The investing public tends to place a great deal of faith in the forecasts of economists. To be frank, I am not entirely sure why. An overwhelming majority missed the impact that well-documented declines in real estate were having on the economy in 2007.
Here in 2014, the latest housing data may be showing cracks as well. For example, the National Association of Home Builders (NAHB) puts out a monthly housing market index. In February, the index plummeted to 46, then experienced an underwhelming rebound to 47 in March. Members lack enthusiasm for building conditions whenever the index is below 50. Many economists have dismissed the sour sentiment on the basis of extremely poor weather. However, these are builder expectations about future sales. Wouldn’t shifts in the moods of executives be tied more to people’s desire and ability to purchase properties than to seasonal affective disorder?
Data on the actual number of homes being built back up the gloom expressed in the sentiment readings. Housing starts over the first two months of the year are running at a 10% slower pace than the fourth quarter of 2013. Again, the weather is undoubtedly a factor. Yet regions without bad weather also witnessed a dip in the number of projects started.
Remember, most economists had talked about the economy accelerating in 2014. The fact that this has not genuinely been the case — the fact that we have been decelerating and/or running in place — is being blamed entirely on the ice and snow. The truth? Rising mortgage rates had hurt affordability and the fear of interest rates climbing even higher adversely impacted builders as well as the larger economy.
Here’s the good news. The uncertainty of Federal Reserve tapering combined with a noticeable increase in safety-seeking have pushed interest rates lower. Over the last nine months, the U.S. economy has shown an ability to expand when 10-year Treasuries yield between 2.5% and 3%. On the other hand, if rates move appreciably higher than 3.25%, expect stocks to struggle.
