Monopoly game maker lands in jail with investors

Stocks edged higher yesterday after spending part of the session in negative territory as investors cautiously await today’s inflation numbers. The Fed begins its 2-day policy deliberations today with no changes expected.

Something’s gotta’ give. I am not even sure where I saw the headline and chart. I only know that it was on my phone and that I was probably walking… FAST, urged on by the crisp, unforgiving cold temperatures here in New York. Nonetheless, it did catch my eye and… yes, I most likely mumbled to myself working it all out in the few minutes that followed. Side note: mumbling to oneself in New York City is fairly common. The headline read something like “the economics of owning a home don’t make sense anymore.” That is probably far off from the actual headline, but you get the message. It was enough for me to scroll down to see the chart which had 2 lines. It looked like the y-axis (that’s the one on the left ) had “monthly payment,” and the x-axis had time. The lines represented monthly mortgage payment and monthly rent payment. They both seem to roll in tandem for most of the chart… until 2021. To be clear, and I am sure that you don’t need to hear it from me, both were climbing for the entire chart. What was noteworthy was that monthly mortgage payment quite noticeably shot up leaving already high rent payments in the dust sometime in 2021.

I know that you are thinking about it and that you are probably saying, “of course, mortgage rates have gone up… a lot,” and you are correct. If you are a regular reader, you also know that home prices are at all-time highs. So, homes cost more, and financing their purchase with mortgages are costlier yet. That all amounts to higher monthly payments. If you could see the chart I saw, you would see that there was a clear break from equilibrium. So, what will it take to get everything back to where it should be?

If you are a cynic… or a landlord, you would say, “obviously rents are going to go up!” But you see, there is this thing in microeconomics that constrains purchase decisions by income. As a consumer, you can choose to buy a home or to rent one, and the costs of those two choices can indeed change, but at the end of the day you will be constrained by your income. That only moves if you get a raise… or you discover oil in your backyard.

According to the latest data from the Bureau of Economic Analysis, US personal income rose by +4.5% over the past year. That is pretty good with inflation expected to be around +3.1% (later this morning). Wanna give a guess at what the annual growth rate of home prices is? According to the latest data from the Federal Housing Finance Agency, house prices rose by +5.48%. Now, that is higher than personal income growth. But when you look closer yet, you will see that home prices were rising in the high teens from late 2021 through this time last year when they fell to the current levels. From January of 2022 through October of this year, 30-year mortgage rates went from 2.35% to 8.05%. Do I have to tell you that that is a lot? I should think, not.

It turns out that you were correct when you attributed the spike in monthly mortgage payments to higher home prices and higher mortgage rates spurred on by the Fed. Now you know that the growth in your income did not keep up with the growth in home prices. So, what is going to change this pattern and bring things back into harmony? Well, it turns out that things are already enroute.

Those higher costs have already stemmed demand significantly and home price growth has slowed significantly, though average home prices are at record levels. It turns out that even mortgage rates are below their October peak, but they are still far higher than they have been in more than 2 decades. So, either home prices are going to have to fall or mortgage rates are going to have to decline significantly. The first is up to you and the second is up to the Fed. Of course, if monthly rents spiked in line with monthly mortgage payments, we would not have noticed the discrepancy. Don’t get any smart ideas if you are a landlord; consumers are still constrained by their income. Are you thinking what I am thinking? A raise might come in handy.

WHAT’S ON THE MOVE

Oracle Corp (ORCL) shares are lower by -8.97% in the premarket after it announced that it missed the mark for Revenues last quarter while exceeding estimates for EPS. The breakdown of the numbers showed that the company missed analyst estimates for growth in Cloud sales, a driver for the early morning selloff. In the past 30 days,12 analysts have lowered their price targets while only 2 have raised them. Dividend yield: 1.39%. Potential average analyst target upside: +7.5%.

Hasbro Inc (HAS) shares are lower by -5.82% in the premarket after the company announced that it would cut almost -20% of its staff due to dull holiday sales. This should not come as a surprise as the company already lowered full-year guidance in its last earnings release in October. The company expects sales to remain sluggish through 2024. Dividend yield: 5.72%. Potential average analyst target upside: +27.6%.

YESTERDAY’S MARKETS

NEXT UP

• Consumer Price Index / CPI (Nov)  may have slowed slightly to +3.1% from +3.2%.
• NFIB Small Business Optimism (Nov) came in slightly lower than expected and last month’s print at 90.6.