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The Fed Sends Home Sales Down, But Still a Strong Housing Market

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With the Fed emphatically in favor of ratcheting up interest rates and then keeping them elevated, there’s going to be an impact on mortgage rates for sure. The 30-year mortgage rate information provided by the Mortgage Bankers Association (MBA) shows that in the past 20 weeks, the rate has pushed above 5.5% roughly half of the time. From the look of things, it is likely to move higher this month as interest rates take another step up.

But what do these higher mortgage rates mean for the housing market overall?

Higher mortgage rates affect affordability, which pushes more buyers out of the market, unless there is a compensatory reduction in home prices. If we consider the Case-Shiller Home Price Index as a kind of proxy (not perfect since it considers data from just twenty cities across the U.S.), we find that incremental increases are getting smaller and smaller (the line is flattening).  

 

Zacks Investment Research
Image Source: Zacks Investment Research

 

This tells us two things. First, that home prices are going to start coming down some time soon. And second, that something is supporting prices. Despite the fact that mortgage rates have gone from 3.5% to 5.8% this year, the incremental reduction in mortgage applications (from week to week), especially In recent weeks, has not accelerated.

This seems to point to underlying strength in the housing market that we have seen is related to long-term factors like demographics. It could also be that after people absorb the news about rising interest (and mortgage rates), they take stock of the fact that homes are good investments, perhaps more so in a recession. And particularly when you have a steady job.

 

Zacks Investment Research
Image Source: Zacks Investment Research

 

But while incremental reductions in mortgage applications being small is a good sign, they do add up over time. And this means additional inventories, seen from the 52% increase in new home inventories since January. This despite the fact that there’s a slowdown in building activity (starts are down more than 13% since January).

So what exactly is happening with home sales?

Both new and existing home sales are declining. But existing home sales, which constitute about 80% of the market, are declining at a slower rate: New home sales are down 38.5% from January while existing home sales are down 25.9%.

 

Zacks Investment Research
Image Source: Zacks Investment Research

 

Conclusion

When we’re talking about a softening in sales, some perspective is important. Because this softening is coming off one of the strongest periods for the housing market. So it shouldn’t be construed of as weakness per se.

Home prices are going to come down soon, at which time there will be an influx of first-time and entry-level buyers. Underlying demand for cheaper accommodation is very high. So unless something goes very wrong with the job market, home buyers are unlikely to go too far.

Recommendations

Given the state of the housing market right now, it’s probably a good idea to avoid it for now. A better idea would be to pick from the Transportation, Energy or Finance sectors, which are the top three in the Zacks rating system. Here are some Zacks #1 (Strong Buy) stocks from each: Covenant Logistics Group (CVLG - Free Report) , Yellow Corp. , Marathon Petroleum Corp. (MPC - Free Report) , PBF Energy (PBF - Free Report) and BCB Bancorp NJ (BCBP - Free Report) .

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