A Simple Truth of Investing... And What It Means for Housing
Editor's note: Dr. Steve Sjuggerud made an "incredible" call on real estate back in 2011...
Steve explained that it was the best time in American history to buy a house – and he was exactly right. Now, nearly a decade later, many folks think the opportunity has passed by...
But as you'll see in today's Masters Series essay – compiled from the June 16 and June 17 editions of Steve's free DailyWealth e-letter – that's far from the truth. When you consider a basic concept of investing, you'll realize that housing is still a smart bet for your money...
A Simple Truth of Investing... And What It Means for Housing
"Steve, house prices are just too high."
"Relative to what?" I reply.
"Huh?" they answer.
I end up having this conversation with someone almost every other day. I guess friends, family, and business colleagues just expect me to agree with them.
It's like they're saying, "Nice day, eh?" But I don't reply with, "Yes, it is." Instead I say, "Relative to what?" It's not what they were expecting.
Here's the thing... Investing is all relative.
You and I make choices with our money every day, based on relative value. And that's true even if you don't think about it at the time.
Today, I'll share what I mean... And I'll show you why the housing market is an incredible relative value right now.
First, think about how this works. Every time we buy something, we weigh it against something else...
Do you buy a car from General Motors or Toyota? Do you buy the store brand in the grocery aisle and save a few bucks, or do you buy the name brand that you know is good?
Similarly, you might ask, "Can I afford a $500,000 mortgage right now?"
How would you decide? You'd probably ask yourself, "What's my monthly mortgage payment right now relative to my income?"
You make every financial decision relative to something else. If you didn't, you'd have no way to know if prices are "too high."
Housing is the perfect example of this today...
Let's say you're looking at that $500,000 house. You're worried, because the price of this particular house is the highest it has ever been. You really like the house. But you are afraid "asset prices are just too high."
Should you buy it? To decide, we should look at one critical factor here – interest rates.
Today, almost unbelievably, 30-year mortgage rates are at record lows – near 3% interest. So your monthly payment on a $500,000 mortgage at 3% interest is just $2,100 (not including property taxes and insurance).
But what if mortgage rates were at record highs today, not record lows?
In October 1981, mortgage rates hit record highs – nearly 19%. At a 19% rate, you'd pay nearly $8,000 a month on your $500,000 loan.
$8,000 versus $2,000 – what a difference!
So... is that $500,000 house worth buying right now?
Is that asset priced too high... or not?
When interest rates are 19%, that house is probably priced too high. Your mortgage would cost you $8,000 a month.
But when interest rates are at record lows (like they are now), you can probably afford that house... Its monthly payment is only $2,100.
The price of the asset – the house – is unchanged. It's the relative value of that asset that has completely changed – its value relative to interest rates.
The difference is incredible. And we can see this same idea at work in one of the housing market's main drivers... affordability.
Housing affordability is simply the "cost" of a home relative to your income. It's not the price of the home that matters – it's the monthly payment.
The payment part is key. Because as we just covered, that includes interest rates. And low interest rates make investments like houses more affordable.
By looking at incomes, home prices, and interest rates, the National Association of Realtors calculates a housing affordability figure. This measure hit 167 in the latest report. That means someone with the typical income can afford 167% of the typical home price in America.
That's data from last quarter, though... Interest rates have fallen more since then. And that means affordability is on the rise. Based on today's low rates, housing affordability is now as high as we've ever seen, outside of the housing bust lows.
You wouldn't know it by simply looking at home prices. But by examining relative value, the reality becomes clear.
This is an incredible tailwind for the housing market. Interest rates are down dramatically, and that makes housing cheap... even though prices haven't fallen.
It's why I continue to be bullish on U.S. housing... nine years after my initial call.
In 2011, I personally "backed up the truck" to buy Florida real estate.
To this day, Florida real estate (not including my home) makes up the largest percentage of my investable net worth.
I have been optimistic on housing ever since. So you might be surprised to hear that I am not always bullish on U.S. real estate...
I raised the alarm on the housing market in 2005. We were in a dangerous bubble, and I told readers that it couldn't last.
When the environment in real estate turns dangerous again, I'll be happy to sound the alarm. But let me be clear...
That's not happening today.
Part of the reason is what I explained earlier. Thanks to low interest rates, the relative value of housing is incredibly attractive.
There's more to it though... And there's a simple way you can profit from what's going on. Let me explain...
The reason I'm still bullish on housing is simple – supply and demand.
In a bad housing market, supply overwhelms demand. Prices fall when the housing market is overflowing with houses.
We aren't at saturation levels right now. In fact, we are far from it.
One way to see this is through the monthly home supply in the U.S. It measures how many months it would take to get rid of the current housing supply at current sales rates.
In January, the monthly U.S. home supply was five months. Today, it hovers around six. Take a look...
Supply has jumped up a little. But it's nowhere near saturation levels. We've seen monthly home supply jump to double digits in the past.
At six months, the current month's supply is hovering right around its long-term average.
This is a positive factor for companies that build homes. Supply remains in check. And we're not going to see a flood of new supply anytime soon...
That's because housing starts are down dramatically since the coronavirus outbreak began. They're down 45% since the January peak... And they have now fallen to recession levels. So we are about to have a severe shortage of new homes.
Of course, coronavirus is also going to slow demand. But with supply down so much, homebuilders are in a better spot than you might think.
It's true that when the virus hit the U.S., these stocks crashed with the broader market. Homebuilders fell 51%, peak to trough, from February to March.
That's right – the sector at the heart of a housing boom lost half of its value in roughly a month.
For folks who owned homebuilders, it was a painful loss. But the rally in recent weeks has been just as powerful... The sector has soared roughly 80% from its recent lows.
Combine that with the fantastic relative value in housing, as well as the supply and demand positives, and it makes one thing clear...
Housing is a smart bet today. And owning the homebuilders – the companies that drive the housing market – is a smart bet, too.
Good investing,
Dr. Steve Sjuggerud
Editor's note: The opportunity in real estate is incredible today. The factors we've discussed in this weekend's Masters Series mean that you haven't missed the boom.
This Wednesday night, June 24, Steve is hosting an online event to unveil the fantastic setup he's seeing now... and to share the secrets he has used to make millions in real estate. It's free to attend, but you must sign up ahead of time. Click here to save your seat.