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Home Sales Are Crashing Faster Than The Bursting Of The 2005 Housing Bubble

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A Dragan

Existing home sales continued their historic plunge in July, reaching their lowest level in seven years non-COVID, with about 1.7 million home sales down in the past six months.

Source: Bloomberg, Financial Sense Wealth Management

Source: Bloomberg, Financial Sense Wealth Management

To give you an overview of the current pace of decline, the housing bubble peaked in 2005 and capsized towards 2006, but the rate of decline did not accelerate until 2007 when it began to fall off a cliff.

Source: Bloomberg, Financial Sense Wealth Management

Source: Bloomberg, Financial Sense Wealth Management

The decline in existing home sales over the last six months has been so steep that even the sharpest slowdown during the housing bubble did not match the pace of the recent decline in home sales. 6 months to 2022.

Source: Bloomberg, Financial Sense Wealth Management

Source: Bloomberg, Financial Sense Wealth Management

This can easily be seen by looking at the six-month net change in pre-owned home sales going back over 20 years. The current pace of decline is unprecedented.

Source: Bloomberg, Financial Sense Wealth Management

Source: Bloomberg, Financial Sense Wealth Management

We don’t have July data for new home sales yet (we’ll get it next week), but look at the net change over the six months to June of this year. Early 1980s:

Source: Bloomberg, Financial Sense Wealth Management

Source: Bloomberg, Financial Sense Wealth Management

The Conference Board announced that the annual rate of change in the Leading Economic Index (LEI) plunged to 0% in July from its 2021 high. It’s now slowed down in 14 of the last 15 months. It will be the 13th day if it officially enters negative territory in August.th Since 1960 (or about once every five years). Of his 12 past occurrences, 66% showed early warnings of a coming recession, while 33% did not.

Below is the much-needed ‘soft landing’ when the LEI falls below 0% within a year and a half without a recession.

If it goes below 0%, what are the chances of another soft landing? why is that? Well, when the economy bottomed out of its soft levels and then picked up again, inflation during that period was a fraction of what we’re dealing with today. Below are the annual inflation rates at the LEI troughs during previous soft landings.

Number of times the LEI has fallen below 0% in a year and a half without a recession = the long-awaited ‘soft landing’

  • 1967 (2.8% inflation at the bottom of the LEI)
  • 1996 (2.7% inflation at LEI trough)
  • 1999 (1.7% inflation at LEI trough)
  • 2016 (1.0% inflation at LEI trough)

Common to all these soft-landing declines was that the LEI was only slightly below 0%. However, if it goes below minus 1%, it will fall into recession every time.

Source: Bloomberg, Financial Sense Wealth Management

Source: Bloomberg, Financial Sense Wealth Management

Given the current pace of decline, we think it’s likely that the -1% threshold will be crossed this month. We won’t know this until a month later, when the data is finally released in September.

Conference Committee US Leading Index 10 Economic Indicators

Source: Bloomberg, Financial Sense Wealth Management

If we look at the period of inflation from the late 1960s to the early 1980s, we can see that a recession above -1% will occur simultaneously or within seven months at the latest.

Unless inflation magically vanishes below 3% over the next two weeks, it will be very difficult to achieve a soft landing. What history shows is that the higher the inflation rate (bottom panel), the bigger the decline in real GDP usually (top of the bottom panel):

Source: Bloomberg, Financial Sense Wealth Management

Source: Bloomberg, Financial Sense Wealth Management

With inflation hovering at its highest level in 40 years, is it reasonable or realistic to assume we will see a soft landing? I’m here. History shows that the current “Fed Pivot” rally is likely to be short-lived unless a soft landing is imminent and an official recession instead.

Given the above, caution is still warranted, which is why the risk level is below neutral.

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Editor’s Note: The summary bullet points for this article were selected by the Seeking Alpha editors.

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