I doubted the ability of Freddie Mac to forecast the housing market once. Never again. In the immediate wake of the pandemic, Freddie Mac insisted that housing would recover rapidly. I was highly skeptical. Freddie Mac turned out to be too conservative! Fast forward two years and Freddie Mac has delivered a surprisingly solid housing forecast despite the headwinds from substantially higher mortgage rates. In its latest quarterly forecast titled “The Purchase Market Will Remain Solid Even as Mortgage Rates Rise“, Freddie Mac predicted that 2022 U.S. home sales will only contract 2.9% year-over-year and just 1.5% in 2023. These numbers look consistent with the “soft landing” the Federal Reserve hopes comes with getting monetary policy back to neutral. Accordingly, Freddie Mac cleared the way for the Fed to normalize policy this year.
Of course, the forecast likely depends on mortgage rates stabilizing around current levels. Freddie Mac’s forecast for 2022 average mortgage rates is below today’s 5.1%: “Due to the recent weekly increase in rates, we forecast the 30-year fixed-rate mortgage to average 4.6 percent for full-year 2022 before reaching 5.0 percent for full-year 2023.” Even the 2023 average forecast is slightly below today’s mortgage rates.
An over-heated housing market sits at the center of the Fed’s concerns over inflation. Freddie Mac further confirmed my assessment by warning the Consumer Price Index (CPI) faces future upward pressure from housing prices: “shelter inflation is yet to be fully reflected in the CPI and, given the high levels of house price appreciation, we expect the CPI to remain elevated.” This caution also leans against the optimistic “peak inflation” narrative that boosted the stock market temporarily after the last CPI report. Instead of peak inflation, perhaps slowing inflation is a more realistic hope for now.
The Trade
In the meantime, the descent of housing market stocks finally took a pause over the last two weeks. If Freddie Mac is right, then I fully expect housing market plays to find some kind of stabilization in coming weeks. So many home builders already carry recession level valuations that the iShares U.S. Home Construction ETF (ITB) reflects a LOT of pessimism. The stubborn bullishness of recent earnings reports continue to fall on deaf ears. So, if current stock price levels hold go into the next seasonally strong period for the stocks of home builders, I may get more aggressive than usual with my purchases.
Be careful out there!
Full disclosure: long ITB