It wasn’t that long ago that exchange-traded funds tied to home builders were stock market darlings.
The SPDR S&P Homebuilders ETF (XHB) racked up a market-beating 119% return from 2019 to 2021 while broader equity ETFs like the SPDR S&P 500 ETF (SPY) gained only 78.34%. But higher interest rates and slowing demand have snagged the bullish momentum in home-building stocks. Can they rebound?
Obstacles Everywhere
The first obstacle for home builders is interest rates, which have been forced higher as the Federal Reserve tries to combat runaway inflation. Although increases to the federal funds rate doesn’t directly affect mortgage rates, whatever the Fed does still sets the tone for overall interest rate trends.
Because of those higher rates, the cost of financing new homes is a lot more expensive. And that’s caused mortgage demand to crater. In mid-July, mortgage applications to buy homes were down 19% from a year ago, the lowest level since 2000, according to the Mortgage Bankers Association (MBA).
The 30-year, fixed-rate mortgage yield touched a high of 5.81% in June but has since settled in the 5.50% area. Some housing market experts are forecasting that mortgage rates will bounce between 5% to 7% for the rest of 2022.
The declining affordability of houses has been another major obstacle. Home prices in the U.S. hit a new all-time high in June, up 13.4% from one year ago, according to the National Association of Realtors. The nationwide median home price hit $416,000. The biggest surges were in the cities of Miami and Orlando, Fla., and Nashville, Tenn.
While the job market remains in decent shape, companies in many sectors are either slowing or halting the pace of new hires. Could this dampen enthusiasm for new home purchases in hot spot cities like Phoenix, Los Angeles and Austin, Texas? While it’s still too early to know, the softening job market is something to keep an eye on.
Souring psychology is another hurdle.
Builder confidence in July plummeted to its lowest reading since the depressed pandemic levels in 2020, according to data from the National Association of Home Builders and the Wells Fargo Housing Market Index. Production bottlenecks, high inflation and rising home-building costs were all cited as contributing factors.
The Other Residential Market
Rents, like home prices, have been trending higher too.
The median monthly asking rent in the U.S. surpassed $2,000 for the first time in May, rising 15% year over year, according to a report from real estate firm Redfin.