When cracks appear in the rendering, the house doesn’t always win
Matt Simpson May 24, 2022 11:51 PM
The housing market has been a bedrock of the US economy during a period of historically low rates. Now those days are over, large cracks are appearing in the rendering.
- Home sales are falling faster than an auctioneer’s hammer whilst builder’s confidence plummets.
- With cracks appearing in the housing sector and consumer confidence on the ropes, the risk of a recession is rising.
- The Fed are treading on egg shells as they hike rates, as they’re aiming to tame hot inflation whilst targeting a soft landing in a low-growth environment.
- The Fed don’t announce policy U-turns, but we’ve already heard one member speak about a ‘pause’ in rate hikes this week.
- Cracks in the US economy are apparent and it might make the Fed reconsider their current hike trajectory.
Home sales are falling faster than an auctioneer’s hammer
Rising interests take have taken a chunk out of demand. And that’s no surprise with the average 30-year mortgage rate in the US quickly rising to 5.51% - its highest level of compounded debt since 2008. Whilst these rates are not high by historical standards, house prices are. Therefore, anyone who bought at the top may be forced to realise a capital loss if they have sell in a falling market. And, as is always the case, first time buyers are an easy take down with little to no equity in their new, overpriced homes.
Builder’s confidence is getting hammered
The NAHB housing index has plunged to a 23-month low, fallen for five consecutive months – and the -8 point drop in April was its worst since the pandemic. But, perhaps more worryingly, the ‘Traffic of prospective buyers’ has fallen to its lowest level since July 2019. And this is being reflected in building permits data.
New builds may have peaked
Building permits are seen as a leading economic indicator for the US. And there are now concerns that it topped in January, having declined steadily since and falling -3% in April. If builders aren’t building, it means lower demand for raw materials, construction workers, and home related retail sales. The silver lining is that its deflationary - but it won’t fix supply chain bottlenecks and remains a drag on growth.
Home construction stocks look set for another dip lower, given the backdrop of economic data - specifically in the housing sector - this past couple of weeks. The chart above shows the iShares Home Construction ETF relative to the S&P 500. And when you consider the S&P is close to a technical bear, and this sector looks like it may underperform, it underscores how badly investors are currently viewing this sector.
The risks of a recession are rising
In a nutshell, demand for new homes, confidence in the building sector, and plans for new builds are all pointing lower in the US. And to add insult to injury, consumer confidence hit new lows and the Fed are being forced to rise to fight inflation, against a backdrop of weak growth – a scenario we warned about in November. And the Fed haven’t even began the serious phase of their supposed hikes just yet.
The case could be building for the Fed to backtrack
The Fed have to tame inflation, and they have said as much themselves. But to do so whilst leading indicators point lower, consumers are anything but confident and concerned over their finances, a storm could be brewing in the economy. The Fed are treading on egg shells as they hike rates, as they’re aiming to tame hot inflation whilst targeting a soft landing in a low-growth environment. We may get some indication of any such concerns when the Fed release their FOMC minutes later today.
But sometimes the better clues are found in public comments from Fed members, such as Bostic saying this week that they may need to take a pause [from hiking rates] in September. As a reminder, the Fed don’t announce policy U-turns, but will slowly drip feed a change in sentiment through such comments. So, if we see a growing chorus around a ‘pause’, we know the Fed are getting cold feet.
The US dollar continues to correct
Given the magnificent run on the dollar on expectations of several 50-bps hikes, it had already come into question as to whether they were fully priced in. Yet with other central banks turning increasingly hawkish and a slew of weak data form the US has weighed on the dollar as it has embarked upon a much-needed correction.
The US dollar index is currently lower for a second consecutive week, and the daily chart closed well beneath the 102.35 low. Should that level hold as resistance, we think a move down to 101 is on the cards, near the 50-day average. Even if we see an initial break above 102.35, we suspect a lower high can form below 103 before its next leg down to 101.
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