Housing Makes My 'Avoid' List

Summary

• 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:

Source: National Association of Realtors

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:

Source: FRED, EPB Macro Research

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).

Housing Underperforming:

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:

Source: EPB Macro Research

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.

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.

Comments

[make it stop]

Housing affordable for the masses, whether single family or apartments, will hold its value just fine. Middle and luxury prices homes for the top 20% will suffer as borrowing goes out of style.

[Macrobarsbetacai]

Where is there affordable housing? Detroit? Institutional and foreign money propping up real estate in most major cities. Only a slice of the picture but people are cutting out other expenses to pay increasing medical costs and housing costs. Hard to see where this housing market dips if big money can continue to buy more and more.

[kevinconway]

Eric. to restate what I posted before. In Aug 2006 my advisors sent me a chart that demonstrated that when housing slips the market follows about 12 monthsl later, with a 78% confidence level. In Sept 2006 I went 100% cash.....the fall took longer than expected because of the financial shell game being played.

It does not seem to matter what the causes are, just that when there are housing issues bad things tend to happen later. This from Feb 2008 ://money.usnews.com/mo...

Debt across all levels of government and consumer debt are critical components of what is unfolding.

I personally think that current government policies, including the Tax Reform, are insane...driven by very short term thinking...the desire to WIN at any cost. WB picked up an extra $26 Billion...Trump millions with the break for real estate developers...the average American not so much. Once the dominoes start to fall.....

[markelev]

Kevin, Alan Greenspan echoed a similar sentiment today. To summarize what he said, the immediate short term looks good but the long term is "dismal". So I think you're spot on.

[Jacob Rothman, CFA]

Perhaps hyperbole gets clicks. Good to see you move it out of the headline. I guess since I'm old enough to remember the last two equity bubbles popping, a 4% drop off of a strong level doesn't elicit words like "crush" or "plunge" in my usage. Maybe this is why I'm not a good saleman.

Your point about mortgage rates influencing housing sales is well-taken. You might also consider the changes to the tax code that will reduce the tax benefits of home ownership, particularly in high cost/high income states like California, where 1 out of 9 Americans live.

If indeed rates are expected to go higher, I would expect people considering a home purchase to hurry up and buy while they can lock in an affordable mortgage. This would offset the dip (or plunge, depending on adjectival inflation) somewhat, presaging an even greater drop ahead. If this is the case, your warning is very timely indeed. I look forward to seing what words you come up with to describe a much deeper cut in home sales.

[markelev]

Jacob, I think most home buyers/investors have been expecting rate increases for several weeks. So I think the data we are seeing already captures the race to lock in rates (or lack of). Which is why the data is so surprising. Remember this data is pending home sales and thus forward looking.

[wrdemott1]

I have puts on XHB that are making money. XHB and individual builders are going into the highly oversold zone. I will sell my puts if they move up but will be ready to buy some more, especially if mortgage rates continue to rise. Thanks for the analysis.

[Eric Basmajian]

Anytime. Cheers!