Back to top

Image: Bigstock

Housing Prices Likely to Have Slow Fall in 2023

Read MoreHide Full Article

The U.S. housing market is clearly slowing down. The Census Bureau’s statistics show that building starts dropped around 11% between Jan 2021 and Oct 2022 and dropped 6% in the twelve months to October.

New home sales are down over 30% from the beginning of 2021 and down 6% over the last twelve months. But new home sales comprise about a fifth of the market with around 80% of home sales coming from existing inventory. Therefore, this segment clearly signals what’s happening in the housing market.

Zacks Investment Research
Image Source: Zacks Investment Research

And it’s evident that existing home sales are also down by about a third since the beginning of 2021 and down 28% over the past twelve months. The steady decline didn’t however start until Feb 2022. Therefore, we can put it down to inflation, geopolitical factors and the Fed’s mitigating actions that raise costs for buyers and prices for sellers.

The question that arises, however, is the seller response to buyers turning away. Because either of two things can happen in this case: i.e. home owners could take their properties off the market (bringing down existing inventory) and/or construction companies that have already absorbed significant cost increases could produce less (bringing down new home inventories). In both cases, if inventories drop below demand from buyers still in the market, prices would increase.

Total inventories (National Association of Realtors-NAR) are slightly down from October 2021 although up significantly from 2021-beginning, recovering from the dip in the first three months of the year. Therefore, sellers are limiting inventory increases, depending on the level of demand.

This is showing up in prices. Based on the S&P CoreLogic Case-Shiller Index, which measures prices across 20 metropolitan regions, but is only one of several ways we can gauge prices, home prices on average increased 25.9% from Jan 2021 to September 2022 and 10.4% in the 12 months to September. But prices have been moderating since June.

Zacks Investment Research
Image Source: Zacks Investment Research

The current environment of rising rates isn’t the best for existing home buyers to switch properties, If they aren’t under any compulsion to sell for some other reason, it wouldn’t make financial sense to buy a new home at a higher mortgage rate. It also isn’t the best time for builders who will be subject to the higher borrowing rates as well.

So the higher rates are a disincentive to produce more and we can clearly see this play out in the declining building permits (down 10% in October). Therefore, prices may be coming down, but so are inventories.

Zacks Investment Research
Image Source: Zacks Investment Research

It's impossible to predict exactly how this market will play out in 2023. But from the looks of things, prices will come down as inflation, high mortgage rates and affordability issues turn away more buyers. The rate of decline will depend on how well sellers estimate demand. If the employment situation worsens as intended, or if we end up in a recession, demand could decline faster than sellers anticipate, which is when we’ll see some real drama.

Homebuilding stocks are not what you want to be in right now. There’s just too much uncertainty out there. And the Fed is doing all it can to gobble up demand. Try your luck with Zacks #2 (Buy) ranked Loma Negra Compania Industrial Argentina (LOMA - Free Report) if you’re really eager for exposure to this industry.

Otherwise, I’d say it’s best to look elsewhere. Oil is still hot, though not sizzling. Or, you could go safer with a staple like The Hershey Company (HSY - Free Report) . A large number of analysts cover it and agree that sales and earnings will continue to increase next year. And the company also has a good track record, beating analyst estimates (average surprise in the last four quarters is about 9%).

Ditto for snacks producer Hostess Brands, Inc. (TWNK - Free Report) , which is expected to produce attractive growth next year and has, in the last four quarters topped analyst estimates by around 9%. Beverage stocks like Davide Campari-Milano N.V. (DVDCF - Free Report) and Eastside Distilling, Inc. (EAST - Free Report) are also worth considering for the same reasons. All these stocks carry a Zacks Rank #2.

Published in