May 4, 2021
Real Estate Heading for a Crash
In 1989, while visiting relatives in California, someone asked me what I thought of their red-hot real estate market. I cited an affordability study showing that only 10% of Californians could afford the average home (technically it was the median price, where half of homes are priced higher and half priced lower, rather than a true average that can be skewed up by a few high-priced homes).
In that environment, much of the buying was being done for investment or on speculation rather than for home ownership. Foreign money from Japanese investors was coming to California in waves back then.
I told the family I thought that the lack of affordability for homeowners made the market rise unsustainable and to get ready for lower prices. Since two of the family members had recently bought homes, my comments were followed by an awkward silence. Then the 1990 recession came along, causing the real estate market to get so soft it became a big factor in the Savings & Loan crisis. As it turned out, I was correct.
With our current hot, hot, hot real estate market, I am getting the same questions about how long this strong trend can continue. I looked for a similar home affordability study, and could not find one, so I did one myself.
The premise of this study is that all markets, whether we are discussing stocks, bonds, or real estate, are a reflection of the balance between the buyers and sellers. An equal number of buyers and sellers usually produces a stable market. The closer to a 50/50 balance the better. However, if sellers outnumber buyers, prices go down until more buyers are attracted by more affordable prices. Affordability can give us an estimate of the number of potential buyers in the real estate market.
In today’s strong real estate market, buyers are outnumbering sellers and are clearly bidding up prices. This can be seen in simple pricing trends as well as inventory reports on the numbers of homes listed for sale.
If we can gauge the number of families that can qualify for mortgages, it will give us a good insight into the sustainability of the current uptrend in real estate pricing. When it begins to run short of buyers, the real estate market will certainly turn around and head south.
Since real estate markets vary quite a bit by region, I did a state-by-state analysis, using median household income vs median house listing prices, using payments required (Principal, Interest, Taxes and Insurance combined) as a proxy for affordability.
The average interest rate for a 30-year, fixed-rate loan was 3.06% on April 27, 2021 (Source Bankrate.com), so that is the rate I started with.
Mortgage lenders prefer PITI payments to be below 28% of a buyer’s household income, so I compared PITI to the median household income in each of the states to gauge affordability.
This study will be published in its entirety over the next few weeks through national media, but here are a few of the salient points:
It is no surprise that the state with the least affordable market is California, where only 18% of households can afford today’s median priced home. As we saw back in 1989, this imbalance is difficult to maintain for long.
In Arizona, only 36% of households can afford the median priced home, and Texas, where Shadowridge has many clients, has a 40% affordability level. Both states are still imbalanced, which suggests that if there is a real estate crash in our future, these states will feel it, but perhaps not as strongly as California.
The most affordable states are West Virginia, Kansas and Indiana, with up to 63% affordability.
That is what is affordable with current interest rates. But what if interest rates keep rising?
A 4% average loan rate will mean that only 15% of Californians will qualify for a loan, 32% in Arizona and 35% in Texas.
Mortgage rates are just coming off of historic lows and the average historic loan rate is somewhere above 6%. What will 6% rates do to affordability? Only 10% of Californians will be able to qualify for a mortgage, 22% in Arizona and 28% in Texas.
Summary: As prices and mortgage rates creep up, homes become less and less affordable, increasing the likelihood that the real estate market will run out of qualified buyers and turn down. When will that be? No one knows for sure. How lucky do you feel?
Sources: https://worldpopulationreview.com/state-rankings/median-home-price-by-state, Realtor.com, Bankrate.com, https://www.insurance.com/home-and-renters-insurance/home-insurance-basics/average-homeowners-insurance-rates-by-state. 4/27/2021
College Classes Coming
“Discover How to Invest Successfully in Retirement”
My long-running class at Yavapai College has a new title, but is full of the timeless investment techniques and current market insights that has made it the local leader in investment classes for 31 years.
Those who should consider the class are newcomers to Prescott, people approaching retirement, those of us experiencing a life transition where finances need attention, and those simply wishing to become more confident about financial decisions. If any of your friends fit this description, please forward them this article.
In an easy format, investments preferred by investors approaching or already in retirement are discussed. Learn the ins and outs of stocks, bonds, mutual funds, annuities and more. Topics include recognizing risk, IRA strategies, planning to get the results you want, avoiding common investment mistakes and proven risk-reducing strategies that anyone can use.
With the shift back to classroom learning, the College’s website is still being updated, so for now, please mark your calendars and I will publish class numbers and registration details when they become available.
*** Wednesdays, June 2, 9, 16, from 1:00-3:00pm at Yavapai College ***
Sign up online: Discover How to Invest Successfully in Retirement
April 2021 Market Commentary
(By Ryan Redfern, Shadowridge Asset Management, LLC)
Last month I mentioned how we noticed that the market has been peaking mid-month and then selling off into the end of the month. This happened in January, February, and March this year. While I didn’t intend that observation to also be a projection, it seems to have happened again in April, as the S&P 5001 did seem to peak on April 16th, only to trade sideways until the last days of the month.
As of Thursday night, our Shadowridge Dashboard is showing Positive to Negative sectors as 11 to 0 (in other words, all positive) – which we haven’t seen in quite a while. However, so far, the market has lacked any big movement in the major indexes that reflect that positive ratio. It seems a possibility that we’ll see an up-side pop in the near future if the ratio can stay strong. That’s what we’re hoping for at this point, at least for a few more weeks.
Our Mid-Term Cycle indicator went back to positive earlier this week, so for now we’ll remain optimistic that this move up can stay in effect longer than the 12-ish day runs that are currently happening (yet so much shorter than what we’d consider to be normal).
There is an old adage that investors should “Sell in May and Go Away,” and there is a lot of historical data to back up that claim. Yale Hirsh’s Stock Trader’s Almanac has some fantastic stats on this phenomenon relating to their “Best Six Months” strategy, demonstrating that the majority of stock market gains are made between October 31st (Halloween) through May 1st. There are signs to watch for when it may be seasonally time to play it safe, though May isn’t always a negative month.
In this month’s chart, I wanted to show the mid-month peaks over the past few months. Compared to November and December of last year (see chart) where the S&P 500 moved steadily upwards, this year has been quite a bit choppier and more volatile. So much so, that we’ve spent more than half the trading days so far in 2021 out of the market (or at a reduced allocation). I’d love to see an upside breakout, but even with many factors being now in the market’s favor, it can’t seem to make that move.
Bonds – have been trying to make a comeback after being steadily down until around mid-March. Since then, they’ve rebounded around 1%, bringing the Aggregate Bond Index AGG to -2.72% for the year so far. High Yield bonds remain the bright spot, being up around 1% so far in 2021 (FastTrack Data). As long as High Yield bonds remain stable, it is often believed to be a sign that the stock market can have room to continue to move upwards.
So upwards we’ll go, ever-so-slowly, for now. Some wonder how long this will be sustainable. Will Hepburn will be talking about his recent research into real estate prices, affordability, and sustainability at our next monthly webinar (coming up on Thursday, May 13th). And I will be diving further into the positive/negative sectors as well as the current status of our Long-Term and Mid-Term Cycle indicators.
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.
Mark Your Calendars!
Shadowridge Asset Management, LLC and Hepburn Capital Management are now hosting a webinar each month called “Money Matters.” The next webinar will be Thursday, May 13th at 10:00 AM (Arizona Time).
You will have the opportunity to listen to a variety of market and financial planning topics from Ryan Redfern, Will Hepburn, Laura Redfern, and Phil Lebkuecher.
To register, please click here.
Attendance is limited, so please sign up ASAP.
We look forward to seeing you there!
You Are the Conduit
(By Laura Redfern, CFP®, Shadowridge Asset Management, LLC)
“You can’t take it with you” is a common phrase I hear when it comes to money. Another great one I heard this week from a client is, “we are all just conduits.” In other words, money flows through us while we are here, and continues to flow, even after we are gone.
A relevant question to consider is where you prefer your money to flow after you are no longer the conduit. You do have some control over this, but the important part is you must make these decisions and express them before you die. Luckily, we have a formalized system that allows us to do this. But to be effective, we need to use the system properly, building bridges that take the assets where we want them to go.
Checking, Savings, and other Taxable Accounts (Including Individual Investment Accounts)
These accounts don’t automatically have a designated beneficiary, so if nothing else is done, the money in these accounts is considered part of your estate. Generally, that means it goes through Probate and is directed by your Will. If you don’t have a Will, then it would be directed according to the inheritance rules in your state, which could be inconsistent with your intended wishes. There’s a list of different state laws here.
You can have more say in how this money is distributed, as well as potentially make it easier on your heirs, if you complete a Transfer on Death, or TOD, request for these types of accounts. A TOD basically sets up a beneficiary who will gain control over the account right away, without having to pass through the steps of Probate or your Will. This can help for a more orderly and efficient transfer of your assets.
To set up a TOD, contact the institution where your money is held (bank, custodian, your advisor).
Retirement Accounts (IRA’s, Roth IRA’s, 401k’s, 403b’s, 457’s, pension plans, annuities, etc.)
You probably set up a beneficiary (or beneficiaries) when you opened your retirement account. (Do you remember that?) If you’re unsure about this, you may want to contact your HR Department or the custodian where the money is invested. This is important because the Beneficiary Forms on these types of accounts actually create what is referred to as a “Will Substitute.” You read that right – what you have on your Beneficiary Form supersedes whatever you have laid out in your Will. So it’s important to get these right and keep them updated.
If you don’t name a beneficiary, or if you name “My Estate” as your beneficiary, a couple of unfortunate things can happen for your heirs. First off, they may be required to probate your estate before they receive any of the assets. This can take several weeks or months, which could create liquidity problems, meaning that your heirs may not have access to the cash needed to pay the final bills of the estate. Secondly, your beneficiaries could potentially lose powerful tax advantages which are granted to inheritors, but not given to non-person entities (such as estates and trusts). Lastly, not naming a beneficiary can create confusion among those you leave behind as to what your intentions were.
These are actually the simplest to explain because the assets in a Trust Account are distributed according to the Trust Document. Trusts are quite flexible and can be laid out however you desire. For example, you could dictate that the money goes to your children, but only at a certain age or at a certain rate per year. However, be aware that with that flexibility can come complexity and cost.
Setting up a Trust usually requires a licensed Attorney who is well versed in Estate Planning. There is a cost to setting up a Trust, and, depending on the type of Trust you select, there could be additional costs to maintain the Trust.
If you have a simple situation and estate plan, I generally believe that a trust may not be necessary. However, I am not an estate planning attorney – so if you are considering a trust, you should seek the advice of an estate planning professional.
Naming A Charity
Finally, if you are charitably inclined, charities are often thrilled to receive assets from donors’ estates. This can be as simple as naming the charity on your Beneficiary Forms or your Trust (discussed above). You might also contact the charity directly as ask about giving options. Sometimes there are other ways to get your assets to your favorite charities, and they are often well prepared to help you set this up.
Since “you can’t take it with you,” a little forethought can be beneficial to those you leave behind. It can also bring you greater peace of mind. How would you like to see your money flow after you are no longer its conduit? If you would like further information or recommendations for estate planning attorneys, please contact us.
Saving with Reduced Fees
Recently a client referred a friend to me, and when I applied our Family and Friends Discount to their investment management fees, they will both be saving several hundred dollars each quarter through reduced fees.
We give a volume discount based on the total amount of money we work with for a family or other grouping of clients, including friends. The higher the total amount of assets being managed for the group, the lower the fee percentage becomes for everyone in that group.
Would you like to save serious money, too? Simply refer family and friends to Hepburn Capital.
Besides being one of the nicest things you can do for us (and them), mentioning Hepburn Capital to your friends can save you real money. The easiest way to introduce someone to our work is to ask us to send them a complimentary copy of my book, Why Bad Things Happen to Good Investments, or forward our newsletter to them.
As Ryan mentioned in his article in this newsletter, his money-flow market indicators have been giving us green lights, so during late April we have been getting back into the market.
We produce our best returns when trends continue for several months. Longer trends allow us to pass up some gains until the uptrend is first identified, give up the inevitable small loss that signals us to exit, and still have enough of a run in between to provide you with a low-risk profit.
My Future Technologies strategy is close to fully invested as of May 1, 2021, with some holdings focusing on hard assets (Lithium for batteries, and rare earth metals used in computers and cell phones) that should do well if inflation continues to rise.
The two Enhanced Index Models that Ryan manages are both fully invested in index funds and the Advance Protect/Maximize Models are seeing new positions added too.
To protect you from rising interest rates, our Income portfolio is shifting its focus from traditional corporate bonds, to real estate investment trust stocks (avoiding retail and office REITs), and high yielding Business Development Companies that make loans to businesses. While the main bond index (Symbol: AGG) is down 2.67% year-to-date, the Shadowridge/HCM Income portfolios have shown nice gains over the same period.
And that is how we are staying in sync with this market.
Why Not Amazon or Google?
I am often asked if I own Amazon, Apple, Microsoft, Google, or other big-name stocks in our portfolios. “Aren’t they just about sure things?”
While we have had a number of these stocks in your portfolios from time to time, we don’t own any of them now, and Warren Buffet in his recent annual report tells us why we should not take continued gains in big tech for granted.
Of the 20 largest companies in 1989, none are on the list today.
“We were just as sure of ourselves, and Wall Street was, in 1989 as we are today,” Buffett remarked. “But the world can change in very, very dramatic ways.”
“Mental Floss” Humor
One way to find out if you are old is to fall down in front of people.
If they laugh, you’re still young.
If they panic and start running to you, you’re old.
A Slice of Life
What a great time of year in Prescott! Last week, when the Shadowridge team was in town, we had several meetings out on the back porch, enjoying the view and garden while we talked.
Frankie our 5-month-old watch dog, watches everyone come and go, and is ready to give a lickin’ to anyone who will look at him. He’s one of those expensive mutts, part Bernese Mountain Dog and part Poodle.
I’m not sure whether having a puppy keeps me young, or tires me out more, but it is fun, for sure.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Performance and activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** Indexes are unmanaged lists of stocks considered representative of a broad stock market segment. Investors cannot invest directly in an Index.
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.
In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Shadowridge Asset Management, LLC, adapt to changes in the markets by changing the investments they hold, therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor’s account values may be worth more or less than when purchased. Mutual fund shares and other investments used in our managed accounts are not insured by the FDIC or any other agency, are not obligations of or guaranteed by any financial institution and involve investment risk, including possible loss of principal. Advisory services offered through Shadowridge Asset Management, LLC, a Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence.
Copyright (C) 2021 William T. Hepburn. All rights reserved.