Latest News From Our Blog
As long as we’re talking about government shutdowns that last a few weeks, past precedent is highly informative, but the longer the current shutdown continues, the more we’ll be in uncharted territory. This is especially true for the housing market.
The only relevant comparison in the past 20+ years is with the government shutdown of 2013. Unfortunately, any interesting conclusions we might draw from that example are greatly limited by 2 key issues.
The first issue, of course, is the length of time the shutdown lasted–specifically October 1st-16th. Moreover, government employees at the time were reasonably confident that the shutdown would be resolved fairly quickly. As such, they were less likely to allow paycheck uncertainty to affect home-buying decisions.
The bigger issue is that another event greatly overshadowed any potential impact from the shutdown. The “taper tantrum” (a period of rapidly rising rates following the Fed’s decision to “taper” the bond buying that had been doing such a great job of keeping long-term rates low) was still in full swing.
We often minimize the extent to which rising rates can hamper home-buying demand. Indeed, it often makes good sense to do so! For instance, consider late 2016. Interest rates had risen sharply following the presidential election, yet existing home sales went on to hit their highest levels in more than a decade by the end of 2017.
Sometimes, however, rates matter. The more severe the rate spike, the more of a surprise it is, and the longer it lasts, the more it can impact real estate. Timing plays a part as well. In 2013’s case, home sales had been rising at their fastest organic pace(meaning, there wasn’t any artificial “help” from things like the credits in 2008-10) of the recovery–fast enough that the market may have been looking for an excuse to level-off for a few months. The taper tantrum offered that excuse, so the government shutdown was lost in the shuffle.
In the current case, things are a bit different. This time around the government shutdown hit during a fairly decent recovery in interest rates. It will give us a much better chance to see which one matters more. The only catch is that housing sales numbers for the time frame of the shutdown won’t be out until later this month, and the most meaningful numbers won’t be out until February or March.
In the meantime, this much can be known: the shutdown will increasingly affect government employees. Even though they will receive back pay, the delay in that income will cause cash flow issues for many households. While that’s a very big deal for those households and the associated real estate transactions, it’s unlikely to have a major impact on home sales data.
There is also some uncertainty as to the approach lenders will be taking with respect to approving loans for government employees and verifying their income. Lenders understand these borrowers will eventually be getting paid, but they’ll need game-plans in place in the (hopefully unlikely) event it takes months for that to happen. Those game-plans will vary by lender and may changeas the shutdown persists. In a few days, this will be the longest shutdown ever, and the industry will be facing certain challenges for the first time.
Financial Markets This Week
In financial markets this week, rates were able to find a ceiling as the stock rally stalled. Stocks and rates don’t always move in unison, but they’ve often done so since the start of Q4 2018.
There were two key economic reports this week with ISM Non-Manufacturing data coming in weaker than expected on Monday, but perhaps not as weak as investors were prepared for based on last week’s ISM Manufacturing report. Rates moved higher as a result, but leveled off shortly thereafter. Friday’s tame inflation data didn’t compel rates to jump back up to recent highs.
Next week brings several important reports and housing-related updates, or rather, it would have if the government were open. While the Bureau of Labor Statistics is funded (giving us the jobs report and this week’s inflation data), the Bureau of Economic Analysis is not. As such, next week’s would-be headliner, Retail Sales, won’t likely be seen. The same goes for the New Residential Construction numbers for December (due out next Wednesday). We will, however, be able to get a read on building sentiment in January via the NAHB Housing Market Index. This is one of the earliest possible glimpses of the shutdown’s impact on housing from a data standpoint (unless, of course, you count the fact that the shutdown is preventing other data from even being released!).
The size and direction of those moves caused speculation about a big reversal at the beginning of 2019. In both cases, traders figured stocks and rates had moved so much lower so quickly that some sort of bounce was inevitable.
This line of thinking (i.e. that markets should bounce simply because they’ve moved “too far, too fast”) speaks to an actual concept in market analysis. In a word, the concept is “momentum,” but it’s often discussed in the binary form of “overbought” vs “oversold.”
Simply put, the more any given financial market does one thing, the greater the risk becomes that it will do the opposite. The big catch here is that there’s no hard and fast rule about the timing or the size of the bounce. In fact, sometimes the market even seems to punish a herd mentality that is hoping for such bounces for such simple reasons.
With all of the above in mind, this was destined to be a highly uncertain and potentially volatile week. Perhaps we would see stocks bounce more than they already had at the end of December. Perhaps we would see bonds ignore stocks and do their own thing, much like last week. Perhaps it would be Friday’s slate of important events that would set the tone for the new year.
As it turned out, it was all of the above, at least for now. Bond markets (aka “rates”) spent the first 2 days of 2019 doing their own thing, moving lower at a much quicker pace than stocks. Some of that movement was purely incidental, but a majority of the gains were driven by an exceptionally weak ISM Manufacturing report on Thursday morning. Then on Friday, an exceptionally strong jobs report coupled with a few choice remarks from Fed Chair Powell sent everything back in the other direction.
Stocks were less volatile by comparison. They responded modestly to the weak manufacturing data before ultimately edging up past last week’s highs after Friday’s events. In particular, they appreciated Powell’s comment about the Fed being “sensitive to the message markets are sending.” That’s his way of acknowledging that heavy stock losses could actually affect Fed policy.
If we isolate stocks and bonds individually, we can better assess a potential momentum shift. With respect to stocks, if this bounce continues, it will have had more to do with late December and less to do with Friday’s seemingly all-important calendar events.
A somewhat similar case could be made for bonds, although we’ll need to zoom in and see the overnight trading between Thursday and Friday.
As the chart suggests, roughly half of this week’s bounce in rates occurred during the “???” hours overnight, and weren’t directly tied to any calendar events. This is momentum at work! It was finally the moment when traders agreed that rates had “fallen far enough” for now. The jobs report and Powell’s speech merely added some emphasis to the bounce.
So, does this mean everything is changing in 2019?
First off, an entire year is a long time to be guessing at ongoing themes. Things could still change several times before 2019 is over. Secondly, it’s entirely too soon to answer that question.
All we know now is that stocks and bonds agree that the risk of an early 2019 bounce (higher rates, higher stocks) remains on the table. Clearly, we’ve already seen some of it. It makes sense to defend against the possibility of even higher rates next week, but keep in mind that both sides of the market have a long way to go before they’re anywhere close to the recent high range.
The 11th-hour volatility raises a few big questions about what’s on the horizon. Could rates continue to drop or was this just a temporary diversion? Will stocks regain much of the recently lost territory, or are we merely at the beginning of an even bigger crash?
There are plenty of opinions on both sides of these questions. Only time will tell, but if we assume a bigger stock crash requires decelerating economic growth, we’re certainly getting closer with each passing day. Economic cycles may not die of old age, but the longer they live, the more time there is for them to discover new reasons for their mortality.
At the very least, we know investors are worrying about it. But we also know we haven’t lost enough ground yet to call this “the big one” definitively. In fact, in percentage terms, current stock losses aren’t much worse than those seen in 2016.
All that to say there’s still a very real possibility that stocks stage a miraculous recovery in January. From there, the question would shift to rates, considering much of the recent drop in rates can be traced to stock market volatility.
Fortunately, rates haven’t been nearly as volatile as stocks in relative terms. This means they’ve dropped more slowly and been less eager to jump higher when stocks attempt to lead the way. Here’s an example of how that played out this week:
The upcoming week will be an interesting mix of holiday-related distortions and potentially significant economic data. Like the outgoing week, Monday will be a half day for the bond market and Tuesday will be a full closure (New Years Day instead of Christmas this time around). Then, 2019 begins in earnest as market participation ramps up heading into the big jobs report on Friday.
The jobs report (officially, the “Employment Situation,” which provides the nation’s official jobs tally as well as the unemployment rate) is more important than normal for a few reasons. We know the Fed is considering a slower pace of rate hikes and that it will be using key economic reports in its decision-making process. No other report is more ‘key’ than this one.
Additionally, while the government shutdown will prevent other reports from being released on time, as far as we know now, the jobs report will not be affected, thus magnifying its relative importance to the week’s slate of actionable info. Even withoutthe shutdown considerations, the jobs report would already be more important than normal simply due to timing. After all, markets are considering big questions for the new year and this will be the new year’s first piece of data that’s qualified to comment on those questions.