M1 Money Supply, Case-Shiller HPI, and 10YR Yield, Constant Maturity and the economic impacts in the real estate and mortgage sectors.

Economic impacts from the changes in the level of M1 money supply can be seen in the bond market and more precisely by the change in long-term yields. However, from the real estate and mortgage finance perspective, one can investigate macro and micro economic impacts using a housing price index and a long-term yield relative to M1 money supply. Estimating the relationships will use an ordinary least square of the natural logarithm of the raw data to equalize the measurement units for economic analysis and interpretation; and most importantly provide applicable solutions to cure any current financial distress signals.

Recall M1 money supply is aggregation of currency and demand deposits in an economy. The amount of money supply is contingent upon the necessity of physical dollars in the market countered by long-term bond rates to determine equilibrium in the money and foreign exchange markets. Evaluating this relationship can be done in several ways but we look at the impulse response between the two metrics to decide future trajectories. Ultimately, this information is used to trade securities based on external market events.

Using the Case-Shiller Housing Price Index, one can investigate housing prices relative to various economic indicators. Here we look at the relationship between Case-Shiller HPI and M1 money supply and the 10-year yield. Analyzing the raw data, we can see that as external market shocks impact M1 money supply, housing prices or the CSHPI oscillates over a given forecast horizon (top right corner of pic below). This oscillation can be viewed as volatility in housing prices meaning as money supply increases, the housing prices will vary and change significantly based on location and other pertinent real estate factors over the projected forecast horizon.

Overall, analyzing these three economic indicators allows for a more robust interpretation of current economic activity. The average person to the savvy investor can use this information to make better investment decisions to maximize one’s return on investment while minimizing potential losses. With the Fed raising rates by one quarter of one percent this past meeting, future hikes will be determined from economic activity thus investors should be cautious managing assets across this economic space.?

What does that mean for those in the market to buy or sell real estate using financing? Understanding these relationships can help new buyers and seasoned sellers to time their entry and exit in the housing market. While interest rates can impact a purchaser’s buying power, this impact should be minimal to a strong and well qualified purchaser meaning that the purchaser should have the ability to pay one extra principal and interest payment per year. Doing this minimizes the interest paid over the mortgage term and may virtually negate your interest rate when re-amortized with the additional principal and interest payment.

Predicting entry and exit in the housing industry is critical to turning a profit. For example, those that entered the housing market in 2006, 2007, and 2008 experienced declining values with minimal property investment and equity causing property owners to default exasperating the housing foreclosure market during the financial crisis. You can see the possible future trajectories for M1 money supply, the Case-Shiller House Price Index, and the 10YR yield.?