(New York)

A new study out of Harvard makes a very interesting point about US home prices. While real estate prices have seen a strong and steady rise since the bottoms of the Crisis, and prices in many markets seem very lofty, the truth is that the cost of owning a home actually hasn’t risen for the last thirty years. How is that possible? The answer is that while home prices have risen compared to income, interest rates have also fallen strongly, meaning the monthly mortgage payment it costs to actually own a home has remained pretty much flat sine 1987 (on an inflation-adjusted basis).

FINSUM: So this is a good point, but the reality is that the monthly payment does not account for the huge down payment that families now need to come up with (which they did not back when interest rates were at 12%).

(Beijing)

With the US-led tariffs battle in full swing, Americans tend to focus on how such tariffs are affecting our own country. However, to understand how things may play out, we need to see what is happening on the other side. While US markets have taken a shallow hit from the potential trade war, Chinese shares are plummeting, and a very near to a bear market. Both the country’s Shanghai and Shenzhen indexes are at almost a 19% loss from their peak in January, just a hair off the 20% loss that qualifies as a bear market. According to one Chinese securities analyst, “It’s mainly the trade war that has created such panic in the market because the latest developments have surpassed the expectations of many people in China”.

FINSUM: We wonder how much this kind of market pressure will compel the Chinese government to give in to some of the US’ demands? The counter point to that view is that since the country is not a democracy, the government doesn’t really have to worry all that much if people are upset. That is a very blunt view of the situation, but one we think is fundamentally true.

(Washington)

The SEC’s new best interest rule has garnered a great deal of feedback. While on the whole the industry’s reception has been positive, there is some criticism and the view that the rule needs fine tuning, particularly in regards to the use of the “advisor” title. Well, there is apparently also a big loophole in the rule: there is no best interest standard for brokers providing advice to 401(k) sponsors because such sponsors to not fall under the SEC’s definition of a “retail” investor. According to the American Retirement Association, “The commission should clarify that the definition of retail customers include nonprofessional fiduciaries of retirement plans … Otherwise, what you have is an unlevel playing field”.

FINSUM: This seems like something the SEC just missed (especially because the loophole is created by two separate components not fitting well). We suspect this will be amended.

(New York)

Bloomberg has come out with a very interesting piece about how climate change has been affecting the US real estate market. A new study looked at over 3,000 US cities and mapped them by risk to different types of climate change-drive natural disasters, like hurricanes, floods, and wild fires. What the study concluded was quite striking—in all of those categories, the riskiest locations had seen values drop considerably, while the safest locations had seen major gains. For hurricane surge risk, for instance, the “very low risk” locations had seen annual gains of 8.1% between 2007 and 2017, while the “very high risk” locations saw annual losses of 9.1%.

FINSUM: It is interesting to see that Americans have been taking account of these risks for some time even as the national debate over climate change rages on. This could be a major new differentiating factor in real estate.

(Washington)

Despite lots of hopes that a US-led trade war would never come to pass, it is now happening. The US has just imposed $50 bn worth of tariffs on China, which is an escalation of previous metal tariffs, and appears to be a major step towards starting a global trade war. With that in mind, how can one protect their portfolio? While almost all sectors are affected by a trade war, the worst ones will be industrials, autos, and meat producers. Auto companies are likely to be hit very hard by tariffs, so it is best to stay away.

FINSUM: The other thing the market does not seem to be taking into account is that tariffs seem likely to increase US inflation, as companies tend to pass along the increase cost of production onto consumers. That could be an additional downside risk, but one potentially offset by the chance of recession.