The staggering decline in housing affordability, plus an investor's mindset and the week in review
The Sandbox Daily (8.18.2023)
Welcome, Sandbox friends.
Today’s Daily discusses:
mortgage rates soar, affordability remains in flux
a winning investor mindset
a brief recap to snapshot the week in markets
It’s summer Friday, folks – hope everyone has a great weekend !!
Let’s dig in.
Markets in review
EQUITIES: Russell 2000 +0.51% | Dow +0.07% | S&P 500 -0.01% | Nasdaq 100 -0.14%
FIXED INCOME: Barclays Agg Bond +0.22% | High Yield +0.07% | 2yr UST 4.943% | 10yr UST 4.251%
COMMODITIES: Brent Crude +0.76% to $84.76/barrel. Gold +0.13% to $1,917.7/oz.
BITCOIN: -2.21% to $26,050
US DOLLAR INDEX: -0.12% to 103.444
CBOE EQUITY PUT/CALL RATIO: 0.97
VIX: -3.30% to 17.30
Quote of the day
“Mistakes are the path to progress.”
- Ray Dalio, Principles
Mortgage rates soar, affordability remains in flux
Housing affordability is becoming a real issue.
The average 30-year fixed-rate mortgage rose to 7.09% this week – its highest level in more than 20 years, per a report this week from mortgage giant Freddie Mac.
The Federal Reserve has put forward an aggressive string of interest rate hikes as it tries to choke off inflation by slowing the economy and stifle demand. With rates markedly higher in 2023, that means borrowers face higher costs for everything from car loans to credit card debt to… the biggest credit market of them all: mortgages.
So, in plain English, what does this mean for the average American buying a home?
Well, in 2020, a person could afford a $758k house with 20% down on a $2,500/month 30-year mortgage.
Now, for the same money down (20%) and targeting that same monthly payment of $2,500/month, the most a person can afford is a $443k home purchase.
$758k down to $443k for the same monthly payment inside just 3 years – are you kidding me??!? That is an absolutely staggering decline in affordability!
David Doyle, Macquarie’s head of economics, described the current housing market as “the most severe deterioration in affordability on record.”
Source: Freddie Mac, Wall Street Journal, Michael McDonough
A winning investor mindset
Investing is 90% mental, while the rest is education/skill/experience/luck.
Emotions and cognitive factors play a massive role in our decision-making processes that underline the investment process. Developing a winning mindset will help shape your success over your lifetime.
Four simple rules of thumb may help shape the right mindset:
Outstanding investors are patient. As Warren Buffett once said: “the stock market is a device for transferring money from the impatient to the patient.” Time and compounding are two of the most powerful forces in markets and your portfolio.
Outstanding investors prioritize survival. You must be optimistic about the future, but paranoid about the short-term roadblocks and landmines that prevent or distract you from reaching your destination.
Outstanding investors have a plan and understand that uncertainty is a key element. Plan on your plan not going according to plan. The value of planning is not in the accuracy of it, but rather enacting deliberate decisions along your journey, the constant tinkering and iterations that require attention over time, and introducing accountability checkpoints to check on our progress.
Outstanding investors must balance the appropriate risk and reward. To participate in financial markets, one must accept risk and only take the amount and type of risk that is appropriate for their own situation. Every investor must understand their risk tolerance (how much risk you are willing to accept) and risk capacity (how much risk you are able to accept).
Investing is the ultimate test of character. Adopting a winning mindset can help simplify and empower your financial journey.
Source: Brian Feroldi
The week in review
Talk of the tape: Stocks extend their declines for the 3rd consecutive week as the May-thru-July market melt up continues to take a breather and digest gains. U.S. dollar strength and the resilience in Treasuries are weighing on risk assets. Much of the recent bond selloff has been driven by better growth expectations, with the Citigroup U.S. Economic Surprise Index at its highest level since early 2021, offering more support that a recession isn’t surfacing. Sentiment has been more downbeat of late.
Soft-landing expectations are the key driver of the bullish narrative. Disinflation traction cited as another tailwind. Consumer resilience, although showing some signs of fatigue, continues to be a higher-profile bright spot. The 2H23/2024 earnings rebound and record amount of money market assets on the sidelines flagged as some of the other bullish drivers.
Technicals, liquidity headwinds, the lagged effects of policy tightening, and extended valuations are talking points among the bearish narrative. The higher-for-longer Fed another overhang as markets reprice Fed Funds Rate expectations for year-end 2023 and 2024. Seasonal headwinds shouldn’t be dismissed. The recent macro data reported from China confirm, again, the risk to global growth.
Stocks: The major market indexes ended lower for the 3rd straight week as the 10-year Treasury remained near 2007 highs as investors believe that the Fed may maintain a hawkish stance amid decelerating inflation. This week, U.S. retailer earnings helped reinforce consumer resilience, however the outlook is clouded by the prospect of rising rates. The Nasdaq, Dow Jones, and S&P 500 indexes all trade below their 50-day moving average.
Bonds: After this week’s FOMC minutes, traders believe that the Fed could maintain a hawkish stance longer-than-anticipated. Investment grade corporate bond spreads are near their tightest levels of the year as Q2 earnings and July economic data all have come and gone with generally positive outcomes for markets.
Commodities: Energy prices ended lower as the major metals (gold, silver, and copper) were mixed this week.
Source: LPL Research
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.
From $758k to $443k housing affordability in a few years. Astomishing! We live through changing economic conditions, and sense what's going on, but every now and again one has to sit back and look at two numbers like this, pause for a moment, and say ... wow!