The World Bank, in a recent report, is warning of yet another “lost decade.” It seems that every time there is an economic meltdown, the cries for lost decades rise. Certainly, there have been lost decades.

For example, after the 2008 subprime mortgage crisis, many individuals, cities, and even states and countries have found it difficult to recover. Yet, complex systems such as economies usually find ways to adapt.

All Crises are Local at First

I’ve found that keeping things simple, in local terms if possible, helps me to understand bigger things. So it is with the banking crisis, which clearly started in a California institution which catered to tech startups, Silicon Valley Bank.

Thus, local issues, such as loose lending standards, poor risk management, and questionable investment decisions were at the center of the bank’s demise and the subsequent crisis, which for now may have been contained.

Still, as time passes and the news fades regarding the woes of the banking sector, unwary investors, and everyday folks may still be vulnerable to unpleasant surprises. That’s because even though the banking “crisis” may have been stilled by the Federal Reserve and the FDIC, at least for the moment, its repercussions are still not fully realized.

Don’t get me wrong. Tech startups are a crucial component of the U.S. economy. After all, both Microsoft (NSDQ: MSFT) and Apple (NSDQ: AAPL) were once housed in their founders’ garages.

A major difference between those two now blue chip companies, and startups who got caught in the Silicon Valley Bank (SVB) implosion, is that neither Apple’s nor Microsoft’s financial backers became insolvent during either companies’ formative years. As a result, neither of those tech giants had to deal with the repercussions of such an event.

But the startups whose problems resulted from the SVB situation don’t have that luxury. That means that there have been, and there will be consequences that have already begun to spread throughout their companies and the economy. Many of the conditions that worsened as a result of the SVB mess had already been present to some degree, such as falling home prices and employment problems, with the crisis just making them worse.

The Fallout can be Personal

As with any explosion, nuclear or otherwise, the fallout is often as bad or worse than the event. In this case, aside from payrolls problems, and job losses, many of the employees of the affected startup and related companies are likely to have to deal with housing related issues. Some may be life changing.

According to data from online realtor/broker Redfin citing the combined effects of low housing supply, tech layoffs and higher interest rates, the housing markets in tech hubs such as Seattle, San Jose, Austin and Phoenix are showing signs of “rapid cooling.”

Other cities facing similar problems include: Tacoma WA, Denver, Las Vegas, Stockton, Sacramento, and Oakland (the latter three in California). Among the hardest hit was Seattle with a 40% decrease in pending sales year-over-year for February.

You can see a broader picture emerging from the existing home sales released by the National Association of Realtors for February:

• Strength in the South. February increase of 15.9% in February from January to an annual rate of 2.11 million, a 21.3% decrease from the prior year. The median price in the South was $342,000, an increase of 2.7% from one year ago.
• Midwest region was next with a 13.5% increase from the previous month to an annual rate of 1.09 million in February, declining 18.7% from one year ago. The median price in the Midwest was $261,200, up 5.0% from February 2022.
• West region saw a short-term bounce, but long term remains troubling. Sales rose 19.4% in February from the prior month to an annual rate of 860,000, down 28.3% from the previous year. The median price in the West was $541,100, down 5.6% from February 2022.
• Northeast region was the worst as sales only rose 4.0% from January to an annual rate of 520,000 in February, down 25.7% from February 2022. The median price in the Northeast was $366,100, down 4.5% from the previous year.

The MELA Effect: Negative Impact on Tech and Remote Work

Familiar readers are aware of the term I coined, and often use: the MELA system (M=Markets, E=Economy, L=life decisions, and A=Algos), which incidentally is a classic example of a complex system. In a nutshell, because of the way the world works in the present, the stock market is what drives the economy instead of the way things used to be prior to the effects of globalization and the emergence of the debt-financed economy.

And for those who doubt this premise, even Redfin backs into acknowledging its existence when it notes that the fall in tech stock prices along with tech layoffs hampered the ability of buyers since they were using the proceeds of their tech stock holdings and their jobs as primary factors that would allow them to buy homes.

Moreover, the realtor acknowledges the uncertainty caused by the SVB collapse and its effect on the startup segment of technology as well as in remote workers who moved to these locations during the COVID pandemic.

Specially daunting is data such as the 140% increase in supply combined with a 40% decrease in sales in Austin and the recently reported 70% of homes for sale with price drops in Phoenix.

Is the Housing Boom Over?

The real question is whether the megatrend in housing is finally over. The macro answer is, no. A more nuanced answer is that it depends on location, the status of mortgage rates, and the stock market. Again, it pays to think locally. And that means that much depends on what the Federal Reserve says and does in the next few months regarding interest rates.

For example, in my neck of the woods, the Dallas Fort Worth metroplex (DFW) there was a pronounced slowing in housing over the winter months. Much of that was due to higher interest rates and a slowing in stock prices.

Yet, when mortgage rates recently dropped, the buyers were back. For example, a group of one single family home and five townhomes that I kept an eye on as a gauge for market activity all sold in the past month. Moreover, activity at building developments, especially for apartments, visibly picked up when mortgage rates dropped in mid-March. In other words, in a two-week period, a significant portion of inventory moved, and builders stepped up their activity.

As the existing home data above suggests, different areas of the country are faring better. At the same time, some parts of those areas aren’t doing as well as others. This suggests that, as a whole, we are in one of those periods where we may march in place for a while as the situation unfolds.

Three Metrics Tell The Story

There are three bellwether indicators whose direction is highly accurate in predicting housing activity. First, is the U.S. Ten Year Note Yield (TNX), as it’s the anchor for most mortgage rates.

Its recent decline from the 4% yield to the 3.5% yield was responsible for the uptick in sales that I saw in DFW. Note its nearly perfect correlation to the average 30-year mortgage:

The third, and equally important metric is the general trend in the stock market, especially the technology sector, as in the Nasdaq 100 Index (NDX), which houses the largest technology stocks such as the above-mentioned Apple and Microsoft.

Again, when stock prices rise so do 401k plans, Individual Retirement Accounts (IRAs), and trading accounts. Bullish values in these accounts (M) increase risk appetite for large purchases (life decisions), which fuel home purchases, especially when mortgage rates are favorable. This in turn improves economic activity (E). And yes, news travels fast due to the algos, so the dynamic changes rapidly.

NDX is well off of its recent bottom and consolidating near the 13,000 price area. Money is flowing into this index as indicated by rising trends in the Accumulation Distribution Indicator (ADI) and On Balance Volume (OBV).

The long-term direction of NDX will depend on what happens either at 13,000 (an upside breakout) or a fall below its 200-day moving average (a negative breakdown).

Lower Rates and Higher Stocks are the Fuel for Economic Recovery

Much can still happen as the Federal Reserve has not made its future interest rate plans clear. If the central bank raises rates again, I expect bond yields to either rise due to a rebound in inflation, or to fall as traders bet the Fed has gone too far and a recession is near.

A decline in bond yields may be a bullish development for the housing sector as mortgage rates would follow.

On the other hand, if the Fed signals that we’ve seen the top in interest rates for the cycle, bond yields will likely drop, mortgage rates will follow, and stocks will likely rise. That would be a boost for housing as lower mortgage rates and higher stock prices would once again provide the fuel for a MELA infused economic recovery.

It will take time to sort this out. That’s how complex systems work. They probe for solutions. Trial and error assert their influences. Things get messy. Solutions may be temporary or not be apparent for extended periods of time.

One thing remains true throughout this situation: the stock market is now the biggest influence on the economy. And what the Federal Reserve does with interest rates will shape what happens next.

P.S. You’re probably aware that marijuana is becoming more pervasive and socially accepted. According to a recent YouGov poll, the percentage of U.S. adults who say they have tried marijuana sits at 52%, the highest level measured to date.

Marijuana is increasingly legal on the state level, but it remains federally banned in the U.S., which means the industry still has enormous room for future growth. When the federal ban eventually gets lifted, sales (and share prices) will take off like a rocket.

That’s why my longtime colleague, John Persinos, editorial director of Investing Daily, has just launched a service detailing how you can financially benefit from the increasing legalization of cannabis. Called Marijuana Profit Alert, it’s your guide to making money from the “green rush.” Click here to learn more.