Inventors tend to not be one-trick ponies. Johannes Gutenberg, the German craftsman of the movable-type printing press and Bible fame, is also credited with the first periscope in the 1430s. Originally designed to allow people to see over heads at crowded religious festivals, four hundred years on, in 1854, French scientist Hippolyte Marié-Davy adapted the first naval periscope, a vertical tube with two small mirrors fixed at 45-degree angles at each end. American Thomas H. Doughty of the U.S. Navy created his version out of necessity during the Civil War. During the campaign of the Red River while serving aboard the monitor Osage, Confederate cavalry, from the river’s banks, kept up a series of surprise attacks on the Union vessels which had no way of seeing over the banks. This led Doughty to his eureka moment. He took a piece of lead pipe, fitted it with mirrors at either end and ran it up through the turret. The makeshift periscope provided sight lines for the crew, enabled them to neutralize approaching enemies, and freed them from further attack.
Leading economic indicators are themselves alternatives to periscopes because they allow their users to see around corners. Certain economic reports include key leading and coincident information that can diverge in any given month. At the risk of stating the obvious, it’s imperative to lean on the leaders for guidance.
Enter Exhibit A, yesterday’s U.S. Housing Starts and Building Permits for November. Headline numbers for November diverged due to volatile multifamily starts dropping 23.2% month-over-month (MoM) to a 278,000 seasonally adjusted annual rate (SAAR). However, with multifamily permits jumping an outsized 19.0% (MoM) to a 533,000 SAAR, a starts reversal is in train. The opposite was the case for the more stable single-family sector, where starts rose 6.4% MoM to a 1,011,000 SAAR (lilac line) vis-à-vis permits’ 0.1% MoM gain to 972,000, which flagged an unsustainable bounce in starts (blue line).
Starts and permits provide critical lenses into housing under construction and completion. If permits are at the front of the train, completions are the caboose, thus the notable uptick in single-family completions, the first since July which extended the expanding year-over-year (YoY) trend to eight months with November hitting 7.0% YoY (light blue line). Trends in this lagging metric tend to be noisier than leading single-family permits. Nonetheless, recent performance is instructive, as permits have been in contraction since June and the -2.7% YoY drop (yellow line) was the weakest in 18 months.
Pitting permits against completions, with the former underperforming the latter in recent months, it follows that single-family housing price pressures should ease in kind. A real-time read on home prices comes via the Weekly Mortgage Bankers Association (MBA)’s Average Purchase Loan Size. Thus far in December, the YoY path has cooled markedly to a 2.1% pace from November’s 7.4% annual clip and October’s 8.6% YoY advance (red line). For perspective, the October gain a 2 ½-year high.
For what it’s worth, the -6.5-point reversal in the YoY trend in the last two months was not insignificant, equating to a -1.8 z-score. A similar imbalance between rising supply and falling demand occurred as recently as 2022 and resulted in a sizable downdraft I n home purchase loan sizes. Given the current divergence, we see downside risks for 2025 shelter inflation. Shifting from home builders to home buyers, the MBA home purchase index has picked up in the last four weeks, pushing the month-to-date average for December to an 11-month high, which defies mortgage rate as 30-year fixed rates have hovered in the high 6s (purple line).
According to the University of Michigan (UMich) consumer survey, Buying Conditions have moved in sync with the purchase index since August (orange line). Backing the shift in sentiment is ebbing house price pressures. In December, households who thought it a bad time to buy due to high prices fell to the lowest point in more than 3 ½ years. Conversely, selling conditions remain mired in a slump and took out August’s low in November and December. On balance, the impulse from homeowners is close to the weakest pre-pandemic level in eight years (lime line).
Believe it or not, the Federal Reserve plays a part here. A more reticent Federal Open Market Committee won’t make life any easier for those in the market to buy as policymakers raised the median dot for the Fed funds rate over the next three years by 50, 50 and 25 basis points, respectively. Who’s to say how the surprise turn will go over at the National Association of Home Builders (NAHB). Hopes for a brighter tomorrow sent its single-family Sales Expectations index to 66 in December (green line), the most optimistic since April 2022. Predicated on a Fed in a much more aggressive easing stance makes the record-wide spread (in data to 1985) between home builders’ expectations and the NAHB’s other two components – Present Sales and Buyer Traffic – more glaringly disconnected.
The forward curve for the U.S. 10-year Treasury yield will also be an affront to builders’ rosy outlook. Three years out, current pricing for the 10-year is on an upward slope (fuchsia line), not that painted by the gradual decline in the dot plot (yellow bars). The forward curve implies that investors don’t see a favorable path for mortgage rates (brown line) either. Perhaps home builders would be best served to leave their periscopes down so they can enjoy their holidays in peace.