Chart courtesy of Action Economics.
Ask anyone these days and they will tell you that “housing is hitting a wall.” What can one expect when the home mortgage interest rate has about doubled in one year from around 3.5% to about 7%?
A Housing Sector ETF for homebuilders is SPDR S&P Homebuilders ETF (XHB). See https://www.marketbeat.com/stocks/NYSEARCA/XHB/. It was trading at about $85 at the beginning of the year. Now the price level is around $55 (October 25, 2022). So an estimate of the decline year-to-date is about 35%. Note that the Cumberland Equity ETF portfolio has not owned this ETF during the entire year. That could change at any future time. For some detailed information about this ETF, you can contact the ETF sponsor: https://www.ssga.com/us/en/intermediary/etfs.
The iShares US Home Construction ETF (ITB) is a US home construction ETF. It has had a similar decline, falling about 36% from about $83 at the start of the year to about $53 as this is written. Cumberland’s US Equity ETF portfolio hasn’t owned this one during the year. For detailed information about this ETF, we suggest that a reader contact the ETF sponsor: https://www.ishares.com/us/products/239512/ishares-us-home-construction-etf.
Now to the investment question.
When all the headlines are terrible about housing, is it time to nibble at the sector? Maybe. Markets tend to lead the news. So the declines we have seen of about a third of the stock market value for housing stocks in under a year started before and preceded the present debacle in the housing sector and in the real estate sector.
We will offer below a smattering of those headlines and list stories about the housing debacle at the end of this missive. We cannot find much positive views being articulated about this sector, with one type of exception. Longer-term analysts’ estimates cite the expectation that the Fed will soon (2023 or 2024) stop raising interest rates. Some forecasters are even guessing that the Fed will be lowering rates in a year or so.
So the speculation is that housing will go from “falling off a cliff” to “hitting bottom” and then to resurging to another bullish cycle. Will that happen? Nobody knows for sure. When? No one knows that either. But it’s usually the case that the stock prices sniff out the forthcoming bottom and turnaround sooner than the headlines do. Many believe that headlines are notorious contrary indicators because they tend to be “late”.
As of today, we haven’t ventured into the housing sector and real estate sector. Note that this sector is about 15%–18% of the GDP of the United States. Further note that it is all domestic and all in US dollar terms and doesn’t face the issues of currency fluctuation. Our position on the industry and on the ETFs in the sector could change at any time.
Here’s a list of headlines, articles, economic papers, and other sources. Please remember that this is a partial list.
Kristina Kay of Pantheon Macro (https://www.pantheonmacro.com) characterized the situation in an email on October 25, “The housing market collapse continues apace, notwithstanding the fluke jump in new home sales in August.”
Peter Bookvar of Bleakley Financial Group (https://www.bleakley.com) wrote in an October 20 email commentary, “To the question I keep asking on housing out loud, 'to what extent will home prices fall from here?,' what will keep them elevated is still the lack of supply as so many don't want to give up their 3% type mortgage rate. Redfin yesterday said in September ‘The number of homes sold dropped 25% y/o/y while new listings fell 22% – the largest declines since May 2020 and April 2020, respectively.’ They went on to say, ‘The US housing market is at another standstill, but the driving forces are completely different from those that triggered the standstill at the start of the pandemic. This time, demand is slumping due to surging mortgage rates, but prices are being propped up by inflation and a drop in the number of people putting their homes up for sale. Many Americans are staying put because they already relocated and scored a rock bottom mortgage rate during the pandemic, so they have little incentive to move today.’”
In an October 24 email blast, Roger Silk of Sterling Foundations (https://www.sterlingfoundations.com) observes, “Economic theory, and experience, also tell us that, everything else equal, as demand falls, so will prices. It appears that apartments are about to be hit with a double whammy – record high supply, along with record low demand growth.”
My colleague John Mousseau offers this citation:
Here’s the link he references: “Florida Coastal Living Reshaped by Hurricane Housing Codes,”
https://www.wsj.com/articles/florida-coastal-living-reshaped-by-hurricane-housing-codes-11666019241
“4 Key Factors That Drive the Real Estate Market,”
https://www.investopedia.com/articles/mortages-real-estate/11/factors-affecting-real-estate-market.asp
“Introduction to U.S. Economy: Housing Market,”
https://sgp.fas.org/crs/misc/IF11327.pdf
“How Do Home Sales Affect the Economy and the Job Market in Your State?”
https://www.nar.realtor/blogs/economists-outlook/how-do-home-sales-affect-the-economy-and-the-job-market-in-your-state
“Real estate industry accounted for 16.9% of GDP in 2021,”
https://www.realtrends.com/articles/real-estate-industry-accounted-for-16-9-of-gdp-in-2021/
“Comparing Measures of Housing Inflation,”
https://www.frbsf.org/economic-research/publications/economic-letter/2022/october/comparing-measures-of-housing-inflation/
“House Price Responses to Monetary Policy Surprises: Evidence from the U.S. Listings Data,”
https://www.frbsf.org/economic-research/publications/working-papers/2022/16/
“Mortgage demand drops to a 25-year low, as interest rates climb,”
https://www.cnbc.com/2022/10/19/mortgage-demand-drops-to-a-25-year-low-as-interest-rates-climb.html
“US Building "Stocks spooked by specter of rates/delinquencies – levitation...,”
Link [UBS login required]
“A recession bellwether is flashing red,”
https://www.politico.com/newsletters/morning-money/2022/10/20/a-recession-bellwether-is-flashing-red-00062685
“Housing Sector Slumps as Double-Digit Mortgage Rates Approach,”
https://www.theinstitutionalriskanalyst.com/post/report-housingsectorslumpsasdouble-digitmortgageratesapproach
“State of the market: More homes on the market as months of supply jumps 60%,”
https://www.sun-sentinel.com/real-estate/fl-bz-south-florida-housing-market-20221021-o7zhdpcngzahxgzcivxhcjgch4-story.html
“A global house-price slump is coming,”
https://www.economist.com/leaders/2022/10/20/a-global-house-price-slump-is-coming
“Housing Weakness Spreading,” Quill Intelligence, Daily Feather [Subscription is required: Link]
“Global: Past house price crashes show jobs and rates are key,” Oxford Economics Research Briefing [Login required at this link.]
“Global: Housing downturn could see global growth drop to zero,” Oxford Economics Research Briefing [Login required at this link.]
“US: Home price growth slowed sharply in August,” Oxford Economics Research Briefing [Login required at this link.]
“Will tumult in the housing market change the Fed's trajectory?”
https://www.americanbanker.com/news/will-tumult-in-the-housing-market-change-the-feds-trajectory
“Housing and Cycles,”
https://www.spectramarkets.com/issues/am-fx-housing-and-cycles/
“Housing: Home price growth slowed by record amount in August,”
https://finance.yahoo.com/news/home-price-growth-slowed-case-shiller-131932896.html
“S&P Corelogic Case-Shiller Index continued to decelerate in August,”
https://www.spglobal.com/spdji/en/documents/indexnews/announcements/20221025-1457029/1457029_cshomeprice-release-1025.pdf
David R. Kotok
Chairman & Chief Investment Officer
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