US housing data offers an interesting look at how markets and economic data work.

At the moment, the reports of a slowdown in US housing are increasingly widespread.Builders are reporting slowdowns in traffic and sales, albeit from the frenzied levels of 2021.

Today’s MBA mortgage application data was further evidence. They slumped 6.5% on the week after a 2.3% decline the week before. Applications are now at a 22-year low.

The headline-grabber there is that housing demand is collapsing but that’s not so clear. Most mortgages are for refinancing and why would you refinance a 28-year mortgage at 2.8% from a 30-year at 5.4%?

To be sure, applications for mortgages to purchase new homes fell 7% on the week but are only 21% lower than the red hot pace a year ago.

Further clouding the picture is that the inventory of US homes for sale is still ultra-low.

Another doom-and-gloom headline that 24.1% of US home sellers had to lower prices to sell. That sounds bad, right? The reality is that on average one third of US homes sell after price reductions. Now, the number of reductions is climbing quickly and that’s something to watch but there’s a cottage industry highlighting price drops right now when it’s something that’s the norm.

The bigger question about housing is to what extent was this all priced in a long time ago?

We’re seeing the hard data showing a cooling in the housing market now but is that a surprise? Since December, US 30-year Treasury yields have risen to 3.15% from 1.69%.

Did no one expect that to cool housing? Of course not.

Here’s the homebuilders ETF (XHB) overlayed with 30-year rates (inverted).

This shows that homebuilding stocks peaked in December at the same time that US 30-year rates bottomed.

Looking at the end of the chart, we’ve also seen tentative signs of a bottom in homebuilders with rates staying below the recent highs; and that’s despite a broadly bearish market.

So if homebuilding stocks figured this out 7 months ago, can it really be a surprise to the broader market and economy? The indicators we’re getting right now simply confirm what the market has known forever: That when interest rates go up, housing demand cools.

Housing is particularly rate-sensitive but that logic needs to be be applied to everything. The economic data we’re going to see in the months ahead will demonstrate some slowing because of higher rates.

There’s nothing groundbreaking or surprising here.

The question I have is: What portion of the drop is due to higher rates and what portion was due to covid pulling forward demand?

It’s widely assumed right now that many categories of durable goods saw pull-forward demand during the pandemic that will mean less demand going forward. For instance, people bought better TVs and kitchen appliances because they were stuck at home. That shopping is done and will unwind.

That’s clear for autos as well but with manufacturing so impacted by chip shortages, there’s still a huge backlog even as demand slumps.

So where does housing fit in?

The pandemic and low rates spurred housing but inventories are also tight. Demographics are favorable to US household formation.

Will we see housing cool enough to revert to a ‘normal’ market? If so, that’s fine. Prices will be stable, builders can sort out supply chains and then start to add inventory. It could mean a couple years of flat pricing but after such a big jump, that would be fine.

Or will it end up more like TVs? Perhaps there’s more inventory out there than anticipated. Investors bought up many homes and could put them on the market if they think prices will fall. Consumers might simply be priced out by high rates.

Ultimately, I think housing cools but stays healthy.

But what happens next won’t be determined by builder surveys, mortgage applications or lagging data on home sales — it will be determined by rates.