Will The Housing Affordability Crisis Lead to Recession?

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Hannah Miao and Jesse Pound of CNBC report the S&P 500 rises Friday, posts second winning week in a row:

The S&P 500 rose Friday to close out a winning week even as investors weighed interest rate hikes and war in Ukraine.

The Dow Jones Industrial Average rose 153.3 points, or 0.4%, to 34,861.24. The S&P 500 added 0.5% to close at 4,543.06. The Nasdaq Composite dipped about 0.2% to 14,169.30.

All three major averages notched second consecutive winning weeks. The Dow ticked up 0.3%. The S&P 500 gained 1.8%, and the Nasdaq rallied nearly 2% week to date.

The S&P 500 is now up about 3.9% higher in March, more than erasing its losses since Russia invaded Ukraine late last month.

The rebound has come even as the war in Ukraine continues and interest rates shoot higher, with the Federal Reserve is set to hike rates several more times this year.

“Equities are rallying despite a hawkish Fed and stagflation concerns, as many believe there is no alternative to stocks,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.

 The benchmark 10-year rate on Friday touched a fresh multi-year high of 2.5% as investors priced in a more aggressive rate hike cycle.

Financial stocks rose Friday as the 10-year yield jumped. Bank of America and Wells Fargo rose 1.5% and 2.4%, respectively

On the downside, technology stocks eased, weighing on the Nasdaq. Zoom fell 3.2% and DocuSign lost 3.9%, among the Nasdaq’s worst decliners Friday.

Fed Chair Jerome Powell on Monday vowed to be tough on inflation. The remarks came after the Fed raised interest rates for the first time since 2018 last week, with hikes coming at each of the six remaining policy meetings this year.

Powell on Monday noted rate hikes could go from the traditional quarter-percentage-point moves to more aggressive half-point increases if necessary.

The central bank chief’s comments led Wall Street to raise rate hike expectations, with firms from Goldman Sachs to Bank of America penciling in half-point hikes in future Fed meetings this year.

Meanwhile, investors looked to promising signs the economy can run strong even as the interest rates have climbed amid expectations for a more aggressive Fed.

First-time jobless claims last week reached the lowest tally since 1969, the Labor Department reported Thursday — the latest sign of a resilient labor market. Economists expect the March jobs report next week to show similar strength.

“The 10-year yield is rising at the same time that the belief in growth is not collapsing. It’s permeating the market and lifting stocks a bit because that was the immediate concern of the impacts of the war in Ukraine,” Yung-Yu Ma, BMO Wealth Management’s chief investment strategist, said.

Traders kept an eye on Europe as the Ukraine-Russia war continues. The European Union on Friday struck a gas deal with the U.S. in an effort to reduce its dependency on Russian energy.

Diana Oleck of CNBC also reports mortgage rate soars closer to 5% in its second huge jump this week:

The rate for the most common kind of mortgage just surged again.

The average rate on the 30-year fixed mortgage shot significantly higher Friday, rising 24 basis points to 4.95%, according to Mortgage News Daily. It is now 164 basis points higher than it was one year ago.

“That’s the second time this week, and it puts this week on par with the worst week from the 2013 taper tantrum — a record we didn’t see being legitimately challenged a few days ago,” said Matthew Graham, COO of Mortgage News Daily.

On Tuesday, the rate had hit 4.72%, a 26-basis-point jump from March 18. The quicker-than-expected rise in rates has weighed on demand for mortgages and refinancing loans.

The rate surged as the yield on the U.S. 10-year Treasury also took off. Mortgage rates follow that yield loosely, but not entirely. Mortgage rates are also influenced by demand for mortgage-backed bonds. The Federal Reserve is scaling back its holdings of these assets and is also hiking interest rates.

It couldn’t come at a worse time, as the all-important spring housing market gets underway. Potential buyers are already facing extraordinarily tight supply and sky-high prices. With both rates and prices considerably higher, the median mortgage payment is now more than 20% higher than it was a year ago.

Buyers are also facing inflation on everything else in their budgets, which exacerbates the affordability issues. Rents are also surging higher at a record rate, causing more potential buyers to be unable to put aside money for a down payment. In addition, as rates rise, some buyers will no longer qualify for a mortgage. Lenders have been much more strict about how much debt a borrower may take on in relation to income.

Economists are already beginning to revise their sales figures lower for the year. Lawrence Yun, chief economist for the National Association of Realtors, said Tuesday that he expects the rate to hover around 4.5% this year, after previously predicting it would stay at 4%.

NAR’s latest official prediction is for sales to drop 3% in 2022, but Yun now says he expects they will fall 6% to 8%. NAR has not officially updated its forecast.

It's Friday and there is a lot to cover this week.

Let's start with stocks which delivered another positive week led by Energy, Materials and Utilities:

With the backup in bond yields this week, I can't say I'm surprised to see cyclicals (Energy, Financials, Industrials, Materials) are up. You can see the complete list of this week's large cap gainers here.

A little more surprising is the strong performance in Utilities as they typically don't perform well when bond yields are rising.

What this tells me is investors are hedging their bets here, worried that the US economy is slowing and tough times lie ahead. 

Yes, the S&P 500 ETF (SPY) has rallied back above its 20-week exponential moving average but it remains vulnerable to a pullback here:

And the vulnerability remains in tech shares which don't react well when bond yields rise, especially when they rise faster than normal. 

As shown below, the Nasdaq ETF (QQQ) was unable to cross above its 20-week exponential moving average and remains weak:

Can tech shares rise more? The good news is the Nasdaq closed at 14,169, well off its Feb 24 and March 14 lows (12,558 and 12,555 respectively).

But with the Fed in full HAWK mode and yields rising fast, I agree with those who think it's wise to be very wary of these countertrend rallies:

Moreover, market liquidity remains weak which can lead to violent moves:

We shall see what happens next. 

Historically April is one of the ‘best performing’ months for the stock market but this year may be different because of the violent backup in yields and the Fed's hawkish stance.

More worrisome, inflation pressures don't seem to be abating.

And some really top hedge fund managers are sounding the alarm that oil prices could hit $250 a barrel:

I'm not sure about that, if oil does top $200 a barrel, we are going to see a nasty global recession.

We are already headed for a recession as the US housing market is being impacted from a housing affordability crisis:

And a slowdown in housing virtually guarantees a recession.

In fact, this week, Francois Trahan of Trahan Macro Research, had a great research comment titled "Dr. Housing Warns Of Recession Risk Ahead."

He notes:

A mere three and a half months ago the Fed was still pushing the "inflation is transitory" story. Now, one rate hike is already in the rear view mirror and there are another ten in the pipeline, or the intention is anyway. Chairman Powell even talks about supporting a half-point rate hike in May if the data warrants it?!? I suppose this is what we were clamoring for, still, I can't help but question the competency of a group that missed the biggest move in inflation in 40 years. I suppose you go to war (on inflation) with the Fed you have, not the one you want.

Ironically, this is the easy part of the tightening cycle for the Fed. The public seems to hate inflation so pitching higher rates as an antidote is unlikely to be contested – initially at least. The first protests are probably going to come from rate-sensitive industries. The changes already seen in the outlook for housing are troubling. Indeed, mortgage rates are up a ton in a short amount of time and now stand higher than they were before going into the pandemic. In essence, all of the pandemic-induced stimulus from lower mortgage rates has officially been reversed and is now turning into tightening. Note that housing sentiment was already sitting at all-time lows BEFORE the latest surge in rates. This is NOT going to end well.

The Fed's resolve will eventually get tested when economic growth stalls while inflation is still uncomfortably high, likely late this year and into 2023. This is when we will truly know if the Fed Chairman hails from the Arthur Burns or Paul Volcker school of policy. What is clear is that housing is already flashing early signs of problems ahead. Historic lows in housing sentiment combined with a drastic change in the cost of buying a home (price and rates) add up to real problems ahead. Dr Housing is pretty clear on the economic risks we are facing in the coming years. We will discuss what all of this means for the stock market on a conference call next Wednesday, March 30th at 10:30am EST. We hope you can join us as we try to make sense of it all. Click below to register.

I highly recommend you listen in to that conference call this Wednesday, it will be a doozy!

How do I know? I read Francois's research religiously and really enjoyed reading his latest comment.

Let me give you a teaser, his first page:

 
Trust me, this is one research report you need to read and take the time to listen to his conference call where he will get into it.
 
Of course, housing markets all over the world are stretched, including here in Canada:

And the global credit impulse is telling you to adjust your expectations and prepare for a slowdown ahead:

So, in this environment, what can we expect?

Well, I'll leave the last word to Senator Clement Gignac, my former boss at the National Bank Financial eons ago who posted this on Linkedin earlier this week:

 

Got this part: "...as long as our policymakers are able to engineer a 'soft landing'."

Right now, I'm not betting on it and if corporate spreads widen significantly as rates back up, watch out below, it's going to get really ugly, real fast.

But relax, April is typically a good month for stocks, or so they say!

Below, CNBC's Diana Olick reports on recent trends in the housing space.

And Mohamed El-Erian, a Bloomberg Opinion contributor, says the Federal Reserve is being forced into a choice between risking recession or prolonging inflation. He speaks during an interview with Bloomberg's Jonathan Ferro on "Bloomberg The Open." 

Lastly, Federal Reserve Bank of St. Louis President James Bullard discusses the factors behind his dissenting vote in last week's Federal Open Market Committee rates decision, the path to rolling-off the central bank's balance sheet, and outlook for the US economy. He speaks with Bloomberg's Mike McKee on "Bloomberg Surveillance."

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