Juggling Dynamite

Rebounding Treasury bond prices have lowered mortgage rates from their cycle high in October, but home prices at current mortgage rates are still painfully unaffordable for most.

The Bank of Canada estimates that 45% of Canadian homeowners saw their mortgage payments rise in 2023, and 50% of mortgages initiated before March 2022 will face higher rates by the end of this year. The average payment increase is expected to be 34% and 54% for the most indebted households.

At the same time, home sale volumes have fallen from a national peak of 76,259 in March 2021 to 35,013 in November and an average price of $816,720 in February 2022 to $646,134 in November, a decline of 21% (WOWA chart below).

Would-be-sellers are being advised to hold off until the spring, hoping that lower interest rates will yield more buyers by then. Not everyone can wait and hope, though. Listings are rising, especially in areas where homes are the least affordable. See Hoping for early spring in a chilly housing market.

In November data, new listings in the Greater Toronto Area (GTA) were up 19% year-over-year to 10,545, while active listings soared 41% to 16,759 and far outpaced the 7% decrease in GTA home sales over the past year, down to 4,236.

The average home sold price in the GTA was $1,082,179 for November 2023, representing a decrease of 4% month-over-month and more than 17% lower than the cycle peak in early 2022. GTA home sales accounted for 12% of all Canadian home sales. The GTA had a sales-to-new listing ratio (SNLR) of 40% in November, up from 37% in October. An SNLR under 40 is considered a buyers market. John Lusink, president of Right at Home Realty and Property.ca, says the market is stuck. Buyers point to low sales volumes for negotiating a reduced price, while sellers point to flat year-over-year prices as a reason to hold firm.

Trends are not seller-friendly. Mr. Lusink says the inventory of listings on his site was 40% higher in December compared with the same month last year and 100% higher compared with December 2021. For more, see: Toronto just saw the worst year for home sales in 23 years.

Assets bid up by irrational amounts eventually end up on clearance sale. Always. This is something to remember with the seven most expensive tech companies ending 2023 at their October 2021 price peaks (chart shown below, courtesy of All Star Charts), even while the Fed funds rate has moved from .25 to 5.5% and earnings estimates are falling. Sure, this handful of stock all-stars have spent two years going nowhere with tons of volatility, but who cares?

Permabulls are emboldened. The CNN Fear and Greed sentiment index is back in the extreme greed zone. Lessons learned: zero.

Making up a record 31% of the S&P 500 and 45% of the Nasdaq market capitalizations, the ten most expensive tech companies attracted trend-following flows into the bloated S&P 500–a CAPE above 30x in December–by the highest dollar amount on record (chart below since 1999, courtesy of The Daily Shot).

Rebounds in the few have masked ongoing price weakness in the majority.

Even though many companies borrowed long when interest rates were at 5000-year lows during 2020-21, the level of debt matters and forty percent of Russell 2000 companies had negative earnings in 2023–alarmingly high in a non-recession year. The negative earnings share was half that amount heading into the 2001 and 2008 recessions, and then it doubled (see grey bars below since 1995, courtesy of Game of Trades). Credit spreads on publicly-traded ‘hi-yield’ debt started 2024 at a complacent 321 basis points over similar-dated Treasury bonds–much too low for the capital risk inherent. Past bear markets have not bottomed until high-yield spreads have widened to more than 7oo basis points, with junk bond prices dropping with equities.

Large-cap companies are typically more financially stable but still saw a tripling of the negative earnings share during past recessions. The S&P 500 money-losing share at 5% today (in green below) is due to move up from cycle lows. After spiking on hopes for rate cut miracles in 2024, the S&P 600 small-cap stock index (in green below since mid-2021, courtesy of my partner Cory Venable) ended 2023 still -9% from the October 2021 top. Late cycle tech out-performance in the 2008 top (circled in the inset box below) resolved with the S&P 500 following small-cap stocks into a halving. Often, January clocks stock market gains following tax-loss selling in December. But after manic buying last month, this year might be different. Yesterday’s -1.6% was the worst annual start for the tech-centric Nasdaq since 2016, and economically sensitive small caps, transports, and commodities all followed lower.

Danielle was a guest with Jim Goddard on This Week in Money, talking about recent developments in the world economy and markets. Here is a direct audio link, starting at 7:24 on the playbar.