Homebuilders are continuing to build one-family homes at a steady pace, attracting investors to their stocks. However, according to the latest National Association of Homebuilders survey, homebuilders are feeling lukewarm about the current market. The survey evaluates three main categories: the current market environment, the future market outlook for the next six months, and the amount of potential homebuyer traffic. All three categories have shown a decline. The data also indicates a direct correlation between the traffic of prospective buyers and sales, with this year’s numbers suggesting a potential decline in sales in the future.
One of the challenges faced by homebuilders is maintaining the right level of inventory of finished homes for sale. Looking at historical data from 1985 to 2019, the average inventory of homes for sale equated to about six months of seasonally adjusted sales. However, unexpected fluctuations in sales can lead to excess inventory, resulting in price drops and production cuts to correct the imbalance. Conversely, a sudden increase in sales can also lead to excess inventory when sales inevitably slow down. The graph below illustrates this phenomenon, with 2020 showing a significant rise in sales followed by a decrease, leading to higher than normal inventory levels.
Another factor impacting the housing market is the increase in mortgage rates, with 30-year mortgages reaching 7%. While lenders and borrowers have adjusted to this rate, it poses a financial challenge for potential homebuyers, particularly in a time of high inflation and rising prices. Many homeowners who are considering moving into a new home are also benefiting from lower mortgage rates, making the jump to a 7% rate less appealing. This higher cost of borrowing could further dampen demand for new homes.
Despite these challenges, homebuilders have not significantly reduced their inventory of homes for sale, and investors continue to hold onto homebuilder stocks. It appears that a trigger event may be necessary to prompt changes in the market, whether it be homebuilders aligning their activities with their survey results or investors deciding to shift their holdings to other stocks. While the current situation may not require a dramatic event like a recession to prompt change, it will be interesting to see how the housing market evolves in response to these ongoing challenges.
