Yahoo Finance’s Alexis Christoforous and Brian Sozzi discuss existing home sales and today’s market action with Michael Jones, Caravel Concepts CIO.
Video Transcript
BRIAN SOZZI: All right, I want to bring in Michael Jones, Caravel Concept's Chairman and CEO. He's here with us now for a market dive. Michael, existing home sales, very solid, which is kind of contrary to what you think. So many people are unemployed in this country. What do you think about the housing market? And what's your latest view on the economy?
MICHAEL JONES: Well, our view has been that Fed policy was probably going to drive another bubble in the housing market. It seems paradoxical when there are so many people unemployed, there's so much economic pain out there. But in the housing market, this is a divide between the haves and the have-nots. If you've got a job, then you've got-- you've got interest rates at historic lows, and that makes affordability.
Even though prices have been strong, they have not yet caught up to the big drop in interest rates. That means that monthly payment looks fairly reasonable to people who have a job. And as long as the Fed keeps interest rates at these levels, as long as they keep pumping liquidity into the economy, there's a big tailwind behind the housing market, and we could see a bubble along the lines of what we saw in the mid-2000s sometime in 2021 or 2022.
ALEXIS CHRISTOFOROUS: Let's talk about that possible bubble. I mean, what happened with the housing market in '08, which led to the Great Recession, was all of those mortgage-backed securities going south. That's not what we're seeing now, right? So where-- where do you see the bubble forming? And what might that look like?
MICHAEL JONES: You bring up a really, really good point. And I think this is what people need to be watching for for the signs that this bubble is getting too frothy. In 2004, '05, and '06, a lot of that bubble was driven by gimmicky mortgages, you know, flex pay, interest-only, subprime. These were mortgages that were essentially extended to people who couldn't afford the home that they were buying, and that's what created the froth. That's what created such a catastrophic collapse when home prices stopped going up.
In this instance, we have a very different driver for the bubble. Interest rates are at historic lows. Combine that with a huge demographic wave. The millennials are getting to that age where they're ready to buy the home in the suburbs, have a yard for the kid, and better schools.
So you've got powerful fundamentals. You've got demographics. You've got interest rates. Until we start seeing the gimmicky mortgages come back, until we start seeing interest-only, flex pay, and so forth, I won't worry that we're getting to a dangerous point in the housing market.
BRIAN SOZZI: Well, let's stay on this, Michael, because it's refreshing to hear somebody giving the blunt honesty on the powers of what the Federal Reserve is doing here. Are they sowing the seeds of an equities bubble?
MICHAEL JONES: I believe that they are. And to a certain extent, we're already getting close to one. If you look at where we are in sort of longer-term valuation things like the cyclically adjusted PE, we are getting close to bubble level. We're still not at the extremes that we saw in '99 and 2000, 1929. But if you take those two historical instances out, we're kind of in some of the highest valuations that we've seen.
I don't think we're done with that, though, because frankly, one of the things that's propping up the current market is confidence that there will be another stimulus bill. I'm not sure we're going to get it before the election, but we will get another stimulus bill. It'll be the first priority of the new Congress.
And if we get that stimulus bill, the Federal Reserve is going to have print more money to fund it. That money's got to go somewhere. It's likely to go into equity markets and keep driving this market higher and higher. There'll be a price to pay for that at some point. But bubbles are fun to ride on the way up, and I think we're still in the acceleration phase of the equity markets.
ALEXIS CHRISTOFOROUS: And you know, just sticking with housing for a moment, we've got Freddie Mac coming out saying that the 30-year mortgage rate's falling to a record low of 2.8%. Are housing stocks highly valued right now? Are they a little too rich for your blood, Michael, or is there more room to run up?
MICHAEL JONES: I actually think if you look at valuations of housing stocks now and compare them to where they were in 2005, 2006, I think there's still room to run. And we've just had a nice little tailwind to kick in for the housing start-- to the housing stocks. In addition to the housing starts, it's very obvious, you know, there's a lot of demand for their product, we've had a collapse in lumber prices.
From March to about August, early September, lumber prices nearly doubled. Well, now they're back to March levels. That is a huge part of the input costs for these-- these home builders. And getting a break on lumber costs, which I certainly didn't expect, that's going to, I think, help their earnings as we go into 2021.
BRIAN SOZZI: Let's do a U-turn here, Michael, Joe Biden. As someone who manages money, is a Joe Biden presidency good for what you do?
MICHAEL JONES: So you know, there's-- there's a lot of misunderstanding, I think, in terms of what drives equity markets when different administrations turnover. And is Joe Biden a uniformly good thing for equity markets? No, he's going to be raising capital gains tax rates, and he would be raising-- if he's elected, he'll be raising corporate income taxes. That is going to be something of a headwind for the equity markets.
However, I think that headwind from the tax policy is going to be absolutely swamped by the ability to get-- think about what has been holding back stimulus, another $2 trillion in stimulus. It has been Republican opposition. If you get a new president in place that's a Democrat, he is absolutely going to push for $2 trillion in stimulus.
He's going to want what Nancy Pelosi wants. The Federal Reserve will have very little choice but to help finance that by printing more money. So I think the combination of more stimulus and the Federal Reserve financing that stimulus, that's going to be far more powerful for equity investors than the undeniable headwind of increased taxes on corporate earnings.
BRIAN SOZZI: All right, let's leave it there. Michael Jones, Caravel Concepts Chairman and CEO. We appreciate the straight talk this morning. We'll talk to you soon.
