When Will Houses Be Affordable Again? (EP.360)

Episode Summary

Executive Summary: Animal Spirits covered a wide range of market and lifestyle topics, centering on year-to-date equity strength, the legacy of Jim Simons, skepticism toward consumer sentiment and survey data, housing affordability, passive investing, and behavioral finance themes like status, judgment, and Gen Z’s digital upbringing. The hosts mixed data-driven chart discussion with personal anecdotes and recommendations.

Main Topics: Market performance and stock return context (Priority: 5/5): The hosts noted the S&P 500’s strong year-to-date gain and argued that recent multi-year returns have been unusually strong despite frequent pullbacks, making the current environment feel less average than headline numbers suggest. Jim Simons and quantitative investing (Priority: 5/5): They reflected on Jim Simons’ death, explaining his Renaissance Technologies track record, the capacity limits of his strategy, and how his success depended on hiring exceptional quantitative talent rather than traditional fundamental analysis. Consumer sentiment and survey skepticism (Priority: 4/5): The discussion criticized political and demographic slicing of sentiment data and broader survey results, arguing that many surveys have become less useful or too easily distorted for actionable interpretation. Housing affordability, home equity, and market interventions (Priority: 5/5): A large section focused on home prices, mortgage affordability, tappable equity, and the limits of short-term policy solutions. They argued that subsidizing demand generally lifts prices and that the housing shortage has no quick fix. Passive investing and index ownership (Priority: 4/5): They highlighted new research suggesting that S&P 500 stocks with lower passive ownership have outperformed, and that heavily passively owned stocks are not necessarily the most expensive by valuation, challenging common assumptions. Behavior, identity, and social perception (Priority: 3/5): The hosts discussed how car ownership, fashion, and online feedback function as status signals, while also reflecting on how constant scrutiny shapes modern behavior and self-image. Cultural nostalgia and media recommendations (Priority: 3/5): They recommended films and reflected on 1990s adolescence versus Gen Z’s hyper-connected upbringing, arguing that earlier generations had more freedom to be young without constant documentation or social feedback.

Key Arguments: The S&P 500’s recent run has been strong enough that another 20% year would be unusual, though not impossible, given how many setbacks have occurred along the way. Jim Simons’ results were extraordinary, but Renaissance’s edge had practical limits: capacity constraints, annual profit distributions, and the need for a highly specialized team. Consumer sentiment and other survey data are increasingly shaped by politics and self-selection, making them most useful only at extremes. The 401(k) system is a net positive overall, despite the critique that it contributed to inequality; the real fix would be broader access, not a return to pensions. Housing affordability cannot be “fixed” quickly through subsidies because boosting demand tends to raise prices; meaningful improvement requires time, income growth, and more supply. Passive ownership does not automatically imply overpriced stocks; in the cited research, the least passively owned quintile outperformed and had higher average P/E ratios than the most-owned quintile. People often grow into their mortgage payment as income rises, which is why fixed-rate mortgages can be helpful over time despite high upfront affordability pressure. Gen Z’s mental burden is intensified by growing up under constant digital documentation, read receipts, streaks, and public feedback, reducing the freedom to be young and clumsy privately.

Data Points: S&P 500 year-to-date return: about 10% - Used to frame market performance halfway through the year S&P 500 returns over the last five years: +31%, +18%, +29%, -18%, +26% - Illustrated the volatility and strength of recent market cycles S&P 500 since March 9, 2009 bottom: about 900% up - Referenced in a chart about prior pullbacks Previous 5%+ pullbacks since March 9, 2009: 28 - Showed how many setbacks occurred during the long bull market Value creation in big tech examples: 4% between years 0 and 10; 96% after year 10 - Used to argue that large companies may still have runway after going public S&P 500 annualized return since end of 2017: 13% per year - A recent multi-year return figure discussed on the show Passive fund ownership of S&P 500 stocks: 24% today vs 7% 10 years ago - From Ben Johnson/Balchunas discussion of index-fund ownership Average passive ownership by S&P 500 stock: 24% of shares outstanding - Explained as the average index-fund ownership level Least-owned passive ownership quintile performance: Outperformed over 1, 3, and 5 years - Research cited on passive ownership and returns Highest passive ownership quintile valuation: Average P/E of 27 - Compared against lower passive ownership quintiles Lowest passive ownership quintile valuation: Average P/E of 34 - Showed higher valuation among less passively owned stocks in the cited study U.S. cost of living / housing affordability: Miami affordability restoration projected around 2034; Boston by Q3 2027 - JP Morgan city-level affordability estimates New housing completions: About 1% of U.S. housing stock annually - Illustrated the slow pace of supply growth Tappable home equity: $11 trillion - Axios estimate of equity available while retaining 20% equity Total U.S. home equity: $32 trillion - Used to infer equity held by mortgage-free homeowners Average tappable equity per mortgage holder: $206,000 - Axios data on household access to home equity Seriously underwater homes: 1 in 37 homes / 2.7% - Bloomberg headline and clarification about underwater mortgages Change in seriously underwater share: Still much lower than pre-pandemic; about half the pre-pandemic rate - Context that tempered the alarming headline Home listings with price drops: 6.2% as of May 5, 2024 - Redfin data showing price reductions remain relatively uncommon Jobs satisfaction: 63% of U.S. workers satisfied - Eric Soder’s tweet citing a record high in a long-running survey Share of Americans expecting to work past 62: 46% now vs nearly 60% in 2016 - Axios/Felix Salmon cited on retirement expectations Used car prices: 23% drawdown - Mannheim used car index decline noted as the deepest on record Murder rate change in 2024: Down 19% - Steven Ratner tweet referenced by the hosts Coffee CPI claim circulating online: False claim that coffee was removed from CPI - The hosts corrected a viral tweet about inflation measurement

Pivotal Quotes: "The 401k, I don't want to, I will reject this claim outright." — Michael Batnick: Reaction to a New York Times piece questioning whether the 401(k) was a mistake "There's no short-term fixes for this. None." — Michael Batnick: On the U.S. housing market and why demand subsidies cannot quickly solve affordability "How do you square this with the fact that people always say everyone's so ill-prepared for retirement?" — Ben Carlson: Questioning the consistency of survey data on retirement expectations and job satisfaction

Implications: The episode reinforces that markets, housing, and consumer behavior are best understood through long-run context, not headlines. Listeners should be wary of viral statistics, recognize housing as a slow-moving supply problem, and avoid overinterpreting surveys or simplistic policy fixes.