It's been three months since I last addressed the housing market and homebuilders, in the column, "There's No Pent-Up Housing Demand."
With the spring season here, this is a good time to visit the issue again.
I am anticipating the strongest homebuying market since the nadir of the last housing crisis about a decade ago. The logic I'll offer for such, however, is largely not conventional.
First, I expect long-end U.S. Treasury yields to decline and to drag mortgage rates down as a result. Some of this has already begun.
The 10-year U.S. Treasury yield surged into the last two FOMC meetings but reversed following each. It is near its 2017 low and off by 0.25% since the FOMC's last meeting three weeks ago. The fact this is occurring even while the members are more aggressively telegraphing desires to accelerate the process of "normalization" is important.
If bond market participants were in agreement with the need for such action to be taken, especially the reduction in the size of the Fed's balance sheet, long-end yields and mortgage rates would be rising, not falling.
The fact that they are falling is a signal that bond market participants are of the opinion that the aggregate economy is not strong enough to warrant higher interest rates and that any attempt to push them up further in the near term will be counterproductive.
The FOMC members, however, appear to be oblivious to this message and also to the longer-term cautionary tale of "three steps and a stumble."
The historical precedence for the creation of the "rule," however, has been that the FOMC members lose sight of the real state of the macro-economy, become myopic in their assessment of it and overshoot policy as a result.
Discussions of unwinding the Fed's balance sheet are an indication that such a mindset may have taken hold at the FOMC again.
However, it is that action, along with any more increases in the short-end interest rates, that will cause bond buyers to more aggressively buy the long end of the market and thereby drive the yields lower, and facilitate lower mortgage rates as a result.
Both stocks did well last year but have pulled back following the Fed's last two rate hikes. Traders and investors have been exhibiting a concern that long-end yields would continue rising, forcing mortgage rates up, reducing home affordability and decreasing home purchase activity by first-time buyers as a result.
Although it is still possible that such will happen, I think it is more likely that the trend toward the FOMC accelerating normalization will continue, with bond market participants growing more concerned about "stumbling" policy decisions resulting.
The silver lining for the economy and housing is that the resulting lower mortgage rates will stimulate home purchase activity.