Tag Archives: Stephen Ahern

Signs of a housing recovery?

According to a well-known gauge of the U.S. housing market, home prices have been on an upswing. The latest S&P/Case-Shiller 20-City Composite Home Price Index, which was released in May, posted its biggest gain in seven years. This improvement has spurred renewed optimism about housing’s role in the country’s economic recovery.

What does the latest S&P/Case-Shiller home price index reveal about home prices?
The 20-city index–one of several S&P/Case-Shiller housing indices–showed a 10.9% gain between March 2012 and March 2013, the highest increase since 2006. In addition, all 20 cities tracked by the index had gains for three straight months.While the numbers certainly give homeowners and real estate investors cause to be optimistic, it’s important to note that not all cities saw the same price increases. Both San Francisco and Phoenix saw large price jumps of more than 20%. However, New York and Boston had smaller gains of 2.6% and 6.7%, respectively. What factors are driving the recovery, and what do rising home prices mean for the economy as a whole?A variety of factors are driving home prices up, such as low housing inventory, low mortgage rates, and a decline in foreclosures/short sales.As for the economy as a whole, rising home prices often serve as an indicator that the economy is performing better since it generally demonstrates increased consumer confidence. And while this latest report is good news for homeowners looking to sell, it also provides welcome news to underwater homeowners who may now see an increase in their home equity.

It is important to note, however, that other economic data–such as the large number of institutional investors buying properties to rent–suggests that there is still a ways to go in terms of a full-fledged housing recovery.

Could this all lead to another housing bubble?Today’s economic environment is different than the one that led to the housing bubble burst in 2006. Those differences include a tighter mortgage lending environment and houses that are still undervalued at prices that are significantly lower than they were at their 2006 peak.

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Market Nosebleed? Time to re-balance?

With the Markets daily hitting new highs with little pullback, it may make you remember the “go-go” late 90’s. Then the “new paradigm” of stock valuations justified the high prices despite zero or negative earnings. The market went so high most of us ended up with ”nosebleeds”. This time is very different.

Most substantial bull markets are accompanied by new theories trying to explain the market and why traditional valuations using P/E multiples no longer seem to be valid valuation metrics. In the current rally, P/E multiples on stocks remain in-line with historic average levels. The market is hitting new highs, but valuation multiples are not! Thus, we believe the fear of nosebleeds at this market level might be a bit premature. We would expect P/E’s to rise dramatically if we were going to see a significant drop, but currently stocks seem to be fairly priced.

If the muddle-through economy continues, stocks should continue up on a reasonably trajectory. We still have some worries about the weakening effect that the sequestration and cutbacks in government spending will have on our nascent recovery, but this is precisely why we re-balance portfolios and stay invested in our asset allocation to reduce overall portfolio risk.

We have received several inquiries from clients about re-balancing their portfolio now that the market is reaching new highs. Rest assured that as part of our normal process, we review each portfolio at specific intervals and recommend re-balancing when the portfolios are out of alignment with each client’s long-term goals. Even when markets are volatile, we keep an eye on the allocation drift and, as we monitor it, we may make a recommendation to re-balance the portfolio more than our customary semi-annual re-balance.

It is important to note that a proper re-balance strategy is done at set intervals and must balance the need to keep things in alignment with the need to keep transaction costs low. The near-impossibility of perfectly timing a market bottom or top is why we stick to our knitting and follow the plan. Remember, you must have a long term perspective to be in the market. A reasonable approach to asset allocation and re-balancing will do well for the vast majority of investors and help avoid the fears of nosebleeds and market crashes.

If you are having a market “nosebleed”, give us a call at 877-448-3400 and we can help you with the proper cure!