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Larry’s note: Welcome to Trading with Larry Benedict, my free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
One of the major themes in the markets this year has been the impact of rising interest rates.
According to the Fed’s May meeting minutes released on Wednesday, interest rate increases will remain firmly on the agenda.
The Fed confirmed that we can expect at least another two 0.5% raises over the next couple of months.
We’ve already seen how rising interest rates have affected the major indices…
High-growth stocks – the sector most vulnerable to rising rates – have been smashed with the Nasdaq down around 30% for the year.
Even the less tech-laden S&P 500 is down around 20% over the same time. Technically, that puts the S&P 500 in bear territory.
After a dreamy two-year run, the heavy selling of 2022 has certainly made stock investors far more nervous.
However, rising interest rates aren’t only knocking stocks around. Today, I’m going to discuss how current interest rates are affecting property.
Property is typically a holder’s biggest investment. So, what happens in the property market determines how much they spend in the broader economy.
On May 19, data showed a 2.4% decline in existing home sales…
While this might not seem like a big deal on the surface… it represented the lowest adjusted annual sales rate since June 2020.
Let’s look at some clear trends in the chart of existing homes sales below…
United States Existing Home Sales
Source: TradingEconomics.com, National Assoc. of Realtors
There was a huge drop off in early 2020 as the pandemic took hold… and then a huge increase as the Fed cut rates and flooded the economy with cheap money.
But since the start of 2022, that clear trend has been down.
The latest data puts existing home sales right around where they were before COVID (orange line).
I’ll be watching this line closely to see if it starts to flatten out… because a clear break below the orange line will tell me that higher mortgage rates are sapping buyers’ confidence.
Right now, the data shows the number of houses for sale has increased almost 11% compared to the previous month’s data.
However, the impact of rising rates is even stronger on new home sales. This sector represents around 10% of the total U.S. housing market.
As the chart below shows, the falloff this year is more dramatic…
United States New Home Sales
Source: TradingEconomics.com, U.S. Census Bureau
Month-over-month, this latest data represents a massive 16.6% fall (red circle).
To be fair, these numbers can move around…
However, a fall of that magnitude is simply too big to ignore… especially when you compare it to the forecasts.
The seasonally adjusted annual rate of 591,000 sales was almost 160,000 below the 750,000 consensus forecasts.
Now that new home sales are back around pre-pandemic levels, I’ll also be watching this data to see if it flattens out.
Any further large falls will have a clear flow-on effect to the economy.
The next test for the property market will be on May 31 with the release of the S&P/Case-Shiller home price year-over-year data for March.
February data showed home prices increased by around 20% over the previous year… marking an extended period of big gains.
As we’ve seen since early 2020, when prices continue to rise, homeowners are happy to spend.
However, if home price rises stall or start to fall – along with rapidly rising interest rates – you can bet the average consumer will quickly pull in their belt.
And that would have major implications for the economy.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
How are you approaching the current housing market? Are you buying, selling, or holding on to property?
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