Cash is outperforming stocks and bonds in 2018 for the first time since 1992. Gone are the days of no corrections and low volatility. In fact, we discussed this almost exactly one year ago, that the probability of 2017 style low volatility repeating in 2018 was very low. Rates are rising, growth stocks are starting to underperform value stocks, and the housing market is weakening. The housing market is different from the last cycle in that there weren’t exotic mortgages issued. There are still issues with the housing market as we discussed here, but not at the level that could catalyze a crisis like 2008. The similarity of the housing market today with 2008 is that consumers think prices aren’t affordable. Weakness in the housing market won’t crater the economy, but it is one more negative catalyst which adds to the other issues such as the fiscal stimulus losing its positive effect and the hawkish Fed. The housing and real estate surprise index has the lowest z-score since the calculation began in 2000. The data was obviously worse during the financial crisis, but the z score of the surprises is now worse.
Housing Market Index Down 13% YoY
The most recent example of a big negative surprise in the housing industry is the housing market index. This is a survey, so it isn’t hard data. However, in the past few months, the soft data has been too optimistic. The soft and hard data appear to be re-coupling. The sentiment shift is in concert with the correction in the stock market. As you can see from the chart below, the index hit an 18 year high of 74 in December 2017.
Source: Twitter @CharlieBilello
In the last 3 cycles, the average peak was 73.6. Generally, when this index hits a high number in the 70s and then declines, it signals the cycle is over. That thesis is supported by the lack of home affordability even as wage growth is strong.
The November housing market index was 60 which missed estimates and the prior reading which was 68. The low end of the expected range was 66. Either this report is a one-off event or it’s a signal of a larger trend. Since we’ve seen a lot of data showing housing is weakening, this data seems like an extension of the recent trend. It will cause analysts to lower their 2019 growth forecasts. Goldman Sachs has recently become relatively bearish on growth as it only expects GDP to grow at a 1.75% pace by the end of 2019.
