// How will the market react? //
If housing is growing :
- ... in the near-term, unemployment will drop, and the Fed will have room to keep rates high ... slightly further along, housing supply will rise, core inflation ( rent ) will drop, and the Fed will have room to lower rates
- ... profits from sales will end up in developers' share prices
- ... profits from mortgage will end up in lenders' share prices
Conversely, if housing is slowing, unemployment will rise, core inflation will rise, and corporate earnings will erode, thus hinting at stagflation.
// What is the broader interest rate environment like? //
- ... To recap, the Fed is in its cutting cycle, but has hinted at very few cuts in 2025. The bond market has run with this hint, and sold off massively, pushing yields up.
- (1) Yields are currently "high".
- ... The incoming Trump administration is expected to grow the fiscal deficit rapidly at the beginning of its term, both boosting the supply of treasuries, and placing upward pressure on yields, thinning the spread between safe-haven and riskier debt.
- (2) Yields will be pushed "higher".
- (3) Everyone else will find it harder to borrow.
- (4.) The private sector is pressured to save, rather than invest.
- (5.) Risk asset prices will deflate.
( * "high" and "higher", are of course, relative to whatever folks are used to in recent years )
- ... At some point, that leads to uncomfortable amounts of unemployment.
- (6.) the Fed will intervene by accelerating rate cuts, or preemptively intervene by buying treasuries directly (between 1. and 2.).
- (7.) Money supply will increase.
// How will housing growth affect the broader interest rate environment? //
- Hot housing data should therefore, prop up yields at the short-end of the curve, but push them down further out. Scenario (6.) will be more more likely, as the Fed will be able to continue supporting higher rates in the near term, before it is forced to push rates down later.
- Cool housing data should therefore, push down yields at the short-end more quickly. Scenario (2.) is more likely to be interrupted by a more urgent buying of treasuries.
// Dank memes and violent arm-waving //
In either case, risk-assets may spike after the news, as the week's data storm of uncertainty blows past.
Anyway, this was a fun thought experiment, and it encompasses the sort of thing I don't understand, which I think I ought to understand better.