“Markets create opinions,” a wise individual once noted. This suggests that during extended market rallies, investors develop narratives justifying further price increases. Conversely, in bear markets, they generate reasons for ongoing declines.
Everyone is entitled to their own viewpoint, regardless of its merit. Some may rely on technical analysis; others might focus on fundamental metrics. Both perspectives can seem entirely correct—until they are not. At that point, new theories must emerge to address the unexpected shift.
The housing market has not experienced much positive momentum over the past five years. After decades of increasing prices, which peaked amid intense speculation from 2002 to 2006, a surprising turn unfolded. Housing prices stopped rising and, in fact, began to decline.
Since reaching a peak in 2007, housing prices across the nation have dropped by 35%. In certain areas, like Florida and Las Vegas, the decline has been even more drastic. Yet, it seems the bottom of the housing market may have already been reached, and many may not have even noticed it.
How could this occur? Wasn’t the looming shadow inventory supposed to extend the downward trajectory of housing prices indefinitely? Were declining wages and high unemployment not expected to dampen any rebound?
Housing Market Update
Certainly, these were all persuasive arguments suggesting that housing prices would continue to fall. However, they now conflict with emerging data…
According to the Standard & Poor’s/Case-Shiller index tracking home values in the 20 largest U.S. cities, prices increased by 1.6 percent in July compared to the previous month and were up 1.2 percent from July 2011, as reported by the Los Angeles Times earlier this week. This marked the fourth consecutive month of improvement, generating optimism that the real estate slump has finally ended.
But before you celebrate with a toast…
The Los Angeles Times warns, “A full-blown housing recovery is improbable as long as job growth and household incomes remain stagnant. In fact, the month-over-month improvement in July was not as strong as the previous month’s 2.3 percent increase, leading to the possibility that home prices may level off or even drop in the near future, resulting in a jagged recovery characterized by seasonal variations.”
We will keep a close watch on this evolving situation for you. Additionally, we are also monitoring food prices, particularly the rising trends…
Skeleton Economics
On August 3rd, we highlighted an impending surge in food prices due to the worst drought since 1956. At that time, Oklahoma Governor Mary Fallin had declared a state of emergency across all 77 counties in Oklahoma because of extreme drought conditions.
Like the connections in a skeletal system, as the summer drought led to record grain prices, it will subsequently trigger unprecedented increases in meat prices.
Here’s the reasoning…
“Global food prices are projected to surpass last year’s all-time highs as droughts in the U.S., South America, and Russia inflate animal feed costs, prompting farmers of meat and dairy to reduce their herds,” stated Rabobank International.
“Food prices monitored by the United Nations might rise by 15 percent by June 2013, exceeding the record established in February 2011,” noted Nick Higgins, an analyst at the bank, in a recent report. Grain and oilseed prices are expected to remain high for at least the coming year to curb demand and encourage farmers to increase planting efforts.
The drought, identified as the worst in fifty years in the U.S., followed a season of arid weather in South America, driving corn prices to an all-time high of $8.49 per bushel on August 10 on the Chicago Board of Trade, and soybeans reaching $17.89 per bushel on September 4. Although livestock prices have lagged behind skyrocketing feed costs, over time, the practice of culling animals to manage costs ultimately leads to decreased meat supply.
This is how the cycle unfolds: Initially, grain prices surge. Subsequently, meat and dairy farmers scale back their herds to minimize feeding expenses. This may temporarily lower meat prices due to the influx of available supply from culling. Eventually, however, prices skyrocket as the reduced supply struggles to meet demand.
Earlier this week, fear of a potential bacon shortage, described with dramatic flair as the “aporkalypse,” swept across the internet.
In conclusion, while the housing market and food prices both present complex challenges, careful observation and analysis are pivotal. Stay alert as we continue to monitor these crucial economic signals.
Sincerely,
MN Gordon
for Economic Prism