The bull trap

Heaven forfend. Could the steerage section be correct?

We have real estate and financing news today. It supports the possibility that those out buying houses at the moment, engaging in multiple bids and succumbing to their base house lust, may be cascading into a bull trap.

And what’s that?

It’s a false upmarket based on misconception, hopium and hormones. A bull trap is a mini-rally that occurs early in a long-term trajectory down. People think things are better and leap in, only to find the asset they just bought is about to tumble in value for reasons they cannot control and conditions they cannot escape.

Or, not. As a post here said, nobody actually knows what the rest of this year (or beyond) will bring. Recently volumes and prices have gone up in some big, bellweather markets. Months of inventory have dropped. Sales have outpaced new listings. Multiple offers and bidding wars have been things once again. Realtors have rediscovered their rizz.

But wait. What if it’s all vapours?

The evidence grows. Labour markets in Canada and the US are throwing off heaps of jobs, with the unemployment rate plunging to a 53-year low. Wages have been rising for eight months and economists say we have full employment. If you want a job, well, here ya go. Last Friday there was a monster non-farm payrolls report in the States, followed on Tuesday by news inflation is sticky. In fact it went up in the US last month. That pretty much guarantees the Fed will raise rates by at least a quarter point at least two more times.

And here’s what happened. This is the yield on a five-year Government of Canada bond so far this month. Uppa she goes.

Bond yields go nuts on jobs & inflation

Bond yields, along with the CB rate, help determine the cost of a mortgage. The jobs/inflation news has just reversed a drift lower. Three-year home loans are climbing to 5.25% with two-year money up a half point to 5.5% and five-year mortgages at the same level. Variables are pushing 6.5% and apparently on their way to 7%, with the stress test near 7.5%.

There’s more. Markets have now decided that pause in rates by Tiff and his buds at the BoC will be temporary. They are pricing in at least one (and probably two) more increases by our central bank with no reprieve until the autumn. If you were hoping for a rate cut (like all the kids on Reddit), that’s not anticipated to occur until mid-2024.

In the States the benchmark 10-year Treasury is back around the 3.75% mark. Consensus opinion is the Fed will push its benchmark north of 5% – half a point above the current level. At least.

Now, did you catch the latest housing reports? Existing home sales across the nation have tanked again month/month and sit 37% below year-ago levels. We just had the worst January since 2009, in the midst of the credit crisis. Prices have followed, with the Frankenumber off 15% and average solds down 23%.

Ditto for starts. While every politician has been squawking about massively accelerating home construction, the pace of new building is falling. Of course. Because buyer demand has dried up. So starts are down 13%. And all this negativity comes despite one of the balmiest Januarys in recent memory, when mortgage rates were softening and house prices declining. In fact, this is the biggest dump in valuations in 40 years.

So, now the latest economic news may suggest that…this…is…just…the…start.

Is that possible?

Says a report from the econs at BMO: “While the Bank of Canada may be done hiking rates (emphasis on “may”, as the market is now giving high odds to one more move), we suspect that prices have not fully adjusted to the 425 bps of rate hikes over the past year. Accordingly, we look for some further price softness nationally in the months ahead. In the seven past housing corrections in Canada, it took three years on average for prices to hit bottom, and we are just one year from the peak of last February.”

“We suspect that the market is still digesting the incredibly aggressive rate hikes of the past year. After all, the Bank of Canada only began raising rates less than a year ago, with the latest volley just three weeks ago. And a persistently robust jobs market raises the risk that the rate-hike cycle is not quite done yet, especially if inflation proves more persistent than expected.”

The gamble continues. Some see opportunity. Many see danger. Nobody knows. Everybody thinks they do.

About the picture: “Thank you for your fantastic blog,” writes Zoe, in Langley. “Been a reader for many years! About the picture: My sweet cat Oscar right before he starts destroying these flowers.”

Source: https://www.greaterfool.ca/2023/02/15/the-bull-trap/