"The house of delusions is cheap to build but drafty to live in."
- A.E. Housman
After a hard day's work, we all go home to relax and eventually go to bed to prepare for the challenges of the next day. In many ways, a person’s house is the central foundation of their life.
From a top-down economic perspective, housing is also the foundation of the U.S. economy. For many Americans, rent or mortgage payments are their largest single expense every month. Alongside this, the most significant portion of net worth for most Americans is often their house or apartment.
Post pandemic we've had literally the most rapid increases in home prices in modern economic history. Specifically, according to the Case-Shiller Index, home prices across the U.S. increased 18.9% in aggregate with every region reaching an all-time high. This was driven by cheap money, low supply, and the net migration out of cities.
We've looked at this many times over the years, but the value of the home has a very tight and positive correlation to consumer spending. If the price of your home is appreciating, you are likely to feel wealthier and spend more. Conversely, if the price of your homes is decreasing it has the opposite effect and decreases the consumers propensity spend.
Setting aside the correlation to consumer spending, according to the NAHB, housing comprises between 18 and 23% of GDP. This comes from a combination of investment in building new homes, investing in existing homes, housing related bills, and rents/owner's equivalent rents.
In a nutshell, housing matters big time to the U.S. economy.
Back to the Global Macro Grind…
There is no doubt the U.S. market has started to slow. We've seen this across almost every metric we track in our U.S. housing compendium. Consider some of the recent housing related data points:
- March 2022 Existing Homes Sales were down -2.7% M/M and 4.5% Y/Y;
- The most recent mortgage purchase applications number declined to 258, which is the lowest number since 2021;
- NAHB Builder Confidence in March fell to a 77, which is the lowest level in 7 months (the survey also noted the lowest traffic of home buyers since the summer of 2021); and
- Finally, last week the real estate website Redfin price cuts on 12% of listings, which was the most since 2015.
The one positive for housing remains inventory, which is near all-time lows. According to our most recent data, there is roughly 2.0 months of homes for sale in the U.S. market. Housing inventory remains near at close to cycle lows and is well below a balanced market of 6.0 months of inventory. But despite nationally low inventory, the metrics we track for housing are decelerating on a rate of change basis.
Of course, this is not a terrible surprise given the rapid increase in mortgage rates (which are now near decade highs) and commensurate decline in affordability. In the Chart of the Day, we put this rate shock into context. As the chart highlights, this is one of the quickest increases of mortgage rates in the shortest periods of time that we’ve ever seen. As a result, mortgage payments on new loans are up some +26% Y/Y in a period when prices themselves have increased near 20%.
Ultimately, this Fed induced slowing of housing may be offset by the aforementioned low inventory and the general growth of demand due to demographics, but make no mistake the U.S. market housing is slowing. To the extent that Fed follows through on the 9+ rate cuts priced into the Fed Funds Futures Market for 2022, housing will also continue to slow from here.
As my colleague Christian Drake who follows U.S. Housing wrote earlier this week:
“If the policy goal is to cultivate recessionary conditions in hopes of engineering disinflation via demand destruction, the most interest-rate sensitive part of the economy is good place to start. And Operation “break stuff” appears to be gaining traction … at least across the housing-scape.”
In rapid rate hike periods, housing should slow first given its sensitivity to rates. But given housing’s critical role in consumer spending and GDP, aggregate growth slowing won’t be far behind. Could the Fed engineer a soft landing and crush inflation, while demand remains robust? It is certainly possible, but I think we all know that is probably unlikely.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 2.60-2.94% (bullish)
UST 2yr Yield 2.33-2.65% (bullish)
High Yield (HYG) 79.34-81.05 (bearish)
SPX 4 (bearish)
NASDAQ 13,064-13,840 (bearish)
RUT 1 (bearish)
Tech (XLK) 144-154 (bearish)
Gold Miners (GDX) 38.23-41.65 (bullish)
Utilities (XLU) 74.45-77.30 (bullish)
Healthcare (PINK) 27.02-28.47 (bullish)
REITS (XLRE) 48.36-50.87 (bullish)
Shanghai Comp 3055-3235 (bearish)
Nikkei 26,406-27,617 (bearish)
DAX 13,901-14,608 (bearish)
VIX 19.50-25.78 (bullish)
USD 99.31-101.16 (bullish)
Oil (WTI) 92.91-107.90 (bullish)
Nat Gas 6.05-7.84 (bullish)
Gold 1 (bullish)
Copper 4.61-4.81 (bullish)
Silver 24.30-26.51 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
