As the summer season draws to a close, home sales are expected to remain sluggish due to high mortgage rates. However, the new home market and home builder stocks show promise for the future.
Recent data indicates a lackluster housing market leading into the fall. In July, existing-home sales reached a seasonally-adjusted annual rate of 4.07 million, the lowest reading since January, according to the National Association of Realtors.
Unfortunately, other indicators also offer little hope for improvement in the coming months. Pending home sales increased in July for the second consecutive month but remained well below last year’s levels, the National Association of Realtors reports.
Additionally, August data from the Mortgage Bankers Association suggests that overall demand for home purchases remained low last month.
Joel Kan, the deputy chief economist of the mortgage bankers group, attributed this to elevated mortgage rates and limited housing inventory.
Buying a house has proven challenging this year, especially for those in the market for previously owned homes. Freddie Mac’s tracked mortgage rates have stayed above 6% for the entire year, peaking at 7.23% in the previous month—the highest level in over two decades. Shortages in home listings, likely caused by the earlier refinance boom spurred by low rates during the pandemic, have contributed to rising home prices.
Nicole Bachaud, a senior economist at Zillow, predicts more of the same for this fall. Although properties are selling quickly, there aren’t enough homes on the market, resulting in lower sales for existing homes. The limited inventory will also push prices higher, with Zillow anticipating a 6.5% year-over-year increase by next July.
New Construction Thrives amidst Challenging Housing Market
While the existing-homes market continues to face challenges, new construction is thriving. Builders have capitalized on the housing market’s limited supply, as data suggests a surge in new home sales. In fact, July witnessed the highest level of seasonally-adjusted sales since February 2022.
Builders are able to tilt the scales towards new construction by offering incentives like mortgage rate buy-downs. Consequently, the sales of new construction are expected to remain robust.
Despite the recent rise in mortgage rates, there is little evidence to suggest that builders have been adversely affected. Carl Reichardt, Jr., a home building analyst at BTIG, notes that public builders have not indicated any unusual weakness in August.
Typically, the housing market experiences a slowdown towards the end of the year. However, this does not necessarily impact home building stocks. In fact, these stocks tend to perform well in the latter part of the year as companies discuss their plans for the upcoming year, and investors anticipate the spring season.
Historical data analysis reveals that home building-related stocks have consistently outperformed the broader market between the end of September and the end of January. The SPDR S&P Homebuilders ETF (ticker: XHB) has averaged a 6.3% increase during this period, surpassing the S&P 500’s average gain of 3.4%.
Prominent holdings of the fund include PulteGroup (PHM) and Toll Brothers (TOL). Both companies have experienced substantial growth in their share prices, with PulteGroup soaring by 82% and Toll Brothers by 68% in 2023.
In conclusion, despite challenges in the existing-homes market and rising mortgage rates, new construction is thriving. Home building stocks have historically performed well towards the end of the year, indicating optimism in the industry.
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