“Stability. Reliability. No wobble.” These three qualities are everything you want when seated. Most chairs or bar stools, however, are made with four legs. To check the boxes for all three assets, it requires each leg to be the same length and lie on a plane that’s perfectly flat. Anyone who frequents their favorite restaurant or watering hole knows this never happens 100% of the time. There’s always that one uneven spot in the joint where your chair annoyingly wobbles. The geometric principle of three legs would fix this issue. For instance, a three-legged stool has a fixed base of support. Since any three points will always rest perfectly on a single surface, all three legs will always touch the floor simultaneously, regardless of the difference in leg lengths or the unevenness of the floor. This ensures the stool is always stable, reliable and never wobbles. The biggest caveat is the biggest weakness of the three-legged principle: if one leg breaks, the whole stool topples.
During economic expansions, the three-legged principle applies to the pillars that support financed purchases for homes and autos – interest rates, prices and unemployment. Rates and prices constantly fluctuate, the former more so than the latter, creating ebb and flow for affordability when economic conditions are not threatened. But, if the labor cycle breaks, which happens once every business cycle, rates and prices matter much less. To wit, lenders will be much more concerned about default risk in a higher unemployment environment and pull in the reins (i.e., tighten lending conditions), being more selective in their underwriting. That makes the unemployment pillar the most important.
Conveniently, the University of Michigan’s (UMich) consumer survey allows said pillars to be quantified and visualized. For example, both home buying and home selling conditions include net measures (i.e., ‘good time’ versus ‘bad time’) related to interest rates, prices and economic uncertainty (read: unemployment). The rates’ guide has the highest beta, prices show the least volatility over time and economic uncertainty is the most cyclically relevant.
Over the last two years, the metrics for rates and prices concurrently bottomed in the same exact month – November 2023 – at respective levels of -44.5 (lime line) and -14.5 (orange line). Twenty-three months on, relative improvement took the shape of -23.0 for rates and -8.5 for prices. Economic uncertainty, on the other hand, deteriorated from November 2023’s -11.0 to April 2025’s low of -20. The most recent readings in September (-19.5) and October (-18.5) differ little from those seen in the scary month of April (light blue line). At these depths, from a business cycle standpoint, the current picture echoes prior recessions.
Prior to General Motors announcing nearly 3,000 indefinite layoffs yesterday afternoon, company layoff announcements in October flagged more than a wobble for the job market. MacroEdge’s Job Cuts Tracker rose to a month-to-date figure of 134,867 as of the 28th, up from 83,590 in September (inverted lilac bars). It marked the third straight month-over-month increase for pink slips, pushing these alternative jobless data to the third highest behind February’s 151,082 and March’s 146,479. With GM’s announcement and others trickling in during this month’s last two days, we could easily see the second-highest, not that such trivialities matter to Federal Reserve Chair Jerome Powell.
The layoff picture is integral to Pending Home Sales, which look forward. These transactions, which measure sales commitments under contract, were flat in September at a depressed level of 74.8 (blue line). Since the 2001 inception, the pending index averaged 100.6, meaning the latest figure was 25.6% below normal. The path for layoffs suggests more downside in pending sales; the index could test the January low point of 70.6 in coming months.
The weekly check-in with the Mortgage Bankers Association (MBA) revealed that 30-year mortgage rates fell to 6.30% in the week ended October 24, a 13-month low. This relative easing for housing sparked hope for an end to the sales slump. When layoffs from large firms start to reach five-digit territory, like Amazon’s and UPS’s this week though, they can more than offset lower rates’ traction. To that end, last week’s decline in rates (fuchsia circular marker) did not coincide with a move up in MBA’s average home purchase loan size. This defies falling borrowing costs tending to raise homebuying power for higher-priced homes. One week does not make a trend, but it is worth noting.
D.R. Horton added color to the affordability backdrop in its Monday earnings call. Specifically, mortgage qualification issues were cited: “We’re still largely at the low-end about 3.99% rate that we’re offering. And we’ll just see as it comes. I think it’s probably going to be a combination of both. In other words, if we need to step down some more to drive to the monthly payment to open up the absorptions that we’re looking for at a community level to drive the returns that we want, then we’ll continue to do that. And if rates drop down and we are allowed to reduce our incentive in terms of the cost of that BFC [builder forward commitment], we’ll take advantage of some of that. So I’d expect it to be a balance as we look forward.”
Redfin’s October 23rd update nodded to the three-year low in mortgage rates “opening [a] door for homebuyers – but few are walking through.” Redfin cited two of the forces pushing rates down — economic uncertainty and political tensions –making house hunters uneasy about committing to a major purchase. This echoes what UMich portrayed for the three pillars of home purchases. To wit, while a typical homebuyer with a $3,000 budget has gained $9,500 in purchasing power compared to a month ago and $26,000 over the last year, Pending Home Sales remain stuck.
The Fed’s rate cut and cessation of Quantitative Tightening (QT) could underpin the housing market. One of the big ‘if’s,’ though is to what extent given $35 billion a month in mortgage-backed securities will not stop; instead, those prepayment proceeds will roll into Treasury purchases. Add to this Powell’s non-committal near-term policy guidance for a December rate cut, which will raise mortgage rates given the move in underlying Treasuries, and we’re compelled to say it’s anything but a foregone conclusion that housing affordability will improve any time soon, despite Powell’s acknowledgment that the sector is “weak.” We can add that to the laundry list of economic indicators he’s comfortable ignoring.