Happy as a Clam, but Why?

Happy as a Clam, but Why?

The unabridged version is “happy as a clam at high tide.” Whether unabridged or abridged, one must ask the following upon hearing the saying: Why should a clam be happy? Can a clam be happy? Who would want to be as happy as a clam?

We start with a digression, but we do so for a reason: Why are home builders so happy? They’re certainly happy. Is it logical for them to be happy as a clam, so be it, or otherwise?

Sentiment among home builders continues to heave strongly toward optimism (optimism tends to induce happiness). The home builder sentiment index posted at 72 for January. This is a couple ticks lower than the 74 posted for December — a decade high — but it’s still high compared with postings for the past 10 years.

Perhaps the traffic component of the index is the reason overall builder sentiment levitates at a high level. The traffic component, which has long languished below 50 (the demarcation between overall optimism and overall pessimism), posted at 54 in January. Traffic is up. This points to growing interest among first-time buyers, an important constituency.

Home builders start 2018 happier than they started 2017. But the latest data on housing starts suggest they should curb their enthusiasm.

Housing starts fell in December, and they fell by more than a negligible amount. Starts were off 8.2% for the month. The important component of the data, single-family starts, was off most. Single-family starts tumbled 11.8% to 836,000 units on an annualized rate.

Despite the year-end drop, starts finished 2017 higher than where they started. Starts increased 2.4% to 1.202 million units for the year to post the highest year-end tally since 2007.

Market participants are forward-looking creatures. December was an off-month for home building. The future points to a rebound, and one likely to be sustained through 2018. Demand for new homes remains strong. The strength is buttressed by a robust labor market, rising economic growth, and rising business activity.

So home builders should be happy. And so should the lenders that finance their customers.

Mortgage rates have risen palpably since early December. Quotes on a 30-year fixed-rate prime mortgage are somewhere between 4.125% and 4.25% at the national level, according to Mortgage News Daily’s latest survey. Nevertheless, home buyers are willing takers. Purchase applications were up 3% week over week last week. They’re up 7% year over year.

Rising interest rates have been a source of anxiety of late. We’re not particularly anxious. The economy is fundamentally strong; a fundamentally strong economy can thrive in a rising-rate environment. We see no reason that housing and mortgage lending can’t thrive, too.

This Is No Bubble Market

Rising interest rates have raised the volume on “bubble” chatter, particularly at the more conspiratorial and contrarian media outlets. Is the bond bubble set to burst?

First, we question if bonds are in a bubble. Bond prices have continually risen and bond yields have continually drifted lower for the past 35 years. Double-digit rates on long-term bonds in the early 1980s have relentlessly trended toward low-single-digit rates for the same long-term bonds.

This fact alone hardly constitutes a bubble. Indeed, the fact bond yields have continually drifted lower for decades is the antithesis of a bubble. A bubble is characterized by a get-rich-quick mentality. Thirty-five years is hardly quick.

Bond values take their cue from GDP growth. Nominal GDP growth is low in many leading economies. Though ramping up here, domestic GDP growth is still mild by historical standards.

What’s more, the risk premia for bonds is still normal by historical standards. Spreads between BAA-rated corporate bonds and 10-year U.S. Treasury notes adhere close to the 100-year historical average. This is not a distorted bond market.

History shows that bonds can remain in a bull or a bear market for decades. The last bear market — marked by chronic, not acute, falling prices and rising yields — lasted from 1946 to 1981. Previous cycles, both bull and bear, have been equally long in duration.

Rising interest rates and falling bond prices? Maybe. This is hardly proof of a popping bubble, though. Interest rates could be starting a rising trajectory that could last for decades. If so, the rise will most likely be chronic and incremental. Markets readily and calmly adapt to what is chronic and incremental.