The US housing market has turned, abruptly. Despite a lack of inventory, the median price for existing homes is turning quickly. Ordinarily, this would signal a possible peak in US rates. However, core inflation is well above target, and the unemployment rate is well below the NAIRU. Bonds could rally in 2023, but the Fed is going to want convincing evidence that the jobless rate is heading above the natural rate of unemployment to bring core inflation down.
A drop in the unemployment rate tomorrow combined with a strong average hourly earnings print could signal another bearish turn for the stock market. The Fed may be unable to pivot this year despite the downturn in housing.
The spread between the 30-year fixed rate mortgage (Bankrate) and the 10-year Treasury yield spiked above the pandemic peak yesterday. In the UK, the average 2-year fixed rate mortgage jumped to around 6% on Tuesday. As noted by BuiltPlace, small increases in mortgage rates have a much bigger impact than in previous periods because of higher loan-to-income ratios. In the UK, estate agents are bracing for a 10% decline in house prices. It could be more in the region of 20%.
The surge in Gilt yields (which has resumed in the past two days) and the unravelling of some leveraged LDI schemes has led to further selling pressure in illiquid assets, including commercial real estate and private equity. The European commercial real estate market may be particularly exposed. Much real estate is traded privately, taking time for price drops to be realised. Despite this, the latest pan-European Commercial Property Price Index fell another 4.4% in Q3 and is down ~15% from its peak.
