Wentz Weekly Insights
What Is Going On In The Housing Market? The Sticker Shock From Higher Rates

Stocks saw near term pressure build last week that resulted in the first down week in six weeks for the S&P 500 and the first negative week for the NASDAQ in nine weeks. Several factors are contributing to the weakness, which may continue over the next several weeks, including overbought conditions, quarter-end rebalancing, a corporate buyback blackout period beginning before the start of earnings season, global central bank tightening, weak seasonality, political tension, and growth concerns/weak economic data. On the other hand, the factors that have driven stocks higher may be fading in the near term including FOMO, or the “fear of missing out” on a the tech/AI rally or even a broader rally, the growth and craze around AI, soft-landing optimism, and a potential rebound in corporate profits.
The more hawkish message from Jerome Powell and the Fed has resulted in a more inverted yield curve with shorter-term bond yields rising while yields on longer term bonds fell slightly. The yield on the Treasury 2-year note rose to 4.75% over expectations for higher rates, while the yield on the 10-year bond fell slightly to 3.73% on expectations for slower growth. This note from a previous newsletter explains why the yield curve is followed and the chart below shows the historical yield spread between the two bonds – notice how the economy enters a recession (grey highlights) shortly after every yield curve inversion.
One of the more immediate impacts of higher rates have been felt through the housing sector due to higher mortgage rates. Mortgage rates are a market rate that are tied to the 10-year treasury yield rather than the Federal Funds rate that the Federal Reserve controls. With the fed funds rate at 0% through much of the pandemic, many homebuyer were able to buy, and homeowners were able to refinance, with a lower interest rate. In fact, now over 60% of current homeowners have a mortgage rate of less than 4%, per CNBC.
However, over the past year consumers and prospective homebuyers are feeling the sticker shock of higher interest rates. This slowed the housing market tremendously through 2022 and much of the first half of 2023. For example, last week the National Association of Realtors reported the number of existing home sales was down 20% in May compared to a year ago with the annualized sales pace of existing homes at 4.300 million in the month, and much lower than the 2022 high of 6.340 million.
While the sales pace has declined since 2022 from the sticker shock of higher rates, the pace has picked up from the lows in January this year as more consumers are beginning to overcome the shock of higher rates. The issue now, and if you are in the market for a home we are sure you feel the pain, is the lack of homes on the market. The same existing home sales report shows there were just 1.080 million units on the market in May, a figure that has declined by 6% over the past year. At the current sales pace, this supply of homes would only last 3.0 months. This is extremely low as 6.0 months supply reflects a balanced market. Furthermore, there were twice as many homes for sale on the market right before the pandemic as there are now.
This data is seen in new home sales as well. Home builders have dealt with a surge in demand, at the same time are running into supply and labor issues which is keeping the sales pace of new homes lower. In the latest data by the Census Bureau, the sale of newly constructed homes was 683,000 (on an annualized pace) in April, above the year ago sales pace as supply issues have eased somewhat, but still below the recent high of 1.027 million new home sales in 2020 when we were not experiencing the supply issues yet.
The tighter supply of homes and strong demand has resulted in higher home prices. The median price of an existing home was $396,100 in May, while down 3% from a year ago, is up 47% from the median price of $270,000 from February 2020, immediately before the pandemic. One of the most followed home price indexes, the Case-Shiller home price index, shows home prices were up 45% from February 2020 to the highs on June 2022, have fallen 5.5% from June 2022 to January 2023, and are up slightly since then.
The strong housing market was a source of economic strength for much of the pandemic recovery from 2020-2022 but has slowed since as the consumer deals with higher mortgage rates. The issue we are seeing now is many do not want to put their home on the market to give up their sub-4% rate which is further driving the inventory issue. The month to month data going forward is expected to remain choppy and with housing making up a sizable portion of economic activity, we see it contracting from growth for several more quarters.
Week in Review:
Stocks opened the holiday shortened week on a quiet note once again, though down for the day but finishing off the lows of the day. Data included housing starts that were well above expectations as homebuilders pick up the pace of home builds. China cut its benchmark lending rate for the first time in about a year as it faces weaker economic activity, but that failed to rally markets. On the political front, there were positive headlines after US Secretary of State Blinken visited China, reviving talks after Nancy Pelosi’s visit to Taiwan last year, and possibly setting up a meeting between President Biden and President Xi. Yields moved slightly lower across the curve while the S&P 500 fell 0.47%.
Market participants were focused on Fed Chairman Powell on Wednesday as he began his two-day testimony to Congress. His prepared remarks reiterated what he said in the June 14 FOMC meeting as well as “nearly all” Fed members expect further rate increases. Aside from the testimony it was a quiet day with very little corporate news. Stocks traded lower for most of the day with tech trade appearing exhausted and underperforming. Treasuries were relatively unchanged, the NASDAQ fell 1.21%, S&P 500 fell 0.52% while the equal weight was relatively unchanged.
Thursday saw several other central banks around the world announce their respective policy decisions, several of which came as a surprise – the Bank of England (after seeing core inflation hit a record high last month) unexpectedly raised its policy rate 50 basis points, more than expected, while the Norges Bank (of Norway) and Swiss National Bank both raised rates another 25 basis points, with all three indicating further rate increases would be necessary. Meanwhile, Powell continued his two day testimony with no additional news to note. Existing home sales were relatively flat in May but data continues to show a supply issue with homes on the market as homeowners do not want to give up their sub-4% mortgage rate. Stocks traded mostly higher for the day, but this was again driven by some of the mega cap names, with the S&P 500 up 0.37% and Russell 2000 down 0.80%.
With no other data on the calendar Friday, markets focused on the deteriorating PMI flash reading for June that showed further contraction in manufacturing, with services in line with expectations, while input price pressures picked up. There were mixed comments from Fed officials – Bostic supporting no more rate hikes while Daly said two more hikes is reasonable. Not much else happening for the day with markets focused on the global central bank tightening. Stocks finished down again with the S&P 500 losing 0.77%.
Stocks were lower for the week with Treasury yields higher on the short end and slightly lower on the longer end resulting in a deeper inverted yield curve. The 2-year yield rose to 4.75% while the 10-year fell to 3.73%. Crude oil was down another 3.65% on additional weak data from China, while the dollar index increased 0.7% and gold fell 2.1%. The major US indexes snapped their weekly winning streak and finished as follows: S&P 500 -1.39%, NASDAQ -1.44%, Dow -1.67%, and Russell 2000 -2.87%.

Recent Economic Data

  • The housing market index, an indicator of homebuilder sentiment, was 55 for the June survey, an improvement of another 5 points from May, and now up from the low of 33 in November. This is the first time the index surpassed 50, a reading that indicates favorable conditions, since July 2022. Present sales, expectations on sales, and traffic of potential homebuyers all improved further in the month, in fact six consecutive months of improvements. The improvement was widespread with all regions seeing a higher index reading in June.
  • Furthermore, housing starts substantially beat expectations in May with a 21.7% monthly increase in housing starts to a seasonally adjusted annualized number of 1.631 million, the fastest monthly increase since 1990. This is now 5.7% above the year ago pace. The increase was driven by both single family and multi family homes, each up 18.5% and 28.1% respectively in the month, although single family home starts still down 6.6% from last May. The number of permits filed to build a new home was 1.491 million on a seasonally adjusted annualized pace, up 5.2% in the month but still 12.7% below a year ago. The number of homes authorized for build but not yet started remains near record highs at 286,600, up from the pre-pandemic trend of around 160,000. We think it will be interesting to see if housing starts/new home sales continue to outpace existing home sales because existing home owners may not want to give up their 3% mortgage rate they locked in from 2021 and prior, which is why we are seeing such a tight supply of existing homes on the market.
  • The pace of existing home sales was basically flat in May compared with April, rising 0.2% in the month to a seasonally adjusted annualized pace of 4.300 million which was slightly better than expected. However, the pace of sales is still down 20.4% from a year earlier. The South and West regions saw improvements in sales while the Northeast and Midwest saw a slight pullback. Inventory remains a major issue with current homeowners unwilling to move due to the sub 4% interest rate they have locked in, compared to current market rates of around 7%. Total inventory in May was 1.080 million units, up slightly in April and down 6% from a year ago, with the sales pace at 3.0 months supply (6 month supply reflects a balanced market). To get a better idea of the inventory issue, there were twice as many homes for sale pre-pandemic as there is now. Prices of existing homes were mixed across regions and fell slightly overall. Keep in mind existing home sales are based on closings, so these numbers reflect homes that went under contract in March/April.
  • The latest Freddie Mac mortgage survey shows the prime mortgage rate fell slightly last week to 6.67%, remaining at relatively the same level since the beginning of June but up from the lows of the year of 6.09% in February.
  • The number of unemployment claims for the week ended June 17 was unchanged from the prior week at 264,000, with the four-week average little changed at 255,750. The number of continuing claims was 1.759 million, a slight decline, with the four-week average at 1.770 million, also down slightly from the prior week.
  • Inflation in the UK made headlines after core inflation for May hit the highest annual pace of 7.1% in over 30 years and headline inflation stayed at 8.7% versus the expectations for it to come down to 8.3%.

Company News

  • Google is accusing Microsoft of engaging in anticompetitive practices in the domestic cloud computing market by using the licensing terms in its Office 365 to lock in customers to its Azure cloud computing business. It was only a month ago reports surfaced that European regulators were targeting Microsoft for its anticompetitive practices over Azure.
  • The Federal Trade Commission filed a lawsuit again Amazon for violating several laws protecting consumers. It claims Amazon intentionally used deceptive practices to steer users to a specific choice without their consent by getting customers to sign up for Prime as well as sabotaged customer attempts to cancel the service. Separately, it announced its annual Prime Day will occur July 11-12.
  • Overstock.com became the winning bidder and agreed to purchase the intellectual property and digital assets of now bankrupt Bed Bath & Beyond for $21.5 million. Bed Bath & Beyond will still plan to hold an auction for its Buy Buy Baby assets at the end of June.
  • IBM said it has agreed to purchase the tech business management company Apptio in a move to strengthen its push into hybrid cloud and AI. IBM will purchase the company for $4.6 billion with cash on hand.

Other News

  • Russia was back in the headlines over the weekend with heightened questions on the trajectory of the war in Ukraine and the power of Putin. The private military group, the Wagner Group, leader Yevgeny Prigozhin started a rebellion and sent a convoy of mercenary fighters toward Moscow. Prigozhin and the Wagner Group have been a close ally to Putin and has been key in Putin’s efforts in Ukraine, but recent issues arose over Prigozhin’s discontent around Putin’s management of the war in Ukraine, the number of losses it has occurred since the invasion, and Russia’s intention to absorb the military group into its own. Shortly after the rebellion and after allegations of mutiny, Putin and the group came to an agreement where Prigozhin would avoid criminal charges and in turn pull back from their march toward Moscow in a de-escalation of events. Pressure is increasing on Putin after this conflict along with the amount of positive reaction from Russians.
  • The past two weeks have been full of global central bank policy announcements and headlines, some highlighted below:
  • Last week the Bank of England concluded its policy meeting with a 50 basis point increase in its policy rate which was more than the 25 basis point increase that was expected. The decision came a day after the UK reported a record high reading on core inflation, news that central bank officials said suggested persistently higher inflation in the region would take longer to decline. Policymakers indicated further rate increases would be necessary still.
  • Other global central bank policy decisions included the Norges Bank (of Norway) raising rates 50 basis points and Swiss National Bank raising 25 basis points, both indicating more rate hikes would be necessary. The Turkish central bank reversed policy course with a 8.5% increase in rates to 15% as it is dealing with one of the highest inflation rates in the world at 40%+. This comes immediately after electing a new Finance Minister and after cutting rates since 2021.
  • Powell testimony – In his prepared remarks Powell reiterated it was prudent for the Committee to not raise rates considering how far and fast it moved over the past year to allow them time to assess additional data/information, it will base future decisions on the totality of incoming data and the balance of risks, and “nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year.” The testimony did not produce as many headlines as the FOMC meeting was just the week prior and much of what he said we already knew. But there were a lot of questions on banks, in which his response was they are “very strongly capitalized” and there should be stronger supervision of banks and an update to the Fed’s approach on liquidity issues as regulations may not be strong enough. There was not as many comments on monetary policy, but he did mention it will take “some softening” in the labor market for inflation to come down and generally businesses are saying they are better able to find workers but it is still unbalanced.
  • Chicago Fed president Goolsbee said the decision to hold rates steady was a “close call” and compared the decision to a “reconnaissance mission” in that it will give the Fed more time to see how higher rates affects the economy.
  • Boston Fed president Bostic said his baseline is “we should stay at this level for the rest of the year” which will allow it to assess the impacts of ten consecutive rate hikes. Bostic believes we are at the beginning stages of seeing how tighter policy will influence the economy and would rather see how it plays out to see how the economy is reacting to the tighter policy, saying it takes 6-24 months to feel the affects.
  • Fed Governor Bowman said she also believes additional rate increases will be necessary, adding that while tighter policy has had some effects on the economy and inflation, core inflation has plateaued since the fall of 2022 and additional rate increases will be needed to get to a sufficiently restrictive level in order to bring inflation down.

Did You Know…?

Betting Against Stocks

Total short interest on U.S. stocks, meaning the amount traders have put betting stocks will go down, has exceeded $1 trillion in June, according to data from S3 Partners LLC and reported by Bloomberg. This is the highest level of short bets since April 2022, when stocks were about the same levels as they are today and prior to the roughly 22% drop they saw until the bottom in October. Stocks that have seen the highest increase in short positions are some of the tech names driven by the AI hype that have seen the largest gains so far this year including Apple, Tesla, Microsoft, and Nvidia. For example, according to S3, Tesla short traders have bet $26 billion against the stock, however are now carrying a loss of $14 billion as the stock has continued to rise.

WFG News

Early Close – July 3

Please note that with the stock and bond markets closing early on July 3rd, Wentz Financial Group will close at 1:00pm, and will be closed on July 4 for the holiday.

The Week Ahead

It will be the last week of the second quarter with stocks looking to continue their winning streak for a third consecutive quarter of gains. It should be another quiet week but volume may be higher with quarter-end rebalancing taking place. There are several notable quarterly reports this week on the earnings calendar including Carnival Cruise lines on Monday; Walgreens on Tuesday; Micron and General Mills on Wednesday; Nike, McCormick, and Paychex on Thursday; and Constellation Brands on Friday. Also on the corporate side, the Federal Reserve will release the results of its annual stress test on Wednesday for some of the largest U.S. banks. The results will determine how much banks can distribute in dividends or use for share buybacks. The economic calendar has many notable reports with the highlight for the week being the personal income and outlays report on Friday that includes data on consumer spending, incomes, and most importantly inflation with the Fed’s preferred inflation reading (PCE price index). Current consensus expectations see another strong 0.4% monthly increase in the core index, keeping the annual rate at 4.7%. Outside of that, Tuesday will see durable goods orders, the consumer confidence survey, new home sales for May and the Case-Shiller home price index. Thursday will see the final revision on first quarter GDP, weekly jobless claims, the pending home sales index, and finally on Friday we will receive the consumer sentiment reading where focus will remain on inflation expectations. On the political side, there will be less political activity with Congress out on recess through July 4.