Bonds: A Hint for the Housing Market

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.