- Pending home sales plunged.
- Inventory might be rising.
- Rising rates are indeed "crushing" housing.
More Housing Weakness
I just published an article titled "Higher Mortgage Rate Crushing Housing" and I caught some flak for the use of the word "crushing." Some critics thought that was slightly hyperbolic, but the recent pending home sales data adds more evidence to support the claim that, in fact, higher rates are crushing housing.
Pending home sales, a forward-looking indicator for existing home sales, fell 4.7% in January 2018. Not only did January show a large decline, December pending home sales were revised lower which means the decline comes off of a lower base. Also, the downward revision to December indicates that existing home sales are likely to be revised lower for December as well.
Pending Home Sales Table:
In my article "Higher Mortgage Rate Crushing Housing" I wrote:
Even though the move in interest rates has only taken place over a few weeks, and most of the action has been on the short-end of the curve, the rising rates have already started to impact the housing market. The economic data for the housing sector has started to drastically miss expectations and has moved into contractionary territory.
Mortgage rates have risen recently which has impacted the housing market. It is surprising how quickly the impact was felt from such a short move and truthfully, not a big one on the long end.
Mortgage rates have risen to an average of 4.40% for a 30-year fixed and 3.85% for a 15-year fixed. These rates are roughly 100 basis points off the lows in 2016. A 100 basis point move in long-term rates has dented the housing market as I will outline below. What would happen if rates moved 300 basis points?
In an overleveraged economy such as the United States, a small move in interest rates has massive impacts on the rest of the economy. It is for this reason that the economy cannot withstand higher interest rates.
It is quite clear that the slight move in rates has taken its toll on the housing sector. The economic data shows it and if that is not enough, the housing sector ETF (ITB) is dramatically underperforming the market, down 11.4% in the past one month compared to only 3.5% for the S&P 500 (SPY).
Source: YCharts, EPB Macro Research
I just added a new feature to EPB Macro Research, called "Sectors I Like" and "Sectors I Would Avoid." Housing made the list of "Sectors I Would Avoid."
Now, in addition to the two portfolios and three weekly reports, as well as the chatroom and other features, members of EPB Macro Research will have an updated list of sectors and where we stand on them at EPB Macro Research. The portfolios are updated monthly but these sector tables will be updated in every article if changes need to be made.
Here is an example of how it looks on the side of the "long-only" asset allocation (allocation blurred to protect members).
EPB Macro Research Long-Only Asset Allocation for March 2018:
Members of EPB Macro Research will always have access to dozens of ETFs that have a bullish view or bearish view as well as two model portfolios to guide them through markets. At the very least, you can have a back pocket list of sectors you can feel comfortable in or sectors you should avoid.
I am not yet short housing, but I am actively avoiding it.
Please consider joining EPB Macro Research; click here to learn more.
A Membership Includes:
- Daily Data Flash: 1-2 posts per week on current macroeconomic data analyzed with a consistent set of principles (Brief Report).
- Weekly Macro Theme: 1 in-depth report on a current macroeconomic condition or a member question. (Long Form Analysis).
- Weekend Dashboard: A weekend post on relevant economic data and market updates to stay up to date and prepare for the week ahead.
This article was written by
Eric Basmajian is the Founder of EPB Macro Research, an economics-based research firm focusing on inflection points in economic growth and the impact on asset prices. He was previously an analyst at a quantitative hedge fund.
Eric leads the investing group EPB Macro Research where he applies investing strategies with the understanding that when there is an economic inflection point, company fundamentals don’t matter, technical trends break down and investors are blindsided. His analysis helps investors position their portfolios to avoid losses and maximize gains during changing economic conditions. Learn More.
Analyst’s Disclosure: I am/we are long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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