Sales of existing homes in the United States plummeted for the third consecutive month in May, underscoring the persistent affordability challenges that hindered the crucial spring selling season this year. During the same month, sales of new single-family houses in the country reported an 11.3% decline, painting a somber picture of the real estate landscape.
The spring selling season, marked as the peak period for home sellers, typically commences in March and extends through May and sometimes into June. This timing coincides with warmer weather following a harsh winter, enticing buyers to make a move before the start of the new school year. In contrast, the winter months are characterized by subdued home building activities due to unfavorable weather conditions, with the south experiencing excessive wetness and the north enduring biting cold.
Challenges in the Market
The current scenario is marred by steep challenges. The SPDR S&P Homebuilders ETF XHB and iShares US Home Construction ETF ITB have both suffered notable setbacks, declining by 8.3% and 11% respectively since April 2024-end. This predicament can be largely attributed to the adverse impact of higher mortgage rates and escalating home prices on overall home sales.
Rising Prices
The prevailing scarcity of homes continues to exert upward pressure on prices. The median sales price surged by 5.8% year over year, boosted by heightened sales of luxury properties and the prevalence of competitive multiple offers. Notably, the record-high home prices are exacerbating the divide between existing homeowners and potential first-time buyers, as articulated by NAR Chief Economist Lawrence Yun.
Market Recovery Delay
Although there has been a slight softening in mortgage rates, the Federal Reserve is unlikely to implement interest rate cuts until later this year. This delay in monetary policy adjustments is viewed as a hindrance to the recovery of home sales, which have stagnated around a 4 million annualized rate over the past year. At the current pace, it would require 3.7 months to clear the existing inventory of homes, marking the longest duration in four years.
Glance at the Future
Despite the prevailing challenges, Lawrence Yun foresees a ray of hope in increased inventory levels, which are expected to bolster home sales in the upcoming months. The supply of existing homes on the market witnessed an 18.5% year-over-year surge, totaling 1.28 million homes. This uptick can be partly attributed to homeowners who, after anticipating a decline in mortgage rates, have opted to list their properties. However, the inventory levels, while showing improvement, still linger below pre-pandemic levels when mortgage rates were considerably lower.
Anticipated Fed Rate Adjustments
The release of recent inflation and retail sales data has fueled market speculations regarding potential interest rate cuts later this year. According to the CME FedWatch Tool, there is a 56.3% likelihood that the Federal Reserve might slash rates to 5%-5.25% by September and a 42.1% probability of a rate reduction to 4.75-5.00% by December.
Industry Valuation
Comparatively, the homebuilding industry boasts a compelling valuation proposition. With a forward Price-to-Earnings (P/E) ratio of 8.22X, the sector stands out against the S&P 500 ETF. Additionally, the industry’s favorable price-to-book ratio of 1.31 and price-to-sales ratio of 0.92 further accentuate its valuation attractiveness.
Financial Performance Insights
Noteworthy financial metrics enhance the appeal of the homebuilding industry. The sector’s projected earnings per share (EPS) growth aligns closely with that of the S&P 500 ETF, underlining stability. Moreover, historical EPS and sales growth rates for the homebuilding industry have outpaced those of the broader market, reflecting strong performance. This is coupled with superior return on asset and return on investment metrics when compared to the S&P 500 ETF.
Optimistic Industry Outlook
The Zacks Building Products – Home Builders industry holds promise, securing a favorable industry rank. Positioned in the top 30% of around 250 industries, the sector is poised for potential outperformance over the next 3 to 6 months. Despite experiencing subdued growth earlier in the year, the industry’s prospects are brightened by its undervaluation and the likelihood of modest interest rate adjustments.
Research reveals that approximately half of a stock’s future price appreciation is attributable to its industry classification. Industries ranked in the top half outperform their counterparts significantly, reinforcing the positive sentiment towards homebuilders. Furthermore, belonging to the buoyant Zacks Construction sector, which ranks in the top 25% among 16 sectors, further augments the resilience of the housing industry. Year-to-date, the construction sector has seen a commendable 4.5% uptick.