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Texas Housing Market Hope During Stock Market Hype

March 26, 2013 by Kevinmiller
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A few weeks ago, we saw the worst of the media’s knee-jerk habits on display when the Dow Jones industrial averagea widely used stock index, hit what was widely reported as a “record high.” Does that mean that golden economic times are ahead?

Well, no. Or maybe they are (and, yes, it actually might be a good time to buy a home, as we’ll discuss in a bit), but if so, we sure can’t tell from the Dow.

Here’s the thing: The Dow is a bad, very bad, no good indicator of economic health. Planet Money explains (to the credit of “the media,” a bunch of other outlets also eagerly jumped on this counter-narrative as well):

After adjusting for inflation, the Dow was higher in 2000 than it is today. It was also higher in 2007. It would need to rise another 10 percent or so to hit an all time high in real (i.e., inflation-adjusted) terms.

When reporting on other numbers that change over time, it’s routine to adjust for inflation. So when people talk about wages stagnating for American households, it means that, after you adjust for inflation, the median wage is roughly the same as it was 15 years ago. If you didn’t adjust for inflation, you would say the median wage has risen by more than 40 percent over the past 15 years. But that would be a meaningless statement.

Moreover, the Dow isn’t really a good measure of corporate performance anyway (the S&P 500, among others, is better):

The Dow average, drawn out to two decimal places, may seem like some perfectly scientific number, but it’s far from it. A small committee selects 30 big companies — I.B.M., G.E., McDonald’s, Disney and so forth — and then adds up the price of their stocks. Then the analysts divide it by the Dow Divisor, a misleadingly precise-seeming number formulated to account for things like dividends and splits that right now is, well, about 0.132129493. The resulting figure is repeated throughout the country.

Texas Home Loan on the Horizon
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And those are the least of the Dow’s problems. More troubling is that it ignores the overall size of companies and pays attention to only their share prices. This causes all sorts of oddities. ExxonMobil, for example, divides its value into nearly five billion lower-cost shares, while Caterpillar has around 650 million more expensive ones. Therefore ExxonMobil, one of the largest companies in history, pulls less weight on the Dow than a company less than a fifth its size.

In summary:

1. If you adjust for inflation (and, seriously, why don’t reporters take the time to do this), the Dow is still roughly 10 percent below the record high set in 2000. The Dow was also higher in 2007.

2. Even if it was at a record high, mathematically, the Dow is an aribitrary, obviously flawed measure of the health of American corporations (flaws admitted to in the Planet Money podcast by the Dow itself)

3. The performance of the stock market, while important and not at all irrelevant to the broader economy, tends to ebb and flow much faster than indicators such as employment and middle class earnings.

4. Many folks considering buying homes, especially first-time home-buyers, aren’t heavily invested in the stock market, if at all.

5. Massive economic thunderclouds, like the debt and over-regulation, are still looming.

But while it’s not a good idea to buy into the Dow hype, that doesn’t mean that better times aren’t ahead. And even if they’re not, it’s still a relatively optimal time for families who are in good financial position to buy a new home to go ahead and do so. This is also true for families who already own their homes to, say, go ahead and take out a home refinance loan.

Simply put, Texas home interest rates are still very, very low in historical terms (click here for current rate conditions), which means that it’s become much cheaper to borrow over the past few years than in previous eras. And at TexasLending.com, we work hard to make sure our Texas home loans stay as affordable as possible.

 
 

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