The GMI Top 5 – Housing

In this week’s newsletter, our focus is the Top 5 Global Macro Investor charts for Housing...

As ever, a much fuller and more in-depth analysis can be found in Global Macro Investor (www.globalmacroinvestor.com) and Real Vision Pro Macro https://www.realvision.com/pricing). Global Macro Investor is our full institutional research service and Real Vision Pro Macro is the sophisticated retail investor service, which is co-authored with leading research firm MI2 Partners.

Let’s dive right in...

This week saw the release of some key US housing market data. This provides a good read on the health of the overall housing market and also helps us gauge the strength of the broader economy.

GMI Chart 1 – NAHB Housing Index

Homebuilder sentiment in October totally collapsed down to 38 when consensus was looking for 43... it was a huge negative surprise!!!

GMI Chart 2 – NAHB Housing Index vs. US 30-Year Mortgage Rates

The driving force pushing homebuilder sentiment lower is the MASSIVE increase in 30-Year Mortgage Rates (here inverted), up a whopping 111% year-on-year. This is literally off the chart, historically unprecedented, and absolutely terrifying!!!

GMI Chart 3 – ISM vs. US 30-Year Mortgage Rates

But, out of all the charts we track at GMI, this still has to be the scariest chart in the world right now and continues to suggest ISM is about to fall off a cliff...

GMI Chart 4 – US Mortgage Applications

All of this has led to a complete collapse in mortgage applications for new homes, down 37% year-on-year, the lowest reading since September 2010...

GMI Chart 5 – US Monthly Supply of New Homes

... and, as a result, the Monthly Supply of New Homes on the market recently rose to 10.4 months, levels historically consistent with recession and the highest level since the GFC in 2008...

What this all means...

Homebuyer Sentiment is at a 40-year low; it’s really shocking stuff. There simply is no demand...

The real risk now is that house prices can fall around 10% into early 2023 as this toxic combination of sharply higher mortgage rates, too much supply, no demand and a slowing economy takes hold...

The GMI Big Picture

Edward Leamer presented a paper in 2007 at Jackson Hole entitled, “Housing IS the Business Cycle” ...

And indeed, housing is a long-duration asset financed by debt, which makes it the segment of the economy most susceptible to changes in interest rates.

For example, the sharp rise in mortgage rates has thankfully triggered a collapse in mortgage applications and should continue to drive housing starts and new home sales lower into year-end – less inflationary pressures...

On the other hand, because housing IS the business cycle, it also means we’re very likely to see a sharp rise in unemployment next year... it’s a really scary chart.

What’s the bottom line?

If unemployment starts to rise as projected here, it means that the Fed will need to rethink their stance on higher interest rates and reverse course to support the economy. Our base case is that we’re rapidly approaching peak hawkishness and that we should see a change in language from the Fed very soon.

For those interested we have attached below the article by Edward Leamer; it makes for a very interesting read: https://www.nber.org/system/files/working_papers/w13428/w13428.pdf

Take care. Next week we’re writing GMI so there will be no weekly chart update from us, but we will release a sample section from a previous monthly.

We hope you enjoy.

Raoul Pal – CEO, Founder – Global Macro Investor

Julien Bittel – Head of Macro Research – Global Macro Investor