November 5th, 2018 | Too Much of A Good Thing
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Stocks, particularly the Dow Jones, plunged over 800 pts in just 48 hours of trading earlier this month because…get this….because the economy is doing really really well. But don’t stock prices typically perform the best when the economy is doing well? Yea-no. The US economy is doing so well that interest rates increased to its highest level in 7 years (more on that in a moment). The 10 year US Treasury hit a threshold of 3.25% and the fear of these higher rates slowing down the economy triggered an avalanche-type sell-off in stocks. Classic case of too much of a good thing.
The 10 year US Treasury, which is what mortgage rates are most closely tied to, has more than doubled in the past 16 months. While that may seem unprecedented, it’s worth the reminder of where the 10 Year US Treasury hovers in a more normal economic state. It bears reminding that a rate of 1-2% for the 10 year US Treasury was at what is considered an emergency level, a level required to keep the US economy from the brink of a catastrophic collapse.
If we take out the highs of hyper inflation from the late 1970’s and early 1980’s, and we strip out the emergency level rates from 2010 to 2018, we may be able to come up with a more reasonable expectation for a range of the 10 Year US Treasury of 4-8%. Let’s not forget that the US Treasury was nearly twice as high as it is now during the housing boom. It’s ok everyone, keep calm and breathe. Rates in the 5’s are a necessary progression back to normal.
September marked the first month in 11 years where the median priced home reached the $300,000 threshold. However, we have to think that the tea kettle of pricing is whistling loudly, and we can see some pull back or at least a pause in prices. The number of resale transactions for the month of September was down over 16% from September of 2017. Also, the nearly 6,150 homes on the market without offers is up over 20% from this month last year. If you are doing the math, 6150 divided by 2400 = 2.5, meaning there is considered to be 2.5 months supply of housing, much more healthy than 1% where we have been hovering for what seems to have been way too long.
Have a great week!