One of the important reasons why I’ve taken the position that, left to its own devices (i.e., without the effects of reckless or pernicious government policies), the economy is headed towards a slowdown rather than a recession is that interest rates didn’t go high enough long enough to cause the housing market to turn down sufficiently to cause the economy as a whole to roll over.
Effects of the government shutdown on data
Before I proceed further, let me note that the partial government shutdown means that most of the important housing data is not going to get published, including new home sales, housing permits and starts, and real residential investment as a share of GDP. We will have to make do with existing home sales from the NAR, purchase mortgage applications from the Mortgage Bankers Association, and inferences from mortgage rates and the Case-Shiller house price indexes. This is far from ideal, and means that this very important leading sector of the economy will be significantly less reliably measured.
The recent decline in long-term bond rates is helping the housing market
Now to my main point: in all of the recent storm and stress about the partial inversion of the yield curve (Side note: If the yield curve is treated as infallible, then what are we to make of the fact that neither the 2-year to 10-year nor the 3-month to 10-year segments of the curve have inverted?), something that has not gotten enough attention is its effect on housing.
Let me show you two graphs that ought to get your full attention. First, 10-year treasury rates (Blue) and mortgage rates (green) vs. housing permits (red) for the past year:
Second, purchase mortgage applications for the last 10 years, through last week (h/t Yardeni.com):
The message of these two graphs is obvious. Long-term Treasury rates are now as low as they were a year ago, when housing peaked. Mortgage rates aren’t quite there yet, but they aren’t far off. And potential home buyers have responded by applying for mortgages at the highest rate in nearly 9 years.
To see this in a little more detail, let’s continue with my usual housing mantra:
Interest rates lead sales.
Sales lead prices.
Prices lead inventory.
Here’s what YoY Treasury rates (blue) look like compared with YoY permits:
Next, here are permits compared with prices:
Because there is a delay that usually runs around 6 months between when mortgage rates decline and when housing permits, starts, and sales bottom, the housing market may continue a bottoming process for several more months. But if mortgage rates continue to stay low for much longer, by the second half of this year there should be a renewed increase in the new home market, possibly to new highs. Meanwhile, house prices have continued to rise. They may pause, which will help purchasers, but because they are unlikely to decline appreciably, this will still put pressure on the markets.
Further, here is a long-term look at single-family and total housing permits:
Note that, with the sole exception of the very shallow and short 2001 recession, permits always made a bottom during and not before a recession. In other words, if we’re not in a recession if permits bottom in a few months, it is unlikely we’ll be in one later this year. And if we are in a recession then, it probably won’t last that much longer.
In summary, depending on whether mortgage rates remain at this level or not, this is strong evidence that a downturn or even a recession that is likely to occur by about the middle of this year may be brief, ending by about year’s end as well.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.