Two “Data” items to discuss with you today:
#1: Comparing current US home price trends to prior recessions and recoveries.
This chart shows the S&P/Case-Shiller US National Home Price Index back to 1987, indexed to 100 in January of that starting year. The compounded annual growth rate over this period is 4.0 percent, in case you were wondering. It was much better from 1987 to the peak you see in the middle of the chart, at a 5.8 percent CAGR. In the 15 years since that 2006 peak, home prices have shown just a 1.9 percent CAGR.
Two things stand out to us from this image:
First, recessions (grey bars) actually have a mixed record in terms of their impact on US home prices:
- During the 1990 downturn, they peaked in July 1990 (the month before the Iraqi invasion of Kuwait) and then fell 3 percent through March 1991. They would not get back to the 1990 highs until July 1993, 3 years later.
- The 2001 recession had no effect at all on house prices. They rose 6.7 percent in 2001 and 9.6 percent in 2002.
- The 2007 – 2008 bursting of the housing bubble was, of course, horrible for home prices. From their peak in July 2006, they fell 27 percent over the next 5 ¾ years and bottomed in February 2012.
Second, the current recession (yellow bar, far right) has seen home price appreciation that has only one (seemingly scary) precedent:
- The current one-year percent change in US home prices is 13.2 percent (latest data, March 2021).
- From October 2004 – December 2005, at the peak of the housing bubble, the S&P/Case-Shiller Index also showed similar comps (13-14 percent annual gains).
So, is the current US housing market analogous to the mid-2000’s bubble? In our view, no. Mortgage credit quality is much better, if nothing else. Chair Powell was asked about this at his last press conference, and no doubt the query will come up again next week.
Takeaway: Our perspective is that 2021 US housing market most closely resembles that after 9-11, in 2001 and 2002. We were in NYC at the time, and after the terror attacks many people moved to the suburbs. This is one reason the 2001 recession actually saw home prices rise. Also worth noting: mortgage rates fell from 8 percent to 6 percent (not typos) during 2000 – 2002, and they’ve gone from 3.5 pct to just under 3 pct now.
#2: Global gold fund money flows. The latest World Gold Council data on global exchange traded fund flows was out today, with May 2021’s data. A reminder: financial product money flows are very important to gold prices just now, because global jewelry demand is not yet back to normal and India (a critical end market) is only now starting to reopen after a very difficult pandemic surge in April and May.
Here is the WGC monthly fund flow data from June 2019 – May 2021 in dollars (bars, broken down by regional flows in different colors) as compared to the price of gold over that time period (gold colored line, right y axis):
The headline here is that May 2021 was the first strong month for global gold ETF inflows (+$3.4 bn) since September 2020 (+$4.8 bn). This came is roughly equal parts from US funds ($2.1 bn of inflows) and Europe ($1.6 bn), with Asia/other seeing small outflows (-$0.3 bn). Given how well the flow data tracks prices, this explains gold’s 8 percent rally last month.
The intriguing question is “why did global gold ETF flows turn so positive in May 2021 after 6 straight months of outflows?” Rising inflation fears could be part of the answer, but that doesn’t explain the timing. These concerns are hardly new.
Takeaway: Our working theory is that the selloff in online virtual currencies last month has boosted gold’s appeal. Gold may be a non-correlated, occasionally choppy asset in terms of price, but its value doesn’t decline by half in 5 weeks. Nor does it respond to Elon Musk tweets, and nor do policymakers occasionally discuss banning it. In fact, the Chinese government makes gold panda coins and sells them to the world. Ditto for the US and many European countries. Gold is, relative to virtual currencies, a no-drama investment. We continue to recommend a 3-5 percent position in gold for diversified portfolios.
World Gold Council report: https://www.gold.org/goldhub/data/global-gold-backed-etf-holdings-and-flows