With November coming to a close, markets are still down about -15% for the year when we look at the S&P 500.  If we look at the US Government Bond market, long-term government bonds are still down about -25% for the year! And the more standard measure of the broader US investment grade bond market, the “AGG,” is still down about -12% for the year!

     If we look at a shorter time frame, the SNP is still negative for the last six months but only by a small single-digit amount. In the US Government Bond market, long-term government bonds are still down by more than -12%, and the AGG mentioned above is also down about -5%.

     Thankfully, the month of November did finish the month higher than it started. While it was a nice gain for November, all the growth in November was centered on two specific days. Those were the 9th of November and the 30th of November. Without those two days, the S&P would have finished negative for the month by roughly -3%.

     The month of November, hardily trying to work itself into positive territory, was interesting to watch. It looked a good bit like this video of cars trying to get traction in the snow. Some would call this “tough sledding.” But November pulled it off despite the dodgy moments and days occurring during the month.

     As I've mentioned before, one of the things that often begin to confront markets is the worries of negative items beginning to spread out. At times it's called the “wall of worry” that the market tries to climb, and there have been times when markets have climbed the wall rather successfully. Yet not always. Despite all the worries, it does appear in the current environment, though, that there are more worries already in play, and they'll begin to unfold in the near future even more than they already have.

     A few of them will appear before the end of the year, and then more will appear as the new year begins to unfold. The chart below shows a few items that are worrisome to markets currently.

 

Though incomes have risen some this year, consumer spending is up a great deal more and savings have fallen to levels not seen since 2005.

    Though it's already been highlighted above in red, I want to focus your attention on the drop in the savings rate just in the last seven months! When savings drop, the safety net for consumers goes away quickly, and currently, the percent savings rate of income is at the lowest point since 2005.
 
     Piggybacking on top of the drop in the savings rate shown above is the rise in spending; they go hand in hand. Without a doubt, we are now (December) in the largest consumer spending 30-day cycle of the year, and the spending is going to skyrocket higher; income will follow the current trend and not spike higher. The one thing I have not superimposed on this same chart above is the additional compounding problem that we are at all-time highs on credit card balances!

 

To exacerbate the problems of overspending and a continued drop in savings, credit-card balances are at all-time highs by a large margin over 2007.

     One thing I would encourage you to do is to be observant as you go about your day. We've all been somewhat surprised by all the development of either housing or multi-unit apartments or even commercial construction sites over the last 18 months or two years. If you'll notice, a lot of that building is still going on. The reason it is going on now is that it was simply a concept a year or two ago, and plans had to get made and approved, then building permits had to get pulled, and funding had to get approved by banks, and so now the construction is occurring. But remember that the interest rate being charged for these projects has doubled. It's 200% of what it was just a year ago. That is a phenomenal increase in cost due, in simple terms, to inflation. I've heard people complain and even write articles about how the cost of eggs has gone through the roof, up some 35% for the year. Imagine if they were up more than 100%, like the cost of borrowing money has gone up. 

 

Issued building permits have slowed in the last six months, but this is a lagging number for "deliverable housing." Permits are often issued months ahead of any construction beginning. Look around, and what is coming out of the ground now was likely permitted early in 2022.

     One interesting piece of data that stands out in my mind, from the first day of October of this year through the first day of October 2023, 900,000 apartments are being built currently. They’ll come online to be rented nationwide. All of those are built at increased building costs and much higher financing costs. Imagine either the price of those new rentals and/or the losses those developers will have to take on planned rents.  This could lead to some large apartment complex foreclosures much further down the road.


     We are looking at a labor market with some noticeable layoffs announced, but many more will be coming. By the time we write the end of the February 2023 newsletter, layoffs will constantly be headlines.
 

     Back in late 2019, I was in a meeting concerning housing needs/demands going into the future, and some of the planning was all the way out to 2030.  At that time, the multi-family industry was forecasting 35 million new apartments, townhomes, and condos would need to be built by 2030 in order to accommodate the coming needs of consumers.  Of course, this turned out to be about six months before Covid showed up and basically stopped the world. 

     After about an 18-month shutdown of construction in late 2021, planners, developers, etc., got back on the bandwagon to build towards that 2030 multi-family housing goal.  They started when inflation began to show its ugly head, and then in early 2022, interest rates began to pop higher.

With rates higher, layoffs beginning to jump up, consumer spending going off the charts, and credit card balances at an all-time high, none of these things bode well for the multi-family market other than, single-family housing being too expensive to buy. 
 

We will remain watchful!

 

Ken Graves, Chief Investment Officer

Mortgages (click here)  

 

 

As we were pulling the information together for the review of the data to put in the newsletter, I am just amazed at the MASSIVE change in interest rates in the last 180 days and then again for the last 365 days.

As we have constantly beat the drums on, mortgage rates moved on from the record-low territory seen in 2020 and 2021 it is amazing that someone would let other people borrow money for up to 30 years below 2.50% per year! It is truly stunning that there were an amazingly large number of investors who would hand out money and only want that tiny amount of interest to be paid on it for that huge amount of time. So glad to have been able to do that and help encourage you to do that as well.

Yes lower than average but more than double where they were 12 months ago!  We noted in our main column how much it has impacted the purchase finance business and the refinance business.
 

 

Update to our secure email and information delivery system.

     Due to the industry that we're in, the regulations that accompany all that, and just our general concerns for the privacy and safety of data, we go to great lengths, and a great deal of money is spent to try to ensure that information about our clients and to our clients is secure.

     Behind the scenes, many people work hard to help make available to us programs, applications, and ways of accessing data so that that data is handled with integrity.

     Recently we began using a different way to send and receive secure information through emails. What we will be doing going forward is, using that very system to send out any information that needs to be kept highly secure when it is en route to our clients. The other side of that equation is that we can receive information that needs to be kept secure from our clients. It involves us sending you a login link to the secure e-mail system. We can't send out a generic link because each client has to be invited via a specific e-mail address that we have on file for you, and you have to respond to that specific request in order to keep the system secure.

     So going forward, if you receive an e-mail that, upon opening, appears like this below, we are attempting to put you inside the loop for either receiving a secure email from us or to allow you to send us any secure information or documents you would like to. Yes, you will have to put your email into it and set a password for it, but after that, it is set up to recognize you, and you won't have to do that each time.