The markets are still expressing a lot of discontinuity following the U.S. elections concerning the immediate economic outlook. This will pass with time and the markets will begin to reflect more uniformity of thought with respect to the economic potential.
The most germane issue for the housing sector to consider is how long that will take.
Discussing macroeconomic trajectories and potential with market participants, and what they imply about the pricing of markets, is a bit like having a conversation with someone who's constantly trying to complete your sentence as you are talking. It's very annoying for the speaker and the listener is often wrong about what is about to be said.
That's similar to what is occurring in the markets, though different sectors appear to be anticipating different immediate economic prospects based on the election results.
One of the most notable examples of discontinuity is the surge in both long-end Treasury yields and the simultaneous surge in homebuilder stocks. There is also an outsized upside in the stocks of homebuilders focusing on first-time buyers vs. those catering to more seasoned buyers.
Since the election, the first-time-buyer builders, Beazer Homes (BZH) and Hovnanian (HOV) , have increased by 18% and 11%, respectively, while Toll Brothers (TOL) is only up 4%, and multifamily builder Lennar (LEN) is unchanged.
This doesn't make sense.
The buyers most sensitive to Treasury yields and thus mortgage rates are the first-time homebuyers. As such, the logical market reaction to the surge in Treasury yields and mortgage rates of late should have been a decline in the prices of Beazer and Hovnanian.
What's interesting is that both the Treasury markets and first-time-buyer homebuilder stocks are exhibiting a belief by market participants that an increase in economic activity caused by an increase in imminent fiscal stimulus from the Trump administration immediately following his inauguration is likely.
It is not.
The current Congress will either pass a "continuing resolution" or an "omnibus bill" to fund government operations through the beginning of a Trump administration. In neither case, however, will there be the increase in federal outlays resulting in fiscal stimulus the markets appear to be anticipating.
Further, it is most probable that barring an economic crisis that allows fiscal stimulus to enter the "Overton window" of possible responses, the Trump administration will not be able to get any fiscal stimulus measures through Congress during his first year.
The first year of the first term of a new executive administration operates under the federal budget approved by the previous administration.
Even putting those issues aside, though, the fiscal conservatives in the House of Representatives, who are largely represented by the memberships of the Tea Party Caucus, Freedom Caucus and Liberty Caucus, will make it very difficult for the Trump administration to pursue the federal spending plans he promoted during his campaign.
The markets appear to be pricing for expectations of a fiscal stimulus through either tax cuts and deregulation or increased spending simply because the executive and legislative branches are Republican-controlled.
It is more appropriate to think of them as an executive that is left of center fiscally and a House that is right of center; and that this will make budget negotiations far more contentious than they appear.
As the markets begin to exhibit an awareness of this, it is probable that long-end Treasury yields will begin to decline again and homebuilder stocks will, too.
The most immediate issue for housing and the builders, however, is the probable negative impact of rising mortgage rates as the holiday season begins.
As I've written about every year around this time, potential buyers begin to consider their buying plans based on the prevailing mortgage rates during the end-of-year holiday season.
The increase in mortgage rates of the past few months has resulted in a 10% increase in the monthly principal and interest costs of a 30-year fixed-rate mortgage.
That means that for the same income, the purchase price of a home for which a buyer can qualify has been reduced by about the same; i.e., a buyer who could qualify for a $300,000 house purchase last summer is now only qualified for a $270,000 purchase price.
Unless Treasury yields begin to decline very soon, and drag mortgage rates down with them, that is going to have a negative impact on housing activity next spring.