Housing sector

Shattered homes: Trouble sets in in booming housing sector

All is well in the homebuilding market. Where is it?

The statistics certainly look encouraging. In December, work began on 1.7 million homes, rounding off the best year for housing starts since 2006, by the United States Census Bureau. And this year promises to be no less robust, with permits issued in December to build 1.87 million homes, up nearly 9% from the previous month. Homebuilder sentiment remains near all-time highs, according to a report from the National Association of Home Builders (NAHB).

But there are some problems, and the stock market seems to be taking over. For one thing, mortgage interest rates are on the rise. The average 30-year fixed mortgage rate just climbed to 3.64% from 3.11% last month, according to the Mortgage Bankers Association. This is the largest one-month increase since 2013.

Meanwhile, home prices are skyrocketing, raising questions about affordability. The median selling price for new homes reached $416,900 in November, according to the Census Bureau. This represents a huge increase of almost 26% compared to February 2020, just before the outbreak of the pandemic. A shortage of certain materials did not help matters.

Such news casts doubt on the sustainability of the housing craze, as “the specter of rising rates has the potential to overshadow the group’s impressive results,” writes Stephen Kim, an analyst at the investment bank. Evercore, in a report.

He expects industry earnings to be strong by the end of the year, but in the meantime he predicts residential real estate stocks will face a tough turn. Kim wrote that “the way forward for equities will be volatile as valuation pressure comes and goes with rate sentiment.”

After a nice ramp-up in 2021, the SPDR S&P Home Builders Exchange-traded funds (ETFs) have fallen 14% this year, including nearly 2.1% on Thursday when the stock market turned. Construction company Toll Brothers, for example, is down 19% in 2022.

The Federal Reserve is determined to raise interest rates, and that’s always a bad thing for builder stocks. The recent rise in mortgage rates shows that credit markets are already bracing for Fed tightening. “We believe history shows that a rising rate environment could be an overhang for equity performance,” Janney Montgomery Scott analyst Tyler Batory wrote in a research note.

Still, despite the turmoil, he added that industry fundamentals such as strong demand and well-funded builders will eventually perform well going forward.

In addition, the fallout from the 2008-09 financial crisis caused a sharp slowdown in construction, leading to a contraction in supply, which is helping to support builders’ results. The pandemic has spurred Americans’ nesting instincts and millennials in particular are now reaching a point where they want to settle down.

Maybe builder stocks will be too.

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Tags: homebuilders, home prices, housing starts, mortgage interest rates, pandemic, sale price, SPDR S&P Homebuilders exchange traded fund, Toll Brothers