Everything is great in the home-building market. Or is it?
The stats sure look encouraging. In December, work commenced on 1.7 million homes, rounding out the best year for housing starts since 2006, per the US Census Bureau. And this year looks no less robust, with permits issued in December to construct 1.87 million homes, up almost 9% from the month before. Home builder sentiment remains near all-time highs, said a report from the National Association of Home Builders (NAHB).
But there are a couple of problems, and the stock market seems to be picking up on those. For one, mortgage interest rates are heading higher. The average 30-year fixed mortgage rate just shot up to 3.64%, from 3.11% last month, according to the Mortgage Bankers Association. This is the biggest one-month hike since 2013.
Meantime, home prices are spiraling, raising questions about affordability. The median new-home selling price hit $416,900 in November, the Census Bureau found. That marks an enormous increase of almost 26% compared with February 2020, right before the pandemic appeared. A shortage of some materials hasn’t helped matters.
Such news stirs doubt about the durability of the housing craze, as “the specter of rising rates has the potential to overshadow the group’s impressive results,” wrote Stephen Kim, an analyst at investment bank Evercore, in a report.
He expects industry earnings to be solid by year-end, but in the interim predicts that residential real estate stocks will have a rocky ride. Kim wrote that “the path forward for the stocks will be volatile, as pressure on valuation ebbs and flows with rate sentiment.”
Following a nice 2021 run-up, the SPDR S&P Homebuilders exchange-traded fund (ETF) has tumbled 14% this year, including almost 2.1% on Thursday, when the stock market turned around from its losing ways. Building company Toll Brothers, for instance, is off 19% in 2022.
The Federal Reserve is set on lifting interest rates, and that’s always a bad thing for builder stocks. The rising mortgage rates of late show how the credit markets are already getting ready for Fed tightening. “We think history shows that a rising rate environment could be an overhang on stock performance,” Janney Montgomery Scott analyst Tyler Batory wrote in a research note.
Nonetheless, despite the turbulence, he added that the industry’s fundamentals, such as high demand and well-financed builders, will end up with good results up ahead.
What’s more, the fallout from the 2008-09 financial crisis created a big slowdown in construction, leading to a shrunken supply, which helps buoy builders’ results. The pandemic has spurred Americans’ nesting instincts and the Millennial generation in particular is now reaching a point where it wants to settle down.
Maybe builder stocks will, too.
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Tags: home builders, home prices, housing starts, mortgage interest rates, Pandemic, selling price, SPDR S&P Homebuilders exchange-traded fund, Toll Brothers