Yahoo Finance New Home Sales Dip in May: What Lies Ahead for Housing?
Sales of new U.S. single-family homes slipped in May, marking the lowest level in six months, according to the U.S. Census Bureau’s latest report.
New home sales — a leading housing market indicator based on signed contracts, not closings — decreased 11.3% to a seasonally adjusted annual rate of 619,000 units in May from April, according to the Commerce Department's report released on Jun 26, 2024. This was the steepest monthly decline since September 2022 and marks the lowest level since November. May’s sales pace was down 16.5% from the year-ago level. Last month’s figure also missed analysts’ expectation of 645,000 by 4%.
Geographically, the plunge was the strongest in the Northeast, declining 43.8%. Sales dropped 12%, 8.6% and 4.5% in the South, Midwest and West, respectively.
High Rates Continue to Hammer the Housing Industry
The U.S. housing market is facing significant challenges as high mortgage rates continue to weigh on the industry. Despite a slight downward trend, 30-year mortgage rates are still hovering near 7%, significantly impacting home sales and construction activities. The 30-year fixed mortgage rate dropped below 7% to 6.87% for the week ending Jun 20, 2024, according to Freddie Mac’s Primary Mortgage Market Survey.
In early May, mortgage rates soared to the highest level of the year, and although they have slightly decreased since then, they remain near 7%. This surge in borrowing costs has coincided with a steady climb in home prices. According to the S&P CoreLogic Case Shiller Index, national home prices increased 6.3% in April compared to a year earlier and rose 1.2% from March. The combination of high mortgage rates and escalating home prices is creating affordability challenges for prospective homebuyers, leading to a slowdown in sales.
Limited Relief From the Federal Reserve
While borrowing costs are expected to ease slightly this year, significant relief is unlikely. Federal Reserve officials have projected only one rate cut this year, contingent on inflation moving closer to the Fed's 2% target. Some officials have even suggested that rate cuts might not occur at all this year. The persistence of high-interest rates is dampening the outlook for the housing market, with homebuilders feeling the pressure.
Declining Homebuilder Sentiment and Construction Activity
U.S. homebuilder sentiment declined in June, as reported by the National Association of Home Builders/Wells Fargo Housing Market Index. The negative sentiment among homebuilders reflects broader concerns about the future of the housing market under the strain of high mortgage rates.
Additionally, housing starts for privately-owned units fell 5.5% in May compared to April, marking the lowest level in nearly four years. This decline was 8.1% below the consensus estimate of 1.390 million units. Residential building permits, a key indicator of construction activity, also dropped 3.8% month over month and 9.5% year over year in May. These declines highlight the significant slowdown in construction activity, further exacerbating the challenges faced by the housing industry.
Implications for Investors
The Zacks Building Products - Home Builders industry has underperformed the S&P 500 Index and the broader Zacks Construction sector over the past three months. Over this period, the industry has lost 11.7% compared with the broader sector’s decline of 9.7%. The Zacks S&P 500 Composite has gained 4.7% in the same time frame.
Image Source: Zacks Investment Research
Shares of a few prominent players in the industry, like Lennar LEN, D.R. Horton DHI, PulteGroup PHM and KB Home KBH, have lost 13.4%, 14.7%, 8.8% and 2.9% in the past three months.
Lennar currently carries a Zacks Rank #4 (Sell) and D.R. Horton has a Zacks Rank #3 (Hold). Yet, PulteGroup and KB Home currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Image Source: Zacks Investment Research
From the valuation perspective, on the basis of the forward 12-month price-to-earnings ratio, which is commonly used for valuing homebuilding stocks, the industry is currently trading at 9.5 compared with the S&P 500’s 21.5 and the sector’s 16.3. The industry’s valuation looks a bit undervalued compared with its sector and the Zacks S&P 500 Composite’s average.
Also, the industry currently carries a Zacks Industry Rank #74, which places it in the top 30% of more than 250 Zacks industries.
The prolonged period of elevated borrowing costs continues to currently weigh on home sales and builder sentiment, making it a challenging landscape for housing-related investments for now. Also, while some relief from the Federal Reserve might be on the horizon, the extent and timing of such measures remain uncertain.
Nonetheless, the lack of existing homes for sale in the market and a desire to own a home have been driving demand for the U.S. housing space, defying the challenges associated with the high interest rate environment and rising raw material and labor costs. There is a sizable shortage of new as well as existing homes after more than a decade of under-building compared with population growth. Low housing inventory, robust employment figures, desire to own a home, and favorable demographic trends should propel growth in the homebuilding market in the future.
Although caution is warranted due to recent stock performance, macroeconomic woes and cost pressures, the industry’s relative undervaluation compared to the broader sector, along with solid rank, suggests a potential upside once market conditions stabilize.
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PulteGroup, Inc. (PHM) : Free Stock Analysis Report
KB Home (KBH) : Free Stock Analysis Report
Lennar Corporation (LEN) : Free Stock Analysis Report
D.R. Horton, Inc. (DHI) : Free Stock Analysis Report
