Despite an accelerating slide in housing sales and production following this year’s rise in mortgage rates, my homebuilder stock price index has performed in line with its benchmarks since April. At current prices, homebuilding stocks trade at less than four times projected 2022 earnings and less than five times projected 2023 earnings, which already discounts an expected significant decline in future profitability. Here are my other key takeaways on the latest developments in housing:
- The rise in mortgage rates above 5.00% since April has taken another bite out of housing affordability. Along with the surge in house prices, the increase in mortgage rates has raised mortgage payments on the average house by 68.2% and the associated 20% down payment by 44.1% since December 2019.
- With futures markets predicting a 4.00% Fed Funds Rate by the end of the year, the average rate on the 30-year mortgage will likely rise above 6.00%, perhaps to 6.75%, adding more weight to the decline in affordability.
- The NAHB/Wells Fargo Housing Market Index (HMI), a measure of homebuilder sentiment, has fallen for eight straight months to 49 in August, slightly below the neutral level of 50.
- Fannie Mae’s consumer-focused House Purchase Sentiment Index (HPSI) has fallen for five straight months to 62.8. 76% of consumers now say that it is a bad time to buy.
- YTD through June, new home sales are down 13.7%, with double digit declines posted in three of the past four months. Since sales initially began to drop sharply in 21H2, comparisons are less unfavorable for the second half, so I am projected that new home sales for the full year will be down 15.5% to 651,700 units.
- Monthly unadjusted single-family housing starts fell by double-digit percentages in June and July, with July down 18.8% vs. 2021. YTD, they are now down 2.1%. With units under construction running too high relative to the pace of sales, I now project that single-family starts will decline 10.1% to 1.01 million units for all of 2022.
- As with new home sales, the YOY decline in monthly unadjusted existing home sales quickened to double-digits in June and July. YTD, they are down 10.3%. Given current trends, existing sales should decline at a low double-digit rate in 2022, probably to between 5.2 and 5.3 million units.
- The futures market’s projected 4.00% Fed Funds rate and my forecasted 6.00% mortgage rate depend upon the inflation outlook, an analysis of which is beyond the scope of this report. Many economists believe that it will take time, perhaps years, for inflation to subside; but there are factors and events, such as supply chain disruptions and the war in Ukraine, that could change inflation expectations more quickly going forward.
- Nine of the 11 homebuilders that I follow (with the other two yet to report) posted an average calendar 22Q2 decline of 15.0% in new unit orders, greater than the 22Q1 decline of 9.7%. The average order price advanced 15.6% YOY, so the average dollar value of new orders was down 1.9%. That compares with the average increase in new order dollar value of 7.8% in 22Q1. With unit orders still likely to fall and price increases moderating, the dollar value of orders will likely decline at a faster rate in 22H2.
- Homebuilding stocks are down 34% YTD, according to my Index, which is worse than 11.5% declines in the S&P MidCap 400 and S&P SmallCap 600. The stocks are mostly flat since early April, however, in line with the performance of the benchmarks. Although they dropped on the recent disappointing news about broader housing market trends, they have held their value surprisingly well, in my view. At current prices, they trade at less than four times 2022 consensus estimates and less than five times 2023 estimates, which already discounts a significant drop in their profitability.
- Besides obvious uncertainties about interest rates, inflation, employment and consumer confidence, the future financial and operating performance of the homebuilders will depend upon how successfully they are able to adjust to new market conditions. The improved relative performance of homebuilding stocks vs. the broader market since April suggests some investor confidence about their ability to adjust or alternatively confidence that current housing market conditions will improve before too long.
This is a summary of my recent Housing Market Update report. To obtain a copy of the report, please connect with me using the contact information provided below.
Follow Up: On Tuesday, Aug. 23, the Census Bureau reported that the seasonally-adjusted annualized pace of new home sales declined 12.6% in July to 511,000 units, from 585,000 in June. Year-over-year, the decline was 29.6%. Houses for sale (or inventory) increased by 3.1% to 464,000 units, raising the number of months’ supply to 10.9, a level last seen in the 2008 financial crisis. Although still subject to revision, the decline in new home sales was greater than I anticipated. My forecast of a 15.5% decline in 2022 new home sales (to 651,700) may therefore be optimistic. The report also suggests that first-time homebuyers have moved almost entirely to the sidelines, leaving move-up buyers, especially for high-priced homes, as the dominant force in the market by far. This is reflected in the 5.9% increase in the median sales price to $439,400 and the 19.6% jump in the average sales price to $546,800 in July (vs. June).
August 22, 2022 (August 24, 2022 for the Follow-Up)
Stephen P. Percoco
Lark Research
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