Million-Dollar Starter Homes
Sector rotation continued this week as the Nasdaq moved 2% lower on technology sector weakness, albeit with a bit of a recovery today. The defensive Dow Jones Industrial Average was the winner this week, with the S&P 500 ending somewhere in the middle. While uncertainty and fear simmer, it is worth remembering that diversification is your friend. Particularly worth noting are the sectors that have underperformed for much of the past year, and which have come back to life more recently. Sectors showing a renewed interest include consumer staples, real estate, utilities, and health care. While we cannot fully insulate portfolios from market forces, we can help minimize downside risk to some degree. Diversification has a role to play in portfolios and it is times like these that remind us of its place.
The biggest economic release this week showed that inflation was in line with expectations. The Federal Reserve’s favored piece of economic data is the PCE price index, which this week indicated inflation continues to come down. In June, core PCE, which excludes food and energy, was up 2.6% from a year ago and represents the lowest level since March 2021. While this remains above the Fed’s target of 2.0%, it does give the Fed the ability to put an interest rate cut back on the table. While no one expects the Fed to announce a rate cut at next week’s meeting, the probability of a September rate cut is now above 90% according to recent polling.
In other news, we learned that the economy grew by an annualized 2.8% in the second quarter as represented by U.S. GDP. This was well above the forecasted 2.0% growth and up from 1.4% during the first quarter. Strength was seen in consumer spending, government spending, and nonresidential investment. After letting inventories drawdown in the first quarter, companies built them back up during the second quarter, adding significantly to the growth rate.
In the housing market, sales of existing homes in June fell 5% mostly due to a lack of inventory and mortgage interest rates above 7%. The median existing home price of $426,000 was up 4% from last year at this time, at a record high. Part of this increase was due to a shift in sales to more expensive homes relative to ones at the lower end of the market. Inventory levels remain stuck near historic lows mostly due to homeowners reluctant to give up their historically low mortgage rates.
Earnings announcements have been coming out steadily this week and are hard to summarize. Some companies are reporting great revenue and earnings growth while others are meeting expectations but lowering forward guidance. Those companies that both missed expectations and lowered guidance saw their stock prices fall substantially. This coupled with the rotation from tech to more defensive parts of the market has created opportunities. We continue to take gains from overweight technology positions and have benefited from the rotation into areas such as REITS, utilities, and healthcare. Today 3M, one such company, rose 21% on the day after announcing better-than-expected earnings and raising guidance. If volatility worries you, it may be best to turn off the news for the next few weeks.
In closing, I want to return to housing. I mentioned above that the median existing home price is now $426,000. You may be shocked (as I was) to learn that the number of cities where a starter home is worth $1 million or more has grown from 84 five years ago to 237 today. It turns out a million-dollar price tag no longer means lavish and luxurious living. In more than 200 U.S. cities, buyers will find a price tag of $1 million or more on a typical starter home according to Zillow. For clarification, a “starter home” is defined as being among those in the lowest third of home values in a given region. As a result, the median age of a first-time home buyer was 35 years last year. Perhaps not surprisingly, the states with the largest number of cities with $1 million starter homes include California (117), New York (31), and New Jersey (21). Florida and Massachusetts round out the top five with eleven each. Now you know.
Bruce J. Mason, MBA