US Housing Market Is Extremely Tight

They think that intelligence is about noticing things that are relevant (detecting patterns); in a complex world, intelligence consists in ignoring things that are irrelevant (avoiding false patterns).~ Nassim Taleb via The Bed of Procrustes

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at the incredible strength of the US housing market and explore some reasons why we should expect this strength to persist… We then dive into the short-term outlook for the SPX, add some data to our longer-term bull thesis for risk-assets, including a record level of people expecting a crash + very positive late election year stimulus seasonality. And finally, we end with a look at one of the worst-performing markets year-to-date, energy assets, plus more…

Let’s dive in.

***click charts to enlarge***

  1. Back in July, we put out a report laying out the long-term bull case for US housing. Well, the latest prints are definitely supportive of this take. Home sales saw a record jump last month to new 14-year highs.

  1. This incredibly strong backdrop of demand is mirrored by record low in relative new home inventories…

  1. Interest rates are the fulcrum of the global economy. They underpin the valuation of all global assets. The housing market being no different. Falling interest rates lead to falling mortgage rates which bring down the monthly payments on mortgages, thus making housing more affordable.

The chart below tracks the 30-year fixed mortgage rate (blue line) and the 30-year Treasury Bond (orange line). The red line tracks the spread between the two.

When we see the spread elevated, like it is now, it typically precedes a large move lower in mortgage rates as they tend to follow treasury yields with a lag. So not only are mortgage rates at all-time record lows. If history is any guide, they’re about to move even lower.

  1. The US demographic trends are incredibly favorable to the housing market over the coming decade. BofA notes that the “population of 35-44 year-olds is expected to grow 14% over the next ten years.”
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Disclaimer: All statements are solely opinions and are for educational purposes only.

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