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The housing market might yet again be the biggest hazard we have in our economy. Housing inventory is increasing in many markets while affordable housing lags demand. Pending home sales is beginning to plummet and we are seeing mortgage rates up significantly from one year prior. When it comes to gold, we are seeing it regain safe-haven status as the stock market and housing market are showing signs of weakness.

Strong Labor Market and Less Affordable Housing

Housing data is weak when compared to the labor market data. The labor market is running red hot with unemployment at record lows. Workers are getting the raises they demand and there are plenty of new job openings. Historically when the labor market booms the housing market follows suit. The supply of affordable single-family homes is much lower than in previous economic booms. Builders built less than 50,000 single family homes of fewer than 1400 square feet.

In previous economic booms we would typically see about 200,000 fourteen-hundred square foot homes built. This lack of inventory can also be seen by the decreasing supply of vacant housing. This shortage is limited affordable single family homes.

Housing Inventory Increases Across the Nation

Nationwide housing inventory has increased 5% while some of the larger markets have seen inventory increase by 10%. The slowing housing market can be further understood when looking at the pending home sales index.

The image above is the Pending home Sales Index released by the National Association of Realtors (NAR). This metric is one of the early indicators of weakness in the housing market. The reason for this is the 2-month time gap between signing a contract and closing the sale. This index fell to the lowest level since May 2014. The decrease in pending home sales shows the start of a slowing housing market. The National Association of Realtors report says that prices have risen too fast, much faster than wages have increased.

Tax Code

Changes to the tax code has increased the effective cost of owning a home. When looking for a home, a prospective home buyer will calculate their all-in cost. This would include the mortgage, property taxes, insurance, and all the tax deductions. The changes in the tax code limit the maximum deduction, thus increasing the all-in cost to own a home. As the all-in cost of a home increases the demand for that home would decrease. These tax changes have more effect where there are state income taxes. This is because the federal deduction on state taxes has been limited.

Mortgage Rates

One of the biggest concerns with the housing market is rising mortgage rates. One year ago, a typical 30-year fixed-rate mortgage loan would have a rate of about four percent. Now the same mortgage loan would be closer to five percent. The group that is affected most by this are individuals who are looking to buy a bigger home. It becomes much harder to buy a larger home when you must pay a higher interest rate on a larger basis. The increase in rates makes it so individuals can afford less than they could one year ago. As individuals can afford less the housing market will need to adjust prices to reflect that change.

Gold Re-Establishes Safe-Haven

Labor markets are strong, and unemployment is at all-time lows. On the flip side, the housing market has begun to slow and financial markets have sold off precipitously.  The S&P 500 is down about 15% from its top in early October and gold has rallied over $100 since mid-August. Gold has regained its shine. In my previous article, I had mentioned that gold has been negatively correlating with the overall market. This correlation did not hold as strong over the past few years when markets were rallying. But as we are seeing the housing and financial markets begin to turn over, we are seeing gold reestablish this correlation and its haven status.

Gold made another push to $1300 last week as markets hit lows for the year. Watch out for big moves in gold as equity volatility has begun to bring more volatility into all markets, gold included.