The Unexpected Resilience of the Housing Market: What’s Really Going On?
The recent Federal Reserve interest rate cut is shaking things up in the housing market. With record-high home prices and rising mortgage rates, you might expect a downturn, but that’s not the case. In our latest video, Ward Brown explore the factors influencing an already resilient market.
Discover the dynamics at play—like stable demand, cautious builders, and homeowners sitting on significant equity. Learn how limited supply and steady demand, combined with the rate cut, are affecting housing stocks.
Transcript
Hello, I’m Ward Brown.
The housing market and housing related stocks have been on a wild ride since the pandemic. Many of the usual patterns we’ve seen in previous cycles have been completely flipped. What’s happening is not what anyone’s expected in this all-important segment of the US economy. Let’s take a look.
With record high home prices, steep mortgage rates and persistent recession fears you’d think the housing market would be struggling. But it isn’t. Housing stocks are sitting near all-time highs.
So what gives? The key for a while now has been plain old supply and demand. We’ve had stable demand for the last several years and there just hasn’t been enough homes for sale. The pandemic just threw additional fuel on that fire. Work from home created a demand surge and Millennials, the largest generation we’ve ever had, have hit their peak home buying years.
Meanwhile, shortages in labor and materials created an even bigger gap between supply and demand.
Another variable is that home builders have been playing it cautious for a while now. After getting burned in the 2008 financial crisis, they’ve been careful not to overbuild. For years now, we’ve been behind the demand curve.
When the Federal Reserve started hiking interest rates in 2022, housing stocks took a nose dive, just like you’d expect. They dropped around 40% or so in six months. But since bottoming out in October of 2022, they’ve been crawling their way back up, even as interest rates climbed right along with them.
A real housing crisis needs a demand collapse and an over-supplied market. This time it’s been the exact opposite. Right now, the housing market is being held back by a simple equation – mortgage rates, plus high prices, equals fewer buyers. New home sales in hot markets, like the Sunbelt in the southeast, are holding up, but existing home sales are dragging.
Sellers are sitting on a ton of home equity to put towards a down payment in the event of a move, but there’s a catch. Those same homeowners also have those really nice sub 3% mortgages and the thought of trading up to today’s much higher rates means a major spike in monthly payments. Builders are offering incentives with things like rate buy-downs, but the bottom line is moving up does come with a hefty price tag. It’s a bit of a stalemate at present.
Realtor friends I ask generally say the same thing – activity is pretty muted, but if a decent house comes on the market in a desirable neighborhood it gets snatched up immediately, usually with multiple bids and some of them in all cash. There’s just a ton of capital out there.
An additional tailwind for housing stocks is that there are some really good management teams running lean, profitable operations. For a bunch of home related stocks, especially the builders, their margins are better than ever. And they’ve been holding up. It’s like management has taken a master class from the mid-2000s housing crisis.
So we look ahead, inventories are creeping up especially in places where prices got ahead of themselves. But offsetting that, is the interest rate cut with, more cuts on the way. We’re already seeing some signs of activity picking up.
At the end of the day, high mortgage rates are still a hurdle. But, the resilience of the housing market boils down to limited supply, steady demand, with a continued focus on improving the existing homes we’re in right now.
It’s a dynamic helping sustain housing related stocks.
Thanks very much for watching.
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