Housing market data from the U.S. Commerce Dept. and others show sales and production leveled off and even recovered a bit in the final months of 2022 and first two months of 2023. The seasonally-adjusted annualized rate (SAAR) of single-family housing starts has averaged 840,000 units since October, while single-family permits have averaged 770,000. With housing construction still running high relative to the pace of starts, however, housing production could fall further in the months ahead (but probably after the spring selling season).
New home sales have started to recover. The SAAR of new home sales rose steadily from 583,000 in November to 670,000 in February. Consensus estimates expect a March SAAR of 635,000 when reported on Thursday. First-time buyers remain largely absent from the new homes market. Sales to move-up buyers now account for 90% of new home sales.
Homebuilder sentiment has rebounded from its lows, but remains below the neutral level of 50, an indication that builders expect a continuing but slower rate of market contraction. Although buyer traffic remains weak, a higher proportion of serious buyers has buoyed builder sentiment.
After falling to a low of 6.1% in early February, the average 30-year mortgage rate has rebounded to 6.6%. If the Fed Funds rate levels off by mid-year, mortgage rates should fall to below 6.0%, perhaps even as low as 5.5% in the coming months, as the spread between the 30-year mortgage rate and 10-year Treasury yield drifts back to its historical average.
Net orders for the 11 homebuilding companies that I follow plunged 49.2% on average in 22Q4, worse than 22Q3’s 34.5% decline. That exceeded the 21.1% drop in 22Q4 national new home sales as reported by the Commerce Dept. The difference is due primarily to elevated cancellation rates. YOY sales and delivery comparisons will probably remain unfavorable in 23H1, but should turn positive in 23H2.
Consensus estimates currently anticipate an average earnings decline of 35%-40% in 2023, followed by a mid-single-digit rebound in 2024. The September-to-February rally in homebuilding stocks combined with lower earnings forecasts raised forward P/E multiples from 7 to 8. That is still below the group’s long-term average forward multiple of 10 times. Homebuilder stocks may still have as much as 25% upside potential from here over the next year or two.
Homebuilding stocks have significantly outperformed the broader market since September. After such a strong advance, the stocks seem due for a correction. However, the prospects and relative valuations of individual builders vary, suggesting that there may still be a near-term upside opportunity in certain builder stocks from here.
This is a summary of my latest Housing Market Update report. To obtain a copy of the full report, please reach out to me using the contact information provided below.
March 24, 2023
Stephen P. Percoco
16 W. Elizabeth Avenue, Suite 4
Linden, New Jersey 07036
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