My Housing Logic Conundrum

 | May 10, 2017 | 2:00 PM EDT
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It's only been three weeks since I last addressed housing and home builders but since I wrote so much about my expectations for this spring/summer housing season starting about a year ago I want to hit it again before the season progresses further.

In the last three weeks Hovnanian Enterprises  (HOV) , and Beazer Homes USA (BZH) are up 2% and 15% respectively.

Since I initially outlined my expectations for the 2017 housing season, and these two stocks specifically, in July of 2016, they're up 32% and 65% respectively.

The trends I wrote about last year have begun to be exhibited in positive performance for housing.

Rebounding household formations by three generations, the millennials, Xer's, and tail end of the baby boomers, along with the distancing in time since the last housing crisis, is providing a demographic push for housing.

I think that will continue for the next several years as activity begets activity and home ownership becomes central to the belief in the achievement of the "American Dream" again.

Part of that process, as I've discussed before, is that potential home buyers would decrease their consumption of automobiles in preparation for reallocating that income to mortgage servicing.

That appears to be happening as auto sales continue to recede from the record pace set during the previous three years, or so, following the reintroduction of subprime auto loans and the holding of such loans by banks.

This is however a double edged sword and leads to a problem with the logic for a rebound in home purchase activity I've advanced for the past year.

Declining auto sales are not just caused by home purchasers reallocating income from servicing auto loans to servicing mortgages.

It's a reflection of the bifurcated economy I've written about before too. An increasing percentage of the population is not economically viable due to technological advances that have displaced much of labor that used to be performed by human beings.

That trend too is going to accelerate and become a secular and systemic issue. Human labor disintermediation is also, most probably, a permanent issue and drag on economic activity now.

However, one of the reflections of that drag that I've been anticipating, is the decline of long-end U.S. treasury yields to new record lows, with the 10-year breaking below 1% and the 30 year fixed conventional conforming mortgage rate dropping below 3%.

That hasn't happened though.

Although the yields and loan rates are below where they were at the end of last year they are both well above where they were in the middle of last year.

This is a problem for me because it means that either my interpretation of where long end yields should be and how the bond market broadly should be performing at this stage is wrong, or the collective wisdom of everyone else involved in the bond market is wrong.

It's an unpleasant situation to be in because my analysis continues to suggest that U.S. yields and loan rates should be substantially lower than they are and I can't determine a mathematical logic for why they are not.

In other words, beyond the reactive rhetoric used by pundits to explain why yields are where they are I can't determine the support for such.

As it stands now I'm continuing to try to determine why U.S. treasuries are being valued the way they are where my analysis is wrong.

I will write about that in the future. For now, I'm sticking with my call for much lower yields and loan rates that will be even more positive for housing and the home builders.

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