Home Guides & Resources chevron_right Economy and the Markets Bonds: A Hint for the Housing Market Published March 6, 2023 Charlie Toole, CFA, CFP®Director of Portfolio Management A leading indicator for the housing market is on the rise: Pending home sales were up 8% month over month in January. If you pay attention to bond prices (which we do), this may not be such a surprise. Here’s why. For the last two years, housing activity has been driven by the bond market, specifically by rising yields and falling bond prices. In the chart below, you can see how the Pending Home Sales Index has followed bond prices lower—at least until last fall, when bond prices stopped sliding. Since October 2022, bond prices have risen while yields have fallen. Soon after this trend began, the Pending Home Sales Index reversed its downward march, and it’s been steadily rising since. That may seem odd on the surface, but when you factor in the relationship between Federal Reserve policy, bond yields and mortgage rates, the pieces fall into place. Falling bond prices and higher interest rates mean that borrowing is more expensive, whether you’re a business or an individual…or someone buying a home. As bond prices fell, the average 30-year fixed-rate mortgage rose from generational lows of under 3% in 2020 to as high as 7% in fall 2022. Like a winter storm, February has brought a chill to the bond market. Bond prices have dropped more than 2% (and mortgage rates have ticked up from 6.1% at the beginning of February to 6.5% this week). Is this a small hiccup or the start of a new downtrend? The future direction of interest rates (and bond prices) is unknown, but we can be confident that pending home sales, and the housing market, will follow them up or down. Note: Chart shows level of the Pending Home Sales Index and the price of the Bloomberg U.S. Treasury 2–10 Year Index from Jul. 31, 2020, through Feb. 28, 2023. Source: FactSet. This material is distributed for informational purposes only. The ideas and opinions contained herein should not be viewed as recommendations or personal investment advice. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed. Our statements and opinions are subject to change without notice. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged. Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs. For a summary of Adviser Investments’ advisory services and fiduciary responsibilities to our clients, please review our Form CRS here. © 2023 Adviser Investments, LLC. All Rights Reserved. Tags: bondsChart of the Weekhousing marketinvestment management