Over the past 8 months, financial conditions have tightened a lot. Interest rates higher, mortgage rates higher, and a stronger USD are all symptomatic of tighter financial conditions. The Fed sees this and wants this to happen. In their minds, the central banker playbook calls for tighter financial conditions in order to fight current inflationary pressures. Tighter financial conditions destroy economic demand at the margin, thus relieving inflationary pressures. That process is well underway. Initial jobless claims on the rise, layoff announcements on the rise, commodity prices lower, gasoline at the pump lower.
Residential housing is an important part of this process too and demand for US housing is down and down a lot. The top chart looks at the percentage change in new home sales. A -30% drop over the last 12 months – not as bad as 2009/2010 but close. The second chart looks at actual units of new homes sold. Between 2020 and 2021, there were about 825k new home sold annually. That number has fallen to just 500k annually now – roughly down about -35% from the 2020/2021 period. You must go back to 1980 to see a weakening trend as bad as the past six months for housing and new home sales.
Lumber prices are down -60%, gas at the pump is down -22%, and now the housing market is softening. I think the Fed raise another +100bps between Sept/Oct and by that point both the market and the Fed will be at roughly the same level for short terms rates. All it will take is one weak employment number this fall to send the Fed into “pause” mode with regards to additional rate hikes. Markets don’t like the word “pause” – they LOVE it. When the Fed says “pause”, the market will hear “go”. I think the next thing to weaken is the labor market and that might happen right about the time the New England Patriots are limping into their early November bye week (probably with a 3-7 record, but I digress).
US New One Family Houses Sold Annual Total YoY (%)
US New One Family Houses Sold Annual Total (Thousand Units)
Richard Barrett
Chief Investment Officer
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