Home sales are starting to look weak
Last week we saw the release of existing home sales in the month of January and the decline was far bigger than expected. The number of units sold on an annual basis was 4.08 million, which was a decline 4.9% compared to the prior month. Analysts were expecting a smaller decline of 2.6%. While inventory remains tight at a 3.5-month supply, it is improving. Month over month inventory increased 3.5% and when compared to last January, we saw an...
Home sales are starting to look weak
Last week we saw the release of existing home sales in the month of January and the decline was far bigger than expected. The number of units sold on an annual basis was 4.08 million, which was a decline 4.9% compared to the prior month. Analysts were expecting a smaller decline of 2.6%. While inventory remains tight at a 3.5-month supply, it is improving. Month over month inventory increased 3.5% and when compared to last January, we saw an increase of 17%. For now, it appears that housing prices are stable with the median price of a home sold in January at $396,900, an increase of 4.8% over last January. The number of cash buyers slipped from 32% one year ago to now only 29%. What is more disturbing is the numbers on first time homebuyers. Over history, first time homebuyers have generally made up around 40% of home sales, but January data shows that has slipped to only 28%. I don’t see a crash in the housing market coming, but I do believe people buying a house thinking they will make 10 to 20% on their investment over the next year or so is a mistake as I’m pretty confident those days are gone. If you’re going to buy a home, buy it as a place to live and raise your family, do not try to make a quick investment return on the short term.
Some home sellers are giving up
As a whole, the US home selling market has had some cracks, which we have talked about in the past. The rising interest rates have kept buyers on the sidelines and people selling their homes still think they’re worth more than what they can get in today’s market. Also, sellers have been spoiled over the past few years thinking you put your house on the market and you should be able to sell it in less than a month. Over a longer period of time, which looks out further than just the last few years, it used to maybe take 3 to 6 months to sell a home. Home sellers really became discouraged in December as delistings soared 64% in the month compared to last year after not finding an interested buyer to purchase the home. At 73,000 delistings, this was the highest level since 2015. We could see that change if interest rates come back down, but at this point in time there’s no indications that that will happen in a major way. I’m still looking for a low growth environment for the price of real estate in the coming years.
Another comparison showing AI is overpriced
Many people have used the comparison of the tech boom and bust when looking at the high prices for a lot of these AI stocks, which I believe has a lot of relevance. But if you go back 100 years, there’s another comparison with Radio Corp. of America, which was a booming technology back then. If your company put radio in the name somewhere, you got to ride along on the upward trend. Sound familiar? RCA stock rose 200 times its value during the 1920s, but then by 1932 it fell 98%. What is even more amazing is in 1986 General Electric acquired RCA for about 72% higher than the price peak back in 1929. It has never been a wise investment strategy to overpay for any investment, which seems to mostly happens in technology. Over the years this hype cycle has happened with cannabis, electric vehicles, and 3-D printers just to name a few. No one knows where the top will be for AI, but one thing I know for certain is many people will lose far more than they could even imagine, which unfortunately will destroy their retirement portfolios.
Berkshire Hathaway historically high cash balance
It is no secret that Warren Buffett’s company, Berkshire Hathaway, is sitting on over $300 billion in cash, which is invested mostly in T-bills. As a percent of assets, it is now just over 25%, which has never been seen before. The excess cash is caused by two things, first reducing ownership of Apple and some other stocks. Last year alone Berkshire sold 605 million shares or about 70% of its holdings in the stock. It now has a market value of only $75 billion. The second reason for all the cash is likely because of his philosophy to invest when others are fearful and sell when they are greedy. We are definitely in the greedy stage, which we have been talking about at our firm for probably over a year now. No one knows when this will change, but it will. With the expensive nature of many companies and the markets, Warren Buffett likely cannot find anything on sale that he believes is worth buying. I don’t see a major crash coming in the near future, but I also don’t see any big gains coming either. I do continue to believe we will likely see a correction that leads to a short-term pullback of 10 to 20%. I hope you’re prepared for a few months of volatility, as I believe it is coming.
What’s so Special about your “Full Retirement Age”?
The Social Security Administration references your “full retirement age” quite often, so it is important to understand why that matters, and why it doesn’t. The main reasons this age is important is because at that point you are no longer subject to the earnings limit, and your benefit amount at that age is used to calculate spousal benefits. If you begin collecting Social Security before your full retirement age, you are subject to an earnings limit of $23,400. For every $2 of wage or self-employment income you have above that limit, $1 of your Social Security benefit will be withheld from you. Other income sources do not count and this rule no longer applies after reaching you full retirement age, meaning you can work and earn as much as you want. If you do have Social Security withheld due to the earnings limit, you will receive a credit for that when you reach your full retirement age. As a spouse if you had a limited earnings history, you may collect a spousal benefit from the record of your higher earning spouse. The spousal benefit is ½ of the higher earning spouse’s full retirement age benefit amount. The age that the higher earning spouse actually collects does not change the spousal benefit. In order to receive the full spousal benefit, the lower earning spouse needs to collect at their own full retirement age. Waiting beyond that does not increase the spousal benefit, but collecting before full retirement age will reduce the spousal benefit. For those reasons full retirement age matters, but there are plenty of situations where it doesn’t. If you stop working before your full retirement age, then the earnings limit is irrelevant, and if you and your spouse both have an earnings history, then spousal benefits are irrelevant. Many retirees have the belief that something special happens to their benefit amount at their full retirement age, but the truth is, your Social Security window is from age 62 to 70. Every month you wait to start, your benefit amount increases slightly. There is no additional increase upon reaching a specific calendar year, birthday, or even your full retirement age. For some it may be best to collect at their full retirement age, but for the majority of retirees it is more beneficial to collect at an age other than their full retirement age based on their individual income, asset, and tax situation.
Companies Discussed: Freeport-McMoRan Inc. (FCX), Qualcomm Incorporated (QCOM), Super Micro Computer, Inc. (SMCI) & Eli Lilly and Company (LLY)
