US Asset Markets – Housing breakouts
As the market still observes the tremendous rebound in equities while international borders remain closed in the middle of the Covid pandemic, one asset market that warrants even more attention is Housing. Against the odds and general expectations, US housing has been one of the outperformers since the March panic in markets.
Setting the Scene
When analysing the US housing market rebound and bull trend, it should be put into the context of time and relative to the wider equity markets. The US housing market follows long-term patterns of 16-18 year cycle. The last peak was around 2006 from which the subprime crisis unfolded suggesting that we are currently in the process of a mid cycle adjustment. The overall bull cycle is likely to continue into the mid 2020’s.
In that sense, this is no different to previous cycles when we saw economic downturns and turbulences between housing peaks. This was true in the early 1980’s when the economy suffered after a period of high interest rates to tackle inflation. It was between the housing peaks of 1973 and the next one around 1990. It was also true 20 years ago as the Nasdaq bubble burst. That was was a mid cycle downturn between the housing bubble of savings & loans in the early 1990’s and the subsequent subprime peak around 2006.
In both instances interest rates were cut aggressively. From a high of 20% in 1981, interest rates fell to 8.5% in 1983 and then lower to 5.88% in 1986. After 2000 interest rates were cut from 6.5% to 1%. This time they were cut from 2.5% in December 2018 to almost zero today.
Consequently, mortgage rates fell and housing found a platform to boom again. Today’s mortgage rates are near their lowest levels ever. So long as the Fed is clearly focused on improving the labour market, which it is, these rates should remain low in the absence of a serious inflation threat which itself may initially be ignored should it arises. Even if the yield curve steepens a little through rising long end yields (a bear steepening) it would incentivise banks to lend and funnel credit into the market.
Latest Developments
Remarkably, and despite the fear that was in place just 4 months ago, US building permits as well as housing starts have almost fully recovered the collapse seen in Mar-April. New home sales in the US are the highest since 2007.
Lending rates are indeed an important factor. In addition this also looks like a move to what can be called hard assets – relatively scarce, tangible, and durable – which is also why the likes of Gold are up. It is an outcome of monetary debasement.
On the listed financial markets two clear developments have taken place:
- A major bullish breakout on the S&P 500 Homebuilders index which is now trading above the last high seen in July 2005
- The major pivot on the S&P Homebuilders / S&P500 ratio has been taken out in favour of housing. As a result, that ratio is now at a 13 year high. Yes, while the S&P 500 has rallied an incredible 56% since the March low, the S&P 500 Homebuilders Index has rallied an extraordinary 170% in the same period. That’s right, three times as much. It has even outperformed the Nasdaq. If that is not an indication of a housing boom in the making, then what is?
What Next?
The behaviour of the ratio is similar to that seen 20 years ago when the Fed cut rates down to 1% following the crash in the Nasdaq. That led to a boost in the housing market which continued into 2005-2006. Similarly, the current trends are likely to continue for the foreseeable future i.e. a handful of years, in favour of housing. The technical setup on the ratio suggests a move to 0.53 from a current level of 0.42.
This all lines up rather neatly with the cyclical analysis showing a shift in housing approximately every 18 years. Expect another peak in 2024-2025 though between now and then is a long way up.
For more on long term housing cycles, an earlier video is included again below. The commentary and charts in this article are the latest developments in that story. Viewed from another historical perspective, the behaviour of asset markets – both stocks and real estate – are looking similar to the post Influenza period some 100 years ago suggesting the 2020’s will eventually see major bubbles as was the case in the 1920’s, created by constant cheap money and monetary debasement in this case, which will also see a falling US Dollar over the long run. Given the current circumstances of ongoing Covid-19, high unemployment, closed borders, and thus seemingly limitless monetary easing by the likes of the Federal Reserve, it is difficult to avoid such a conclusion. That is not a criticism, but rather an increasingly clear observation of the path being laid before us. The “inflation is ultimately in asset markets, even if there is a mis-match with parts of the economy, which means the often wild looking cycles of boom and bust will, as always, continue.
For those with an even longer term perspective and questions around what a potential “end game” we could be heading towards, please feel free to listen to the recording with Patrick Dewilde in Episode 4 of “In Conversation with Shyam Devani”
SKA