Calmer Markets; Are Home Prices Already Done Falling?

The movement of the bond market for the whole week was very low as compared to one day of the previous week. Not only was the volatility very light, but the trading pattern changed as well.

At the start of the recent panic in the banking sector, stocks and bonds went into risk aversion mode. Scary news pushed money out of stocks and into bonds. Promising Development did the opposite. This results in stock prices and bond yields moving with a high degree of correlation (as bond yields decrease when bond prices increase).

Incidentally, March 22 is your “big day”, when the 10yr yield crossed a range between 3.64 and 3.43. Fast forward to the current week (where 10yr yields spent most of their time between 3.54 and 3.58) and there are no signs of that type of correlation.

This is largely due to the markets finally calming down and the banking sector moving away from hyper-cautious assessment of risks. To be clear, that doesn’t mean those concerns are gone, just that the week hasn’t seen the same volatility or decline in banking sector sentiment. The following chart shows the percentage change in regional bank stocks compared to the S&P. This shows that as soon as bank stocks stopped falling, the broader stock market began to recover.

If the bank drama continues to fade, markets will focus not only on a more cautious banking sector but also on the economic impact of already high interest rates. Those forces combined should put downward pressure on inflation – something that is already showing up in the data, as shown by the “core” level (i.e. excluding food and energy) in this week’s release of the PCE price index. ) has been observed in a decline of one-tenth of a percent. , Along with its more current counterpart, the CPI, both of the two main inflation indices are telling a similar story.

This week’s other economic data may not have had an impact on the market, but it is relevant to the housing outlook nonetheless. The pending home sales number is still historically low, but has increased in each of the past 3 months. That’s a big win for this week’s report (which covers the month of February) because of the sharp jump in rates seen last month.

Weekly purchase applications, according to the Mortgage Bankers Association report, confirm that buyers are paying attention to rates. The rate recovery in March has coincided with a recovery in shopping apps.

But the most notable and most confusing housing data released this week will be a pair of major home price indices from the FHFA and S&P Case Shiller. When examined in year-on-year terms, both the indices show a clear decline in prices.

Month-on-month figures tell a different story. In fact, the broad FHFA index actually moved back into positive territory in January. Case Shiller was down 0.4% but at least it’s a slower pace of losses than last month. And both are well above their moments of sharpest declines seen late last year.

Does this mean that house prices are falling? Yes, indeed, if you ask FHFA and answer on current data. A big jump in rates or an unexpected economic shock could change the scenario. What we can actually conclude from the current data is that prices are showing a good level of flexibility at this level, unlike the last time monthly home prices moved into negative territory.

On a side note, keep in mind that the year-to-date index could soon turn negative, even if prices don’t fall further. Reason: The price index had peaked in May/June of the previous year and closed at a slightly lower level soon thereafter. Prices would need to rise by about half a percent by May to avoid turning negative. Even if prices flat-lined here and didn’t move much, here’s how it would look on a chart.