The Wolf Has Come for the Housing Market
Headwinds are huffing and puffing on the housing sector, so here's how I'd play it and one stock I'd recommend right now.
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Headwinds are increasingly hitting the housing sector. This part of the economy drives 15% to 18% of economic activity in the United States and is a key economic engine. The combination of historically low housing affordability, rising homeowners association costs as well as increasing prices for property insurance and taxes has made for a tepid environment for existing home sales over the past few years. In fact, 2023 and 2024 saw the lowest levels of existing home sales of any year since 1995. 2025 is not starting out any better, as March saw the lowest number of existing home sales since the Housing Bust just over 15 years ago.
For a few years after the pandemic, one of the key problems for home buyers was supply as tens of millions of homeowners had golden handcuffs that came from 3% and 4% mortgage rates on their existing homes. New home builders stepped into this void and reaped the benefits. Unfortunately, the good times are in the rear-view mirror now. New home inventory has surged in recent quarters and has become quite problematic.
The average price of a new home in the U.S. has continued to tick up slowly. This is mainly due, however, to the higher strata of the market holding up better than the lower and middle ends of the market. In addition, the average price metric does not capture the increasing number of incentives home builders are resorting to in order to move inventory. In its last reported quarter, home builder Hovnanian Enterprises, Inc. HOV disclosed 9.7% of sales were allocated to incentives like mortgage rate buydowns and "free" upgrades. This was more than triple the level of 2022.
New home inventory levels have gotten so high that just over 30% of home listings consist of new construction. In addition, home builders are facing higher costs because of tariffs on building materials such as Canadian lumber. This will crimp margins further. The entire home sector is facing some new headwinds as well. There appears to be an increasing number of homes listed that were previously used as short-term rentals through such services such as AirBNB Airbnb, Inc. ABNB. Here in south Florida, I have seen a surge of homes in my Zillow and Redfin feeds that are listed for sale fully furnished and as "successful" BNB rental homes.
And as anyone who listens to a lot of real estate podcasts knows, there is a new potential home sector overhang on the horizon. This is around Federal Housing Administration loans. "Temporary" Covid-related programs to keep homeowners in their abodes have been extended several times over the years. But they look finally set to expire at the end of September. Despite this taxpayer largess, the delinquency rate on these loans is in the low teens. Of the approximately 7.8 million FHA mortgage loans covered in the programs, some 65% are for individuals with debt-to-income ratios of 43% or higher. Many haven’t made a mortgage payment in years. When these loss mitigation programs are finally allowed to expire, it should result in more supply on the market that is already struggling with inventory. This is especially true in states like Texas that have a relatively fast foreclosure process.
The housing sector looks poised to get significantly worse before it gets better. This is why I remain heavily underweight the sector. The few stocks I own in this area have true book values, substantially under their current trading levels, like The St. Joe Company JOE. On a personal level, it means after selling my home in the summer of 2023, I am positioning myself to buy another property in late 2026 or 2027. Entry points are likely to be nicely lower by then and with more bargains to choose from. Most likely this will also apply to stocks in home builders.
At the time of publication, Jensen was long JOE.
