Expect The Unexpected (Volatility in Markets and Housing) - 11.9.23

by Ryan Schoen , Sr. Insight Analyst

Quick Hit

This week mortgage rates saw their most significant weekly decline in over a year and one of the best 3-day winning streaks in decades as markets adjusted to the Fed pause, updates on the U.S. Treasury’s plans to boost the size of auctions for bills, notes, and bond issuance to fund a worsening budget deficit, as well as a spike in the unemployment rate.

Key Points and Stats

1. U.S. employers added 150K workers in October which fell well short of the 180K that economists expected.
2. There were downward revisions to the previous two months of job gains to go along with an unemployment rate that ticked up from 3.8% to 3.9%.
3. The unemployment rate surpassed its 24-month moving average and every time it has done so it has marked the start of a significant deterioration in labor markets.
4. For the four-week period ending October 22nd, 2023, months’ supply has risen to 3.46 months, nearly a full month more than the 2023 lows of 2.57 months set in June set during the height of “purchase season”. The corresponding move in home prices was a decline from $381K to $370K, (i.e., there is a direct relationship between supply/demand and movement in home prices).
5. At the moment, the overall housing market finds itself in the slowing phase (relationship between prices and months’ supply… as opposed to expanding, contracting, or recovering) as the market attempts to return to some sort of normalcy and strike a balance between supply and demand.

The Unemployment Rate is Flashing Warning Signs

This market reminds us always to expect the unexpected and brace for volatility. This week mortgage rates saw their most significant weekly decline in over a year and one of the best 3-day winning streaks in decades as markets adjusted to the Fed pause, updates on the U.S. Treasury’s plans to boost the size of auctions for bills, notes, and bond issuance to fund a worsening budget deficit, as well as a spike in the unemployment rate.

The most unexpected of the three came last Friday via the October Jobs Report which was a miss on many levels. The report revealed that U.S. employers added 150K workers which fell well short of the 180K that economists expected. In addition, we received news of downward revisions to the previous two months of job gains to go along with an unemployment rate that ticked up from 3.8% to 3.9%. The unanticipated weakness in the labor market had traders unwinding short positions which boosted bond prices and lowered yields.

The question up for debate now is whether this rise in the unemployment rate is a head fake spurred in part by strike activity and labor disputes that have since ended in the auto industry or an inflection point indicating a larger trend yet to unfold. As of right now job creation still looks healthy, but historic patterns are emerging. Most notably the unemployment rate surpassed its 24-month moving average and every time it has done so it has marked the start of a significant deterioration in labor markets.

While this doesn’t indicate a recession is imminent just yet, we’ll be watching the next handful of reports as every time the unemployment rate rises 50 percentage points or more relative to its low during the previous 12 months a recession has occurred. The JOLTS Report confirms that the pace of hiring has started to slow, so it shouldn’t be a surprise if this is the start of a new trend in labor market conditions going forward, but as we opened with, expect the unexpected.

The Four Phases of The Real Estate Cycle (Home Prices & Months of Housing Supply)

Tracking home prices and housing inventory are quite possibly the most important housing indicators to follow in any housing market, but they certainly merit extra attention now than ever given the current landscape and uncertainty that is likely to persist going forward.

The first observation of note is that for the four-week period ending October 22nd, 2023, months’ supply has risen to 3.46 months, nearly a full month more than the 2023 lows of 2.57 months set in June set during the height of “purchase season”. The corresponding move in home prices was a decline from $381K to $370K, (i.e., there is a direct relationship between supply/demand and movement in home prices). The right chart confirms this relationship and the seasonality that exists throughout the course of a year (i.e., later stages of a year or larger bubbles, which indicate a particular week in a year, generally show a rise in months’ supply and a slowing in home price growth for a given year).

Given this relationship, we can observe the cycle or pattern that unfolds more clearly by plotting the year-over-year change in home prices and months’ supply. In doing so, we can categorize which of the four phases (expanding, slowing, contracting, or recovering) the current housing market is in overall and more importantly where location-specific housing markets are present. At the moment, the overall housing market finds itself in the slowing phase as the market attempts to return to some sort of normalcy and strike a balance between supply and demand.

Focusing on select markets that have gained media attention due to recent price declines from their highs, we see that interest rate-sensitive markets such as Los Angeles and Seattle have already swiftly moved from the contracting phase to the expanding phase as months’ supply retreats and home prices rise once again on an annual basis. Without following high-frequency data that has been translated in the correct manner, potential homebuyers and investors may be misinterpreting signs and be surprised by what they actually encounter in the marketplace.

At the other end of markets that continue to garner media headlines are Phoenix and Austin. Both of which experienced substantial declines in home prices from their recent peak after a strong runup, but both continue to navigate their way out of the contracting and recovery phases. Phoenix appears to be having more success finding its footing, while Austin continues to experience pressure after its meteoric rise in home prices and the affordability constraints that have since followed.

Looking more holistically across the country no clear patterns are present, indicating just how imperative staying abreast of local housing market developments will be for industry professionals and homebuyers alike as both navigate the housing market in its current state. Simply passively reading the latest nationwide headlines will likely not lead to the best outcome for either party involved.