Fisher Wealth Management

FISHER WEALTH MANAGEMENT US PROPERTY MARKET UPDATE

A common perception among property bears is that falling US housing prices will lead to a decline in consumer confidence and ultimately to a slowing of the US economy. But, the underlying data tells a different story according to Fisher Wealth Management.

Putting the cart before the horse

Property bears argue that declining home prices in the US will ultimately harm consumer confidence, contribute to weakness in other sectors through reduced consumer spending, and slow the US economy. But they are putting the cart before the horse according to Fisher Wealth Management. The production side of the global economy is still robust, personal income growth is relatively strong, and borrowing costs remain low by historic standards.¹ Therefore, Fisher Wealth Management has little reason to believe that consumption and asset prices will decline precipitously.

What the figures tell us:

• While housing starts have fallen over 25% since the recent peak this past January, the annual rate of 2.3 million units was 30% higher than the previous high in 1999. Current levels are only slightly below the previous peak and are still strong.²
• Additionally, declines in the residential housing market have been offset by increasing gains in the commercial housing market. The net effects of the decline in residential construction knocked 0.7% from second quarter GDP - while commercial property investment increased GDP a nearly equal 0.6%.³
• Existing home price declines are in the headlines too - down year-on-year for the first time since 1995.⁴ It is worth noting that '95, '96, '97, '98, '99 are not generally noted for stock market weakness in the US-with the S&P up 37.5%, 22.9%, 33.3%, 28.6%, and 21.0% (all in USD) in those years, respectively.⁵ That's not to say that property declines caused strong stock performance, more that it is certainly not unprecedented to have strong equity performance concurrent with a slowing housing market.
• Despite falling home prices, household net worth rose 7.9% year-on-year in the second quarter of 2006 - and financial net worth was up 6.2%, (in the US).⁶
• Mortgage rates are falling - having fallen in 9 of the last 10 months.⁷ As a result, mortgage applications were recently up 2% to the highest level since April 2006.⁸
• Correlations that have recently been made in the media between S&P 500 performance and housing indices are exaggerated, in the view of Fisher Wealth Management, and often use a selected period of time for the story rather than a more meaningful time from an historical perspective.⁹

Andrew Teufel, Director of Research at Fisher, said, "The bottom line of this discussion is that, like fears of inflation, avian bird flu, inverted US yield curve, deflation, hedge fund collapses, and the US budget deficit, this is simply another topic that investors have focused on to an unnecessary degree, creating a wall of worry. With hindsight I'm confident we'll see that this issue is vastly less significant than many currently believe and we continue to expect strong returns for global equities in the months ahead."

¹ Global growth data from Bloomberg Industrial Production:
   August y/y % changes are US 4.7%, Japan 6.0%, Germany 7.3%;
   Current borrowing cost data from Lehman US Aggregate Credit BAA
   Bond Index: currently 5.9%, average since 1976 is 9.3%; Personal
   income growth in the second quarter 2006 (y/y), US data from
   Commerce Department: real disposable income up 2.8%; Japan
   data from OECD: real disposable income up 1.7%; UK data from Office
   of National Statistics: real household disposable income up 1.5%.
² Housing start data from US Department of Housing and Urban
   Development: August level is annual rate of 1.665 million
³ GDP contribution data from US Commerce Department
⁴ Existing home price data from National Association of Realtors
⁵ S&P 500 annual total returns data from Thomson Datastream
⁶ Flow of funds data from Federal Reserve
⁷ Mortgage rate data from Thomson Datastream
⁸ Mortgage application data from Mortgage Banker's Association
⁹ Housing index referenced is the National Association of Home Builders
   Housing Market Index

NOTES TO EDITORS

FISHER INVESTMENTS EUROPE LTD and FISHER INVESTMENTS

For a copy of Fisher Wealth Management’s comprehensive Markets Commentary report, visit www.fisherwm.co.uk or call 0845 458 1194.

Fisher Wealth Management is the operating name of Fisher Investments Europe Limited which is registered in England and is authorised and regulated by the Financial Services Authority. (Company number 3850593. Registered office: 16 Curzon Street, London W1J 5HP). Investment management services offered by the Company in the United Kingdom are provided by Fisher Investments.

San Francisco-based Fisher Investments is a discretionary, fee-based investment manager and adviser, established in the USA and regulated by the US Securities and Exchange Commission (SEC). The protections of the UK regulatory system, including the Financial Services Compensation Scheme, do not apply in relation to its services. The Company provides a variety of wealth management strategies and services to high net worth individuals and institutions, throughout North America and the United Kingdom.

With its founder’s industry history going back over 30 years, Fisher Investments has built a reputation of experience and innovation. From engineering the Price-to-Sales Ratio, to pioneering the identification of the Small Cap Value asset class, to recent developments in behavioural finance, Fisher Investments has continued to develop capital markets investment technologies for the purpose of providing excess return relative to benchmarks.

Ken Fisher's ‘Portfolio Strategy’ column in Forbes magazine, which he has been writing for the last 20+ years, is at www.fi.com/forbes.

The past is not necessarily a guide to future performance. The value of investments and the income from them will fluctuate with world stock markets and international currency exchange rates.