“Trump take housing:” how the Iran war is killing the housing sector’s “green shoots”

 

 - by New Deal democrat

“Trump take egg” was a social media meme popularized by MTSW at Bluesky, highlighting prices that T—-p had promised would come down, but increased instead.

The spike in egg prices was due to avian flu, but when it comes to internet memes, nevermind.

Which is by way of introduction to saying that the economic damage done by the Iran war is spreading out.

At the end of February, mortgage rates hit a 3.5 year low at 5.98%. As of yesterday, according to Mortgage News Daily, they made a new 7 month high at 6.62%.

 

I have been writing for nearly a year that the housing market was recessionary, and that the last dominos were falling. But recessions do end and turn into recoveries, and in the last few months there have been signs of “green shoots” in things like mortgage applications that suggested that left to its own devices, any such recession would likely be short. Well, the Iran war is in the process of killing those green shoots.

First, let’s take a look at 10 and 30 year Treasury interest rates (dark and light blue, right scale) vs. mortgage rates (red, left scale) since the Fed first started raising rates 4 years ago:

Note that in the first year, mortgage rates reacted more strongly to the change in the interest rate climate than did long term Treasurys. In the past two years, they gave back that premium, as mortgage rates declined from a high of about 7.80% to the aforementioned 5.98%. Now here is the short term look to emphasize the reversal in the past 4 weeks:

Note that the mortgage rate in the above graph is weekly, and does not include the further increase in the last few days, which would take us all the way back to last August.

And the increase in mortgage rates has already had an effect on new purchase mortgage applications (blue, left scale) in the graphs below) as well as refinancing (gray, right scale). Here’s the longer term look, showing how that after almost completely drying up in 2023-24, mortgage applications generally rose during 2025 and into this year, in response to lower mortgage interest rates:

Now here is the close-up of the past year:

Note that both types of applications fell sharply in the past several weeks - and the two graphs above end as of one week ago.

Refinancing is particularly sensitive to mortgage rates. As the below graph shows, it is virtually a mirror image:

Again, this graph does not include the further increase in mortgage rates this week.

As a result, we can expect both purchase and refinancing mortgage rates to decline further. This is almost certainly going to put an end to the “green shoots” that were beginning to appear in the housing data. And if those higher rates persist, if there is a recession this year, it is only going to be made deeper and longer.

New and continuing jobless claims remain near historic lows

 

 - by New Deal democrat

Along with the weekly update of retail sals, new jobless claims continue to be the most positive economic data in the entire specturm.

Last week new cliams increased 5,000 to 210,000, which is about average for the entire post-pandemic period. The only other time they were this low was 2018-19, and before that, the 1960s! The four week moving average declined -250 to 210,500. With the typical one week delay, continuing claims declined -32,000 to 1.819 million, the lowest number since June 2024:

On the YoY basis more important for forecasting purposes, initial claims were down -6.2%, the four week average down -5.9%, and continuing claims down 1.8%:

This week let me include the long term historical look at how initial claims lead the *number* of unemployed (red in the graph below), and to a much lesser extent, so do continuing + initial claims:

The same is true with respect to the unemployment rate:

With the significant drop in new and now continuing jobless claims since last November, the forecast is very much that the number of unemployed in the next several jobs reports is likely to decline:

Note that the number of unemployed peaked in September and November. Jobless claims forecast that this number will remain below those peak months.

And the same is true of the unemployment rate, even though it ticked up in the last jobs report:

The unemployment rate is likely to tick down to 4.2% or even 4.1%. The only complicating factor is whether the number of *employed*, as well as the number of unemployed, also declines.

I continue to suspect that, not only is there residual post-pandemic seasonality in the jobless claims numbers, but that the drying up of immigration as well as the ramping up of deportations in the past year has had a great deal to do with both the stalling of employment as well as the relative persistence of the unemployment rate.

Updating the K.I.S.S. estimate of the coming shock in CPI

 

 - by New Deal democrat

There’s no big economic data today, so let me update something I posted last week, in which I warned readers to expect a shock in the next CPI report. 

I wrote that “based on past history and using conservative assumptions, the model forecasts a 1.8% increase in CPI between March and April. Using normal assumptions it would forecast a 2.1% increase in these two months. And if I were to plug in today’s $3.92/gallon average vs. $3.72, the model would forecast a 2.5% increase in consumer prices by the end of April.”

Well, as of today’s weekly update from the E.I.A., gas prices as of the 20th were $3.96/gallon:

That would translate to an increase of 2.6% in consumer prices using my K.I.S.S. method of estimating the ballpark increase.

And according to GasBuddy, as of today, gas prices are right at $3.99:

which would translate into a 2.8% increase.

There is no way on earth wages would be able to keep up with that kind of shock.

The bond market sends an unprecedented message

 

 - by New Deal democrat

Something not just unusual, but unprecedented has happened in the bond market this year.

Normally, when an inverted yield curve (where earlier maturing bonds yield more than later maturing ones) regularizes, or un-inverts (where yields get higher the later the maturing), it is because the Fed has lowered rates sufficiently that all maturities, from 3 months to 30 years, follow them downward, but the shorter maturities decline in yield more.

An excellent example of this is the Fed easing on the cusp of the Great Recession. In January 2007, the yield curve was almost totally inverted (dark line). Maturities out through 10 years were not just lower than the Fed funds rate, but each longer maturing bond earned less than shorter maturing ones. The only exception was the thinly traded 20 year maturing. Even the 30 year bond yielded less than the Fed funds rate. As the Fed smelled increasing trouble, it made a series of rate cuts, and by March 2008 (the lighter shaded line) the curve had completely normalized, with shorter dated maturities declining in yield far more than longer dated ones:

But that’s not what has happened this year. The dark line in the below graph is the yield curve from December, while the lighter line is from the end of last week:

In December the yield curve was still inverted out through the 2 year maturity. By last week the yield curve had normalized, but not because earlier maturing bonds had declined in yeild, but rather because short to medium term yields had *increased* in yield, with yields from 3 months to 2 years progressively rising more.

I’ll spare you all the graphs I generated to test whether this year’s configuration was truly unique, but below are three of them. In all three, shorter maturing yeilds are lighter in color than longer maturing yields. (Note: these are not *all* maturities, but are representative. But be assured that I looked at every single maturity from 1 month to 30 years available on FRED, as far back as each series went).

First, here is the period of disinflation that started in 1982 and continued until the pandemic:

Each time following an inversion, the shortest dated yields fell the most, followed by more intermediate term yields, while the longer maturing yields declined only gradually.

But what about the inflationary 1960s and 1970s? Here is the first part of that era:

And here is the second part:

Again, in each case of an inverted yield curve (where the lighter colored matirties were higher in yield than the darker ones), *all* of the maturities declined in yield as the curve normalized, even though as time went on even the earliest maturities yielded more than they had before. 

The closest analog to the present situtation I could find was the end of 1981, when the curve normalized as most yields stayed roughly the same as the (temporary) bottom in yields was imminent:

So the present situation in the bond market is one of a kind.

This unique event has probably happened because bond traders no longer expect further rate cuts, or at best they expect only one of them. Rather, traders likely expect at least some inflationary impulse over the next several years that mean that short term maturities must offer more yield to be competitive. Normally this has happened in an environment of an overheated economy which is gathering inflationary steam; as opposed to the current situation where for the past year about the only sector of the economy experiencing anything more than tepid growth has been related to the building of AI data centers.

This time around the inflationary expectations appear to all to be downstream of decisions in Washington which have been likely to shift both the supply and demand curves towards more inflation, including tariffs and the War with Iran resulting in the closure of the Strait of Hormuz (supply shocks) as well as a Federal budget that is most comparable to a Mafia bust-out (demand shock).

We live in interesting times.

Construction spending in January declined, manufacturing construction tanked; but the AI data center Boom continued

 

 - by New Deal democrat

This morning the construction spending report for January was released (note that this is still about 3 weeks later than usual, so last autumn’s government shutdown continues to reverberate in the data). In the past I have used it to help track the long leading sector of housing, but in the wake of the Inflation Reduction Act, plus the chaos now in Washington, it has also been useful to track manufacturing. And finally, via private construction of water supply, as a proxy for construction of AI data centers.

And with the exception of that last item, the numbers in January, even nominally, were all negative. Total construction spending declined -0.3%, residential spending down -0.8%, and manufacturing spending down -2.0%. Non residential spending as a whole declined -0.4%. But spending on water supplies increased a sharp 3.3%. Below are all of the above, normed to 100 as of one year before (January 2025). I also show the PPI for construction materials to show how much spending there was for each in “real” terms:

Since the cost of construction materials (red) increased 6.6% during the 12 month period, only spending on (likely AI data center related) water supply increased in real terms.

Here is the same data measured YoY:

Note that almost every sector of construction has either slowed down or turned negative in the past year, and in particular manufacturing construction has declined sharply. Only residential construction has rebounded slightly on a nominal basis, and in real terms bottomed last spring. In contrast, the Boom in water supply construction is apparent. Notably, as shown in the graph below, even spending on water supply construction in real terms has declined since last September:

Most importantly, this paints a picture of spending in the two leading sectors - housing and manufacturing - declining through 2025. 

This is yet more evidence that the only sector which has been keeping the economy out of recession recently has been that releated to AI data centers.