What is Ailing the Housing Industry? 3 Factors at Play

Recently released data on the housing industry has been disappointing and does not bode well for the sector with sales remaining under pressure.

A report issued by the National Association of Realtors (“NAR”) in late September showed a sharp decline in pending home sales in the United States in the month of August. A sale is listed as pending when the contract has been signed but the deal is yet to close - this usually happens within a month or two of signing.

The NAR data shows that the Pending Home Sales Index declined to 106.3 in August, down 2.6% from July and the year-ago period. This is the fifth time in six months that pending home sales have declined.

Existing home sales also declined in August – according to the NAR, sales declined 1.7% from July with the South and the West recording sharp declines.

Then data released by the U.S. Census Bureau and the Department of Housing and Urban Development showed a sharp decline in new home sales as well. Sales of new single-family houses declined 3.4% sequentially in August 2017. Privately-owned housing starts also declined marginally (0.8%) in August.

The NAR now expects existing-home sales of around 5.44 million at year end, representing a slight decline from the 2016 level of 5.45 million (up 3.8%).

Low Supply Levels

The biggest issue being faced by the housing market is low supply. Inventory build-up is being impacted by factors like rising lumber and land costs as well as tight labor supply and shortage of land. Although demand remains strong, housing shortages, especially in certain areas, have been weighing on sales.

Impact of Hurricanes Harvey and Irma

Contract signings for August in the South were impacted by the damage caused by Hurricane Harvey in the Houston area. Moreover, sales in the South will be further affected by slower activity in Florida in the aftermath of Hurricane Irma. The impact of these two hurricanes will weigh on housing sales in the coming months as well.

Rising Prices

According to the NAR, home prices have been rising above incomes. According to the NAR report, the national median existing-home price this year is expected to increase about 6% compared to a 5.1% increase in 2016. Limited listings and rising prices have kept home buyers at bay with many postponing their search for the time-being.

Should You Avoid the Sector?

The supply situation in the housing sector will remain an issue in the coming months especially in the hurricane-affected areas where focus will be more on rebuilding rather than on constructing new homes. This will impact housing starts data especially as the existing labor force will be used for rebuilding.

However, demand in the housing sector remains strong. Strong employment, income growth, growing interest from first-time homebuyers, relatively low mortgage interest rates and low inventory of new and existing homes are some of the factors that should support sustained growth in housing demand. Moreover, the sales shortfall resulting from the hurricanes should be recovered in 2018.

The Home Builders segment enjoys a good Zacks Industry Rank (top 25% out of 256 industries). The industry has outperformed the broader market year to date as well.

Top-ranked stocks in this segment include companies like Persimmon PSMMY, Beazer Homes USA BZH and KB Home KBH. While Persimmon is a Zacks Rank #1 (Strong Buy) stock, Beazer Homes and KB Home are Zacks Rank #2 (Buy) stocks. You can see the complete list of today’s Zacks #1 Rank stocks here.

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