Nobody’s saying it, but it feels as with the housing shortage, inflation is becoming structural.
This morning’s CPI came in hotter than expected. Two major hurricanes have devastated the Southeast U.S. where population growth had been increasing. And mortgage rates may have hit the bottom for the foreseeable future.
Homebuilder stocks and REITs seem to be setting up for a big move.
Something’s got to give.
The mainstream perception was that the Fed’s lowering of interest rates would juice the mortgage market. Regular readers know that it just ain’t so as the bond market sets mortgage rates, not the Fed.
Last week, I wrote “Investors should prepare for a bond market shock and some repercussions. That’s because the housing market may be vulnerable to an unpleasant surprise if the NFP number comes in above expectations. “
Sho’ nuff! That’s exactly what happened as the stronger than expected new jobs number (254,000 vs. 140,000 expected) caused bond traders to panic, pushing the yield on the U.S. Ten Year Note (TNX), the actual benchmark for the average 30-year mortgage, above 4% (see below for full details). Moreover, the response to the latest, and hotter than expected CPI, is keeping bond yields near recent highs.
What Spooked the Bond Market?
The answer is simple. As I noted recently, the bond market is afraid of a resurgence in inflation caused by the Fed’s return to easy money policies in a system that is still amply supplied with liquidity thanks to the bull market in stocks and the incomplete draining of the massive amounts of QE which the Fed and other central banks unleashed in response to the pandemic.
As a result of this unprecedented amount of liquidity, by raising rates since 2022, the Fed was only able to reduce the rate of rise in inflation. Yet, the inflation in the system – higher prices that are only flattening out, but not falling – persists. Thus, the fear in bond land is that when the Fed increases liquidity it will just fire up an already warm and at worst half full liquidity bucket.
The bottom line is that if the bond market is right, we will likely see a resumption of inflation as we saw in the 70’s when Paul Volcker started easing too soon in the cycle.
Still don’t be surprised if the bond market’s recent rise is just about over as the potential for hurricane related job losses and other economic disruptions could bring bond yields down in the short term. Jobless claims shot up this morning, with much of the climb likely related to the effects of hurricane Helene in the Carolinas. It’s not unreasonable to expect a further climb in this series over the next couple of weeks as a result of hurricane Milton hitting Florida.
Is the Door Shutting on Potential Homebuyers?
As a result of the action in the bond market, total mortgage applications fell 5.16% year over week for the most recent reporting period. Mortgage applications for home purchases were flat while applications for refinancing existing mortgages dropped 9%, compared to the prior week’s data. Meanwhile purchase demand for homes rose 8% year over year.
This should not be a surprise. Last week, I suggested that many potential buyers weren’t waiting any longer and locked in a mortgage rate. This was illustrated by a 68% increase in the number of rates locked in since the Fed’s rate cut. This week’s data suggests that a few laggards remain. Next week’s numbers for home purchases, barring a reversal in rates will likely show a further decrease.
Thus, until proven otherwise those who locked in rates early are looking like the smart money.
Of course, much could change in the bond and mortgage markets as the effects of the latest CPI and the effects of the hurricanes work their way through bond land.
CPI Adds Fuel to the Inflation Fires – Mortgage Rates Have Likely Bottomed.
This morning’s CPI coming in above expectations is adding fuel to the flames ignited by the stronger than expected NFP payroll number.
The U.S. Ten Year Note yield (TNX) may be topping out in the short term, but is likely to remain above 4% in response to the September payrolls data, the steady and structural feel of CPI, and the uncertainty of whether the hurricanes will lead to a slowing of the regional economy in the Southeast U.S. or a supply chain related boost in inflation.
TNX has been treading near its upper Bollinger Band, which means that a move back toward the 20-day moving average may develop. On the other hand, a sideways consolidation pattern straddling 4% is also possible.
Until proven otherwise, that means that mortgage rates have hit at least an intermediate term bottom. So, if the most recent mortgage data is any clue, those who wish to refinance may have already done so. On the other hand, the effects of two major hurricanes are likely to have an effect on the already tight housing supply picture.
The Big Picture for the Housing Market. Hurricanes Raise Uncertainty
Last week, I offered details on the current situation in housing. You can find them here. If you’ve missed these posts, I recommend reviewing the last six, prior to this one, which began on August 29, 2024.
Here are the salient points:
· The current housing shortage is structural. It is likely to remain in place for years;
· Supply and demand remain in favor of homebuilders and attractively located rental properties with lots of perks;
· Mortgage rates may be near the lows for the cycle;
· Consumers trying to decide whether to buy or rent are mostly influenced by the monthly payment they will have to deliver either as a mortgage or rental payment;
· New homes seem to be more attractive for buyers than existing homes; and
· Homebuilders should remain profitable but their margins are starting to shrink.
The big question is what will the effects of two major hurricanes in the Southeast U.S. where populations had been growing be on the housing market over the next few months and perhaps longer.
On the Ground
Recently I wrote that the lack of activity in the housing market was of concern and that home sellers were starting to panic. Here’s a follow up.
I’m seeing a bit more action in the undeveloped subdivision owned by a small builder I’ve been keeping an eye on is now sporting a “new construction” sign from a realtor, which means that they are starting to take new orders. I saw a surveyor truck there on a recent drive-by. Let’s see how quickly the place fills up – or not.
Renters seem to be moving into single family homes more actively. Lots of U-Haul trucks are driving around these days. Unmarked and marked moving company trucks as well.
In addition, there are lots of apartment complexes which are on the verge of completion in my area. Some just hung up “Now Leasing” signs. There may be some action there soon.
Homebuilders and REITs – Big Moves are Setting Up.
The iShares U.S. Home Construction ETF (ITB) is setting up for a big move as the Bollinger Bands are tightening around prices and the test of the 20-day moving average becomes more urgent.
The iShares U.S. Real Estate ETF (IYR) is fighting for support at its 50-day moving average.
Bottom Line
Structural inflation and the unknown effects of two major hurricanes are about to influence what happens next in the housing market. Homebuilders remain in the supply/demand sweet spot, but mortgage rates seem to have bottomed, adding a new layer of complexity to the situation.
Homebuilder stocks and residential REITs seem to be setting up for a big move.
Thanks to everyone for your ongoing support. I really appreciate it.
Thanks also to all the current Buy Me a Coffee members and supporters. Special shout out to new members who now have access to the Sector Selector ETF Service, which is included, at no extra charge with your Buy Me a Coffee membership.
For active trading, short term trading strategies, check out the Smart Money Passport.
For long term trades featuring homebuilders and REITs go to Joe Duarte in the Money Options.com.
I also appreciate single coffees, which you can buy me here.
If you’re thinking about day trading, my new book – Day Trading 101 – will get you started along the right path. It’s only $0.99 with your Audible membership.
And if you like this post, hit the Like Button and Share/Restack it. It helps to spread the word.
You’re the music. I’m just the band.