Housing market data from the U.S. Commerce Dept. and others show sales and production falling at a rapid rate. The seasonally adjusted annualized rate (SAAR) of single-family housing starts and building permits has fallen for eight consecutive months by about 30%. With housing construction still running high relative to the pace of starts, it seems likely that housing production will fall further in the months ahead.
New home sales appear to be stabilizing, however. The seasonally adjusted annualized pace of new home sales has been hovering around 600,000 since April. At the same time, the composition of sales has changed. First-time buyers are largely absent from the new homes market, while sales to luxury buyers are up significantly YTD vs. prior year levels.
The stabilization in new home sales is not reflected in homebuilder sales sentiment. The NAHB/Wells Fargo Housing Market Index fell to 33 in November, from 38 in October, its 11th consecutive monthly decline. The Index is now plumbing lows last seen briefly at the start of the pandemic and during the 2008 financial crisis.
The average rate on the 30-year mortgage exceeded 7% in late October and early November, but it has since fallen back by about 40-50 bp to around 6.60%. according to Freddie Mac’s Primary Mortgage Market Survey. The decline over the past few weeks follow similar declines in long-term U.S. Treasury yields on optimism that the FOMC will begin tapering its Feds Fund target rate increases.
Fed futures currently anticipate a 75% probability that the FOMC will begin tapering its rate increases, with a 50 bp increase in the target Fed Funds rate at its December meeting. After that, they seem to be pricing in one or two 25 bp increases in the first half of 2023.
If the reading of the Fed is correct, the 30-year fixed rate mortgage, should stabilize or perhaps even decline in the coming months. Even with more Fed Funds rate increases likely, there remains a historically wide spread between the 30-year mortgage rate and 10-year Treasury yields. Perhaps then the mortgage market has room to absorb a 100 bp in increase in the 10-year Treasury yield or mortgage rates could drop by another 100 bp.
Against this backdrop, homebuilding stocks have rebounded over the past two months to the high end of the trading range that began last April. They have outperformed the broader market since April, despite the steep rise in interest rates.
22Q3 unit sales (orders) declined 23.1% in total and 34.5% on average for nine of the 11 homebuilders that I track that have reported results so far. The pace of the decline has moderated recently. On a trailing 12-month basis, unit orders were down 9.4% in 22Q3, compared with a 9.0% decline in 22Q2.
This is the summary or executive overview from my recent Housing Market Update. To obtain a copy of the full report, please reach out to me using the contact information provided below.
November 28, 2022
Stephen P. Percoco
16 W. Elizabeth Avenue, Suite 4
Linden, New Jersey 07036
© 2015-2023 by Stephen P. Percoco, Lark Research. All rights reserved.
This blog post (as with all posts on this website) represents the opinion of Lark Research based upon its own independent research and supporting information obtained from various sources. Although Lark Research believes these sources to be reliable, it has not independently confirmed their accuracy. Consequently, this blog post may contain errors and omissions. Furthermore, this blog post is a summary of a recent report published on this subject and that report provides a more complete discussion and assessment of the risks and opportunities of any investment securities discussed herein. No representation or warranty is expressed or implied by the publication of this blog post. This blog post is for informational purposes only and shall not be construed as investment advice that meets the specific needs of any investor. Investors should, in consultation with their financial advisers, determine the suitability of the post’s recommendations, if any, to their own specific circumstances. Lark Research is not registered as an investment adviser with the Securities and Exchange Commission, pursuant to exemptions provided in the Investment Company Act of 1940. This blog post remains the property of Lark Research and may not be reproduced, copied or similarly disseminated, in whole or in part, without its prior written consent.