Nothing to see here…
The Pre-Fall
Demand holding firm with higher rates.
Supply trends are still unchanged.
August tends to be a slow month for the markets. Bankers all over the world vanish from their desks, and many families across the country squeeze some fun into the last few days of summer break. Given these phenomena, it wasn’t surprising to see that not much changed in August in the equity or fixed-income markets. On the real estate side, August also tends to be a slower month as conversations shift from summer moves to planning for the holidays. Without much changing, now is a great time to see where our indicators currently stand and try to make some predictions for what’s coming up this fall.
The Pre-Fall
It feels like the end of summer always presents unique opportunities in the capital markets. During the summer months, liquidity (a measurement of a trader’s ability to execute a large trade) goes down substantially. Senior risk managers tend to take their vacations during the same time of year, and that means that junior risk managers are typically running the show across Wall Street. Most investment firms stay the course of their strategies, lighten up on their risk-taking, and hand down instructions to their traders that simply say: “Don’t blow up.”
One way that traders try to avoid blowing up is by adhering to an old investment lesson that says “Don’t short a quiet tape.” Without a lot of risk managers working full-time and most people paring back their bets, there can be some pretty funky moves as a result of a lack of volume in the markets that present opportunities for the fall. The following is something that might be one of those moves...
Here is a chart of 10-year yields going back about a year and a half:
Yields on the 10-year US treasury bonds from Spring 2022 through present (taking from TradingView).
If you’re noticing that yields are back to the highs we saw in October ‘22, then you picked up on the major takeaway. There was a bit of a puke last fall (even before SVB and the mini-banking crisis) based on the notion that interest rates would have to go much higher to deal with inflation than initially thought. There were several months last fall that gave most people the time to get very “bearish” on risk, and when the recession didn’t come in spring ‘23, bonds and the equity markets rallied for six months straight.
Things started to decouple between the bond and equity markets in May. At the beginning of summer, the fixed-income markets started to digest inflation data and Fed speak pointing to higher rates for longer; interestingly, this is when equity markets went a little ballistic to the upside (see below).
A snapshot of SPY (S&P 500 tracking ETF) from late 2022 through present trading (TradingView).
You can see the consolidation around $415-$420 in SPY during May 2023 which was followed by a rally of over 10% through July & August. My explanation for the rally is that a bunch of relative value macro guys (like yours truly) were selling stock to the late-stage buyers of AI and technology stocks. The tech bulls won, cleaned up the relative value sellers, and rallied equity markets through the fall.
Something seems very, very fishy right now. Unemployment figures are starting to creep up and inflation data hasn’t really turned around enough to make Fed watchers happy. At the same time, the selloff in bonds to last year’s levels will increase the hurdle rate for stocks and make it much, much harder for equities to perform well. There’s a lot coming up in the next couple of months: a Fed meeting on Sep 20th, earnings season, and tough historical seasonality in October. The failing support at the 10-year around 4.35% in yield is also concerning which is compounded by the inability of stocks to regain the 50-day moving average (yellow line). If we had to bet, we would be expecting higher interest rates and lower equity market values in the next 1-3 months.
Demand: Holding Firm.
Supply: Unchanged.
Let’s check in on our trusty table summarizing the current conditions in Denver’s housing market within a 10-mile radius around downtown:
Summary of Denver’s housing market within a 10-mile radius of Union Station. All data taken from REColorado (Sep 15-18).
Things are so similar now to what they’ve been over the last few months that I was tempted to “copy & paste” one of our previous updates in an effort to see if anyone would catch me! Our readers and clients deserve much more than just the “same old thing,” so I’ll do my best to add a little more context for you…
The creation of a “high plateau” is something we’ve been tracking in the real estate market; a combination of demographics, higher interest rates, and high construction costs are all to blame for high prices and low supply. Broadly speaking, Baby Boomers already own their homes and were able to lower their monthly housing costs via mortgage refinancing prior to 2021, and their generation will never be able to afford to reset their monthly payments to an 8% mortgage without making significant sacrifices to their quality of life. As a result, supply will decrease dramatically when the Boomers don’t sell their homes at the same pace as their parents did a generation prior. At the same time, Gen Z’s and Millennials are entering their household formation years and the resulting demand for housing is unquenchable. Builders are trying to build new homes, but without a decrease in labor costs, it will be very hard for them to add enough supply to the market. As a result, prices are being pushed to a level where it’s extremely expensive (but not unaffordable) for younger families to purchase, and Boomers are unable to monetize the equity without moving 2-hours outside of a city. Our clients have typically been families that “have to” buy while those who have the luxury to wait for lower prices are out of the market entirely.
Until this past month, the volume trends were grinding lower and prices went higher. Are these trends about to change…? August was the first month in a long time when new listings hit the market at approximately the same pace as a year prior; it was also the first month when active supply didn’t seem to take a material hit. Are we finally getting to a pricing regime when the market will balance out? My initial guess is “probably.” At some point, pricing can’t continue to run away from incomes, and it’s a lot easier to see an end to the climb when you think rates are going up in the next few months. It will likely take September and October before we will see any sort of confirmation, but maybe relief is in sight.
