Lots at Stake For Rates Next Week; Which Housing Report is Telling You The Truth?

This past week brought the release of two housing reports that track the pace of home sales each month and they told distinctly different stories. Which one is telling the truth?

The reports in question are New Residential Sales from the Census Bureau and Pending Home Sales from the National Association of Realtors.  The former focuses on new construction while the pending sales data provides an early look at potential existing home sales based on contract activity.

We'll let the charts do the talking.  Here's New Home Sales:

20231027 nl8'.png

And here's the Pending Home Sales chart:

20231026 [js.png

Both charts convey post-covid volatility, but one says the housing market is stable and improving while the other says it's as bad as it's been in decades.  How can two reports on home sales tell such different stories? 

The answer is fairly simple: builders are actually building homes so there are actually new homes available to be sold.  Moreover, builders are aggressively offering rate buydown incentives to ease the monthly payment sticker shock.

It's a different world for existing homes.  Inventory is effectively non-existent.  People are reluctant to sell as it often means giving up a very low rate and facing the prospect of buying a new home at drastically higher rates.  

202310274 nl02.png

Here's New Home Inventory over the same time frame:

20231027 oijds.png

While it's clear that neither report is technically lying, we know you're thirsty for a verdict.  We can at least conclude that gloomier message from the Pending/Existing Sales data is more on-message for the housing market due to the sheer size of that segment compared to New Homes.

20231027 nls.png

The good news is that there will likely be a good measure of pent-up demand bubbling to the surface in waves whenever we finally see the interest rate environment improve.

So how about those rates?!

20231027 nl4.png

Ok, maybe that chart isn't so great, but look at it this way: the higher we go, the closer we are to the top.  That may sound like a meaningless platitude, but there's a real kernel of logic behind it.  

We know that the Fed hikes short term rates (which filter through to longer-term rates like mortgages) in order to crimp economic demand and bring prices lower.  In that sense, higher rates do indeed bring about lower rates.

This is an interesting and important time for that thesis, as a matter of fact.  In the past few weeks, the Fed has increasingly flagged the sharper rise in longer term rates as evidence that it doesn't need to hike short term rates anymore.  The Fed has also said it is hearing talk of economic softening that's not yet showing up in the data.  

This comes at a critical moment for a few reasons.  First off, longer term rates actively bounced against an important ceiling over the past two weeks.  The following chart shows it in terms of 10yr Treasury yields, the most commonly used benchmark for longer-term rates.

20231027 nl1.png

While the chart is labeled with 4.99, this is really about the big psychological impact of "5% Treasury Yields!"  Some investors think that's an attractive entry point to buy bonds.  Others simply think it's a big psychological level and thus time to get sideways before the next big dose of motivation arrives.

That brings us to the next few reasons for the critical timing.  The next big dose of motivation stands a very good chance to be arriving in the coming week.  Here's why:

  • We'll get all of top tier economic data typically seen on the first week of any given month, including the exceptionally important jobs report on Friday.
  • We'll hear from the Fed itself on Wednesday when the latest rate announcement comes out
  • We'll see updated borrowing amounts from the U.S. Treasury for upcoming Treasury auctions (this informs rate momentum by changing the supply/demand equation).

The Fed is all but certain to leave rates unchanged on Wednesday.  Moreover, given the abundance comments over the past two weeks, it might be hard for the statement or Powell's press conference to offer much by way of new ideas.  Nonetheless, markets will be listening closely for more clues or confirmation about last week's ideas.

The data is of the utmost importance.  If it does anything to confirm the anecdotal signs of economic softening mentioned last week, it could strongly reinforce recent rate ceilings.  It's a double-edged sword, however, because if the data is strong enough, it could easily lead investors to explore 10yr yields in the 5% range.  In that scenario, the average top tier mortgage rate would have a hard time staying out of the 8%+ range.

Recently Released Economic Data

Time Event Actual Forecast Prior
Tuesday, Oct 24
9:45 Oct S&P Global Services PMI 50.9 49.8 50.1
9:45 Oct S&P Global Manuf. PMI 50 49.5 49.8
Wednesday, Oct 25
7:00 Oct/20 MBA Refi Index 354 347.6
7:00 Oct/20 MBA Purchase Index 127 129.8
10:00 Sep New Home Sales (%) (%) 12.3% -8.7%
10:00 Sep New Home Sales (ml) 0.759M 0.68M 0.675M
Thursday, Oct 26
8:30 Sep Wholesale inventories mm (%) 0% -0.1%
8:30 Sep Durable goods (%) 4.7% 1.7% 0.2%
8:30 Q3 GDP sales Final (%) 3.5% 4.5% 2.1%
8:30 Q3 GDP (%) 4.9% 4.3% 2.1%
8:30 Oct/21 Jobless Claims (k) 210K 208K 198K
10:00 Sep Pending Home Sales (%) 1.1% -1.8% -7.1%
Friday, Oct 27
8:30 Sep Core PCE (m/m) (%) 0.3% 0.3% 0.1%
8:30 Sep Core PCE Inflation (y/y) (%) 3.7% 3.7% 3.9%
10:00 Oct Consumer Sentiment (ip) 63.8 63 68.1
10:00 Oct Sentiment: 1y Inflation (%) 4.2% 3.8% 3.2%
Tuesday, Oct 31
8:30 Q3 Employment costs (%) 1.1% 1% 1%
9:00 Aug Case Shiller Home Prices-20 y/y (% ) 2.2% 1.6% 0.1%
9:00 Aug FHFA Home Prices y/y (%) 5.6% 4.6%
9:45 Oct Chicago PMI 44 45 44.1
Wednesday, Nov 01
8:15 Oct ADP jobs (k) 113K 150K 89K
9:45 Oct S&P Global Manuf. PMI 50 50 49.8
10:00 Oct ISM Manufacturing PMI 46.7 49 49
10:00 Sep USA JOLTS Job Openings 9.553M 9.25M 9.61M
10:00 Sep Construction spending (%) 0.4% 0.4% 0.5%
14:00 Fed Interest Rate Decision 5.5% 5.5% 5.5%
14:30 Fed Press Conference
Thursday, Nov 02
7:30 Oct Challenger layoffs (k) 36.836K 47.457K
8:30 Oct/28 Jobless Claims (k) 217K 210K 210K
8:30 Q3 Labor Costs Revised (%) -0.8% 0.7% 2.2%
10:00 Sep Factory orders mm (%) 2.8% 2.4% 1.2%
Friday, Nov 03
8:30 Oct Average earnings mm (%) 0.2% 0.3% 0.2%
8:30 Oct Non Farm Payrolls 150K 180K 336K
8:30 Oct Unemployment rate mm (%) 3.9% 3.8% 3.8%
9:45 Oct S&P Global Services PMI 50.6 50.9 50.1
10:00 Oct ISM N-Mfg PMI 51.8 53 53.6

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