The U.S. housing market was very strong last year despite high home prices. However, the space started to cool off this year on rising mortgage rates, which put pressure on affordability and quelled demand. This, in turn, forced sellers to lower prices.

Existing home sales dropped for the ninth successive month in October. All four major U.S. regions registered month-over-month and year-over-year declines. Sales of previously owned homes dropped 5.9% sequentially in October, according to the National Association of Realtors, per CNBC. That is the slowest clip since December 2011.

Cooling in Mortgage Rates in the Cards?

Mortgage rates declined steeply last week after a series of economic reports that indicated inflation may finally be cooling off and the Fed might slower the rate hike pace. The 30-year fixed-rate mortgage averaged 6.61% in the week ending November 17, down from 7.08% the week before, according to Freddie Mac, marking the largest weekly decline since 1981. However, a year ago, the 30-year fixed rate stood at 3.10%.

Can Shrinking Home Price Growth Boost Sales?

The October reading put sales at a seasonally adjusted, annualized pace of 4.43 million units. Sales were 28.4% lower year over year. The national median home price rose 6.6% in October from a year earlier, to $379,100. The price gains, however, are decreasing, as the seasonal decline in home prices this time of year appears to be much deeper than usual. If the trend holds good for a long time, we may see a recovery in sales.

Still-Tight Inventory May Keep Prices Still-Elevated

House construction in the United States declined in October more than expected, while the number of permits for single-family homes fell. Residential starts — including both single- and multi-family units — decreased 4.2% last month to a 1.425 million annualized rate. Economists surveyed by Bloomberg had forecast a 2.0% decline.

It indicates a still-tight inventory condition in the United States. “In October, 24% of homes received over the asking price. Conversely, homes sitting on the market for more than 120 days saw prices reduced by an average of 15.8%,” per Lawrence Yun, chief economist for the NAR.

Home Buying: Millennials’ Preference

Though the percentage of millennials staying with their parents has risen over the years, many millennials are now reaching prime home-buying age — 30 to 35 years old — and that could drive sales for homebuilding companies.

John Lovallo, home builder analyst for Bank of America Merrill Lynch, noted that “in 2025 there are going to be 3 million more millennials than baby boomers at their peak in 1987,” which could propel the home-buying industry.

Any Drag?

Slowing Rent Growth

Rents in October rose 4.7% compared with October 2021, the slowest annual increase in 18 months, according to Realtor.com, as quoted on CNBC. Rents are still higher year over year, but gains are reducing, as landlords are losing pricing power amid inflation. Since, rate of rent growth is still lower than rate of home price growth, many people may opt for renting instead of buying homes.

Bottom Line

Against this backdrop, we think it is wise to stay on the sidelines as far as homebuilding investing is concerned. If any good news is received on the inflation and Fed front, housing market may turn around.  

ETFs in Focus

iShares U.S. Home Construction ETF (ITB Quick QuoteITB - Free Report) – Down 2.8% Last Week

SPDR S&P Homebuilders ETF (XHB Quick QuoteXHB - Free Report) – Down 2.3% Last Week

Hoya Capital Housing ETF (HOMZ Quick QuoteHOMZ - Free Report) – Down 2.4% Last Week

Invesco Dynamic Building & Construction ETF (PKB Quick QuotePKB - Free Report) – Down 2.3% Last Week