We’ve been patiently stalking the long side of housing here in 4Q, waiting on a steadier reporting of Quad 4 data to exert tangible pressure on rates and cultivate a macro condition set that has, historically, been favorable for housing related equities.
Below we redux a note we published earlier today in the Housing research vertical reviewing the November cratering in Builder Confidence. The contextualization and linked notes provide a review of the thinking around the call and a refresh on current dynamics.
Builder Confidence | November Rain .....
Builder confidence fell -8 pts sequentially in November, marking the largest sequential decline in 17 years outside of the QM catalyzed plunge in Feb 2014. The retreat was ubiquitous across indicators with each of the 3 subindices posting significant declines.
For housing investors, this is where it starts to get more interesting. It’s at the nexus of deteriorating fundamentals and falling yields where the opportunity opens up and the cognitive dissonance get more acute.
As we detailed on our 4Q18 Housing Themes Call, housing generally performs well in Quad 4 environments -- a dynamic owing largely to declines in interest rates that accompany disinflation and slowing growth.
It’s a bit of a Faustian line as the discrete manifestation of Quad 4 associated prices action occurs as a direct response to the tangible reporting of worsening fundamental data. … and, in canonical counter-intuitive fashion, the deteriorating fundamental backdrop becomes the buy signal, at least tactically, and particularly when the medium and longer-term dynamics remain asymmetrically favorable and outright/protracted recession isn’t an imminent risk.
We’ve detailed the concern cabaret for housing stocks in 2018 exhaustively but suffice it to say, rates have been the predominant driver of performance YTD as the rates-housing equity correlation pushed towards 1 and broader fundamental considerations were sidelined. Indeed, the lagged impact of the 1Q18 increase in rates is still flowing through reported fundamental data and the latest Sept/Oct increase will continue to pressure HPI and volume growth lower.
In other words, don’t expect flagging fundamental trends to inflect meaningfully, nearer-term.
Now, with the above as the contextual backdrop, consider the last couple weeks as they serve as an illustrative microcosm of the-market-is-not-the-economy dichotomy described above.
The domestic housing data continued to underwhelm, the Housing Surprise Index continued to make lower lows and the sector outlook was collectively downgraded further alongside a deluge of Quad 4 macro data, both globally and locally.
The market reaction was quintessential Quad 4 as Momentum/Beta/Growth severely underperformed, the market pared back policy rate expectations while bonds, equity bond proxies and ….. Housing stocks all outperformed.
For a more detailed discussion see our note from 10/24, Awaiting the Washout.
In short, rates remain in the driver’s seat and to the extent reported quad 4 data continues to drive rates lower, we’d increasingly view it as a buying opportunity in the face of still deteriorating fundamentals.
