Housing Starts Drop 8%, What This Means to Investors and Real Estate

Many Homebuilder stocks experienced a downturn on July 19, with a group slip of 0.20%, as the National Association of Homebuilders reported a greater-than-anticipated drop in June housing starts. The homebuilding industry faces challenges from increasing interest rates and supply-side constraints. Despite this, our article delves into the state of the industry, providing insight into the performance of major homebuilding companies and assessing possible investment options.

Key Points

1. Homebuilder stocks traded lower after the National Association of Homebuilders (NAHB) reported an 8% drop in June housing starts, which was more than expected. This decline has largely been attributed to rising interest rates and supply-side constraints.

2. The decrease in housing starts was more significant in the multi-family sector, which includes apartment buildings and condos, with this area seeing a decrease of 9.9% to an annualized rate of 499,000 units.

3. Despite the slowdown, there is still a housing shortage in the U.S. due to existing homeowners not selling, a lack of new construction, and issues that stem back to the 2008 housing market crash. This has led to homebuilder stocks trending higher since October, with significant gains recorded year to date. See the chart for Homebuilders EFT XHB above.

Homebuilder Stocks Dip as Housing Starts Fall Unexpectedly

Homebuilder stocks wrapped up trading on July 19 with a 0.20% dip. The market reaction is attributed to a larger-than-expected fall in June’s housing starts figures, according to a report from the National Association of Homebuilders (NAHB).

The residential real estate market, as of July 2023, is marked by a number of trends and factors impacting home prices, availability, and affordability.

Overall, there has been a moderate increase in the number of homes actively for sale compared to the previous year, indicating some alleviation of the previously strained inventory. The monthly housing market trends report for June 2023 reveals a 7.1% increase in the number of homes actively for sale compared to last year, with a similar increase of 21.5% reported for May 2023. There has been a particular upward trend in inventory since May 2022; however, even with these increases, active home listings in November 2022 were still about 38% lower than pre-2020 levels.

The national average 30-year fixed mortgage rate as of the week ending July 13 was reported to be 6.96%, slightly higher than the rate of 6.7% reported for June 2023. This increase in mortgage rates and other factors have contributed to an ongoing affordability crisis for aspiring homeowners.

Median home prices have seen a bit of a decrease. The U.S. home prices experienced a 0.69% decrease compared to the previous year, with a median price of $425,674 as of June 2023. Despite this slight decrease, high costs remain a concern. In some locations, such as Florida, median prices remained relatively stable, suggesting some regional variations in price trends.

The market also shows a decline in the number of homes sold, with a 16.4% year-over-year decrease reported for June 2023. This is echoed in other reports where existing home sales saw only a modest increase of 0.2% in May.

Furthermore, the real estate industry is currently looking beyond cyclical challenges such as rising interest rates and declining GDP and instead adopting a long-term perspective. Key themes include the ongoing debate between remote work and the return to office settings, which could influence future residential real estate trends. Additionally, the impact of emerging technologies, changing demographics, local job markets, and the rise of remote work are seen to have lasting impacts on real estate and land use over the next five years.

In summary, while the residential real estate market is experiencing some improvements in inventory and a slight decrease in median prices, affordability remains a significant concern due to high mortgage rates and overall costs. These trends indicate a market that remains competitive and challenging for potential homeowners.

What does this mean for the housing market, and more importantly, what’s the impact on investors? Let’s break it down.

Understanding the Impact

As per the NAHB’s report, June housing starts figures fell by an alarming 8%. This drop reflects a reduction to a seasonally adjusted annual rate of 1.43 million from May’s rate of about 1.56 million. This figure includes both new single- and multi-family dwelling units. But what does a “seasonally adjusted annual rate” mean? In simple terms, it’s a measure that helps to analyze underlying trends in the housing market by accounting for predictable seasonal variations in construction activity.

What is the Implied Rate of Housing Starts?

The June reading of 1.43 million starts suggests the number of housing units builders would begin if they maintained the same pace for the following 12 months. We saw a 7% decrease in single-family home starts from May and a 7.4% fall compared to a year ago.

Does the Drop Surprise the Market?

Yes, the drop in June was more significant than analysts expected. Prior forecasts indicated a seasonally adjusted rate of 1.48 million housing starts. While alarming, it helps bring some context to homebuilder stocks’ performance. Despite a 17% year-on-year drop in single-family units under construction, the number of apartments under construction rose to its highest since May 1973.

Facing Current Challenges

Alicia Huey, the NAHB chair, states that the decline in resale inventory has led prospective buyers – those who haven’t been priced out of the market – to seek out new construction. Still, she admits that increasing interest rates, an ongoing lack of electrical transformer equipment, and concerns over lot availability continue to pose significant challenges for builders.

Housing Shortage Amidst Slowing Construction?

Despite the slowdown in housing starts, it’s undeniable that the United States is facing a housing shortage. This issue started with the 2008 housing market crash that drove many homebuilders out of business. Fast forward to today; construction has yet to regain momentum to sufficiently meet demand, even though more millennials are buying homes.

How Should Investors Respond?

Given the robust year-to-date gains in homebuilders’ stocks, it may not be surprising if investors view the declining housing start trends as an opportunity to pocket some profits. However, considering the existing challenges and ongoing housing demand. We have been very cautious about real estate for the last two years. Several people have said that residential real estate would drop after commercial. This may be what has happened now.

As investors, it’s always wise to exercise caution, particularly following a prolonged market surge. However, let this not deter you from making informed decisions based on these insights and recommendations.

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Remember, keeping an eye on market trends and making sound; informed decisions is the key to successful investing.

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