Sales of existing homes, the mainstay of the U.S. housing market, stumbled for the third consecutive month in May, emphasizing the persistent challenges in affordability that have hindered the crucial spring selling season this year. New single-family home sales in the United States saw a decline of 11.3% in May 2024, marking a significant downturn in the market.
The spring selling season, typically the paramount period for home sellers, commences in March and extends through May-June. The advent of warmer weather post a frigid winter, combined with the inclination of buyers to secure a new residence before the upcoming school year, usually fuels this season. Conversely, the winter months witness subdued home building activities due to inclement weather conditions in different regions of the country.
Current Downturn: Impact on ETFs
Market experts note that nearly 40% of home sales in the United States typically occur between April and July. However, this year, the SPDR S&P Homebuilders ETF (XHB) and the iShares US Home Construction ETF (ITB) have reported losses of 8.3% and 11% respectively since April. The surge in mortgage rates and home prices has exerted significant pressure on home sales in recent months.
Record-High Prices
The persistent shortage of homes in the market has resulted in elevated prices, with the median sales price witnessing a 5.8% year-over-year increase. This surge can be attributed to the rise in sales of high-priced properties and the prevalence of multiple offers. Lawrence Yun, Chief Economist at the NAR, has highlighted that the record-high home prices are creating a growing disparity between current homeowners and potential first-time buyers.
Projections and Challenges
Despite a slight softening in mortgage rates, the Federal Reserve is unlikely to implement interest rate cuts until later this year. This delay is believed to be impeding the recovery of home sales, which have lingered at around a 4 million annualized rate over the past year. Currently, it would take 3.7 months to sell all homes on the market, marking the lengthiest duration in four years.
Anticipated Recovery and Market Signals
Yun anticipates that an increase in inventory will eventually lead to a boost in home sales in the upcoming months. The supply of existing homes in the market has surged by 18.5% year over year, totaling 1.28 million homes, as more homeowners who were awaiting a decline in mortgage rates have decided to list their properties. Despite this uptick, inventory levels remain below pre-pandemic figures when mortgage rates were considerably lower.
Market Expectations and Valuation Metrics
The recent inflation and retail sales data have sparked market expectations of potential interest rate cuts later in the year, with significant probabilities indicating such moves by the Federal Reserve. From a valuation perspective, the homebuilding industry currently trades at favorable forward Price/Earnings ratios, Price-to-Book ratios, and Price-to-Sales ratios when compared to broader market indexes such as the S&P 500 ETF.
Industry Outlook and Financial Prospects
Quantitative research studies suggest that the future price appreciation of a stock is heavily influenced by its industry grouping. The upbeat industry and sector ranks of the homebuilding sector indicate potential outperformance in the coming months. Industry-specific metrics, including the projected EPS growth, historical sales growth, return on assets, and return on investment, further bolster the positive outlook for the homebuilding industry.
Conclusion: Looking Ahead
While the housing market is facing challenges amidst the spring selling season, indications of recovery in inventory levels and potential interest rate cuts provide a glimmer of hope for the sector. Investors are closely monitoring market signals and valuation metrics to navigate the evolving landscape of the housing market.