We are tracking signs of economic stress caused by rising interest rates and if the increasing signs of stress are systemic.

This biggest point of increasing economic stress to the economy from rising rates is in the financing of big ticket items like houses. The high price of homes is restricting activity, keeping buyers on the sidelines. The Federal Reserve is slowing down home sales by hiking rates because, once again, a bubble has formed in the price of single family homes. In fact, the argument can be made that we are in a “super bubble” that was caused by ultra-low interest rates for nearly a decade and no limits on the number of houses investment groups or REITs could buy. When a rich guy like Sean Hannity can own 870 houses, that’s a sign of a massive real estate super bubble.

FRED average selling price of houses chart. If 2007 house prices were in a bubble, then 2018 house prices must be a super bubble.

As Bloomberg reports:

The U.S. housing market — particularly in cutthroat areas like Seattle, Silicon Valley and Austin, Texas — appears to be headed for the broadest slowdown in years. Buyers are getting squeezed by rising mortgage rates and by prices climbing about twice as fast as incomes, and there’s only so far they can stretch.

In a survey of potential home buyers that asked if now is a good time to buy a house, the results hit the lowest level since October of 2008.

Good time to buy a house

New home sales completed seasonally has plunged and is coming in way below the average.

New home sales completed seasonally falls in July 2018.

As home sales drop, home builders will build fewer homes as they don’t want to be stuck with a newly built house they can’t sell that has property taxes on it and a host of other fees associated with it.

We are already seeing stress in home builders stocks. Premium members know I’ve been commenting on the Burial Cross on the US Home Construction ETF for many months now.

ITB stock chart

As home sales slow, we would expect the supply of homes for sale to rise. The good news is that we don’t see supply breaking out yet.

Monthly supple of homes in the US as of September 2018.

As long as we are below the Q3 2015 high of 5.9 (red line), we don’t yet have a breakout in supply. The importance of tracking the supply of homes on the market can’t be overstated. Every recession always has a sharp move higher in the supply of homes on the market.

Monthly supply of homes chart spikes up right before a recession.

We have yet to see the supply of homes on the market spike higher and so this tells us that we have time before the next recession hits.

Is a slowdown in the housing market a systemic risk? Of course it is. Weakness in the housing market has been the precursor to every recession for the past 100 years and because so many houses are concentrated in the hands of a few, when prices start to drop and the selling starts, it could be bad folks.

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