Warren Pies: "Expect a double digit correction in the first half of next year"
The 3Fourteen Research co-founder joined me to discuss the housing crisis, the leading indicator he values above all others, and the warning signs of an incoming market correction.
We’re likely in for a positive December followed by a correction but not a bear market in the first half of 2025, 2Fourteen co-founder Warren Pies told me on Talking Markets yesterday. Let’s dig in…
The Real Estate Market Has “Ground to a Halt”
Existing home sales in the US are at “the lowest level they’ve been since 2009.” Additionally, national builders are building a different product, smaller in size and with fewer amenities. “And so those national builders are taking share, and they’re able to sell, but outside of these huge national builders, you’re really not getting any traction in the real estate market,” Warren said. “There's one market for these national builders, and they're raking in the dough. And then everyone else, if you're a real estate agent, if you're a title agent, you're having a hard time.”
Residential Construction Employment is Probably the Economy’s “Most Important Leading Indicator”
For Warren, the residential construction employment numbers are a critically important leading indicator for the economy, as a true recession would start with job losses in cyclical areas of the economy, and primarily through residential real estate.
💡3Fourteen’s model, based off units under construction and labor intensity, says there are about 70,000 (or 8%) too many workers in residential construction. If the model is correct, Warren says “we should expect negative revisions in those numbers.”
“We're not in a position yet to say we think a recession is at hand or within the next six months,” he added. “I mean, we're still at cycle highs on residential construction employment, and that is a leading indicator. So you don't anticipate an anticipatory indicator that would be, it would make you early, which is ultimately wrong, but it has our attention.”
What Would a Housing Correction Look Like?
While most people might associate a housing correction with lower prices, Warren disagrees - because of the underlying shortage. “I don’t think prices will come down,” he said. “I think the way we would get out of this is through a long sustained period of kind of flat prices plus growing incomes, and hopefully some relief between the cost of mortgages and other bonds out in the market.” Basically, mortgage rates need to come down.
Right Now: December and “The Chase”
Positioning and seasonality means “the probability is that this is going to be a strong December,” Warren said.
He says that fund managers or traders who are lagging coming into year end “need to chase” returns, and as well as that, “there's also reinvestment of rebalancing of funds that come in at the end of the year.”
“There's a wall of money that basically travels into the market and makes December such a bullish time of the year,” he said.
2025: Correction Incoming?
Like others on Talking Markets, including Vincent Deluard, Noelle Acheson, and Dale Pinkert, Warren is concerned about the first half of 2025.
He sees “the preconditions for a pretty stiff correction in the first half of next year,” although he’s not expecting a bear market.
“If the inflation, disinflation story starts to stall out, you could see some of those Fed cuts start to get backed out, which is enough to have a backup in long term yields, which then goes into the mortgage market and the housing market into the economy. And eventually you have a correction in stock market,” he said. “I think we should expect a double digit correction in the first half of next year… One way or another, we can't run the entire first half of this year with sentiment where it's at.”
Warren also says the “US ECONOMY IS INCREDIBLY STRONG” narrative is overdone. “It’s strong in some ways, but only 60% of total industries tracked by the BLS are showing job growth, and private sector job growth has slowed to almost a standstill.”
And Finally - Oil
Warren is bearish on oil right now. “Our call has been, and we still have this on, that we would get below $60 oil before the year is over,” he said. “Everyone knows in the market that the oil that OPEC has held off the market has to come back. And that's like the sword that hangs over this entire market. And so once that comes back, it caps upside. So I can find a lot of objectively bullish looking things. Inventories look good. There's backwardation in the futures market. The more or less like hedge funds are pretty short crude oil. But all of that, I think, pales in comparison to how this OPEC oil comes back.”
To watch the full episode, right this way.
Enjoy,
Maggie
Important Disclaimer: It is crucial to remember that this article is for informational purposes only and should not be considered investment advice. Consult with a qualified financial advisor to assess your risk tolerance, investment goals, and overall financial plan.