Housing inventories are valued in a big downturn


Our theme of Housing stock, which includes stocks of homebuilders, building products companies and home improvement players, is down around 42% since the start of 2022, significantly underperforming the S&P 500, which remains in down about 22% over the same period. The housing market seems to be at a crossroads. Demand for housing has remained fairly strong so far, given the strength of the labor market, rising wages and demand for larger housing in the wake of the Covid-19 pandemic. According to data from Realtor.com, the national median listing price for active listings in May was $447,000, up 17.6% from a year ago as homes also spent less time on the market compared to last year. However, on the flip side, mortgage rates have skyrocketed, with 30-year fixed mortgage rates dropping from an average of 3.1% in December 2021 to around 5.8% currently, making the more expensive housing finance. Building material costs also remained high, amid strong demand and supply chain issues, which put pressure on homebuilders’ margins.

Now, markets don’t seem too optimistic about the sustainability of demand momentum, which will lead to a strong sell-off in housing inventory this year. With inflation soaring, the Federal Reserve has become increasingly hawkish. Last week, the US central bank raised rates by 0.75%, its biggest hike since 1994, and more similar rate hikes look likely. It could become even more expensive for people to buy homes as mortgage rates rise further, which could hurt demand. Fed tightening is very likely to push the US economy into a recession over the next few quarters, and a slowdown will almost certainly put pressure on the housing market. That said, any potential decline in housing is unlikely to be as severe as the 2008 crisis. low interest, unlike the 2008 crisis which was caused by high levels of indebtedness and speculation. Leverage in the housing market is also currently well below historical levels, with total US mortgage debt representing less than 43% of current home values.

With the housing stock chart down more than 40% this year, it looks like a lot of the pain ahead is priced in. That being said, it is difficult to predict an entry into the sector, as a weak economy could mean that pressure on stocks will remain. Within our theme, Floor and Decor Holdings was the worst performer, with its stock falling around 50% year-to-date. On the other side, Home Depot has fared a bit better than the other names in the theme, with its stock down around 33% year-to-date.

Stock prices have fallen precipitously across all sectors over the past few months and we are now in a bear market for the first time since March 2020, when the Covid-19 outbreak triggered a stock market crash. We capture key Dow Jones trends during and after major stock market crashes in our interactive dashboard analysis,’Comparison of stock market crashes.’

What if you were looking for a more balanced portfolio instead? Our quality portfolio and multi-strategy portfolio have consistently beaten the market since the end of 2016.

Invest with Trefis Wallets that beat the market

See everything Trefis Price estimates



Please enter your comment!
Please enter your name here