'There is a concern that housing prices are rising too fast,' strategist says

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Mon, May 24, 2021, 2:14 PM

ADAM SHAPIRO: A lot of data that's going to be coming our way, in addition to some earnings-- we can get Nvidia, for instance-- middle of the week. But we're going to add some housing data tomorrow. So where to begin on all of this? Because the other issue is that we've got the S&P 500 above 4,200 now. It seems as if it's leaving the support level in the dust.

SHAWN CRUZ: Yeah, I think right now, for-- as far as housing goes, it's really going to be a matter of sort of that affordability interplay between, one, the cost of the house and then the cost of the mortgage. Sometimes if you have housing prices go up enough to offset that weakening demand, as a result, we might see mortgage rates come down. And that'll sort of change the affordability, whether or not you can or can't-- you can or can't afford that monthly payment. I think there's a little bit of a concern that maybe you are seeing housing prices rise too fast.

There is a little bit of a bottleneck for getting more inventory onto the market from a lot of these home builders, just because the cost of lumber, cost of some of the metals that go into that. There's so many bottlenecks. And don't forget also, once you get a new house, you've also got to probably fill it up with furniture and appliances. There's bottlenecks there as well. So I think housing affordability is going to be really the key to track here moving forward. And we may not get a little bit of an easing just in terms of more inventory coming on the market sooner rather than later.

And we won't really get more of a better picture from the home builders themselves until we hear from them on the earnings for-- in the month from now. So I do think you're going to want to look at the data. I think it's just going to continue to point to a tight housing market. The question will be, when do we maybe get a little bit of a-- more inventory coming out there that can offset some of that strong demand?

EMILY MCCORMICK: And Shawn, when it comes to market volatility, we are seeing the VIX moving lower today. It's hovering below 19 now. Should investors be expecting to see some of the same talk we've been seeing over the past couple of weeks going forward, or are we past that period now?

SHAWN CRUZ: I would expect that chop to continue. And the reason why is there's two things that I think really when you're evaluating market uncertainty. And that is, we don't know what to be worried about. But we know we should be worried about something. That's one. The other one is we know what we should be worried about, but we aren't sure exactly how we're about it we should be. And right now, we're sort of in that second scenario.

I think everyone knows they should be worried about inflation, inflationary pressures, and what that can mean for any sort of a monetary response or also how companies' profitability-- if they decide to eat those rising input costs on their balance sheet, great. We're not going to see inflation rise, at least on the consumer side of things. But you might see margins then come in when earnings come out. We've seen that it looks like right now, markets are priced almost for perfection, given all the earnings beats we just had. And you didn't really see the necessarily strong response from companies after they reported. So I think that's going to be the big question.

And we've actually heard from Raphael Bostic of the Atlanta Fed, where he said he doesn't really expect to have clear answers for inflation. And mainly, is it really just transitory, or is there really something the Fed's going to have to respond to potentially until later on this fall? So I think this choppiness you're seeing out of markets is probably going to continue into the near future. I think the path of least resistance could still be higher. But I do expect this choppiness to remain somewhere around what we're seeing right now, just off of highs, at least until we maybe get a little bit more clarity or maybe some indications that can help us inform expectations moving forward.

ADAM SHAPIRO: Shawn, help us understand what an average investor is trying to make heads or tails of this inflation discussion. Because some people might say that this market's already priced in the added costs because of the supply chain bottlenecks. So the Fed clearly isn't going to do anything until perhaps later this year or next year. So why wouldn't we, as you just said, the path of least resistance go higher?

SHAWN CRUZ: Because I do think when you are investors, especially for longer term investors, they are looking out a little bit further into the future. And for sentiment, maybe what the Fed does isn't going to impact day-to-day traders as much. But it certainly could impact investor sentiment over the longer run. And so, that's why I think you could have a little bit of choppiness here, maybe a little bit of a drift higher, but you just won't get the answers. We know what we should be worried about. We aren't sure how worried we should be.

I expect that mantra to at least continue here into the near future. You can maybe keep an eye on some of the more transitory components of the inflation report. Think of used car prices up 20% in the most recent CPI. Maybe you can start keeping an eye on those components that were very elevated that are seen to be more transitory. Are they actually turning out to be more transitory? That's going to be the big question.

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