The global economy has weathered many storms, from financial crises to pandemics. However, one event looms ominously on the horizon: A potential recession triggered by a major credit event or a housing market crash, or possibly both. The warning signs are becoming increasingly apparent. The latest housing data suggest the market is not as robust as it might appear.
So, what’s going on?
Despite high mortgage rates, the housing market has remained buoyant, with home prices continuing to rise. The general perception is that the housing market is propping up the economy. However, recent data paints a different picture. David Rosenberg, who I’ve done several podcasts with, noted that “in October, median new home prices “sunk a record -18% YoY, taking out the worst point (-15%) we saw in the Great Recession.”
That’s a scary chart.
While the resilience of the housing market amidst 7%-8% mortgage rates has been a popular talking point, the reality is that this may be the lagged effect setting in. Given that most people’s wealth is tied up in their homes, this dip in home prices could become a significant issue in the coming months.
Long-duration Treasurys are starting to agree.
Until recently, long-term Treasury yield moved alongside changes in Federal Reserve monetary policy expectations. However, following October’s disappointing new home sales report, long-term bond prices rose by more than 1.5%, while stocks posted modest declines. This inverse correlation suggests a shift in market sentiment. Monday’s price action appears more like a flight to safety than a reaction to Fed policy changes. While it’s unwise to overreact to a single day’s market movements, the fact that Treasuries responded in this way indicates a readiness to shift to safer investments should conditions deteriorate.
As the housing data is likely to worsen, we should expect another significant rise in Treasurys. If the housing market continues to stagnate, and if new home construction – a crucial engine of the residential real estate boom – slows down, then a recession could be looming.
The Bottom Line
The lessons from the past, particularly the Great Recession, underline the importance of being prepared for such eventualities.
The year is not over. For all we know, the lagged effects of the fastest rate hike cycle in history could still hit just before 2024. I’ve noted continuously we are in a very short-term risk-on setup, but that the move won’t last. Gold agrees, lumber agrees, utility stocks agree, and small-cap stocks agree.
How do melt-ups end?
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
