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Will 13-Year Low Existing-Home Sales Recover? ETFs in Focus
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U.S. existing home sales plunged to their lowest level in over 13 years in October 2023, mainly due to climbing mortgage rates and a scarcity of available houses. Sales decreased across the Northeast, West, and South, while remaining stable in the more affordable Midwest region.
The overall reduction in home resales marks a substantial 14.6% year-on-year decline for October. Median house price rises 3.4% year-on-year to $391,800, a record level for any October. First-time buyers made up 28% of sales, unchanged from the previous year but below the ideal 40% for a robust market.
Factors Impacting the Market
High mortgage rates, a lack of supply, and the reluctance of homeowners to sell (due to previously locked-in low rates) have resulted in a stagnant market. Sales slumped 4.1% to a seasonally adjusted annual rate of 3.79 million units, marking the lowest since August 2010.
High Mortgage Rates
Mortgage rates have seen a dramatic increase, with the 30-year fixed-rate mortgage peaking at 7.79% in late October, the highest since November 2000. The Fed also noted a flattening in housing sector activity, due to high rates.
Inventory and Market Conditions
The market witnessed a 5.7% decline in available previously owned homes compared to last year. The current inventory would take 3.6 months to deplete, indicating a shortage, especially in the $100,000-$250,000 price range. Despite this, the median house price rose 3.4% year-over-year to $391,800.
Any Respite Expected in Second Half of 2024?
Experts like Daniel Vielhaber, an economist at Nationwide in Columbus predict a challenging housing market into the first half of 2024, with supply issues and high mortgage rates continuing to pose significant obstacles, as quoted on Reuters. Things should improve in the second half of 2024 when the Fed is expected to cut rates and as a result, mortgage rates come down.
However, on the price front, experts' opinions vary on the future trend. While some predict a continuous rise in home prices, with expectations of up to a 4% increase (as quoted on Go Banking Rates)??????, others like Morgan Stanley expects a likely decline of about 3% from 2023 levels??????, as quoted on Housingwire. Morgan Stanley’s bear case scenario for a fall in home prices in 2024 is about 8% year over year.
For 2024, factors such as lower mortgage rates, higher home listings and decent labor market may play a significant role in shaping the housing market dynamics. But if the economy slips into a recession, demand could fall further in 2024. Overall, Morgan Stanley expects stronger housing activity in the second half of the year and new home sales (+7.5%) to increase more than existing home sales (+2.5%) over the course of the full year.
ETFs in Focus
Homebuilding ETFs like iShares U.S. Home Construction ETF (ITB - Free Report) and SPDR S&P Homebuilders ETF (XHB - Free Report) have a Zacks Rank #3 (Hold). The funds ITB and XHB are up 41.2% and 35.1%, respectively, this year (as of Nov 24, 2023). The funds ITB and XHB have a P/E ratio of 9.64X and 12.31X. This indicates that the valuation is still-cheap in these funds. Those who fear the company-specific risks, may invest in homebuilding ETFs like ITB and XHB with a long-term perspective.
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Will 13-Year Low Existing-Home Sales Recover? ETFs in Focus
U.S. existing home sales plunged to their lowest level in over 13 years in October 2023, mainly due to climbing mortgage rates and a scarcity of available houses. Sales decreased across the Northeast, West, and South, while remaining stable in the more affordable Midwest region.
The overall reduction in home resales marks a substantial 14.6% year-on-year decline for October. Median house price rises 3.4% year-on-year to $391,800, a record level for any October. First-time buyers made up 28% of sales, unchanged from the previous year but below the ideal 40% for a robust market.
Factors Impacting the Market
High mortgage rates, a lack of supply, and the reluctance of homeowners to sell (due to previously locked-in low rates) have resulted in a stagnant market. Sales slumped 4.1% to a seasonally adjusted annual rate of 3.79 million units, marking the lowest since August 2010.
High Mortgage Rates
Mortgage rates have seen a dramatic increase, with the 30-year fixed-rate mortgage peaking at 7.79% in late October, the highest since November 2000. The Fed also noted a flattening in housing sector activity, due to high rates.
Inventory and Market Conditions
The market witnessed a 5.7% decline in available previously owned homes compared to last year. The current inventory would take 3.6 months to deplete, indicating a shortage, especially in the $100,000-$250,000 price range. Despite this, the median house price rose 3.4% year-over-year to $391,800.
Any Respite Expected in Second Half of 2024?
Experts like Daniel Vielhaber, an economist at Nationwide in Columbus predict a challenging housing market into the first half of 2024, with supply issues and high mortgage rates continuing to pose significant obstacles, as quoted on Reuters. Things should improve in the second half of 2024 when the Fed is expected to cut rates and as a result, mortgage rates come down.
However, on the price front, experts' opinions vary on the future trend. While some predict a continuous rise in home prices, with expectations of up to a 4% increase (as quoted on Go Banking Rates)??????, others like Morgan Stanley expects a likely decline of about 3% from 2023 levels??????, as quoted on Housingwire. Morgan Stanley’s bear case scenario for a fall in home prices in 2024 is about 8% year over year.
For 2024, factors such as lower mortgage rates, higher home listings and decent labor market may play a significant role in shaping the housing market dynamics. But if the economy slips into a recession, demand could fall further in 2024. Overall, Morgan Stanley expects stronger housing activity in the second half of the year and new home sales (+7.5%) to increase more than existing home sales (+2.5%) over the course of the full year.
ETFs in Focus
Homebuilding ETFs like iShares U.S. Home Construction ETF (ITB - Free Report) and SPDR S&P Homebuilders ETF (XHB - Free Report) have a Zacks Rank #3 (Hold). The funds ITB and XHB are up 41.2% and 35.1%, respectively, this year (as of Nov 24, 2023). The funds ITB and XHB have a P/E ratio of 9.64X and 12.31X. This indicates that the valuation is still-cheap in these funds. Those who fear the company-specific risks, may invest in homebuilding ETFs like ITB and XHB with a long-term perspective.