Let’s Take A Short Look Into The Future

Doom and gloom sells.  Just check out some of the posts over the past week regarding the state of the housing market.  This time, it is hard not to put a negative spin on what is happening.  Existing home sales data was weaker this morning down 0.6% for June and down 2.2% for the year.  Impressive still despite lower inventory and higher rates.  Good news, inventory is up 0.5% year over year.  Let’s hope that translates into more sales to meet demand.

Housing starts and housing permits also declined last week.  Fewer starts, fewer houses on the market.  Permits for single family homes did increase 0.8% so there was so a silver lining to this release.

A stronger dollar also equates to less demand from foreign investors.  This is an incredibly important component to the health of the housing market.  Home price appreciation combined with the stronger dollar makes US housing very pricy.

HERE ARE MY GREATEST CONCERNS.

There is no doubt that the outlook for housing is slowly turning bearish.  The economy, overall, has performed at peak performance through the second quarter of 2018.  The question remains, can the expansion that we have experienced for the past 3-4 years continue.

Builder activity has also not kept up with demand.  This is a statement in regards to the building community nationally.  Construction costs (remember those tariffs) and labor shortages are also weighing down on builders.  Locally, the first time home buyer is out of luck unless they are looking in a much higher price range or want to move further away from the county as prices have increased here too.

We all have enjoyed an interest rate market for years now that will be virtually impossible to duplicate.  30yr rates still remain below the 5% threshold but are slowly inching their way higher as the Fed has started unloading balance sheet pushing yields for the most part higher.  Shangri-la.

The tariffs that everyone has been reading about will not doubt have a significant impact on growth domestically. Canada is now hitting us back and there are still the implications to deal once China lowers the boom on our $200bb hit to them.

Finally, the 2-10’s spread.  The spread between the 2yr note and the 10yr note.  This is the all important indicator as to the state of the economy.  Normally that spread is significant with yields on the 10yr note significantly higher.  Investors are willing to take on the longer risk knowing growth is sustainable long term.  Signs of a slowing economy will make investors sell shorter term securities first i.e. 2yr.  That spread currently sits at 30bps.  Once we get to zero and invert….

I believe we will see a strong finish for 2018.  However, I am also looking at 2019 as a year where we can see a major correction coming and the days of sold in 24 hours coming to stop.

 

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