Snowballing into the third consecutive month of decline, existing home sales in the U.S. dimmed the glow of the spring selling season, grappling with persistent affordability hurdles. The home sales hiccup in May veered off course, plunging 11.3% from the prior month’s figures in May 2024, orchestrating a somber melody in the housing market symphony.
Spring emerges as the primetime for homeowners to tap into the property market, with a whirlwind season kicking off in March and swirling through May and June. The warmer climate cascading after the frosty winter months entice buyers to take a leap into a new abode before school bells ring in the next academic year. Thus, winter typically lays a quiet blanket over home constructions; the south drenched in moisture while the north shivers alongside frosty winds.
Trudging through the swamp of challenges, the SPDR S&P Homebuilders ETF XHB and iShares US Home Construction ETF ITB witnessed a downward spiral, shedding 8.3% and 11% respectively since April (as of June 27, 2024). The ominous shadows of escalating mortgage rates and soaring home prices cast an ominous gloom over the realm of home sales.
Record-High Prices
The realm of homes brims with lackluster supply, catapulting prices to soaring heights. The median sales price crescendoed by 5.8% year-on-year, fueled by a surge in high-priced properties and a flurry of multiple offers. The echoing words of NAR Chief Economist Lawrence Yun resonate, accentuating how skyrocketing home prices are broadening the crevice between existing homeowners and budding first-time buyers.
Delayed Recovery
Despite a wisp of softening in mortgage rates, the tantalizing prospect of a Fed interest rate cut has built a steady hum of anticipation. However, Yun’s forecast paints a somber picture, suggesting that this interlude might continue to stall the revival of home sales. The annualized rate of home sales has hovered around a sobering 4 million mark, echoing a lugubrious crescendo. The current jive of home sales would take a prolonged 3.7 months to sweep all homes off the market shelf—the lengthiest span in the past four years.
Any Ray of Hope?
In a corner of hope, Yun prophesies that an uptick in inventory might fuel the flames of home sales in the imminent months. The bounty of existing homes paraded across the market stage with an 18.5% hike year-on-year, mounting to a tally of 1.28 million homes. A crystallization moment where homeowners, long awaiting the symphony of plummeting mortgage rates, have unravelled and listed their properties. Despite this flurry, the inventory still lingers beneath its pre-pandemic stature, a time when mortgage rates were perched at significantly lower pinnacles.
When Will We See a Fed Rate Cut?
The poignant reverberations of inflation and retail sales data have stirred the appetite for an imminent journey into interest rate alterations. With a 56.3% probability swirling in the air, the whispers of a Fed interest rate slice to 5%-5.25% dance towards a September spectacle, as per the CME FedWatch Tool. Furthermore, another shard of possibility splinters through, forecasting a 42.1% chance for the Fed to riffle through another round of cuts, to pierce rates to 4.75-5.00% by the twilight of December.
Compelling Valuation
A dizzying dive into valuations unveils a stark contrast, with the homebuilding industry parading a forward P/E ratio of 8.22X, juxtaposed against the 18.25X P/E sported by the S&P 500 ETF IVV. The industry dons a favorable price-to-book ratio of 1.31, while the IVV flaunts a contrasting 3.85 amidst its pages. The harmonious tale of price-to-sales ratios elegantly favors the homebuilding industry at 0.92, reclining aristocratically over the 2.70 held by IVV.
Sound Financial Prospects
The silhouette of the sector’s future whispers of a projected EPS growth standing shoulder to shoulder with IVV, at 6.61%. A historical stroll down memory lane narrates a charming tale where the historical EPS growth of the homebuilding industry sparkled at 33.61%, gallantly overshadowing the 9.87% growth fluttering around IVV. Nestling beside, the cradle of historical sales growth in the homebuilding industry cradles a 12.29% growth story, dwarfing the 9.87% twinkle of IVV. The stage upon which return on assets and investments dance unveils a tale of contrasting fortunes, with homebuilders dramatically scoring 10.60 and 14.41 times better than the polite performances of 6.84 and 10.94 times sported by IVV in their respective domains.
Upbeat Industry and Sector Ranks
Diving into the harmonious realms of Zacks whispers an enchanting tale, with the Building Products – Home Builders industry nestling cozily in the top 30% echelon, amidst a treasure chest teeming with 250 industries. The magnetic aura trailing the industry hints at an impending outperformance over the next 3 to 6 months, riding the crest of a subdued 0.2% surge thus far in the year, fueled by the promise of cheaper valuations and a tantalizing whisper of moderate interest rate alleviation.
Brooding over quantitative slumbers unfurls the sage wisdom that nearly half of a stock’s future price crescendo bows before the altar of its industry clout. The top 50% of Zacks Ranked Industries takes a spellbinding lead over the bottom 50%, trumping them by a sprawling factor of more than 2 to 1. The homebuilders perch atop an upbeat Zacks Construction sector, an exalted realm nestling in the top 25% altitude amidst a landscape bedecked with 16 sectors, serenading a graceful upward trajectory, up by 4.5% in the year’s date.