The National Association of Home Builders (NAHB) was just about as bearish on the housing market as it allows itself to get. In its latest press release on the NAHB/Wells Fargo Housing Market Index (HMI), the NAHB declared “…the housing market is now slowing.” The HMI plunged from 77 to 69 in a sign that builders are finally feeling the pressure of the headwinds leaning against the housing market. Sentiment is now back to where it was after the first few months of the pandemic. In fact, sentiment is below its pre-pandemic high.
Affordability Pressures
Affordability issues are weighing heavily on builders. In an earlier press release, the NAHB warned of “… current deteriorating conditions as a sharp jump in mortgage rates in March and April coupled with ongoing building material supply chain disruptions, labor shortages and high inflation drive up housing costs.” The NAHB effectively threw out its data for the first quarter in order to reflect the higher mortgage rates for April. Using 5.11% as its mortgage rate, the NAHB concluded that only 48.7% of homes sold were affordable to households earning the median of income: “the lowest affordability level recorded on the HOI since the beginning of the revised series in the first quarter of 2012.”
While the Federal Reserve needs to slow down the housing market in order to achieve its inflation targets, the jury is still out on whether housing prices will drop significantly in the coming housing market slowdown. For example, existing homes for sale are in such short supply that it could take a deep recession to force prices down significantly. In the meantime, I am going to watch the commentary from the earnings report of home builders. Builders like KB Homes (KBH) have remained consistently bullish on the housing market to-date.
![As of the first quarter 2022, the median sales price of homes sold in the U.S. sat at record highs as part of a tremendous pandemic-era, Fed-fueled boom. Source: U.S. Census Bureau and U.S. Department of Housing and Urban Development, Median Sales Price of Houses Sold for the United States [MSPUS], retrieved from FRED, Federal Reserve Bank of St. Louis, May 17, 2022.](https://fred.stlouisfed.org/graph/fredgraph.png?g=ONom "Median sales price of homes sold in the U.S")
The Lingering Bull Case
Joe Zidle, Chief Investment Strategist from Blackstone (BX), appeared on CNBC’s Fast Money yesterday to give the bullish case for housing despite all the negative headlines. He provided the following key points:
- The economy has a long runway thanks to strong employment.
- Housing prices are more dependent on employment conditions and will not be the part of the economy that breaks (first) when the Fed finally stops tightening monetary policy.
- Housing activity will slow and price appreciation will level off. (In other words, the housing market is slowing, but a crash is not imminent).
- The Fed will need to keep hiking rates further (well into 2023) than the market expects.
- There is very little excess in housing, so the market is not at risk like it was in the financial crisis. Home equity remains at an all-time high. Home owners have not been drawing down on home equity loans like they were in the lead-up to the financial crisis.
Recall that last month Freddie Mac issued a solid forecast for housing despite rising mortgage rates.
The Housing Stocks
At the time of writing, housing stocks are absorbing the latest negative news surprisingly well. Despite a fresh surge in interest rates, the iShares U.S. Home Construction ETF (ITB) is trading flat. ITB was higher during the day. ITB is even back to out-performing the general market as the housing market does its best to hang in there. The churn of the last 5 weeks contrasts sharply with the on-going sell-off in the S&P 500 (SPY). Still, I am content to wait until the launch of the seasonally strong period for home builder stocks (October or November) to buy into the recession-like pricing in housing stocks.
Be careful out there!
Full disclosure: long ITB, long KBH