“This is the way.”
- The Mandalorian
As you get older your eyesight gets worse, but your ability to see through people and situations gets disproportionately better.
“It’s not what you’re looking at that matters, it’s what you see” slowly takes on new life.
I’m just going to go ahead and say it again.
Macro is not about divining good/bad (absolute), it’s about front-running better/worse.
Macro alpha is rate of change centric.
This is the way.
Back to the Global Macro Grind…
So, which way for housing after making the COVID Kessel Run (from pandemic trough to multi-decade/all-time highs) in less than 12 parsecs?
The Big (Pandemic) Picture: With rates pinned at all-time lows, the HSI (Housing Surprise Index) perched at an 18-year high, palooza-level sentiment characterizing Builder Confidence, WFH/Deurbanization and the broader parade of positive, peri-pandemic related catalysts converging on a peak demand-supply imbalance in the existing market, the pulse of post-lockdown tailwinds was ubiquitously positive and helped drive an absolute and relative performance bonanza for housing-related equities. That, summarily, has been the prevailing reality for housing.
Patrolling the Internals:
- HPI: The demand surge cultivated by the K-shaped distribution of the recovery (i.e. asset inflation and income recovery for those most likely to purchase homes) coupled with all-time low rates and deurbanization occurred against an all-time tight supply backdrop. In canonical eco 101 fashion, prices have served as the primary release valve for that fundamental imbalance. Expect more of the same on the RoC front nearer-term as the price data reflects (on a lag) peak purchase activity through October (at least) and as supply and ATL rate trends have remained unchanged.
- K-Shaped manifestations: In October, applications for mortgages larger than $766K rose 59% while applications for mortgages in the $150K-300K price range rose +13% according to the MBA. Indeed, Existing home Sales in the $1M price tier are up over 100% Y/Y while sales for the $750K-1M price tier are up +80% Y/Y. Alongside the broader supply-demand imbalance, this mix shift is amplifying the acceleration observed in HPI trends.
- New Construction: New Home Sales have been running at the largest spread ever to Starts and the Share of New Homes bought (sold but not yet started) reached the highest percentage since December 2005 in October as the deurbanization push has remained on conspicuous display. While housing activity has been broadly strong, New Home builders have been a disproportionate beneficiary given acute supply conditions in the existing market.
- Mortgage Purchase Apps: After progressively declining for 7 weeks off the mid-September peak, Purchase demand rose to new cycle highs over the most recent two weeks. The data carries a discrete salt grain caveat as it includes the period surrounding the thanksgiving holiday but if you accept the SA data roughly at face value and we don’t a sharp retrace relative to the last two weeks, then the November data will have closed strong, meaning reported transaction volume (i.e. reported EHS data one and two months from now) will remain fairly solid.
- Forbearance Trends: the latest MBA data this morning showed that while loans in forbearance decreased from 5.54% to 5.48% as of Dec. 6, “New forbearance requests reached their highest level since the week ending August 2, and servicer call volume hit its highest level since the week ending April 19.” The re-intensification of the virus, the associated containment initiatives, the recent deterioration in the labor market and the impending year-end income cliff are clearly having a negative impact on income and housing security.
The Outlook | Quad 2: As we look ahead, Quad 2 defines the outlook both domestically and globally. A protracted reflationary environment is generally not optimal for housing.
It’s mostly a rates dynamic. While the growth acceleration is a fundamental positive, the concurrent acceleration in inflation and any curve steepening and/or realized/anticipated rise in policy rates pressures affordability with the result being a flow-through drag on demand and prices.
RATES: As we highlight recurrently, when rates aren’t really moving they don’t particularly matter to housing, but when they are moving they are all that matters. During the active rate shock period, housing effectively becomes a single factor model with rates as that causal factor.
To make this a bit more tangible, consider the following hypothetical:
Most buyers target their home search and anchor their decision calculus around the monthly payment amount. If rates move sharply higher quickly, some buyers will no longer be able to qualify to buy the house they wanted.
Think of someone who can afford the monthly payment on a $300k house and suddenly rates move from 4% to 5%. Now, with the same payment, they can only afford $270k.
The seller still wants $300k and the buyer still wants the house, but they can no longer afford it at that price. This happens everywhere and suddenly transaction volume slows because the sellers and buyers suddenly find themselves far apart.
Eventually, the buyers come up a bit and the sellers come down a bit and activity resumes, but at a lower price level.
The above typifies the sequencing of dynamics associated with negative rate shocks. The impact of positive rate shocks is similar, but in converse (as we’ve just witnessed, again).
THE (Eternal) CAVEAT:
We’ve been obliged to offer the same cautionary salvo during every cyclical rotation, headfake or otherwise.
While slow, measured increases in rates within a goldilocks macro environment (a slow rise in rates reflecting improving growth prospects but no real inflationary pressure threatening a policy shift) may be largely benign for housing (think 2017), we’ve seen recurrently that disorderly curve steepening and “too far, too fast” in rates self-regulates and short-circuits on itself via tightening of financial conditions and a dampening of the growth outlook which ultimately drags down equities and refreshes the bid for bonds.
With debt levels at all-time highs and after a decade of cumulative slowflation exposure, the duration risk embedded in positioning is ubiquitous. The Fed obviously knows this and will only countenance so much vis-à-vis a backup in the long-end.
While the Fed is expected to punt on explicit WAM extension (Weighted Average Maturity extension, i.e. soft yield curve control) action this week, it certainly remains in queue (relatedly, we’d view any large-scale sell-off in housing accompanying a sloppy rates backup as a tactical buying opportunity).
THE CALL:
With Housing Equities higher by ~80% from their Covid Cliff lows, the HSI just rolling off a near-ATH, the HMI at an all-time high, a modest slowing in high-frequency fundamental data and rates vol percolating alongside and emerging backup at the long end of the curve and a multi-quarter Quad 2 outlook, we think caution is warranted.
In short, the upside argument has lost asymmetry and the data are likely to progress in the direction of “less good”.
Again, we don’t expect any kind of imminent collapse but when you filter data through a better/worse lens, “less good” is relegated to the “worse” side of that binary filter.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.88-0.99% (bullish)
UST 2yr Yield 0.11-0.18% (neutral)
SPX 3 (bullish)
RUT 1 (bullish)
NASDAQ 12,254-12,592 (bullish)
Tech (XLK) 123.24-127.08 (bullish)
Energy (XLE) 37.36-42.24 (bullish)
Utilities (XLU) 61.47-63.34 (bearish)
Gold Miners (GDX) 33.14-36.35 (bearish)
Shanghai Comp 3 (bullish)
Nikkei 268 (bullish)
DAX 13130-13399 (bullish)
VIX 19.45-24.94 (bearish)
USD 90.23-91.28 (bearish)
Oil (WTI) 44.89-47.41 (bullish)
Nat Gas 2.30-2.85 (bullish)
Gold 1 (bearish)
Best of luck out there today,
Christian B. Drake
Macro Analyst
