Property Management Blog

Landlord's Newsletter | June 2021

3G Properties Group - Tuesday, June 1, 2021

National Market Update*

Inflation is going to be a very popular word in the investment vernacular this year. With the economy picking up a head of steam and corporate profits surging, the foundation for stock-market performance is quite solid. So rising inflation represents the fly in the ointment, and while we don't think it will ruin the party, we do expect it to continue to scratch the record.

The investment landscape is rarely devoid of threats. For investors, the key is to evaluate those threats within the bigger picture. Last week, markets were guided by the tug-of-war between rising inflation concerns and the Federal Reserve's intention to keep the monetary-policy-stimulus spigot wide open for a while longer. With this tension likely to remain behind the wheel in 2021, here's a look back at prior risk factors that instigated anxiety and volatility for the market:

Interest rates – 10-year interest rates rose sharply from January to March, stoking worries that higher borrowing costs would choke off the economic expansion and threaten further upside for stocks.

  • The 10-year Treasury yield began the calendar year below 1% for the first time ever, but quickly spiked from 0.93% to 1.73% by the end of March. The steepness of the ascent rattled the stock market, sparking two separate 4% pullbacks during that stretch.

  • Our view was, and remains, that rates are higher, but not high. Moreover, the catalyst for the rise – expectations for stronger economic growth – is, in our view, a positive factor longer-term.

  • Rising interest rates were a factor in market pullbacks in 2013 and 2018, but did not undermine the broader expansion. Equities gained an average of 30% in the 12 months following those bouts of rate-driven volatility2.

  • The surge in longer-term rates has brought historical comparisons to 1994, a year in which the 10-year yield rose nearly 3% and both stock- and bond-market performance suffered. We'd note, however, that the Fed hiked its policy rate seven times in that period. We don't expect the Fed to lift its policy rate above 0% at all in 2021. What's more, 10-year rates averaged 6.8% at the last five stock-market peaks. We don't expect rates to reach those levels this time around, but we think there is still significant room for interest rates to rise before they undermine economic growth or equity-market gains.

  • Where are they now? Ten-year yields have treaded water since March, bouncing around the 1.6% level, which still leaves them below where they were at the beginning of the pandemic. We think firming inflation expectations will lead longer-term rates gradually higher as we advance. Over the past 25 years, prior gradually rising rate environments have been accompanied by solid equity-market gains and subdued fixed-income returns2. While fixed income allocations may seem unattractive, bonds added value for balanced portfolios by helping limit downside during stock-market pullbacks.

  10-year U.S. Treasury Yield

Source: FactSet, 10-Year Government Treasury Yield, through 5/20/2021

This chart depicts the long decrease in government bond yields over time.

Stock valuations – The sharp gain in stock prices since the March 2020 lows pushed valuations to 20-year highs, raising concerns that the market had run too far ahead of the fundamentals2.

  • The S&P 500 rose 75% in the first 12 months of the recovery, pricing in expectations for a rebound in corporate profits2. That profit recovery is well underway, with earnings rising 49% in the first quarter of this year2. Nevertheless, stock prices have risen much faster than the underlying profits to this point, meaning valuations have become extended.

  • With the price-to-earnings ratio nearing record highs recently on the back of technology-stock gains, references to the late-'90s dot-com bubble have emerged. There are notable differences, however, that, in our view, limit the risks that valuations are signaling a brewing market bubble. Most importantly, profits were peaking then, but they're rising from a trough currently.

  • Where are they now? The P/E ratio has declined from nearly 24 times to near 22 times2. This is still well-above the historical average, but we expect it to continue to come down as earnings rise. Looking back at bull markets since 1929, P/E ratios traditionally rise in the first year of a bull market, as optimism rises, then decline as earnings rebound1. With expectations for earnings growth of roughly 30% in 2021, we think valuations can be reigned in while still supporting stock-market gains2. Looking further out, we think the combination of valuations and earnings growth will produce positive but more moderate gains for equities. Over the past 40 years, periods of accelerating earnings have often seen outperformance from value and cyclical investments, which are linked to economic momentum2.

  S&P 500 Forward P/E Ratio

Source: FactSet, S&P 500 Forward Price-earnings ratio, through 5/20/2021, The S&P 500 is an unmanaged index and cannot be invested in directly.

This chart shows the near record high forward PE ratio for the Stock Market with an average of 16.34.

Housing prices – Home prices have skyrocketed over the last year amid a significant jump in demand. Lower inventories (supply) and rising building-material costs have also added to price gains. The last time home prices were on this trajectory, a housing bubble became the catalyst for a financial crisis. We're not traveling the same path now, but we don't think the current pace of appreciation will be sustained.

  • New and existing home sales are at their highest levels in more than a decade, reflecting the surge in demand2. Falling unemployment, virtual work trends, and still-low mortgage rates should all support an enduring positive outlook for the housing market for the next several years. The average size of a new single-family home has also begun to rise for the first time in many years, likely reflecting the shift in home preferences sparked during the pandemic. Increased homebuying activity, improving job growth, and an estimated $1.5 trillion in household savings are a potent combination for healthy consumer spending, which we think will be the backbone of strong GDP growth this year and next.

  • Home prices are currently rising by more than 10% year-over-year, the strongest level since before the '08/'09 financial crisis. However, during the housing bubble, there was too much supply compared with demand, and lending conditions were reckless. Currently, lending standards are much more prudent, and, importantly, demand is outstripping supply, which should prevent an outcome like last time. We also don't expect this level of price appreciation to persist indefinitely. Spiking lumber prices have abated a bit, which, combined with a return of more construction labor, should help inventories catch up toward demand.

  • Where are they now? The median sales price of a home in the U.S. has risen above $347,000, up 35% from the 2007 peak. The rising cost of building materials is a short-term contributor to the jump in prices, but the underlying supply and demand conditions, along with the foundation of the durable economic expansion ahead, should support the housing market as we progress. We don’t think housing poses a systemic threat to the economy or the financial markets. In fact, it's likely to be a tailwind for consumption ahead. That said, we don't think the pace of national home-price appreciation will be sustained.

  Home Prices Have Risen Amid Soaring Demand and Lumber Prices

Source: Bloomberg

This chart illustrates the gain in housing prices after the COVID-19 related recession, partly driven by the increase in lumber prices in our view.

*Source: Craig Fehr, CFA, Investment Strategist, Edward Jones

Dallas-Fort Worth has less than a one-month supply of housing inventory on the market — down 75% from last year.  Home sale prices, meanwhile, are up 15.7% over last year in D-FW. The current median home sale price is $323,955. All-cash sales of existing homes comprised a quarter of transactions in April as competition in the housing market continued, according to the latest REALTORS® Confidence Index Survey. This marks an increase from 15% of similar sales a year ago and 20% in 2019, the survey shows.

Our offices will be closed on Monday, July 5th, in observance of our country’s Independence Day.

Backyard BBQs and Quiet Dinners At Home: There’s A Perfect Summer Salad For Every Moment.

Whether you are searching for a healthy summer salad recipe, making summer salads for a crowd at your next get-together or just trying to put dinner on the table without having to turn on your oven, we’ve got you covered! Buckle up, because here come the 20 best summer salad recipes ever! Consider this your one stop shop for the tastiest main dish salads with grilled meat, summer salads with fruit, salads for a picnic—basically any salad recipe you might wish for for any occasion you’ve got on your calendar can be found right here!  

20 Best Summer Salads:

Click here for more recipes: 20 Best Summer Salads | The Modern Proper 

Please bear in mind 3G Properties Group handles basic maintenance requests and is not a general contractor or construction company.  We are happy to work with YOUR preferred vendors as long as 3G obtains proof of their liability insurance, copy of their W9 and coordinates the repairs.  As your property management company, we are charged with coordinating all maintenance with your resident as part of our liability protection for both you and 3G.  If the owner, resident and vendor are communicating outside of our Maintenance Coordinator and/or 3G team, this can cause significant problems. We expect to pay your vendor through our system so all of your annual expenses are reflected on your 1099. 3G Properties Group strives to provide you with a “hands off” experience as much as possible, relieving you from maintenance burdens and headaches!

Notes from a few of our residents!

  • I am a tenant with 3G Properties and have nothing but good things to say about them. They take care of any issues I have had quickly and with great professionalism. Rosemary has always been a pleasure to work with and the maintenance people have been very efficient! I also love this home and neighborhood and take care of it as it is mine! Would highly recommend the 3G Properties Group. Nelda Flores
  • In the two years we’ve been here we have only had to use maintenance for replacing the lights in the kitchen and to fix a cabinet. It took less than two days before the issue was fixed . They are very professional and good . We are Very happy and satisfied 😀 Ana de Lira
  • We love working with 3G properties. Their professionalism is top notch. For an investor, they do all of the work, advertise, find the tenant, screen the tenant, organize the lease, and then manage the property. All I have to do it receive a direct deposit once a month. It's awesome. I'm also a Realtor. I feel confident recommending them to all of my investors clients as a "division" of my company. Kelly Hernandez

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3G Properties Group
2611 Cross Timbers Rd.
Flower Mound, TX 75028

Phone: 940.262.0091

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