Since 1982, the accredited investor requirements have been the same - $200,000 of individual income, $300,000 of joint household income, or $1 million net worth (excluding primary residence).

Here is what the SEC recommends from its report issued in December 2015:

  • Grandfather in the previous income and net worth requirements, but subject to 10% investment limitation in any one issuer
  • Increase income threshold to $500,000 and net worth to $2,500,000 (no percentage limitation)
  • Index the threshold requirements for income and net worth to inflation
  • Grandfather issuers' existing investors that are accredited under current definition

In addition, the SEC also recommends the accredited investor definition be expanded to include individuals with the following attributes:

  • Certain professional credentials (Series 7, CPA, CFA, etc.)
  • A minimum amount of investments of $750,000
  • A minimum amount of experience investing in exempt offerings
  • Individuals who pass an accredited investor examination

The SEC estimates there are currently about 12.4 million accredited investor households.  The new inflation-adjusted requirements would impose a limit (10%) on 4.4 million households, which could lessen funds available for issuers under Regulation D.  The limit is probably a pretty good idea to prevent people from "putting all their eggs in one basket."  Including all of the new expanded definitions, the pool of accredited investor households would expand to 14 million.

All of these changes would have a big effect on the private capital markets over time. Record amounts of money flowed into venture capital (VC) the last few years.  Given easy capital access and lower levels of due diligence on crowdfunding platforms, I suspect there will be many failures and few winners of those using the VC platforms (like any portfolio of VC investments).  When VC investments hit though, they will be big, but a huge gamble rather than an ‘investment’ in the end.  Far more interesting to me are the real estate and private equity opportunities with more tangible businesses and quality cash flows.  While not knowing anyone personally, my inclination that those who fail to build a quality peer network of lenders or investors will be the ones using the platforms as sources of capital.  This could result in negative selection bias. At the same time, the pure convenience of the platform and quick execution may make crowdfunding platforms a viable solution for all or a portion of capital raising.

In the future, online crowdfunding platforms could become the norm rather than the exception.  Hopefully there will be an increase in quality and greater due diligence standards on a self-imposed basis by the industry.  Will more qualifying individuals consider crowdfunding as part of basic asset allocation?  Could this be offered in 401(k) plans in the future? 

It will be really interesting to see what, if any, of the SEC recommendations become law and the subsequent impact on crowdfunding and individual investors. Keep an eye on this, we sure will.

 

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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4 Quick Year-End Financial Tips

12/23/15

By Michael McKeown, CFA, CPA - Chief Investment Officer

It is a busy time of year, but here are some easy ways you or your advisor can save money before we ring in 2016.

1. Tax Loss Harvesting - The amount of losses taken can offset your tax liability from 0% to 43.6%. It depends if you are netting losses against long-term gains, short-term gains, or ordinary income (up to $3,000).  There are several areas to seek out portfolio losses like Master Limited Partnerships, which along with any commodity related asset like oil, are down over 40% on the year. 

2. Bump up 401k savings (or overall rate) - Is your savings rate 15% of your pre-tax income?  That is the magic number it takes to fund a successful retirement, according to the Boston College Center of Retirement Research.  (Here is a quick check-up we wrote earlier this year to see how you are doing.)  The 401k limits are the same for 2016, with a maximum of $18,000 and a catch-up of $6,000 for those over age 50.

3. Take your RMDs - For those in retirement, make sure to take your required minimum distribution from traditional IRAs and 401k(s) before year-end.  The penalty is 50% of the amount that should have been withdrawn, so it is not a cheap mistake.

4. Examine your income and spending - It sounds easy, but most people just will not do it.  The average American spends more time deciding which movies they will see in a given year than on their finances (which reminds me, I cannot wait to see The Big Short).   Consider your income and expenses over the past year and projections for 2016.  Is there an area that could be improved? A few ideas: refinance mortgage, health/auto/home insurance, 529 college savings plans for kids or grandkids.  If you are retired, what is the spend rate as a percentage of your overall portfolio value? If consistently above 4%, given the low interest rate environment, there could be a long-term issue.

 

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

http://crr.bc.edu/wp-content/uploads/2014/07/IB_14-111.pdf

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The Wait is Over

12/17/15

By Michael McKeown, CFA, CPA - Chief Investment Officer 

The federal funds rate is the most interesting interest rate in the world.  It is the rate that depository institutions can charge one another for overnight loans.  Banks make these loans to maintain the required reserves, which is the minimum amount banks must keep by law in relation to the loans outstanding (i). 

The Federal Reserve last changed the federal funds rate, on December 16, 2008.  At the time, it cut interest rates by 1% to a 0 to 0.25% range.  It came to be known as the floor or the zero lower band, assuming that interest rates could not go negative.  On December 16, 2015, the U.S. Federal Reserve, after months and years of anticipation, raised interest rates to a 0.25% to 0.50% range. 

 

The last two interest rate hiking cycles began in June 1999 and June 2004, respectively.  The last fed funds interest rate increase was June 2006.   
 
The Federal Reserve's mandate is to maintain price stability and full employment. Let's check in on a few metrics. 

Due to the selloff in energy and commodity prices, the headline Consumer Price Index (CPI) is just barely positive.  The Federal Reserve focuses on the Personal Consumption Expenditures (PCE) Core Index, which at 1.3%, is still below the 2.0% target, which the Fed believe is due to 'transitory' factors. 

Core inflation rates in '99 and '04 were relatively similar, though headline numbers were in a much more normal range compared to today's headline CPI data. 

The unemployment rate today stands at 5% and likely relatively close to full employment.  One sub-sector of the labor market we like to watch is temporary hires.  It usually provides a strong leading indicator for the trend in the economy.  At the beginning of the interest rate hiking cycles in '99 and '04, temporary hires were increasing at 9% and 7.5%, respectively.  As of November 2015, temporary hires increased at only a 2.6% rate from the previous year. 

Perhaps there was a change in the dynamics of temporary hires or a lack of talent available, but this is a data point flashing caution.  This is especially so since any time the rate fell below 3%, it never came back above 3% until after the next recession. 

The increase in the fed funds rate and expectations of the future increases will undoubtedly affect pricing across the fixed income universe.  We recommend investors utilize experienced bond managers and strategies that have seen a hiking cycle before, and avoid loading up on short-duration bonds, which could take the brunt of the pain.  In our portfolios, we prefer barbell strategies, using floating-rate securities paired with longer dated investment grade bonds. 

(i)  http://useconomy.about.com/od/monetarypolicy/a/fed_funds_rate.htm

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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Walking in a Winter… Heatwave?

12/9/15

By Michael McKeown, CFA, CPA - Chief Investment Officer

If you were born and raised in Northeast Ohio, golfing is not exactly an activity one does in the winter months. 

While not exactly a heatwave, the warm temperature compared to most Novembers and Decembers has everyone walking around without coats and even in a slightly better mood (no thanks to the Cleveland Browns).

In Buffalo, our Snowbelt cousins have not seen any snow yet in November or December this year, the first time this has happened since 1899!

There is hope for a continuation of a mild winter thanks to el Niño.  Warm water in the Pacific Ocean combined with trade winds release atmospheric pressure that affects weather around the world.  In the U.S., it means warmer temperatures across most of the country.  In addition, many areas have had mild precipitation, though historically some Western ski areas and parts of the Midwest received above average snowfall.

Source: ENSO

According to Live Science, "El Niño was originally named El Niño de Navidad by Peruvian fishermen in the 1600s. This name was used for the tendency of the phenomenon to arrive around Christmas. Climate records of El Niño go back millions of years, with evidence of the cycle found in ice cores, deep sea muds, coral, caves and tree rings."

Are you dreaming of a white Christmas?

Watching the 1954 classic, White Christmas, is an annual holiday tradition in my family, even though we all know the scenes and songs by heart.  According to The Weather Channel's forecast for snow across the nation, Cleveland has a 45% chance to see snow each Christmas.  Nonetheless, the last five el Niño patterns from 1957, 1965, 1972, 1982, and 1997 never brought snow on December 25th, and is a sign that the mildness from November should continue throughout December.

The last two winters were unseasonably cold and huge snow storms resulted in below average economic data and the worst two quarters of growth in the last three years.   If this winter stays true to the past and ends up being warmer with only average precipitation, the comparisons to last year are a low hurdle and could result in economic data surprising on the upside in the first quarter of 2016.

Indeed, this happened in 1997/98 with surprising growth across data.  Looking further back at the el Niño years, it was difficult to find a pattern, though the warmth contributed to above average performance in 1957 and 1965.  So there's a small sample size, but the low comparisons from '14 and '15 should be easy to outpace.

The el Niño weather pattern is only one piece of the puzzle for forecasting changes to growth which many may be underestimating in the near term.  Still, the economy must contend with the Federal Reserve poised to raise interest rates on December 16th for the first time since 2006.  In addition, the strength of the U.S. dollar weighs on export growth while loan conditions are showing signs of tightening, which could cause issues in the second half of '16.
 

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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How the New Budget Deal May Affect Your Social Security Strategy

12/2/2015

By Laura Springer, CFP, CPRC - Client Manager

News coverage on the recently passed Congressional bill that includes the phase out of a lesser known Social Security claiming strategy called “File & Suspend/Restricted Spousal Application” has caused quite a stir among the retired, soon to be retired… and younger workers paying into the program who are concerned about its viability.  In other words, close to everyone.  As pensions become less common, Social Security is quickly becoming the backbone of retirement for many.  But because there are a multitude of strategies that vary based on marital status, earnings and disability history, most agree that decisions around benefits can be confusing and any changes to policy feel alarming, particularly in light of much political discussion surrounding possible future insolvency of the program.  Between the various claiming options, updates to the program and misinformation available, exactly how should you decide on a strategy, who is affected by this change and which strategy was phased out?  And which strategies should those individuals consider now? 

When considering your Social Security strategy, you'll want to first do so within the context of a full financial plan due to the complexity and variance around each individual's tax situation and spending goals, marital history, health status and intention of working through age 70… for starters.  The next step is to focus on three key ages: The soonest you can apply for benefits (which varies but is generally 62), the age you may collect "full" benefits called "Full Retirement Age" (FRA) and the latest you may collect benefits, which is age 70 for everyone.  Because the Social Security Administration is no longer regularly mailing statements, to determine your benefits at each of these ages, you will need to visit the Social Security website www.ssa.gov to create a login to your personal record and find your “Full Retirement Age.”  This is the age any American who has worked long enough at a job where they paid into the Social Security system (40 calendar quarters) may claim a “full” benefit.  If you fall into this category and are married or divorced but previously married for more than 10 years, the recent legislative changes may apply to you. 

While everyone should research their options, you will not be affected by the recent changes if you are single, divorced but married for less than 10 years, turning 62 before the end of 2015, and anyone who is currently married or divorced but previously married for 10 or more years but have worked less than 40 quarters to claim your own benefits.  The latter group may claim a spousal benefit, which is half the amount of their spouse's FRA benefit.  If you are widowed, disabled or care for a disabled dependent, contact your local Social Security office to discuss your options.

The strategy in question "File & Suspend/Restricted Spousal Application" used by some married couples and divorced individuals who qualified (see below), was also known as “Claim now, Claim more later.” The now sunsetted strategy worked like this: If the higher earner was older, they would file for benefits at FRA, but immediately suspend them until a later date, thus accumulating an 8% higher benefit for each year they waited to collect. Once their spouse, the lower earner, turned FRA, they filed a restricted spousal application and collected the spousal benefit while allowing their own to also accumulate at 8% a year.  Then at 70, they elect to stop collecting the spousal benefit and instead collect their own, maximized benefit. For divorced individuals who never remarried and reached full retirement age, the strategy was even more costly to the Social Security Administration.  They could both collect a spousal benefit while allowing their own to be maximized at 70. 

In the new budget deal, Congress deemed this to be an unintended loophole in policy that was more beneficial to those with financial means who could afford to suspend benefits until age 70.  Thus, it will no longer be available to the following individuals who previously qualified, which were:

Currently married individuals turning 62 in 2016 or later who have both worked in jobs contributing to Social Security for more than 40 quarters and are eligible to collect on their own benefits.

Divorced individuals who were married for over 10 years and fulfill the same work/age/eligibility requirements as above married individuals turning 62 in 2016 or later.

For everyone turning 62 in 2016 or later, when applying for benefits, you will be considered filing for benefits based on your own work history.  If your spousal benefit happens to be higher, you may elect the spousal benefit and will continue to collect it until the death of your spouse.  At that time, you will have the option to collect your deceased spouse's benefit (assuming it was higher than your own). 

Although File & Suspend/Restricted Spousal Application strategy is no longer available, there are many strategies and combinations of strategies married couples may consider.  These include both claiming early at 62 at a reduced benefit, claiming at full retirement age, waiting until a later age up until 70 or any combination of these strategies.  And again, if you turn 62 before the end of 2015, you may still elect the File & Suspend/Restricted Spousal Application strategy.  If you are interested in how a financial plan can help you make the best Social Security decision for your family, please contact Aurum Wealth Management at 440-605-1900.

 

This material is for informational purposes and is based on public information as of the specified date. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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Tech Echo-Bubble?

11/20/2015

By Michael McKeown, CFA, CPA - Chief Investment Officer

Harvard Business School had 20% of its graduating MBA class go into the technology sector this year, the most since 1999-2000.

Silicon Valley has so many privately-held, venture backed companies worth over a billion dollars, that there has to be a category for them: unicorns.

Mutual fund managers are making a push into private tech investments, since companies are waiting so long to go public.  (Of course, now there may be an investigation due to how they are valuing these assets).  The biggest story of late being Square's IPO pricing the company at half of its private value of $6 billion from just one year ago.

Tinder's CEO described the Web Summit in Dublin as "a concert... Tech, I guess, is more important than it was.  It's like the new rock."

Does this mean we are in the top of a tech echo bubble?

First, let's establish what we are looking for. 

ech·o [ˈekō/] - a close parallel or repetition of an idea, feeling, style, or event.

bub·ble [ˈbəb(ə)l/] - used to refer to a significant, usually rapid, increase in asset prices that is soon followed by a collapse in prices and typically arises from speculation or enthusiasm rather than intrinsic increases in value.

Now, let's examine the evidence.

Back in 2000, Technology fit the definition of having a rapid increase in price that quadrupled the performance of the S&P 500 and delivering total returns over 700% from 1995 to 2000.  Over the last ten years, Tech only beat the S&P 500 Index by 40% and increased by 78% total in the last five years.

In terms of detaching from fundamental value, the bill was certainly met with a sector Price/Earnings ratio approaching 70X!  Today, it stands at 21.5, still below average compared to the last 26 years, thanks to the bubblicious years.  Price to book is slightly above average, but not much.

Back in 2000, the technology sector made up 34.5% of the S&P 500 Index, more than any sector, ever!  It fell all the way down to 15.5% in 2006.  Today, technology is the largest weight at 20.8% of the index followed by financials at 16.5%.

With all of the anecdotal evidence from the beginning of this note, is this Tech Bubble 2.0?

As college football goofball Lee Corso is known to say, "Not so fast my friend."

Valuations are mixed, and even below average, tech companies have real earnings, and actually continue to invest in R&D or through acquisition into people and technology (as opposed to many stagnant industries preferring buybacks, dividends, or mergers).

There is no doubt that technology companies are changing a vast number of people's lives.  Amazon as the de facto "go to" for shopping, Netflix in how we consume movies/TV, Facebook in how we interact with friends and family, Google in how get information, and Apple in making fashion/lifestyle statements.  Just because the valuations are not as high as in 2000, it does not mean prices cannot fall.  The momentum is waning somewhat over the last year, but it just does not fit the full on definition of an echo bubble.

 

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.


 

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How Are Fund Managers Doing This Year?

10/30/2015

By Michael McKeown, CFA, CPA - Chief Investment Officer

Active management continues with a rough time so far this year versus passively managed indices.  Equity markets rebounded in October, but we will examine the data through the third quarter of 2015. 

Source: Morningstar 

The median ranked fund underperformed by 1.16% on a year-to-date basis and by 1.61% and 1.04% annualized over the past 5-year and 10-year period, respectively.  Investment committees and investors alike must be diligent in determining where and why fund managers are underperforming.   Detailed performance attribution aids in determining whether it is time to buy, sell, or hold a particular fund. 

The graph above shows the performance of the S&P 500 High Quality Index and the S&P 500 Low Quality Index, which breaks companies into groups based upon how steadily earnings and dividends grow.  This is the second consecutive year of high quality outperformance.  Traditionally, funds have a tilt to the high quality factor, which should be producing better results for active managers. 

Why are they having such a tough time?  Well, the largest stock in the world and within the S&P 500 Index, with a total market capitalization of $675 billion, is Apple.  There are 42 analysts with coverage and ratings on the stock.  With so many reports issued and every meeting or announcement scrutinized, how does a manager have an edge?  At the other end of the spectrum is Diamond Offshore Drilling, with a market capitalization of $2.6 billion, it is one of the smallest constituents of the S&P 500 Index.  It has coverage from 27 analysts.  

Among other reasons, suffice to say, there is a lot of information on U.S. large cap stocks. 

Source: Morningstar 

U.S. small cap managers are doing a better job, with 39% outperforming an index fund year-to-date, but most underperformed over the past 10 years.  Over the long-term, due to a greater number of stocks abroad and less research coverage, international and emerging markets have fared decently against passive indices. 

Active managers historically add value in fixed income.  This year has been difficult since funds tend to own greater exposure to corporate bonds, which underperformed comparable Treasury and mortgage-backed securities.  In addition, many funds make active currency bets which detracted from returns with the rise of the U.S. dollar. 

The flows do not lie and investors are switching from active to passive, especially on the domestic side.  In turn, this pressures mutual fund fees, which is a net positive for investors. Relative performance is often cyclical for active management and we would typically expect managers to add value if small caps, international, or quality outperforms (since most managers have a tilt to these factors).

 

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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Wendy Eldridge Named to NAPA’s 2015 Top Women Advisors

10/20/2015

Wendy L. Eldridge has been named by the National Association of Plan Advisors (NAPA) to its inaugural Top Women Advisors of 2015 list. The list recognizes women who are making significant contributions to their field. Winners were grouped into four categories. Eldridge was honored in the “All-Star” category, for top producers who have their own book of business.

Eldridge specializes in working with 401(k), 403(b), 457, defined benefit and non-qualified plans. She assists clients with every aspect of their plan, including negotiating plan fees, investment options, compliance testing, Form 5500, audits and the day-to-day administrative management of the plan. 

“Being named to NAPA’s Top Women Advisors is an outstanding accomplishment,” said Christopher D. Bart, managing director, partner with Aurum. “Wendy has earned this recognition through her dedicated approach to her clients and by offering exceptional custom retirement plan solutions.”

Winners were selected from more than 450 nominees who were voted on by roughly 12,500 industry people. For more details and to view the complete winners list, visit NAPA’s website.

To receive the latest updates and articles from Aurum, subscribe to the firm’s free news alerts, aurumwealth.com/news/newsletter-signup.

 

About Aurum Wealth Management

Aurum Wealth Management Group is an independent Registered Investment Advisor providing private wealth management services as well as corporate retirement plan services. In 2013, 2014 and 2015, Aurum was a Weatherhead 100 Upstart winner and in 2012 was one of eight firms to be nationally recognized for excellence in investment management research and named to the Financial Advisor Magazine 2012 All-Star Research Team.

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Is this Housing Bubble 2.0?

10/6/2015

By Michael McKeown, CFA, CPA - Chief Investment Officer

The housing bubble and recovery are a relic of the past.  Several cities have residential home prices hitting new post-crisis highs in the United States. 

Source: S&P Case-Shiller, Reuters, Aurum

Thanks to several years of little new construction, population growth, low interest rates, and robust local economies, many areas are on fire again.  Charlotte, Dallas, Denver, and Seattle are among the leaders from the 2006 peak levels.  In contrast, Cleveland is barely off the floor from the levels in the year 2000 (at least better than Detroit, though not saying much).

At a national level, U.S. prices are at the equivalent of 2005 levels and grew at a 5% year-over-year rate in the last 12 months.

Housing makes up 42% of the Consumer Price Index and over the last year grew at 3.1% as demand outpaces supply.  As long as salaries and wages keep growing, this should not inhibit the consumer too much at this stage.

 

“Job Boom Leads to Housing Shortage” – Channel 3 WKIT – Forest City, Iowa

“Silicon Prairie: Tech Hubs of the Heartland Lure Young Talent with $160,000 Homes” – Bloomberg News – Lincoln, Nebraska

As the location of the first quote suggests, the housing supply issue is not just in the flourishing coastal cities like Seattle and San Francisco.  Meanwhile, debates around rent control and the lack of space continue in the booming tech towns, making some eschew the regions for more affordable options.

To answer the question posed in the title, are we in the midst of second housing bubble in a decade?  It depends.  Over the last 15 years, the national 20-city composite index is up 82% or about 3.9% per year.  If we subtract out the rate of inflation over this time frame of 2.2%, then housing prices increased at a real rate of 1.7%.  Professor Robert Shiller, who correctly predicted the housing crisis in the mid-2000s, essentially showed us that housing should keep up with inflation and provide a 0% real return.

The housing supply constraint of many cities will put upward pressure on prices during this expansion phase.  Several areas seem like prices are disconnected from the underlying fundamental values.  Nonetheless, real estate values are a demographically driven market and the population migration to the coasts and Sunbelt regions justify the above average real return of housing over the last decade and a half. 

 

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates

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