Housing Sector Becomes a Major Fixer-Upper
The rapidly deteriorating housing market will take some time to repair and is revealing cracks in the foundation of the larger economy.
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The fighting in the Middle East appears to have stopped -- and I'm glad I took advantage of the huge spike in oil prices last Friday. But there's another major issue for the economy that unfortunately is not going away anytime soon: That is the continually deteriorating housing sector.
This will have ongoing and significant ramifications as housing accounts for 15% to 18% of economic activity in the United States. In addition, things are likely to get substantially worse for housing before they get better.
You can increasingly see this deterioration starting to show up in the quarterly results and guidance from home builders. KB Home KBH reported its most recent quarter on Tuesday. The large home builder managed to step over very low expectations.
Overall sales, however, were off over 10% on a year-over-year basis and home deliveries dropped 11%. Elsewhere, new home orders fell 13% and the company’s order backlog declined by 27%. Net income fell 36% from the same period a year ago and management chopped full year guidance significantly as spring selling season was largely a bust. All in all, a fairly miserable quarter and one I expect to be repeated as other home builders post their quarterly results in the months ahead.
Home inventories are surging in most regions of the country, with the notable exception of the northeast. There were one million active listings in June, the first time that has happened since the pandemic. I don’t believe this will be the high-water mark, unfortunately for numerous reasons.
Some real estate experts believe that up to a third of the homes bought in the years following the pandemic were by investors. Many of these were bought by investors and used as short-term rental properties. During the revenge-travel period following the pandemic, these properties were nicely cash-flow positive. But thanks to ebbing demand and surging ownership costs (property insurance, taxes, maintenance), these properties are now bleeding cash on a monthly basis. As such they are being dumped on the market. There are currently four of these properties on Zillow for sale within a three-minute walk of me here in Delray Beach, Florida. These former AirBnb locations will continue to help push inventories higher.
In addition, later this year, investors can expect many homes with Federal Housing Authority loans to hit the market. After a five-year taxpayer hiatus, the extensive loss mitigation efforts around these low-down payment mortgages are being ratcheted down this Fall. While a small part of the overall mortgage market, the minimal payments required mean some of these homes have little to any equity in them. I expect delinquencies to surge in this area of the mortgage arena. To be noted, after student loan payments were recently restarted after a similar hiatus, delinquencies went from below 12% prior to the pandemic to 31% in May.
Finally, large investors like BlackRock, Inc. BLK are starting to unload some of their inventory in recent months. I expect this trend to accelerate in the coming quarters. Given housing cycles typically last three to five years, housing is likely to remain an increasing economic headwind for many quarters. That is a negative for a wide swath of the economy including obviously homebuilders but also housing dependent companies like Home Depot HD, Builders FirstSource BLDR and RH RH.
I also expect average home prices to start declining in the coming quarters. This is likely to have a significant negative impact on consumer confidence, which is already struggling. So, while the struggling housing sector does not generate the financial headlines it should, it is a growing economic overhang I am closely monitoring.
At the time of publication, Jensen had no position in any security mentioned.
