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November 29, 2018

Could Housing Be the First of Many Dominos To Fall?


Early this week, the market shook off Thanksgiving blues and started with a bang!
Stocks bounced sharply, and Treasury yields moved up in tandem.
Last week’s start was a different story.
Stocks fell sharply. Treasury bonds were mostly steady; despite the sell-off in stocks, they didn’t rally much on the long end of the yield curve.
There was a persistent move to the safety of bonds, but that didn’t match the sharp sell-off in stocks.
A rumor last Wednesday, that the Fed might be considering an early 2019 pause to its current plan to rate hikes – up to four times more –helped stocks bounce off levels from the day before. Long-term Treasury bond yields also rose.
After all was said and done, the markets ended the day before Thanksgiving mostly unchanged. They ended Black Friday lower again while long-term Treasury yields hovered around 3.30%.
The Fed is focused on “normalizing” interest rates.
The markets are focused on holiday sales forecasts.
I’m focused on the state of the housing market.

The Housing Dilemma

New home sales are crucial to our economy because of the ripple effect they create for builders, mortgage servicers, real estate brokers, and home-furnishing retailers.
This morning, new home sales for October were expected to rebound, but disappointed… yet again.
The consensus estimate was a rebound to 575,000 annual rate. The actual was a measly 544,000.
The only good news out of this is that September sales were revised higher by over 40,000 units.
October existing home sales figures have disappointed consensus estimates for six months in a row now, and I don’t expect a turnaround anytime soon.
Existing home sales are a much larger share of the housing market, but are less important to the broader economy. They do, however, give us a good look at overall housing trends.
The seasonally adjusted sales figures were slightly ahead of estimates on the month. The year-over-year figures slightly declined to -5.1% from September. Single-family home sales were down 5.3%, while condo sales were down 3.2%.
Last Monday, the National Association of Home Builder’s updated its housing market index…

Looking Bleak…

It surveys its members, asking them to rate the general economy and housing market conditions. It rates present sales of homes, sales of new homes expected in the next six months, and traffic of prospective buyers in new homes.
The October index bounced slightly to 68 from 67 and was expected to hold steady this month after peaking last December. It didn’t. In fact, it plummeted to 60, a level not seen since August 2016.
In other words, builders are beginning to comprehend the weakness that lies ahead.
Last Thursday, October housing starts and permit numbers were released.
New home starts disappointed slightly, coming in at 1.228 million on an annualized rate and permits were issued at a 1.263 million rate. That was a bit higher than the 1.260 million expected, but a drop from last month’s 1.270 million.
It goes to show how confident builders are to complete projects since the excavation for foundations have begun. Permits can be a little less certain in respect to future projects.
The bottom line: Mortgage rates are rising because of Federal Reserve policy. That puts a damper on an important driver of our economy.
Will housing be the first economic domino to fall?
Maybe…
Courtesy of Lance Gaitan, Economy & Markets (article archive here)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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